An Economist’s Case for a Non-Interventionist Foreign Policy

My talk at the Hoover Institution

The Naval War College, based in Newport, Rhode Island, runs a special 11-month course for foreign Navy officers. On February 3, the Naval War College held a special morning session at the Hoover Institution, where I am a research fellow. I was invited to speak. The best invites, in my experience, are those for which I get to choose the topic. That happened in this case. So the topic I chose was “An Economist’s Case for a Noninterventionist Foreign Policy.”

The four speakers, in order, were Gary Roughead (Admiral-Retired), formerly the Chief of Naval Operations and a Distinguished Visiting Fellow at Hoover, me, Bruce Thornton, a professor of classics and humanities from Fresno State University and a research fellow at Hoover, and George P. Shultz, formerly Secretary of State under Ronald Reagan and a Distinguished Fellow at Hoover.

The audience was, I believe, all Navy officers. There were 47 of them, representing 44 countries. I was warmly received by many of them, especially the officer from Bangladesh, and courteously received by the few U.S. military officers in attendance.

You can listen to the audio here (30 min).

Following is a transcript:

Commander Steve Newlund, US Navy: Our next speaker is Professor David Henderson. He’s a research fellow here at Hoover. His full-time job is as an associate professor at the Naval Postgraduate School in Monterey. He was born and raised in Canada and has been a United States citizen since 1986[amazon asin=0865976651&template=*lrc ad (right)]

I just want to point that out, sir.

(LAUGHTER)

He earned his PhD in economics from the UCLA. He is the editor of the Concise Encyclopedia of Economics, which is translated into six different languages. He’s also author and co-author of numerous books, to include The Joy of Freedom: An Economist’s Odyssey. He’s been published in no less than 30 different periodicals and magazines and he has appeared on countless television shows, to include The O’Reilly Factor – just a small plug for that. Aside from his many awards and decorations, he’s also testified numerous times to both the House and the Senate and the Senate Armed Services Committee.

Without further ado, Professor Henderson.

(APPLAUSE)[amazon asin=0130621129&template=*lrc ad (right)]

HENDERSON: Thank you, Steve.

And thank you.

And how is my volume?

(CROSSTALK)

HENDERSON: It’s good. OK.

So before I get into my talk, I just want to second a couple of things that Admiral Roughead said. First of all, as Steve mentioned introducing me, I teach at the Naval Postgraduate School and so I teach military officers, including, by the way, military officers from some of your countries. I’ve taught students from Israel, from Pakistan, from Norway; not Nigeria yet, I think; Bangladesh, I think, once; and a number of your countries and so I’ve gotten to know a number of people from your various militaries.

I want to also second something Gary Roughead said about the all-volunteer force. It is expensive but it’s worth it. I used to poll my students – I got to the Naval Postgraduate School in 1984 and I used to poll them about once a year – they’re typically lieutenants or lieutenant commanders, that range – and ask them, who favors the all-volunteer force and who would like to go back to a draft. And when I first started doing that, the ratio that favored it was probably about 6:1. And then it went to 8:1. And then it went to 10:1. And then it went to 20:0, which, by the way, as the mathematicians in this audience can tell you, is undefined.

(LAUGHTER)

And so about 10 years ago, I quit polling them. It’s unanimous. And then you ask them why, and it’s almost always the same answer. It isn’t my ideal answer. My ideal answer is like the answer that Milton Friedman would have given, which is, it’s about freedom. People ought to be free to choose their career, especially when the career they don’t get to choose might put them at risk of being killed. But their answer is a much more practical one: It works. They say things like, why would I want to be in charge of a whole lot of people who don’t want to be there. That’s their basic answer.

So as Steve mentioned, I’ve done a number of things in my past. I want to show you one of the pictures I’m proudest off. This is with my big boss, who was a few levels above me and one level above George. Ronald Reagan, in his office in 1991, about three years – sorry – 1993, four years after he finished being president. And I’m not going to give you a big slide show. We’re two-thirds of the way through my slides. And then I’m just going to talk.

(LAUGHTER)

I’ve also been pretty active in trying to push for freedom, trying to rein in the federal government because – by the way, let me tell you something this man said that I think is absolutely correct. In 1981, and remember that was pretty much close to the peak of the Cold War, Barbara Walters, a famous ABC reporter, interviewed Ronald Reagan at Thanksgiving. And by the way, I cannot find the transcript. I cannot find it on YouTube. But I wrote it down. It was really striking. Barbara Walters asked Ronald Reagan, what do you think about the Soviet Union and how much of a threat they are to us and to our freedom. And he said, “They’re a threat, but the biggest threat to our freedom is our own governments.” And I agree with him. It’s governments at every level in the United States right now and in most of the world that are assaulting freedom daily.

