President Trump’s proposed Budget for the year to September 2027 includes $1.5 trillion for defense, up from $1 trillion in the current year. Even on its face, this would produce a dangerous widening of a U.S. budget deficit that is already 6% of GDP. However, defense spending involves an additional risk that the enthusiasts who demand it will find new places to use the armaments, producing additional wars, global destruction and economic catastrophes. There is also the problem of the U.S. lobbying and environmental industries, which together make the U.S. far less efficient than other countries in getting bang for the buck in defense and other procurement. President Trump was elected on a program of reducing international commitments and shrinking government (remember DOGE)? This bloated defense budget is a tool by the big-government lobby to subvert the MAGA movement; it should be rejected with ignominy.
In theory, higher defense spending provides the spender with greater security in a naughty world. In a bipolar world, where the other pole is controlled by a regime with a lunatic and self-destructive notion of economics, this worked well. President Reagan’s defense buildup in the 1980s, in particular his foundational work on the defensive Strategic Defense Initiative, nicknamed “Star Wars” by the Left who were as destructive as ever, was highly effective, because Russia could not economically afford to match it. The Soviet economy, even on its official and overstated figures, had by the 1980s fallen far behind the United States, and a hyper-expensive new weapon system that would need to be spread over the vast area of the U.S.S.R. was completely unaffordable. Accordingly, even the beginning of Reagan’s U.S. defense build-up brought the U.S.S.R. to the negotiating table and eventually brought about its economic collapse through the non-viability of its economic system.
We are not today in such a world. China is economically becoming quite comparable to the United States (albeit less strong than it claims). China’s economic system, while very inefficient, cannot realistically be called Communist and does not have many of the defects of that despicable doctrine – the EU with its infinite layers of regulation is much closer to the classic command-and-control approach. Indeed, the EU is already almost completely useless as an ally and is likely to become more so, as its irrational obsession with “net zero,” which it obdurately refuses to relinquish, hollows out what remains of its manufacturing capability.
In defense procurement, the United States has developed an incredibly inefficient system, only different from the Communism of the Leonid Brezhnev era in that it lacks the Brezhnev U.S.S.R.’s cost controls and sense of urgency. In an all-out arms build-up race between the U.S. and China, my betting money would be on China, especially if I could get even modest odds.
The U.S. economy is nominally capitalist, but how capitalist can its military procurement be when major military contractors such as Boeing (NYSE:BA) have for many years lacked any capital and still lack tangible capital, because their greedy managements repurchased shares at a massive premium to their current price until the company’s shareholders’ equity fell below zero? In such a situation China’s nominally centrally planned military, many of whose supplying companies are privately owned and have balance sheets that are not mere figments of the imagination, may well have an advantage.
An arms race with more than one potential participant capable of winning is something we have seen before: it was the world of roughly 1897-1914, as exemplified by the board game “Diplomacy.” All the major powers began building up their armaments roughly simultaneously in the late 1890s. Over time, the global concert of powers, which had previously arranged itself in a kaleidoscope of alliances, became organized into two opposing blocs, with Germany, Austria-Hungary and Turkey on one side and France, Russia and later Britain on the other. Italy was initially neutral, the United States was independent, but over time inclining to Britain, while Japan was driven towards Britain by its desire to resist the Asian expansionist ambitions of Russia, which it did in the Russo-Japanese War of 1904-05.
From 1905, Europe suffered from a series of crises – Morocco, Bosnia, Agadir, the Balkan Wars – each of which ratcheted up the tensions between the Great Powers and caused them to raise defense spending further, tightening the terms of conscription and building turbine-powered “Dreadnought” battleships. Apart from bloating government, weakening economic growth and creating corruption, this strengthened the political position of the military, especially in Germany, Austria-Hungary and Russia, where constitutional government was weak. Generals like the younger Helmuth von Moltke (1848-1916) in Germany and Conrad von Hötzendorf (1852-1925) in Austria grew overmighty, while in Russia the assassination of the capable Pyotr Stolypin (1862-1911) threw government largely back into the hands of the inept Tsar Nicholas II. The only rational Russian anti-war voice in the 1914 crisis was Tsarina Alexandra’s mystic Grigori Rasputin (1869-1916), who had a much better idea than the Tsar and his ministers of opinion among the rural masses and knew the danger of making them suffer through a European conflict.
The blame for war in 1914 was widespread – Germany was less to blame than most, although von Moltke wrongly saw it as a golden German opportunity. France, thirsting for revenge for 1871, and Russia, appallingly run and needing to mobilize before everyone else because its railways were so inefficient, should bear far more of the blame than they have normally received. So too should Britain’s Foreign Secretary Sir Edward Grey, a slow-witted and idle man who disliked foreigners in general and sat supinely in London while crisis loomed.
However, the most aggressive Great War instigator was Hötzendorf, the Sen. Lindsey Graham (R.-S.C.) of his day, who had attempted to start a war with Serbia 25 times over the previous decade and saw Archduke Franz Ferdinand’s Serb-instigated assassination as a golden opportunity to do so. Like most neocons, Hötzendorf was inept at actually fighting the war, dithering over whether to send most troops to Serbia or to Galicia to hold off the Russians, so that a third of the Austro-Hungarian army meandered on months-long railway journeys between the two fronts and were no use to either, resulting in Austro-Hungarian defeats everywhere.
As the above outline shows, none of the statesmen of July 1914 wanted to precipitate World War I; they would have been insane to have done so, since most of their regimes would be destroyed by it. That illustrates the chief danger of high armaments spending and the increased probability of wars to which it leads: the “tail risks” of disaster that such policies entail.
The U.S. involvement in Vietnam demonstrated this. At each stage, from Eisenhower’s initial deployment of advisers in 1960 to Lyndon Johnson’s manipulation of Congress’s “Tonkin Gulf” resolution in 1964, the nominal decision being taken was for only a modest additional commitment to the Vietnam conflict beyond what was already in place. Yet each U.S. commitment made it more difficult, militarily and politically, for the U.S. to withdraw, and increased the probability of an additional more costly commitment being required later. Hence even Eisenhower’s small first commitment had large “tail risks” of massive U.S. costs and losses that appeared initially to have a low probability. Proper analysis would have greatly increased the expected costs of the apparently modest decision being taken and would perhaps have reversed it.
The current Iran conflict shows many of the same “tail risk” characteristics, which is why I was doubtful about President Trump’s decision to enter it. The nature of the government that runs Iran is of little importance to the United States, which does not depend on Middle East oil, and the “tail risks” of a prolonged conflict are truly frightening – including simply the downside risk of handing the United States back to the Democrats electorally before they have learned their lesson as they did in 1981-93, so that they will not repeat their catastrophic policies of 2021-25. The one big advantage we have in the Iran conflict is Trump’s blessed ability to “TACO out” and cut his losses, as his predecessors notably did not do in Iraq, Afghanistan and indeed Vietnam.
A massive increase in defense spending will encourage the Hötzendorfs that infest current U.S. political life, especially in the Bush neocon anti-Trump wing of the Republican party. It will also bring equivalent increases in defense spending in China, Russia, India, the EU and other potential adversaries, thereby greatly increasing the risk of further wars, as in 1897-1914. No, thank you!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)