America is unlikely to defeat a peer opponent
America is incapable of exercising hegemony anymore. This post explores why.
Noah Smith writes about the Arsenal of Democracy (AOD) being gone, noting that “the balance of military production potential now lies firmly on the side of the autocratic powers.” This development poses a threat to the continued relevance of Western-style democracy as a governing option for states outside of the Americas, western Europe, Japan, Australia and New Zealand.
It would seem the problem is simple. Simply build more armaments. This would require major increases in government outlays at a time when government deficits are already high and rising. I produced an estimate for monetary balance in 2023. It looks to be higher than last year, reflecting a larger federal deficit and smaller financial flows, implying the inflationary forces the Fed is fighting have not fully dissipated and the higher interest rate program is going to need more time to work. Higher interest rates mean higher government interest payments on new debt, creating a built-in tendency towards higher deficits regardless of spending. A new program of increased spending on armaments will only exacerbate this trend, making the Fed’s job more difficult and likely require even higher rates.
President Biden’s approval on his handling of the economy is in the toilet and he may lose the 2024 election because of the brief episode of high inflation over the past two years. Two previous episodes of high inflation, after WW I and in the late 1970’s, were followed by a political wipeout for the governing Democratic party. If Democrats were to try to rebuild American power, they would have to do this without triggering the negative political effects of inflation. Republicans would face the same issues, as well as contend with rising isolationist sentiment in their party.
Creation of the original AOD largely avoided wartime inflation through use of price controls. Continuation of high wartime tax rates meant monetary balance fell rapidly after the war, eliminating inflationary forces by 1948. The result was a brief burst of inflation over 1946-47. More importantly, there was no decline in real wages, unlike today. This happened because of policy promoting the evolution of stakeholder business culture in a pro-worker economic environment. The creation of this proworker environment was the centerpiece of the Roosevelt dispensation. A dispensation is a period when one party’s ideas form the basis for policy. Another term for dispensation is political order. The existence of a dispensation is confirmed when one party wins three Presidential terms in a row. Hence, the existence of a Democratic dispensation was confirmed by the 1940 election, that is, before the war. Because of it, it was possible to ramp up war production and win the war without excessive inflation and so retain political authority.
Building the AOD was made possible by the Roosevelt dispensation, which had been established by political victories enabled by the rising trend in wages directly produced by New Deal policy that was done in such a way as to be clear to voters where this benefit was coming from.
The Democrats lost their dispensation when real wage growth ended in the 1970’s. A new dispensation was established under President Reagan in the 1980’s. The centerpiece of the “Reagan Revolution” was implementing economic policy so that a larger fraction of the fruits of economic activity went to those on top. Lower top tax rates are a key feature of the Reagan dispensation.
Low tax rates mean high deficits. To keep inflation low required policy such as high interest rates and stock buybacks that favored financial returns to capital rather than returns to labor. Deficit spending acts to stimulate the economy in lieu of consumer demand generated by rising worker incomes. American capitalism has required increasing amounts of government-provided life-support to keep operating under the Reagan dispensation. Table 1 shows accumulated public debt over the five most recent business cycles and over three previous periods. Also shown in parentheses is growth in real per capita GDP during each period.
Table 1. Fiscal Stimulus* and GDPpc growth rate (in parentheses).
In the six decades before 1929, per capita GDP growth of 1.8% was achieved under the Lincoln dispensation with minimal stimulus. The record achieved under the Roosevelt dispensation over 1929-1973 achieved much stronger growth (2.5%) than before, but at the rate of $4.3T/decade (2021 dollars) of stimulus. Much of this stimulus was used to win WW II and create the AOD. In comparison, the two decades following 1980 under the Reagan dispensation gave 2.0% growth achieved with an average of $2.5T/decade of stimulus, and since 2000 the results have been terrible. Economic policy makers over 2000-20 applied $9.1T of stimulus per decade to give 1.1% growth. Compare this to the figures during the 1973-81 stagflation era: 1.6% growth with $1.7T of stimulus. The overall record achieved over 1981-2020 of 1.7% growth using $5.9 trillion/decade pales compared to the 2.3% growth with $3.9T of stimulus over 1929-81. The Roosevelt dispensation produced 35% faster growth using one-third less stimulus and left an intact AOD for its successor.