And so now I want to show you a picture of me with someone else, who I’m not such a big fan of. I tried to probe him a little. He came and he was the graduation speaker at the Naval Postgraduate School in June. And you’ll see that it was a graduation by the hat I’m wearing. And you’ll see someone’s thumb in the way, but, oh, well. That’s me on the right. Who is that on the left? Anyone know? General Keith Alexander, the head of the National Security Agency, which now has admitted essentially to basically collecting information on the calls we make. They aren’t necessarily listening but they know, if they want to know, whom you’re calling and who called you.

OK, that’s the end of my slide show.

(LAUGHTER)

So when I was a senior economist with President Reagan’s Council of Economic Advisors, my office was an old, exotic-looking building called the Old Executive Office Building, now the Eisenhower Building, located right next to the White House, which is separated by a narrow driveway. It’s the place most people work when they say they work in the White House. It’s not literally true they do. I’ve started doing that, too. Oh, yeah, I used to work in the White House.

(LAUGHTER)

Being a curious type, I looked into the history of the building and found that when it was first built in about 1870, it housed the War Department, the State Department and the Navy Department. That means that that building, combined with the Treasury, which was on the other side of the White House and just a carbon copy, housed virtually all of government except the post office and the fledgling Department of Agriculture. That was the size of the US government.

Now what happened in between that led to such a massive growth of the federal government in a country that was justifiably celebrated as the Land of the Free? And by the way, let me just give you a couple of statistics. The federal government in those days spent roughly between 2% and 3% of GDP. Now, it spends approximately 21%.

So what happened? A large part of what happened was war. A huge amount of the new power that the government took on in the 20th century was power that it acquired during and due to war. When the wars ended, the power diminished but never back close to its prewar level.[amazon asin=B00ADC4290&template=*lrc ad (right)]

Economic historian Robert Higgs, in his book Crisis and Leviathan, was the first to point out this pattern, and he called it a “ratchet effect.” And I will just give you a couple of examples. I go into it more at length for US audiences but I know that you’re not typical US. But we generally in America think of Prohibition as starting in 1920, two years after the war. Well, not quite. It started during the war. During the war, the government imposed price controls on wheat. As almost any economist can tell you, if you impose a price control below the free-market price, you get a shortage. And when you get a shortage, the government then puts itself in line to get the resources first, and when everyone else has what’s left, it’s very hard for them to justify making grain into alcohol. So under the Lever Act, they imposed Prohibition. They refused to allow grain to be made into alcohol.

Also, other federal powers grew during World War I. The US government, under Wilson, nationalized the railways. They gave it back into private hands at the end of the war but they controlled them more at the end of the war than they had before. We also had the first draft since the Civil War in the United States as a result.

Also, our tax system. We had started taxing income in 1913. The top tax rate was 7%. And it was on incomes that, translated into today’s dollars, would be over $7 million. By the end of the war, the top tax rate was 77%; 11 times. And although Secretary Mellon, the Treasury Secretary in the ’20s, brought the tax rate down, he never brought the top tax rate below 25%. And the bottom tax rate started at 1% and it went to 6%.

So a big part of the growth of government in the United States, the federal government of the United States, as I said, was due to war.

Now, one person on the left, the left part of the political spectrum, who recognizes that war leads to more government control, and celebrates that fact, is editor of The Nation, a left wing publication, Katrina vanden Heuvel. Two months after 9/11, vanden Heuvel and co-author, Joel Rogers, wrote, “If anything, the war on terrorism creates an opening for Progressives.” “Progressives” is the term leftists use nowadays to refer to themselves. So they don’t want to call themselves leftists. “If anything, the war on terrorism creates an opening for Progressives, not closure. Indeed, it presents the opportunity of a lifetime. It is a truism of modern politics that war generally mobilizes and helps the democratic left. It does so despite the repression of dissent that war time also brings because war raises the stakes in politics and invites consideration of wider goals, including justice. War’s mobilization of the populace against a shared threat also heightens social solidarity while underscoring the need for government and other social institutions that transcend or replace the market.” In other words, according to her, government grows in war time, displacing free-market institutions, and she likes that.

Now, my title, as I mentioned, is An Economist’s Case for A Noninterventionist Foreign Policy. This is going to be largely American oriented. And let me get some of the economics into it.

