President Bush has made it clear on many occasions that the War on Terror (WOT) will be a long war and a war that will be “fought on many fronts.” The ends and aims were set out very clearly in the National Strategy for Combating Terrorism – February 2003, which called for overcoming terrorists and their organizations, denying support, sponsorship, or sanctuary to terrorists, ensuring that other states follow this same end, reducing the underlying conditions that terrorists seek to exploit, and supporting U.S. interests at home and abroad (The White House, 2003, pp. 15-32).
This is referred to as a 4D strategy (defeat, deny, diminish, and defend). Each of these ends contains several aims within it, and the policy does not just focus on states or state-sponsored terrorism, but this is clearly the emphasis of the policy.
Under the first end of overcoming terrorists and terrorist organizations, there are three key tasks: identify terrorists and terrorist organizations, locate terrorists and their organizations, and destroy terrorists and their organizations (Ibid. pp. 15-17).
The emphasis in this section is placed on improving intelligence and intelligence capabilities, improving the use of law enforcement, and improving the use of special forces and other military armories. It is important to note that the use of national law enforcement, an agency often considered less important than the FBI, is recognized and can be utilized as a power resource.
Within the end of denying sponsorship, there are five key objectives: stop the state sponsorship of terrorism, establish and maintain an international standard of accountability with respect to combating terrorism, strengthen and sustain the international effort to combat terrorism, interdict and disrupt material support for terrorists, and eliminate terrorist sanctuaries and oases (Ibid. pp. 17-22). This section briefly details how to work with, enable, persuade, and compel states to work with the U.S. on this end.
The third end of decreasing the implicit conditions that terrorists seek to exploit has two cardinal aims: to collaborate with the international community to strengthen weak states and to win the war of ideas (Ibid. pp. 22-24). This end focuses on issues of development and democracy to improve the lives of those who are less fortunate and to provide an outlet for those who are exploited or abused.
The final end of supporting US citizens and interests at home and abroad is the largest and consists of several key objectives, including implementing the national strategy for homeland security, achieving domain awareness, enhancing measures to ensure the integrity, reliability, and availability of critical physical and information-based infrastructure at home and abroad, integrating measures to protect U.S. citizens abroad, and ensuring an integrated incident management capability (Ibid. 24-28).
This section addresses several of the issues presented in the previous sections, such as intelligence gathering, the use of law enforcement and other emergency agencies, and working with the international community. This section does not deal with covering terrorist acts as much as it focuses on preparing for a possible terrorist attack.
When the National Strategy for Battling Terrorism – February 2003, is combined with the Bush Doctrine, a clear but contrasting image is created. The Strategy is a mostly defensive document, emphasizing the use of intelligence networks and the support of the international community and organizations.
By contrast, the Bush Doctrine is a much more aggressive approach to dealing with the issue of terrorism, as it focuses on offensive measures to ensure security. In this example, a distinction can be seen as U.S. policy advisers tend to act as defensive realists, whereas the Bush administration tends to act as offensive realists.
However, financing the War on Terrorism (WOT) is too expensive. In the recent confirmation of FY2007, the government allotted a tremendous $610 billion for the support of the above-mentioned 4D or the goals of the National Strategy for Battling Terrorism. Such a cost will be used for “military operations, base security, reconstruction, foreign assistance, embassy costs, and veterans’ health care for the three operations initiated since the 9/11 attack” (Belasco, 2007), which will be divided into different operations against terrorism.
Governments have three methods at their disposal for financing the WOT: taxation, borrowing from the public, and monetary inflation, or the creation of new money. Governments may also resort to coercive requisitioning, seizing the material resources and conscripting the labor services they deem necessary for the war effort without compensation or in exchange for below-market prices and wages.
Historically, a combination of these methods has generally been used to affect the transfer of resources from civilian to military uses during a large-scale war. From the perspective of technical economic theory, however, the government could always realize the funds necessary to carry out its war purposes solely from increased taxation and non-inflationary borrowing on capital markets.
Why, then, if purely financial steps are capable of giving sufficient gross to pay market monetary values for all the resources required to carry on WOT, have aggressive authorities almost always taken resort to the methods of pecuniary inflation and the direct commandeering of goods and services?
The answer lies in the fact that war is an extremely costly endeavor, and the latter two methods, although in very different ways, operate to partly hide these costs from the public’s view (Robbins, 1950). When the public is accurately apprised of its full costs, war becomes increasingly unpopular. Civilian enthusiasm and labor efforts flag, and unrest, and even active opposition, may result on the home front and spread to the front lines.
As Robert Higgs (1987) points out with respect to the inclination of governments to partly replace a command-and-control economic system for the regular financial mechanism during wartime and other alleged national exigencies:
“Obviously, citizens will not react to the costs they bear if they are unaware of them. The possibility of driving a wedge between the real and the publicly perceived costs creates a strong temptation for governments pursuing high-cost policies during national exigencies. Except where lives are being sacrificed, no costs are so easily counted as monetary costs. Not only can each individual count them (his own tax bill); they can be easily aggregated for the whole society (the government’s total tax gross).
It behooves a government wishing to sustain a policy that entails suddenly heightened costs to find ways of substituting non-pecuniary for monetary costs. The substitution may blunt the citizen’s realization of how great their sacrifices truly are and thus decrease their protests and opposition” (p. 65).
