Never Let a Crisis Go to Waste

In the spirit of Rahm Emanuel, who famously said, “You never let a serious crisis go to waste,” it is time to get ready for the next shoe to drop in the sequestration soap opera. Having failed to agree on a budget and having manufactured a crisis whose most visible impact has been on air traffic, Congress is considering, and more specifically Senator Reid has proposed, using funds that will be freed up from the wind-down in the war in Afghanistan to fund the FAA. Get this – the idea is to spend the “peace dividend” to fix a manufactured crisis.

But what is really at stake here is not the FAA but the idea that the budget increases originally put in place to fund the wars in Afghanistan, and before that Iraq, are now permanent sources of funding to be transferred to domestic initiatives going forward. Put another way, the new guiding principle seems to be that once a budget increase is authorized, it never goes away. That is not as it has always been.

Budget increases to fund temporary wars and the deficits they create have historically been rather quickly reversed. At least that was the history following WWI and WWII, but somewhat less so following the end of the Korean War and even less so after the end of the Vietnam conflict. For example, during WWI defense spending increased from 1.25 percent of GDP to 14 percent but then subsided to 1.25 percent within a couple of years after the war’s end. In WWII defense spending rose to 45 percent of GDP by 1945 but fell back to 7.33 percent in 1948. Defense spending doubled to about 15 percent during the Korean War but fell back to about 10 percent. Finally, during the Bush-era conflicts, defense spending increased from about 3.6 percent in 1999 to about 6 percent in 2010.

Is the pattern about to change this time? At this point the grab is on for funds. Reid is proposing to divert the so-called peace dividend, which could otherwise be used to reduce spending and bring the budget into better alignment, and to deploy it for other purposes. Once those as-yet-to-be-realized war-related spending reductions are used to justify spending in other areas, we will see how an attempt by Congress to capitalize on a manufactured crisis only further damages the prospects for ensuring the longer-run fiscal health of the country.

About Robert Eisenbeis 16 Articles

Affiliation: Cumberland Advisors

Dr. Robert A. Eisenbeis serves as Cumberland Advisors’ Chief Monetary Economist. In this capacity, he advises Cumberland’s asset managers on developments in US financial markets, the domestic economy and their implications for investment and trading strategies.

Dr. Eisenbeis was formerly Executive Vice-President and Director of Research at the Federal Reserve Bank of Atlanta, where he advised the bank’s president on monetary policy for FOMC deliberations and was in charge of basic research and policy analysis. Prior to that, he was the Wachovia Professor of Banking at the Kenan-Flagler School of Business at the University of North Carolina at Chapel Hill. He has also held senior positions at the Federal Reserve Board and FDIC.

He is currently a member of the Shadow Financial Regulatory Committee and Financial Economist Roundtable and a fellow member of both the National Association of Business Economics and Wharton Financial Institutions Center. He holds a Ph.D. and M.S. degree from the University of Wisconsin and a B.S. degree from Brown University.

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