One of the major contributions of economists like Ludwig von Mises, Friedrich Hayek and Milton Friedman – by the way, Milton Friedman – who, here now, being at Hoover for a day or so, who has heard of Milton Friedman? OK. Milton Friedman is justly thought of as probably the most important economist of the last half of the 20th century. George was friends with him I think from the ’50s. I was friends with him from the early ’70s. He was, I’d say, the most important person at Hoover. And of the thousands of economists, people like him that have studied specific markets and specific interventions, they find a few systematic things, that when government intervenes, it often causes unintended consequences, and those unintended consequences are often worse than the problem they intervened to solve.

Let me give an example from domestic economic policy and then I want to give an example from foreign policy.

On August 15, 1971, President Nixon imposed price controls on the whole US economy. One of the things economists are most agreed on is that price controls – what we call ceiling prices, maximum prices; the price can’t go above them – will cause shortages. And they will especially cause shortages in areas where there are supply shifts that would otherwise raise the price. Well, guess what happened in 1973? OPEC finally got very powerful and raised the world price of oil in a few months from $3 a barrel to $11 a barrel. But the price of gasoline in the United States under the price controls was not allowed to rise enough to eliminate the shortages. We got shortages; we got line-ups.

Now, when you have that, a government has two choices: End the problem by ending the price controls or go further and intervene more to solve some of the problems the price controls led to. And the US government, under Nixon, Ford and Carter, went further. And one of the things we got out of it was so-called CAFE laws. CAFE – not that stuff you’re drinking – Corporate Average Fuel Economy. They said each auto company has to achieve a certain fuel economy a year. Why? Well, because we’re overusing gasoline. Well, sure, the price has been kept artificially low, so we’re acting as if the price is artificially low. And so CAFE laws came along. What’s the quickest way to get higher fuel economy? Drop the size and weight of a car. And cars became, in the late ’70s, early ’80s, less safe, and we actually got more traffic fatalities. That’s a well-documented fact for those kinds of cars. So that’s an example from the domestic economy. Many economists have written about that.

Let me talk about an example of unintended consequences from US foreign policy. Well, actually, let me just mention one that is both domestic and foreign. I mentioned OPEC. We all heard of OPEC in 1973 when they almost quadrupled the price of oil. But OPEC formed in 1960. Why? Because President Eisenhower had imposed import quotas on oil and given preference to Mexico, Venezuela and Canada. And so some of the – Algeria was one of them – I know there’s someone from Algeria here – and three other countries organized to essentially fight back. And then they gradually acquired members in the ’60s and early ’70s. So OPEC was an unintended consequence of US import quotas.

Well, since I’m talking about import quotas, let’s talk a little about the Middle East. Think about George Bush’s invasion of Iraq in 2003. How did that come about? Well, we have to go back further. The United States was hostile to Iraq because the United States saw Iraq as being somewhat hostile to the United States. But why was there any kind of connection at all? Well, in November of 1979, some Iranians took over the US embassy, thus, leading to a long period of bad relationships between the United States and Iran. So the United States was looking for an ally in that region and they found Iraq. By the way, the CIA had helped Saddam Hussein be part of a coup that overthrew his predecessor many years earlier. So they’re looking for this ally and they find Saddam Hussein to go after Iran. But wait a minute. Did history start in November, 1979? Well, according to President Jimmy Carter, it did, because here’s what he left out. A reporter asked him, well, what about in 1953 when Operation Ajax was run by the US government to help depose a democratically elected prime minister of Iran. And President Carter answered – that was 1953; the question is asked in 1979, 26 years later. President Carter answered, “That’s ancient history.”

(LAUGHTER)

Now, let me ask you something. Who here has ever taken a course in ancient history? You don’t remember talking about things 26 years earlier, do you?

Now, it turned out, of course, there was some justification for them overthrowing him because he had nationalized the British oil company. Britain was out of resources after the Second World War and they asked newly installed Eisenhower, newly elected Eisenhower to help them out, and he did. But, you know, I live in a country where sometimes government nationalizes things by eminent domain but I don’t go to war with them. And I don’t want to invite another government in to go to war with them. It’s too bad, but I think war is an extreme solution. And overthrowing a government is an extreme solution.

And so then, Saddam Hussein becomes the US ally and then, of course, he gets a little ambition, takes over Kuwait, and then he becomes a US enemy.

But the point is all of that US involvement really got going in 1953. A former head of the CIA under Clinton, early in the Clinton administration, James – you probably know. What’s the guy’s name? James? The head of the CIA?

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