April 25, 2018

Episode 15: How Debt Finance Leads to War and Defense Spending

We’re increasing defense spending and launching military strikes—and we’re putting it all on the national credit card. That may be no coincidence. Sarah Kreps finds that Americans are more supportive of wars when they are financed through debt rather than taxes. Across the world, Matt DiGiuseppe finds that a nation’s creditworthiness leads to more military spending, especially in response to threats. Military power and conflict used to be financed by taxes, limiting democracies’ appetites, but now that accountability has been lost.

The Niskanen Center’s Political Research Digest features up-and-coming researchers delivering fresh insights on the big trends driving American politics today. Get beyond punditry to data-driven understanding of today’s Washington with host and political scientist Matt Grossmann. Each 15-minute episode covers two new cutting-edge studies and interviews two researchers.

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Grossmann: This week on Political Research Digest, how debt finance leads to war and defense spending. For the Niskanen Center, I’m Matt Grossmann.

We’re increasing defense spending and striking militarily, and we’re putting it all on the national credit card. That may be no coincidence. New research finds that Americans are more supportive of wars when they’re financed through debt rather than taxes. I talked to Sarah Kreps of Cornell University about her recent study with Gustavo Flores-Macías, published in the Journal of Conflict Resolution, called “Borrowing Support for War: The Effect of War Finance on Public Attitudes toward Conflict.”

Debt finance may also help boost military spending. I talked to Matt DiGiuseppe about his new research published in the Journal of Peace Research, “Guns, Butter, and Debt: Sovereign Creditworthiness and Military Expenditure.” He finds a worldwide pattern with credit worthiness leading to more military spending, especially in response to threats.

Grossmann: Traditionally, wars were financed by taxes, but Sarah Kreps says the turn to debt finance has limited democratic accountability.

Kreps: One of the big theories of democratic accountability in war is that, not that you need support from the people to go to war and sustain the war. But that what makes a democracy different is that, since the public bears the burden in blood and treasure, the whole accountability basis of war is that democracies would keep these wars shorter and low cost because the public would basically revolt when they’re faced with the cost vs. benefit.

It’s not that they’re not willing to pay the cost, but, over time, the benefit would have to be commensurate with the cost, and with that out of balance, the public would withdraw its support. We looked at this experimentally, just to see the degree to which this was the case. It turned out that the same war when financed with a war tax has about 16 percent less support. It was actually pretty significant. If you think about it, if you go from, let’s say, 50 percent support to 35 percent support, leaders no longer look like they’re on a solid footing when it comes to public support.

Grossmann: She says debt finance made it easier for Americans to support the wars in Iraq and Afghanistan.

Kreps: We said, “Well, what if there aren’t those costs?” What does that do to democratic accountability linkages?

What it suggests is there is an accountability gap that, if you were to impose an actual cost, you would no longer have these quite artificially inflated levels of support that we see. It’s not to say that, in Iraq and Afghanistan, which didn’t have war taxes … It’s not as though those levels were high.

Our point is those same wars would have lost support far earlier, if getting support to begin with at all.

Grossmann: Kreps says, since Vietnam, policymakers have learned to limit the cost in terms of both blood and treasure.

Kreps: Johnson’s advisors were saying, “We need to pay for this war,” and Johnson says … basically, acknowledging what we know as an academic’s who’ve studied this, which is that, if you make people pay for the war and make them aware of the cost, that that would cause them to withdraw their support from the war, and he was worried, [inaudible 00:03:34] but importantly, that this would also cause people to scrutinize his social programs. I think it caused Johnson to really delay in having the war tax, and that was the last war tax we’ve had.

Grossmann: In the survey experiments, they tried all sorts of variation, but all came to the same conclusion.

Kreps: I think what made the findings more interesting is that they did compare with paying the cost in blood through casualties, and we compared across different types of conflicts. We compared across countries and across political parties. As a scientist, we like to see variation. In this case, it was pretty interesting that there was such convergence … country, which political party … that this caused people to rethink their support for the war when they were faced with paying the cost of it. In a lot of ways, that’s what we were expecting. I think what we were surprised by was the consistency with which that was the case.

Grossmann: Kreps thinks we may be in a new era of no war taxes, and their results don’t depend on time and place.

Kreps: I don’t see us going back at all, and I don’t see it depending on whose in the White House, and I think the fact that … We did this in France, too. France is notorious for being a high tax state. We have almost the same percentages that opposed the idea of a war tax there as did so here within a point or two.

Grossmann: During recent war debates, tax financing wasn’t even on the table.

Kreps: We looked at this qualitatively in the US. We asked people, “Why are you so opposed to this idea of a tax that the US historically has done this.” People said, “Why? What’s next? A walking tax, an air tax, a breathing tax?” What’s clear is that this is just no longer part of the political landscape, and that it’s not a right, left thing. It’s a … just people … this is not something we do now. The norms on this have changed.

Grossmann: Kreps expands on the argument in her forthcoming book, Taxing Wars, and finds a global pattern.

