Security Economics (Panel discussion)

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ASSA/AEA Annual Meetings 2014:
Panel Discussion:

Security Economics

Philadelphia Marriott Downtown
Philadelphia, PA
January, 3 2014

 

Session 1:  Security Economics

Richard Kaufman:
            Well, welcome everybody, to the national security economics session of Economists for Peace and Security. We have a very fine program to present. We’re a little more concentrated than when we organized it due to snow and other weather conditions.
But let me start with a brief introduction to the subject matter.
            This meeting is taking place something more than halfway through President Obama’s two terms of office, and it is a good time to assess his administration’s performance so far and to project where that performance is taking us from the perspective of national security economics. Now it is fashionable in the media and elsewhere to ask how well or poorly Obama did in the year 2013. This is the wrong question to ask. It reinforces the tendency by some to treat politics as a kind of athletic game to be scored inning by inning, or play by play, or game by game, or even year by year. It’s better to seek a broader and longer view. For our purposes this means a cost benefit analysis of the government’s security policies and programs over the past five years and their likely effects and economic consequences to date and for the future. To complete such an analysis, we would need to go into key areas including but not limited to war making, peacemaking, conflict avoidance, total defense spending trends, homeland security, international relations, military health care, force structure and force levels, nuclear forces and non-proliferation, acquisition of weapons and other materials, and military pay.
            Of course we cannot produce a finished cost benefit analysis in this roundtable session, but we can begin the process. I would begin with the defense budget, which at the latest count is about $705 billion, including $81 billion to continue the war in Afghanistan. This reflects a modest decline, actually, in military spending under Obama; and the amount is projected to remain at about the present level over the next several years. We are still spending much more than the average annual Cold War spending level of roughly $447 billion; so we’re now down to the level of $705 billion from where we were three years ago, and that’s, you know, 75 percent greater or so than the average Cold War level of spending when we were facing ominous threats to our security and to the homeland from the former Soviet Union.
            The ending of the war in Iraq and the ongoing negotiations to end our combat role in Afghanistan are at least promising developments. Also promising are the ongoing negotiations in Syria to destroy its chemical weapons, in Iran to prevent it from becoming a nuclear power, and those discussions between Israel and Palestinians well supported by the US. Avoiding further conflict in the Middle East, [and] a nuclear-armed Iran, would be major achievements and should be seen against a backdrop of Iraq and Afghanistan. Linda Bilmes and Joe Stiglitz in their groundbreaking book on costs of those wars, estimated that they will end up costing the US between four to six trillion dollars. That’s trillion, with a ‘T’.
            Now Linda, unfortunately, is one of several of our attending panelists who can’t be with us. We have the names in blue—Bill Hartung, Michael Lind, and Linda Bilmes—all of whom are unable to make it here, mostly because of the snow and weather conditions and travel restrictions. And so Heather Hurlburt and Cyrus Bina will take up the presentations, the live presentations, and I will do a kind of a summary of what Linda Bilmes would have said at this meeting.
            So why don’t we proceed. Heather, you’re going first. Why don’t you introduce yourself, and give your presentation.

