Who Spent the Peace Dividend?

There was a time, not so long ago, in which the crushing federal debt and the huge amount of money that is spent just to service that debt could have been paid off without reducing any social welfare programs at all.  We have come to believe that deficit spending is normal.  It is not.  This dangerous myth began in 1933.

FDR's New Deal was a big mistake -- the Depression would have ended much sooner without it -- but those who lived through those awful times understood a bleakness and hopelessness which we cannot grasp today.  In 1939, the American economy rose out of the Depression because of huge factory orders from France and Britain, who were at war with Hitler, and spending grew much more when our nation was at war across two oceans.  After the war, America spent vast treasure to rebuild Europe and to protect Western Europe from the Warsaw Pact.  The alternatives seemed to be spending huge amounts of money to maintain peace and freedom in Europe or allowing the Evil Empire to move closer to global domination.

President Reagan, however, saw things differently.  His Cold War strategy was "How about this?  We win.  They lose."  What my friend Herb Meyer in Reagan's CIA said would happen, did happen: the slave economy of the Soviet Empire would collapse if forced to compete with us.  The competition was more than big defense budgets.  Giants like Lech Walesa, John Paul II, and Solzhenitsyn gave hope to the slaves behind the Iron Curtain, which worked in concert with the huge American military budgets to bring about the end of the Evil Empire. 

Twenty years ago, in Desert Storm, the true power of the Reagan build-up was displayed before an American left, which actually believed that we had "lost" the Vietnam War.  The appalling ease with which our men and women in uniform disposed of the best Soviet military equipment that money could buy, used by the huge and battle-tested Iraqi military, dispelled whatever vain hopes that the old men of the Politburo might have had about their empire's ability to last more than a few days in battle with us. 

Soon, the Cold War was over: we won.  The Soviet Empire disintegrated into Baltic States, Ukraine, Belarus, Georgia, and the other nations of the Great Russian Empire.  Two years before that happened,  in early June 1989, the young people of China at Tiananmen Square showed just how restive the subjects of Mao's Empire were.  Twenty years ago, for the first time in sixty years, there was no good reason at all for the federal government to spend vast amounts of money or borrowing lots of money to finance Depression relief, fight Hitler, or stop Communism.  Ronald Reagan had given us the "Peace Dividend."

How much was that dividend in dollars?  There is no perfect means of calculating the dividend, but there are plenty of good guesses.  In 1950, 54% of the federal budget was spent on national defense, an amount almost equal to 10% of the nation's GDP.  In 1960, the 55% of the federal budget was spent on national defense; an amount more than 10% of the GDP was spent on national defense.  Although defense had declined relative to the federal budget and GDP in 1970, and continued so that the year before Reagan took office, 1980, defense was 28% of the federal budget and 6% of GDP, defense spending was still a huge amount. 

Because of our victory in the Cold War, defense spending in 2000 had dropped sharply to  20% of the federal budget and 3% of GDP.  If we had been spending the same percentage of our federal budget on national defense as we had been when JFK took office, the dollar amount of the defense budget in 2000 would have been $625 billion more than we actually spent on national defense that year; and if we had been spending the same percentage of our GDP on national defense in 2000 as we actually spent in 2000, then we would have spent $687 billion more than we actually spent on national defense that year.

How big was the Peace Dividend?  In that year alone, we could have paid off 12% of the national debt or we could have slashed federal income tax rates almost by 50% (and that assumes the goofy leftist math which presumes that a cut in tax rates does not produce a jump in tax revenues through greater growth.)  If we had been "investing" the Peace Dividend toward actually paying off the national debt since our victories in the Cold War and Desert Storm, then ten years ago -- before 9-11 -- we could have almost paid off the national debt and embarked upon an enormous, inflation-free, boom.   

Has defense caused the huge debt problems we have today?  Hardly: if the federal government spent the same proportion of its budget in 2010 as it did in 1960, the defense budget would be a mind-numbing $3.189 trillion.  What was the actual defense budget in 2010 -- in the middle of two wars?  Only $848 billion.

What has happened is Washington spent every nickel of the Peace Dividend and borrowed more, until our ability to borrow more will be at high rates of interest, if we can even borrow money at all at the end of the Obama binge.  Right now our national debt is larger than our GDP: if everything produced in America for an entire year were devoted to paying our national debt, we could not pay it.  More sobering, the Peace Dividend was won as much by the Blood, Sweat, and Tears of our men and women in uniform as by ciphers in the national budget.  Yet after Reagan left office, we were on the verge of being able to pay this debt off completely.  Who spent the Peace Dividend?  Maybe a better question is who stole the Peace Dividend.

Bruce Walker is the author of a new book: Poor Lenin's Almanac: Perverse Leftists Proverbs for Modern Life.