If You Want Prosperity, Prepare For War

The chief debate in modern economic policymaking revolves around the question, “What is the economy for?” What values should guide the decisions of bankers, regulators, and politicians? Which ends are worth striving for, and which are superfluous?

Different schools of thought provide different answers to this question, and at any point in time some hold noticeably more influence than others. From about the 1930s to the 1970s, Keynesianism dominated American economics, promoting stability and moderate growth. The great deregulation of the 1980s and 1990s was a laissez-faire enterprise focused on promoting maximum absolute growth amidst greater instability. Further to the right of these neoliberal economists are dogmatic libertarians, who hold that economic policy should maximize individual liberty and promote competition for its own sake. And the social democrats of the far left believe economic policy should promote equality and justice.

All these schools of thought have their own preferred policy options. Keynesians employ cash infusions and bailouts, protective industrial policy, and various manipulations of tax and regulatory codes. Neoliberals promote financial and corporate growth through deregulation. Libertarians believe the government’s job is simply to get out of the way so far as is possible, to allow entrepreneurs and strivers to do their good work. And social democrats tend to favor redistributionist entitlement schemes, massive investments, and mandated high wages to fight poverty and inequality.

The relatively intangible objectives of these four schools- stability, growth, liberty, and equality- are all noble in themselves, but none should make up the core purpose of economic policy. Keynesian policy tends to stultify innovation and competition. Neoliberal policies lead to financial volatility and crushing inequality. Libertarian policies do not recognize the government’s role in ensuring a fair playing field, and are particularly conducive to corruption and plutocracy. And the high-minded ideals of social democracy are unrealistic and tend to discourage independence and dynamism.

What, then, should the guiding purpose of the American economy be, and what sorts of policies should be pursued to fulfill that purpose?

There’s a fifth tradition of American economic policy that has been around with the Republic since the Founding, and it has played a particularly important role in times of great national crisis. It could be called “Strategic Economics.” Its core purpose is national sovereignty, and its means are strategic government investment, public-private partnership, financial stability, and healthy business climate. Interestingly, the aims of each of the other American schools- Keynesian stability, neoliberal corporate growth, libertarian liberty, and social democratic public investment- are met, in various unique ways, through Strategic Economics.

The Strategic Economist begins policymaking with a question: If the United States were confronted with a grave national crisis where the sovereignty of the Republic and the American Way of Life were at stake, what institutions, resources, and practices would the federal government need in order to marshal American strength to confront the challenge? In other words, what would our economy need to look like to supply us through a major war?

There’s much historical precedent for this way of thinking. Alexander Hamilton’s economic plans, including the Bank of the United States, the protection of infant industries, and the assumption of state debts, were aimed at binding together the disparate states of the union against the threats of both civil war and foreign intervention. Henry Clay’s American System, with its network of internal improvements and tariff to support American industries, was similarly premised on using the power of economic policy to promote national union and strength.

The first real test of Strategic Economics came with the crisis of the union in 1861. Many historians attribute the Union victory in the Civil War to the North’s superior industrial capacity; not enough of them trace that capacity to Abraham Lincoln’s prudent economic policies. Protecting and supporting strategically crucial industries like railroads and armaments manufacturers, building infrastructure to move troops and supplies to the front lines, and reviving central banking to ensure a stable credit helped keep Union forges burning. Other policies of Lincoln’s, such as the provision of free land in the West to settlers and the establishment of agricultural colleges, were strategic in a longer-term sense indirectly related to the war effort: booming Union settlement in the West could give Washington D.C. added strategic leverage on the American continent in the event that the North was unable to bring the South back into its fold.

While Lincoln’s generals were out playing tactics, the President was thinking logistics. And good logistics saved the Union.

Between the Civil War and the First World War, America’s expanding colonial empire required it to practice Strategic Economics more constantly than ever before. The best example of this was the construction of the Great White Fleet under the Theodore Roosevelt administration. But largely because of the absence of significant, pressing threats to the Republic, the system tended towards plutocratic decay that required constant reform.

The American entry into the First World War in 1917 necessitated another mass mobilization of the American economy, and President Wilson’s economic programs resembled those Lincoln practiced a half-century earlier. Government partnership and cooperation with major industries, central banking to ensure a steady credit, and new infrastructural projects helped the war effort significantly.

