National Debt and Global Power

Economist Tyler Cowen, writing about the US national debt, makes the following point-

At some sufficiently high debt-gdp ratio, it becomes a foreign policy issue and a big one. Postwar UK had a high debt to gdp ratio, and to this day it is a fine place, but that debt meant the end of England as a world power, for better or worse. The U.S. for instance used financial issues to push England around and they basically had to give up on their overseas commitments. A very high debt ratio here would mean the end of the U.S. as a global world power, again even if gdp does OK. A global power needs the option of spending a lot more, quickly, without asking for anyone's permission. Your mileage on a U.S. retreat from the global policeman role will vary, but it's the elephant in the room which hardly anyone is talking about.

This is a really critical point that I'm very surprised national security conservatives aren't making (possibly because most "conservatives" don't actually care about the debt or deficit, only about cutting taxes). It is generally accepted that good credit - the ability to borrow money quickly at reasonable rates - has been historically the single most important factor for countries that want to project power. It was the basis behind the expansion of the British empire in the 1800s, and conversely was a key cause of the implosion of the French monarchy in the 1780s.

The reason is pretty straightforward- most countries tax/spend systems are generally inequilibrium - you take in roughly as much money through taxes, fees, tariffs, etc. as you regularly spend on general operations. However, foreign crises often require quick, heavy expenditures of money- oftentimes double or more the regular cost of running the state. It's not feasible to get that money through taxes - you can't just double the taxload on your citizens in a year and not expect disaster- even very patriotic people who are totally on-board for the war are going to be unable to part with doubled taxes without succumbing to financial catastrophe. Consequently, you have to be able to borrow.

Some of that borrowing can come from a state's own citizens through the sale of war bonds, which are just loans by citizens to the government. Even during World War II, the very peak of war bond sales in a very widely supported war, my back-of-the-envelope calculations indicate that the government's sale of $185 billion in war bonds covered less than half the cost of the war.

Consequently, the government will typically have to reach out to financial institutions and the general credit markets for loans necessary to fight wars, and credit market participants (particularly those in other countries) will not make loans that they think will not be paid back.

In the event of an attack on the country or similar event, I can imagine a surge of patriotism causing defense contractors to operate on IOUs, or soldiers to fight without paychecks, but that will not work over a long war, and will certainly not work for an unpopular war.

All of this is to make the point that, if a government has bad credit, even if it's a large, rich country, it is very difficult to project power. The US's status as a superpower is to some degree based on its navy, airforce, and sizeable standing army, which historically has been generally paid for out of regular revenues. However, the real American power is the threat that, if necessary, we can greatly increase our military spending to put more people in uniform, and more vehicles and weapons on the ground and in the air - as we did in Afghanistan and Iraq. Even now, with two ongoing conflicts, the US military numbers about 1.5 million troops. During World War II, we had 13 million in uniform. That kind of increase in scale would involve serious borrowing, which would not be viable if lenders didn't believe that the US would be able to pay back the loans - and a really high debt, like what's carried by, say, Greece, makes lenders very wary.

This is not to say that I support the deficit hawks' positions that we need to immediately freak out about the debt. The current national debt is only about half of US GDP - a far cry from the rates held by Italy, Greece, Japan, etc. However, it does have a couple repercussions-

1.) Americans, particularly those that care about the US remaining a global power, need to consider the effects of the national debt on our credible ability to borrow in the future to finance military operations.

2.) Given that much of our current military operations are funded by borrowing, which is adding to the debt, we need to think about military borrowing as a finite resource, like oil reserves, and we should weigh the value of adding to the debt to meet current foreign challenges against the need to have credit available for military operations in the future. Think of it this way - the national debt is kind of like a credit card with a limit - does it make sense to run up the card now on wars that aren't strictly necessary, when we might in the future need to use that card for something absolutely vital for our survival?