Is the peace dividend over?

March 04, 2022 10:09
US defense spending fell from 11.1% of GDP in 1967, during the Vietnam War, to 6.9% of GDP in 1989, the year the Berlin Wall fell, to just over 3.5% of GDP today. Photo: Reuters

Russia’s brutal invasion of Ukraine should be a wake-up call for Western politicians, corporate leaders, and economists who advocate a green and equitable future but lack any practical or strategic sense of how to get there. Regardless of what short-term tactics Europe and the United States use in responding to the current crisis, their long-run strategy needs to put energy security on a par with environmental sustainability, and funding essential military deterrence on a par with financing social priorities.

The Soviet Union collapsed in 1991 in no small part because Russia’s leaders, most of all President Boris Yeltsin and his economic advisers, recognized that the Soviet communist military-industrial complex could not afford to keep up with the West’s superior economic might and technological prowess. Today, with Russia’s economy less than one-twentieth the combined size of the US and EU economies, the same strategy of vastly outspending Russia on defense should be much easier to execute. Unfortunately, there is a hesitancy in many Western societies, particularly on the left, to admit that defense spending is sometimes a necessity, not a luxury.

For many decades, Western living standards have been boosted by a massive “peace dividend.” For example, US defense spending fell from 11.1% of GDP in 1967, during the Vietnam War, to 6.9% of GDP in 1989, the year the Berlin Wall fell, to just over 3.5% of GDP today. If US defense spending as a share of GDP was still at the Vietnam-era level, defense outlays in 2021 would have been $1.5 trillion higher – more than the government spent on social security last year, and almost triple government spending on non-defense consumption and investment. Even at the level of the late 1980s, defense spending would be more than $600 billion higher than today. The extra cost would have to be funded by higher taxes, greater borrowing, or lower government spending in other areas.

Europe’s defense spending has long been far lower than that of the US. Today, the United Kingdom and France spend just over 2% of their national income on defense, and Germany and Italy only around 1.5%. Moreover, national interests and domestic lobbying mean that European defense spending is highly inefficient, with the whole being considerably less than the sum of its parts. I am amazed by how many of my otherwise well-informed friends have been asking why Europe does not mount a stronger military response to Russia’s attack on Ukraine and looming threats to the Baltic states. Part of the answer, of course, is Europe’s dependence on Russian gas, but the larger reason is its egregious lack of preparedness.

Thanks to Russian President Vladimir Putin, this may all change. German Chancellor Olaf Scholz’s announcement on February 27 that Germany will increase its defense spending to more than 2% of GDP suggests that Europe may finally be getting its act together. But such commitments will have major fiscal implications – and, after the large pandemic-era fiscal stimulus, these may be difficult to digest. As Europe rethinks its fiscal rules, policymakers must consider how to make enough space to deal with unexpected large-scale military buildups.

Many seem to have forgotten that wartime spikes in expenditures were once a major driver of government spending volatility. In a war, not only do government expenditures and budget deficits typically increase sharply, but interest rates sometimes go up as well. Nowadays, policymakers (along with many well-intentioned economists) have become convinced that big global economic shocks such as pandemics or financial crises will invariably drive down interest rates, and make large debts easier to finance. But in wartime, the need to front-load massive temporary expenditures can easily push up borrowing costs.

True, in today’s complex world of drones, cyberwar, and automated battlefields, how governments spend their defense budgets matters greatly. Still, it is magical thinking to assume that every time defense budgets are cut, military planners will make up the difference with increased efficiency.

It would also help if the West could avoid further strategic energy-policy blunders of the sort that led us to this point. In particular, Germany, which relies on Russia for more than half of its gas needs, appears to have made a historic mistake in decommissioning all its nuclear power plants after the 2011 Fukushima disaster. By contrast, France, which meets 75% of its energy needs through nuclear power, is significantly less vulnerable to Russian threats.

In the US, the cancellation of the proposed Keystone XL oil pipeline may have been based on sound environmental logic. But now the timing seems awkward. Measures intended to protect the environment do little good if they lead to strategic weakness that increases the possibility of conventional wars in Europe – leaving aside the large-scale radioactive pollution that would result if neutron bombs or tactical nuclear weapons were deployed.

Stiff Ukrainian resistance, swift and severe economic and financial sanctions, and domestic dissent could yet force Putin to recognize that his decision to invade Ukraine was a spectacular miscalculation. But even if the current crisis subsides, the horrific attack on Ukraine ought to remind even the most committed peace advocate that the world can be harsh and unpredictable.

Everyone hopes for lasting peace. But hard-headed analyses of how countries can achieve sustainable and equitable growth requires leaving fiscal space – including emergency borrowing capacity – for the costs of guarding against external aggression.

Copyright: Project Syndicate
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Professor of Economics and Public Policy, Harvard University. He was formerly chief economist at the IMF.