Kreps: The book is much more cross national. As I mentioned, I brought in evidence from France, and Israel, India, and I think what is remarkable is that these countries … The public in all of these countries have a sensitivity to these high taxes and high cost wars that wasn’t present before … that is just no longer worth the stakes, and that that lack of tolerance for high cost wars now feeds back into the types of wars that we’re willing to fight. I found it very interesting, for example, that the US war planners no longer talk about a major war with China … have essentially written that out of the lexicon in planning, because they know that this is not something that the US public would tolerate.

Grossmann: DiGiuseppe also finds a strong worldwide relationship, this time between debt availability and military spending.

The finding of the paper is that, as states increase their credit worthiness, their ability to borrow from foreign creditors, to finance budget deficits, the more they’ll spend on their military, and, additionally, the more they’ll spend on their military when they have greater threats. Not having access to credit really limits the country’s ability to finance their military to deal with threats and to finance basic military spending.

This is pretty intuitive, because, just like a household budget, right? When you have a credit card … When you have a large line of credit on your credit card, you’re more likely to spend more on consumer goods, and when emergencies arise, say severe weather or the prospect of severe weather, you’re more likely to invest in things to protect yourself against that in comparison to someone who is lacking a line of credit and would have to sacrifice their more immediate welfare to provide for security or to address emergencies that might pop up.

The study looks across the world from 1980 into the 2000s, and shows that when states have an increase in credit, their military spending goes up, but when they show a drop in credit, their military spending goes down. When they face threats, when they have credit, they can spend on military, and when they face threats and don’t have credit, they don’t compensate with higher military spending.

Grossmann: He says, “We usually think of a trade-off between defense and domestic spending, guns versus butter, but many countries don’t need to make the choice anymore.”

DiGiuseppe: I think the conventional wisdom about military spending in comparison to domestic spending is this idea of a guns versus butter trade off. In order to invest more in guns, we sacrifice butter. In order to invest more in butter, you need to sacrifice guns. For many countries across the world, this is true. We also know that for many countries, they can expand the pie by borrowing more money, right … by running budget deficit. They’re financed by debt.

My research really suggests that the guns versus butter trade off really plays into domestic politics. Politicians, when they need to increase the military spending, have to get that money from somewhere if they don’t have access to credit, and they’ll be reluctant to increase taxes or cut spending. But when you have access to credit, you can borrow. If people discount the future, and they don’t care about borrowed funds and paying back debt in the future as much as they care about losing things today.

This is going to give the politicians an ability to provide guns and butter together. It’s not so much of a trade off.

Grossmann: The U.S. has plenty of creditability and a large defense budget.

DiGiuseppe: The United States has been incredibly lucky and privileged that we have the world’s reserve currency for the stability, the rock of global financial system, and even throughout the Great Recession, our interest rates actually dropped as people sought to put their assets in the safety of US Treasure bonds. The Great Recession didn’t really affect our creditworthiness.

Grossmann: Worldwide, defense budgets are usually stable, but you occasionally see the type of see-saw we are about to experience here.

DiGiuseppe: There is a tremendous amount of inertia in the defense budget. It’s really hard to cut defense programs. The military contractors are good at making sure all districts have some sort of element going into their debt expense procurement that makes it hard for politics to cut military spending. In the defense budget, increases are not generally made. It’s stable most of the time in the United States, but that’s also because we’ve had very consistent access to credit and haven’t had to make such tough choices that other countries have had to make. But, across the globe, there are times where countries make significant changes to their military spending.

Grossmann: Although creditworthiness and threats lead to more military spending, democracy usually depresses it.

DiGiuseppe: There are two big things that influence military spending in the literature before my article. It’s that one, international threats, external threats and your exposure across the globe are going to determine what your military spending outlays look like. The other one is democracy. Democracy has a negative effect on military spending. It stems from classical liberal arguments that individuals want social benefits. They don’t want to pay high taxes. Enough politicians responding to that pressure or having to respond to that pressure, reduce military spending.

Grossmann: DiGiuseppe says that credit availability is rising globally, but it has not produced a worldwide arms race.

DiGiuseppe: Theoretically, my work should suggest that as access to global capital increases, we should see more military spending, but the data just don’t support that argument, at least at the global level. This is probably for a couple of reasons. We don’t really have great data on update spends on the military globally. Many countries measure their military spends differently, and aggregating them up is quite difficult, especially over long periods of time, once you get past the early ’80s.

Grossmann: The evidence might also help confirm historical analysis. The UK and the US both became major military powers when their credit availability rose.

DiGiuseppe: There is definitely a story to be told here about the why’s of the US and their ability to access credit and their ability to invest in military spending. In fact, a lot of the early research on the relationship between access to debt and military spending suggest that this access to credit had a large role to play into the eventual hegemonic position that privilege upheld … 19th century, rather.

Grossmann: It’s consistent with the view that the US won the Cold War…in part by taking advantage of better credit or “bankrupting” the Soviet Union.