To grasp how the issue of new money obscures and distorts the true costs of war on panic, we must first analyze the case of financing a war solely through the imposition of increased taxes supplemented with borrowing from the public. Prior to the increase of taxes and issue of government securities to raise war gross, the national economy is operating with an aggregate capital structure whose size is determined by the “time preferences” or intertemporal consumption choices of the consumer-savers (Pickup and Kutz, 2005).
The lower the public’s time preferences, and hence the more willing its members are to postpone consumption from the immediate to the more distant future, the greater is the proportion of current income that is saved and invested in building up an integrated structure of capital goods. The greater the stock of capital goods, in turn, the greater the productivity of labor and the higher the real wage rate earned by all classes of workers.
From the point of view of individual investors in the capital structure — business owners, shareholders, bondholders, insurance policyholders — the value of their titles and claims to capital goods are revealed by monetary computation, specifically, capital accounting, and are therefore conceived as amounts of monetary wealth (Belasco, 2007, p. 25).
Therefore, the accumulation or consumption of capital, ceteris paribus — assuming the buying power of money is approximately stable — will always be readily apparent in the changing monetary wealth positions of at least some individuals.
This will be particularly manifested in movements in the stock and real estate markets, which are devoted mostly to the exchange of titles to sums of capital goods. In addition, expansions or declines of the capital stock will be manifested in fluctuations in current incomes — in sum, monetary profits in the economy and in the general levels of wages and salaries (Rothbard, 1996).
As pointed out above, large-scale war (which is true in the case of WOT) involves a pronounced increase in preferences for present goods and necessitates a thorough reorientation of society’s productive setup from future to present goods. To establish this temporal restructuring of production in a money-exchange economy, there must occur a radical change in the flows of money expenditure, with consumption and military spending rising relative to saving-investment.
Regardless of what technique is utilized to accomplish this shift in relative expenditure, it must give rise to a “regressing economy” during the transition to the war economy. The regressing economy is one characterized by a declining capital stock. Its onset is marked by a “crisis” involving total business losses, rising interest rates, sinking stock, bond, and real estate markets, and a deflation of financial asset values (Belasco, 2007, p. 35).
When taxes are raised to finance the war, the crisis is immediately apparent. In order to pay their increased tax liabilities, citizens retrench on their saving as well as their consumption. In fact, they reduce their saving proportionately more than their consumption, for two reasons.
First, assuming an increase in the income tax, the net interest return on investment is lowered, meaning that the investor can now expect less future consumption in exchange for a given amount of saving or abstinence from present consumption. If his time preference remains unchanged, the worsened terms of trade between present and future goods encourages the taxpayer to escape the tax by increasing spending on present consumption and reducing saving and, thereby, his opportunities for future consumption. With all saver-investors responding in this manner, the aggregate supply of savings will decrease, and the interest rate will be driven up to reflect the increased tax on investment income.
Second, moreover, because the incidence of the increased revenue enhancement always falls on his nowadays income and pecuniary assets, it leaves the taxpayer less well-provided with present goods.
As his supply of present goods diminishes toward the bare subsistence level—at which point the premium he attaches to present over future ingestion becomes almost infinite—the individual experiences a progressive rise in his time preference, and the prevailing (after-tax) interest rate no longer suffices as equal compensation for prolonging his current level of saving-investment. He consequently further reduces the proportion of his income allocated to saving-investment.
Finally, as a means of rapidly generating the tremendous revenues typically required at the beginning of a large-scale war, the government might seek to tap, in addition to current income, accumulated capital.
This most likely would involve a wealth tax that is levied on each household in some proportion to the market value of the property it owns, including and especially its cash balances. The tax, if it were uniformly enforced on all classes of wealth, would force capitalist-entrepreneurs to neutralize or issue debt against their real assets to dispatch their tax liability. By its very nature, then, a wealth tax results directly in the consumption of capital.
Furthermore, even though such a tax is levied on net wealth accumulated in the past, it operates to powerfully increase time preferences and reduce savings even further because it must be paid out of present income and pecuniary assets and the possibility of its return can easily be precluded by wholly consuming income as it is received and by consuming whatever privately-owned capital remains (Rothbard, 1996).
References
- Belasco, A. (2007). The cost of Iraq, Afghanistan, and other global war on terror operations since 9/11: CRS Report for Congress. Retrieved August 17, 2007, from http://fpc.state.gov/documents/organization/89927.pdf
- Bush, G. W. (2001). Address to a joint session of Congress and the American people. Retrieved August 17, 2007, from http://www.whitehouse.gov/news/releases/2001/09/20010920-8.html
- Higgs, R. (1987). Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press.
- The White House (2003). National Strategy for Combating Terrorism. Retrieved August 29, 2007, from http://www.whitehouse.gov
- Pickup, S. L., & Kutz, G. D. (2005). Global War on Terrorism: DOD Needs to Improve the Reliability of Cost Data and Provide Additional Guidance to Control Costs: Government Accountability Office Report to Congressional Committees.
- Robbins, L. (1950). The Economic Problem in Peace and War: Some Reflections on Aims and Mechanisms. London: Macmillan.
- Rothbard, M. N. (1996). War and Foreign Policy. In For A New Liberty. San Francisco: Fox and Wilkes.