But the World War One mobilization of the American economy paled in comparison to the intensity of the mobilization during World War Two. President Franklin Roosevelt’s administration had been experimenting with Keynesian policies during the Great Depression, but the strategic requirements of waging total war on Japan and Germany booted the American economy into production-based action. Finance was monitored, new infrastructural projects were laid out and constructed, and the major industries were brought into partnership with the government in defense of the national interest. All the resources of the American economy were brought to bear in a titanic Arsenal of Democracy, and at a strategic level, America’s ability to supply itself more effectively and longer than the other belligerent powers was what ensured its relatively swift victory and favorable strategic situation when the armistice came.

But even before 1945, a new crisis was brewing. The 45-year period of strategic competition with the Soviet Union that was the Cold War froze international politics into a state of constant crisis, and thus the United States made many of the same investments and pursued many of the same policies that it ordinarily would pursue in wartime. Eisenhower’s completion of the Interstate Highway System, Kennedy’s Space Program, the Second Offset Strategy, and the massive government investments in computer technology and biotechnology through DARPA and the NIH all helped America compete with and eventually outlast the Soviet Union. And incidentally, while these policies were put in place for strategic reasons, their domestic effect was increased prosperity and opportunity, and a better quality of life, for the burgeoning American middle class.

It is important to note that following each of these crises, the American economy underwent periods of immense broad-based growth, made possible by the strategic investments, stable financial situations, favorable business climates, and public-private partnerships the wars made necessary. Though Strategic Economics invests in the tools necessary to wage war, a more general prosperity in the domestic economy is the result. The economic expansion after the Civil War and the post-WWII prosperity are only the most blatant examples of this principle at work. I paraphrase Vegetius: “If you want prosperity, prepare for war.”

A set of policy principles can be distilled from the historical experience of Strategic Economics.

First off, the fundamental goal of economic policy should be to prepare the nation for a crisis on the magnitude of 1861 or 1941. Surprises happen in international politics; all we can do is be prepared.

Second, strategic public investments in infrastructure, innovation, and education are crucial. These three “Hamiltonian” investments keep the nation on its toes, by smoothing the flow of supplies and people, moving technology forward, and training a skilled and entrepreneurial population. Smooth transport, advanced technology, and an intelligent population are all crucial to any war effort. Incidentally, these investments are exactly the ones that create new industries, make economic fluidity easier, and build human capital- crucial for a thriving domestic economy.

Third, public-private partnerships and industrial policy are the best way to accomplish technological, infrastructural, and production goals, and they keep the supply chain based in the homeland. It’s common knowledge that the government itself isn’t the most effective of institutions, but it does have the capital necessary to finance risky ventures unattractive to investors. Meanwhile, business and the professional sector have the expertise necessary to accomplish important goals, but they themselves can’t set strategic agendas or, typically, finance themselves with the massive reserves of upfront capital required to accomplish those strategic goals. Public-private partnership, then, unites the strategic and fiscal power of government with the innovative power and technical efficiency of private industry.

Fourth, a stable financial climate and a relatively benign business climate are necessary if the nation is to retain attractiveness for investors and entrepreneurs. This stable and friendly business climate cannot exist on its own- the government needs to step in with investments and public-private partnerships to drive the economy- but there will be more fluidity and innovation in an economy with reasonable regulations, simplified taxes, and a general orientation towards flourishing business. Strategic industries will thrive most in this sort of economy.

Incidentally, these three policy baskets- strategic public investments, public-private partnerships, and a better business climate- are empirically more conducive to innovative dynamism, broad-based economic growth, and increased social mobility than the policies of the Keynesian, neoliberal, libertarian, and social democrat schools. The goals of the other schools are more or less met, and the economy surges forward to the next era.

So our statesmen and stateswomen should be considering this- in a globalized economy with asymmetric threats in a variety of theaters, what must we do to keep our nation safe? If another major war starts, what industries do we need here at home, what infrastructure do we need to smooth the flow of goods and people, what technology do we need to win the day, and what must the general contours of our economy look like to support the war effort? Planning for such a contingency- building a new Arsenal of Democracy, a new Forge of the Republic- will not only prepare us for the war, if and when it comes. It will grow the economy in numerous sectors, improve social mobility, and bring about transformative advances that improve human happiness and potential. This dynamism has been intrinsic to the American experience from the beginning- we should reclaim it, in the interests of the future.

Tax and regulatory reform, financial regulation, massive investments in infrastructure, education, and innovation, and a maintenance of public-private partnerships currently in existence are all good ways to start.