The reason for this is easy to see. The objective of economic policy under the Roosevelt dispensation was to generate wage growth in order to retain the working-class votes that formed the basis for their right to govern. The objective of economic policy under the Reagan dispensation is not to grow the economy, but to grow the wealth of shareholders. Under this dispensation, corporate profits are invested in stocks, either directly through buybacks or indirectly through dividends, rather than into new productive capital. It is no surprise that economic growth has been anemic. Equity values, on the other hand, have grown beyond anything seen in the country’s history. At its 1968 peak under the Roosevelt dispensaiton, the “Buffet ratio” of stock market capitalization to GDP was 0.95. At its 2021 peak (so far) under the Reagan dispensation it was 2.08.
The current Reagan dispensation is unsuitable for building real military capability or pretty much anything else besides financial assets. Just to keep the economy operating under it requires a great deal of stimulus that in the current environment may be inflationary. Thus, to rebuild the AOD as Noah calls for, requires a political dispensation capable of building things like military power.
The purpose of a dispensation is to prioritize the dominant party’s political preferences. These choices reflect the interest of the dominant interests that the party represents. Elite capitalists are one such interest. They own/control two of the three factors of economic production (capital and resources) and so play an enormous role in the operation of the American economy. Their importance means they will necessarily have at least one major party looking out for their interests. Historically the Republican party has represented their interests, as did their Whig predecessors, and they continue to do so today. Elite capitalists are then the dominant interest represented by the Republican party. The economic content of the Reagan dispensation reflects their preferences.
Maintenance of a dispensation requires electoral success. A party needs to appeal to enough interests to achieve an electoral majority. The Democratic party maintained the Roosevelt dispensation by delivering positive economic results (proxied by real wages) to working class voters, who presented a comfortable majority of the electorate. In contrast, while very important, capitalists and senior management are a minority of voters and Republicans cannot rely on their votes alone to maintain the Reagan dispensation. Hence, they have adopted a form of white identity politics to broaden their appeal. White identity politics involved promoting policies and memes that have an appeal to significant numbers of white people. For example, hunters and rural Americans own and use guns for utilitarian purpose and are disproportionately white. Republicans have worked to align identity as a white gun owner with Republican identity by passing laws encouraging gun use. Further examples can be found in chapter 5 of America in Crisis.
Since whites are a majority of the electorate, this strategy is quite effective. Democrats today rely on this strategy as well, but since the Republicans already have the dominant economic and political factions in their camp, they have to cobble together a constituency consisting of an array of identity groups. Over time, one of these, the credentialled elites (what I call mandarins) have become the most important. Today the mandarins play a role like that the capitalist elite plays for the Republicans, while both parties continue to make identitarian appeals.
It would seem that rebuilding the AOD could be achieved by simply switching to a new dispensation resembling the Roosevelt one. The mandarins pose an obstacle to establishing a new Democratic dispensation because they have come to accept some aspects of the Reagan dispensation (perhaps because they benefit financially from its operation). Thus, they are content to play a Preemptive presidential role when in power. The clearest example of this was the decision of Democratic party leaders to support the Republican-crafted TARP bill in fall 2008, which may have forestalled a financial collapse. Compare this bipartisan cooperation between outgoing and incoming administrations with its utter lack during the Hoover-Roosevelt transition. Obama was willing to restrict his response to the 2008 crisis to policies consistent with the Reagan dispensation, while Roosevelt refused to do the same with respect to the Lincoln dispensation (among whose tenets was the sanctity of the gold standard, which Roosevelt would later suspend).
Between the Republicans and Democratic mandarins there is no support for a dispensation that would allow for the US to build non-financial things, whether a new AOD or a Green economy, much less an economy that works for everyone.