DiGiuseppe: We know that the Soviet Union, because it’s a communist country, has such inefficient economic intuitions, that it’s not able to borrow to keep up. Any additional money they put into military spending came at the expense of domestic spending to keep the population happy.

Grossmann: DiGiuseppe says he also sees implications for foreign policy with Iran and North Korea where targeting credit might be successful.

DiGiuseppe: The strategy of the United States and others is to try to limit the access to foreign funds of Iran and North Korea. Certainly nobody … no private creditor in their right mind would lend money to North Korea, or perhaps even Iran for that matter. They’re not likely to pay it back. If we’re engaged in an arms race with these countries, of course we have so much more military power than them. Denying them access to credit is going to force them to make hard choices to impose strength on their ability to provide public goods, and even private goods in the case of Iran and North Korea. In the extent to which their requested capacity allows them to overcome this will determine how far they get ahead. Certainly, imposing those financial restraints on them is gong to force them to make hard choices that, maybe, they, potentially, otherwise would not have had to.

Grossmann: He sees a broader lesson for research, as well. We gain by combining the perspectives of international and domestic politics as well as those of political economy and conflict.

DiGiuseppe: This is an important development in the field. For a while, international relations was put into to conflict at war and major power war, for that matter. That was seen as high politics. Studies of ITE and economic study of trade and monetary policy was seen as low politics, not worthy of the same status of war. I think that’s changed as international relations has begun, especially in the United States. If we’re considering the domestic implications of foreign policy decisions, it’s incumbent on us to explore this tension between political expenses to provide economic benefits and the political incentives to provide security of the country. Those things aren’t going to always overlap. They’re going to be situations where an increase in military spending is going to require sacrifice, and understanding those trade-offs is going to be incredibly important, especially given in the United States where most people don’t know a lot about foreign policy.

Grossmann: Kreps agrees that breaking down subfield boarders is improving our understanding.

Kreps: The international relations folks, who for a long time pretending that all of this was international structure doing the work and great power politics … I think there is a realization that domestic politics has a big role to play in influencing both how a country goes to war, but how it stays in the war. I think that you cannot explain, for example, how the US is in a 17-year war in Afghanistan without making reference to the way in which domestic politics has created an environment that makes that possible.

Grossmann: DiGiuseppe says the two papers covered here word together well. With public opinion, part of the mechanism for debt enabling military spending and war.

DiGiuseppe: If we were going to get to the mechanism underlying the research that I’ve done that shows states that are more creditworthy and spend more in military spending and  additional research that comes out that suggests that those states have access to credit, they’re more likely to engage in conflict.

It essentially increases the autonomian leader to overcome domestic trade constraints, and I’m finding that across national studies with states that have access to credit do, in fact, engage in conflict more often.

Grossmann: In the future, Kreps expects politicians to keep using the strategy of putting off costs to the next generation to maintain support for war.

Kreps: For very little cost and no democratic backlash, they can keep troops where they are. Conversely,  the politics of bringing troops home is really hard, because they don’t want to be the ones with egg on their faces if they’re the ones to have withdrawn and then there’s a terrorist attack that happens on their watch. I think they just stay the course because of the seemingly low cost of doing it, and the way in which the discords of the US has shifted since 9-11, which is no one wants to be seen as soft on terrorism.

Grossmann: DiGiuseppe says even the US should watch out for credit availability to tighten, and when it does, unpopular military budget is likely to be on the chopping block.

DiGiuseppe: If the United States for some reason loses access to credithow long is it going to be before military spending is on the chopping block? How much do individuals care about security in contrast to the economic incentives? We have some clue given the macro evidence that I presented that they’ll seek…or at least that military spending should eventually come at the expense of our access to credit as people prefer domestic programs. We don’t really have good micro evidence of that so far. Some preliminary pilot studies I’ve done thus far show that military spending is actually a pretty popular way to reduce the deficit, and that preference for reducing the military spending increases as the prospect of that crisis comes closer … at least the perceived prospect of that crisis closer in time, and they’re less likely to cut military spending.

Grossmann: Kreps thinks the trend toward higher debt brings little democratic accountability but is not sure when it will end.

Kreps: You can’t just go into debt indefinitely, but, as a country, the US does. I think that this has distortionary effects on foreign policy, because it can … think it can do it all. I think it gets away with it because it has a public that no longer is very accountable because its not having to see or pay the consequences of it, either financially, because of taxes, or in blood, because of it’s conscription and with drones, too.  I’m not advocating for more casualties and more taxes. That’s not the takeaway.

The takeaway is that there needs to be a system of accountability, because the traditional mechanisms for doing that are no longer present.

Grossmann: There’s a lot more to learn. Political Research Digest is available biweekly from the Niskanen Center and on iTunes. I’m your host, Matt Grossmann. Thanks to Sarah Kreps and Matt DiGiuseppe for joining me. Join us next time to find out whether anti-immigration politics killed the California Republican Party and what it might mean for the future of the GOP.