by Terrence L. Chapman and Patrick J. McDonald

The current policy conflict over whether automatic cuts to the defense budget, negotiated as a commitment mechanism to ensure the fulfillment of the budget accord from last summer, should be implemented in January of 2012 illustrates some of the short term to medium term national security challenges associated with an era of budget deficits and increasing public pressure for fiscal restraint.    These cuts would reduce troop levels by approximately ten percent in both the Army and the Marines and entail sizable reductions in capital equipment, namely ships and planes, for both the Navy and the Air Force.  Secretary of Defense Leon Panetta has publicly described these cuts as “disastrous.”  The Chairman of the Joint Chiefs, Martin Dempsey, has warned that they risk hollowing out America’s forces, reducing the military advantage the United States possesses over other countries, while pushing the United States to be “less visible globally.”  Our research on the fiscal politics of power transitions and military conflict suggests that this internal fiscal struggle in the United States possesses much larger long term implications that bear directly on the possibility and consequences of American military decline.  In particular, we see the post-9/11 bipartisan support for tax cuts (except on upper incomes however defined) as a bipartisan choice for decline.

Our research examines how international order depends on the internal fiscal bargains within countries.  These bargains set the terms of revenue that can be extracted from society in order to fund military expansion, which in turn shapes the bargaining leverage of the state, and the structure or division of the larger international political status quo.  The spoils of international bargaining—like preferential trade ties, military basing rights in other countries, multiple alliance options, or the capacity to support/install democratic partners in other countries, benefit American citizens, but may do so unequally.  Key to the internal bargain is the degree to which those who foot the burden of increased defense spending are “vested,” or have a stake in, the international outcomes that that spending affects.  Also important is the ease with which those who fund public outlays can replace leaders who “overtax,” which influences the amounts governments can raise from society.

Decline is a relative phenomenon.  It involves a shift in the relative distribution of military power across countries.  These shifts can have two main consequences: they can reduce bargaining leverage of the declining state; and, as Martin Dempsey has suggested, possibly increase the risk of military conflict when countries seek to renegotiate the global status quo to reflect new and changing power relationships.

Domestic fiscal strength is a key determinant of international political strength.  As Leon Panetta said in his June testimony to Congress, there is no free lunch.  Governments generally have four means to meet revenue needs:  raise taxes, borrow, draw on publicly owned assets, or simply expropriate these assets from society (often by inflating away debt burdens or simply defaulting on debt as Germany did in the interwar period).  A politically independent Federal Reserve, a politically strong financial sector, a strong national skepticism of public ownership, and the presence of institutions that protect the rule of law have effectively taken the latter two revenue-raising strategies off the table.  The former two, tax power and borrowing, carry several tradeoffs.    Taxation reduces immediate consumption, on the other hand, but may be a more sustainable source of long-term strength, provided that citizens paying taxes are sufficiently “vested” in international outcomes, which may be reflected in the degree to which increases in U.S. power are redistributed through economic channels to fund economic growth at home.  Borrowing to finance tax cuts, wars, and greater government spending (as the U.S. has been able to do in roughly the last decade), avoids short-term sacrifice but invites a long-term problem of snowballing debt that delays tough fiscal decisions and makes fiscal power dependent on the borrowing costs for the state.  Most importantly, as the Greek crisis has clearly demonstrated, the capacity to borrow is intimately tied to a government’s political capacity and willingness to tax.

What is unique about the current American situation?  First, in the aftermath of the Soviet collapse and 9/11, the reach of American political and military influence has dramatically increased.  American troops now deployed around the world.  As a consequence, American forces are now part of the military and political status quo wherever they are deployed.  The withdrawal or diminution of these forces, in such places as Afghanistan, Pakistan, or the Horn of Africa, will generate political change as local groups whose influence had been limited by American forces press their concomitant growth in military power to their political advantage.  Second, the United States has built this position of influence without fiscal buy-in on the part of its electorate, instead drawing on foreign capital.  This raises serious concerns about the sustainability of America’s current global military position if the global community of lenders rapidly reassesses, as it been apt to do, the safety of U.S. debt.

The situation today bears some similarity to the 1920’s, when the United States self-imposed a temporary decline from a theretofore zenith of global power achieved at the end of World War I.  Among other things, the U.S. aggravated the reparations struggle and helped to undermine the nascent political order in Europe by opting for tax cuts rather than war debt relief for Britain and France.  Quite simply, the military power and global influence of the United States rest critically on its fiscal power at home.  If there is no such thing as free lunch, the American taxpayer will, at some point, need to increase its stake in the current international political status quo in order to preserve it.  Given current federal tax levels, we worry that bipartisan support for delay in fiscal stabilization through taxation makes decline, and its attendant negative political consequences for international stability and American influence, more
likely.

Terrence Chapman and Patrick McDonald are both Associate Professors of Government and Distinguished Scholars at the Strauss Center for International Security and Law at the University of Texas-Austin