Newsday: U.S. must put economics first
BY JAMES M. LUDES AND BERNARD I. FINEL James M. Ludes, left, is the executive director and Bernard I. Finel is senior fellow at the American Security Project, a bipartisan think tank in Washington.
The financial crisis and how we respond to it will have a lasting impact on America’s national security.
While congressional action on the bailout may inject needed cash into America’s credit markets, the $700 billion needed to finance the plan – in addition to hundreds of billions to make good on the debt owed by Bear Stearns, Freddie Mac, Fannie Mae and AIG – require the United States to assume massive new debts.
All told, this crisis may cost the United States more than $1.5 trillion – a staggering, if necessary, sum. And with the federal budget already in deficit, every single penny of this will be financed by adding to the national debt.
Yet too little attention has been paid to who is financing that debt and what it means for the national security of our country.
The United States was already dangerously indebted before the housing crisis forced the government to slip even further into the red. Since January 2001, the U.S. national debt has increased from $5.71 trillion to more than $9.64 trillion in August. Our foreign debt has increased even faster, from $1.01 trillion in January 2001 to $2.67 trillion today.
The debt we owe to countries that do not share our interests or whose interests may run at odds with our own has grown even faster than that.
In 2001, we owed oil-exporting nations $48.5 billion – we now owe them $173.9 billion. In 2001, China held $61.5 billion in U.S. debt; it now holds $518.7. In 2001, Russia held less than $10 billion; it now holds $74.1 billion.
The new debt we are assuming in this crisis needs to be understood as a potential strategic vulnerability. Clearly, those governments buying our debt are investing in America, but they are also gaining leverage that we might wish they did not have.
Consider the Suez Canal Crisis, which underscored the relevance of economic factors to a country’s ability to engage in military action. World War II had destroyed the economies of Western Europe. The United States alone had preserved the economic might to finance reconstruction – and did so through a variety of mechanisms, including the Marshall Plan, bilateral loans and support of the International Monetary Fund.
Britain had taken advantage of all three, and it had continued to support its currency, the pound, at a fixed exchange rate determined to be important for trade and economic health. By the autumn of 1956, in the middle of the Suez crisis, which began in July, Britain was unable to protect the pound against devaluation without American support.
At that moment, President Dwight Eisenhower used careful and, frankly, ruthless economic diplomacy to force Britain to accept the demands of the United Nations and withdraw completely from the canal.
The United States had a stake in Britain’s economic stability. But Eisenhower concluded that in this crisis, America had an even larger stake in forcing the British to back down. The Chinese, or others, may make a similar calculation about the United States in the future.
This isn’t rocket science. Unlike the challenge of achieving energy security, which will require innovation and technological breakthroughs, the solution here is plain-old common sense. America has to live within its means.
In the past eight years, we have financed two wars and massive tax cuts to the wealthiest Americans by mortgaging not just our children’s future, but their very security to the highest bidders around the world.
Debt-financed tax cuts and overly zealous deregulation have proven to be a failed social experiment with potentially dire national security consequences. We have long recognized that cuts to defense spending can sometimes hurt national security; so too must we acknowledge, once and for all, that tax cuts and runaway spending can do the same.
The United States is a rich and powerful country. It is criminal that we have weakened our own fiscal health so gravely that we are left to consider the national security consequences of restoring liquidity to credit markets. But we must.
