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Covering the Cost of War

Robert Hormats, an international finance expert and the author of The Price of Liberty: Paying for America's Wars, describes the problems with current U.S. fiscal policy, and how to adjust the country's spending for present and future global battles.

A robust national defense system has as much to do with the strength of a nation’s finances as it does with the strength of its military. Few people understand this as well as Robert D. Hormats. A leading expert on international finance, a vice chairman of the Goldman Sachs Group Inc.; a veteran of numerous presidential administrations; and author of the recently published book The Price of Liberty: Paying for America’s Wars, Hormats has gone back through American history to track the financial underpinnings of the wars of the United States. His conclusion: Generations of American leaders have understood the critical relationship between financial strength and the ability to protect national interests, but that relationship is currently in danger.

Hormats sat down with strategy+business recently to discuss how the U.S. — or any government — can finance an appropriate level of military readiness in the future without jeopardizing its independence or standing.

S+B: This is a very timely book. One question it raises is, How can past wartime leaders teach us how to prepare for the long war on terror?
The best leaders throughout U.S. history have explained the true cost of national security to the American people. The best results come when leaders are very candid about what the threats are and what the cost of meeting those threats would be.

Wartime financing is not just about raising money. It also involves engaging Americans in the war effort, and capturing their hearts and minds so that when troops are sacrificing abroad, Americans are not immune from that sacrifice. During World War I and World War II, little children bought war stamps with nickels and stuck them in books. The point wasn’t to raise money — the government didn’t need those nickels and dimes — it was to establish this sense of engagement.

Neither Woodrow Wilson during World War I nor Franklin D. Roosevelt during World War II knew how much the wars were going to cost at the outset, but once they concluded the wars were going to be a lot more expensive and last longer than they anticipated, they were willing to make major changes in the U.S. financial system to pay for each war and explain why these changes were necessary. Conversely, when the true cost is hidden from the American public, like it was during Vietnam and the current war in Iraq, leaders lose credibility.

In the current war in Iraq and the broader war against terrorism, except for those who serve in the military and their families, Americans have not been asked to do anything. It could have been an opportunity for the president to introduce a bold policy for energy taxes and energy independence, or to get control over nonessential domestic spending, such as earmarking. Anything that showed there was some measure of sacrifice.

S+B: What difference would that have made?
First of all, remember that the Iraq War was very popular at the beginning. It was popular because Saddam Hussein was such an evil character and because it was initially successful. If the president had used that popularity to, for instance, add to his tax cuts a request that Americans pay a small tax to ensure wounded veterans received adequate medical treatment, this could have given people a sense that they were somehow identified with the troops fighting the war.

The point of this book is not to be critical of George W. Bush or of Congress. Instead, it’s to ask what our future will look like after the Iraq War. Suppose, for example, that we withdraw and then pull back from national security spending, as we did after Vietnam? Then what happens if we aren’t prepared for a future threat? To date, no one has been candid with the American people about why funds will be needed for a long time to meet national security requirements, what the costs are, and what the longer-term implications could be.

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  1. Robert D. Hormats, The Price of Liberty: Paying for America’s Wars (Times Books, 2007): The book on which this article is based evaluates war spending throughout U.S. history. Click here.
  2. Robert D. Hormats, “War Costs Money. Why Can’t Politicians Say So?” Washington Post, May 6, 2007: Not being upfront about the cost of war can negatively affect the nation. Click here.
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