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Bond Market"Paying For Two Wars"

“Paying For Two Wars”

Comments by Treasury Secretary Yellen and President Biden about “paying for two wars” has attracted some chatter. For example, Adam Tooze just wrote an article on it.

As Tooze notes, saying that America is paying for two wars is a particularly bad framing for support for Ukraine and Israel. A good portion of United States aid is shipping “obsolete” weaponry (admittedly not as obsolete as Russian 1950s era equipment that is showing up on the front line), the offloading of which saves the United States the expenditures associated with decommissioning it. The United States is not going to have combat personnel on the ground under most plausible scenarios, and so the usual disruptive effects of a war are not present for the United States.

What is more interesting how Yellen — who loves talking about budget constraints on fiscal policy — suddenly sounds more like a Functional Finance fan when discussing warfare. Tooze puts the political implications this way:

The insights of left Keynesianism, MMT et al are generally taken to be liberatory, freeing democratic politics from the shackles of fiscal rules, cases in point being America’s debt ceiling or Germany’s “debt brake” (Schuldenbremse). What actually constrains our choices, are the scarcity of economic resources, available technologies and our ability to reach political agreement. Questions of finance and “affordability” are secondary, organizational and technical matters. They reduce to matters of law and accounting. These are not trivial. They have their own institutional ramifications. But they are malleable.

This may be liberatory, but it also raises the political stakes. If we espouse the Keynesian vision we can no longer appeal to budgetary constraints to rule out options of which we disapprove. If one side favors war, or even two wars, or three, fiscal arithmetic does not stand in the way. What does are ethics, or politics or raison d’état.

I would argue that political situation for the left is more awkward. The centre-right will always bash the left for being irresponsible if they do not toe the line that fiscal budget constraints must be respected at all times. Meanwhile, “hard budget constraints” turn into “squishy aspirations” if the right wants either to spend on the military or cut taxes. This leaves the left with two options: either accept fiscal orthodoxy and try to win elections on the argument that the other side is being hypocritical, or hop into the Modern Monetary Theory camp and argue that the only real constraint is the tolerance of inflation. Of course, the establishment centre-left is generally going with the first option, and is discovering that electorates do not really care that much about hypocrisy.

People who approach politics with a strong economic theory bias are doomed to disappointment. Various strands of leftism have been toiling in political failure for decades. On the right, fiscal conservatives are invariably disappointed by their centre-right compatriots when they get in power and axe tax rates. The science of democratic politics is coalition building, and the purity of economic thought is trumped by the need to win elections.

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(c) Brian Romanchuk 2023


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