Heather Hurlburt:
            It’s a real honor to be here. I’m the token non-economist on this panel, and my background is actually in the politics of international security. I’ve also spent periods of my career as a political speechwriter, including in the Clinton White House, and then for the last six years running the National Security Network, which is a non-profit that basically closes the gap between the brilliant 100-page papers that people at this conference write and the two paragraphs that you can get our decision makers to read on these topics.
            The question of what we spend on defense and what we spend it for takes up an enormous portion of my work. I’m going to walk us through basically where we are with Pentagon spending and how that relates to some of the bigger questions that Richard keyed up to help us think about how security economics relates to security politics, and give us a backdrop to think about the specific question that Cyrus is going to discuss, the question of what we’re doing in Asia that Michael Lind would have discussed had he been here, the question of what role our particular nuclear budget and nuclear expenditures play which Bill Hartung would have discussed, and then we’ll cycle back to the question of the wars, which has been Linda’s career expertise.
            So here you see in graphic form the trends that Richard was just referring to in the introduction. And as you’re well aware, we’ve had a lot of agonizing and breast-beating in recent months about the decline in the defense department, which you see as that modest little slope in the blue. You also can see graphically demonstrated the costs of Iraq and Afghanistan. What’s there is really only a portion of the numbers that Linda and Joe Stiglitz talk about in as far as they also look at the long-term costs of veterans, but also the opportunity costs to the economy of when you are putting 50 percent of your discretionary spending into all of this activity, taking your best and brightest and putting them in Afghanistan to lose arms and legs rather than doing startups or health care, or whatever else people might have been doing had 2002-2009 not spooled out the way they had.  In very simple graphic terms you can see—
            Now, there’s an interesting debate about this, because this shows constant dollar expenditures. There is a stand of American political thought, which was very well represented in the last presidential election, which says the proper way to think about defense spending is as a proportion of GDP. And you should make your defense spending constant. And if I had that graph up for you, you would see that it does that and that we’re actually at a lower proportion of GDP spending than we have been at many other times in our history.
            Now of course the counterargument to that is, well, our GDP is a lot bigger than it was in the ‘50s. From a military perspective, nobody’s ever—Clausewitz did not say war is best conducted when your military expenditures are over 3.5 percent of your GDP; but there has been this familiar trope in American political debate.
            If you think relative spending to other countries is what matters most, then what you’ll want to know, as Richard mentioned, we make 39 percent of the world’s defense expenditures; and that’s actually down a little bit, because we’ve cut back a little bit, and China has been spending a lot more, and Iran’s neighbors are spending a lot more. But we outspend our nearest competitor by two-to-one. You can argue about the Chinese number and at what point it will come after us; but if you do this by a peer-to-peer comparison, it’s a little bit ridiculous to think about.
            So you see the amount of agony in political capital, and that you basically had to bring the entire government to a halt to get that very modest little decline that you see there …
            What are we actually talking about? Again, a second debate that goes on in both academic and policy circles is people will say, oh, it’s all because personnel costs are so high, or it’s all because of the wars, or it’s all because procurement costs are so ridiculous. So the broad-grained conclusion I would want you to take away from this very nice colorful graph is that it’s all of the above.  As you can see, every category kind of bloomed in the post-2002 years. And actually what’s remarkable is that there’s a fairly consistent amount of growth. The wealth really got spread around, and so it’s not as simple as, oh, if we just weren’t fighting wars, we’d be back to where we were after the Cold War. Well, we wouldn’t. Or, if we just reformed procurement, which is the white category—well, you know, that only fixes you so much. Personnel—personnel’s actually stayed flat. Well, what’s interesting about that is that [in] the military in 2012, active duty is less than half of what it was in 1972. So expenditure is relatively constant on a number of active duty soldiers; that’s been cut in half. Ray Odierno, the army chief of staff, told a hearing last year that in fact costs per soldier have doubled since 9/11. The average cost to the US taxpayer of a generic soldier—of course there is no such thing as a generic soldier—but the average figure is $90,000 a year, which is, as I say, double what it was in 2001, and the cost curve continues to go up.
            One of the big reasons for that, interestingly, is health care and retirement benefits. And in fact health care inflation in the military in the last decade has dramatically outpaced health care inflation in society as a whole, which is an interesting phenomenon all by itself. And this comes from several reasons, one of which being greatly increased and more generous benefits for both serving folks and retirees; number two being the increased number of veterans who come back from Iraq and Afghanistan having survived very complex injuries. Where, in previous wars, if one were injured on the battlefield one simply wouldn’t survive these kinds of injuries—triple amputations, quadruple amputations, spinal injuries--, now one does. And of course life expectancy continuing on; so there’s a degree of burden that frankly wasn’t calculated when the benefits were put in place. Salary and retention benefits also grew dramatically more generous during the oughts.
            But in addition, you have the political problem that even when the Pentagon goes to Congress every year and says we’d like to give a 1.5 percent cost-of-living increase, Congress says, oh, what the heck, why don’t you make it 3 percent. When the Pentagon goes to Congress and says, we’d like to introduce a co-pay on doctor visits for retirees, Congress says, no, don’t you dare introduce a co-pay. So where there have been efforts at controlling costs, these have in many cases been pushed back in Congress. During the Bush administration you had an expert panel--and think of this what you may--that said basically the whole Pentagon retirement and health care system should be converted over to something like a 401-k and HMO model, as in the private sector; and that was shelved and has never been looked at again, which is a rather interesting phenomenon.
            So it’s become very popular and our military leadership now says, oh, we need to reform paid benefits. One of the other reforms that needs to be made, by the way, is that you have to stay in 20 years to benefit from this retirement. So you may have seen news stories about some of the people who participated in the raid that killed Osama Bin Laden serve maybe 15 years in special forces doing very dangerous things are now retired and have no health care whatsoever. Those were the terms of service they entered under. So you could reform the system so that, if you serve five or 10 years, you would still get some benefits on retirement, but, what’s the flip side of that, someone else has to get less.
            In addition, you have a question of, well, even if you dramatically reformed personnel, you still have all these other costs; so why is the military, you will hear, trying to balance the budget on the backs of its personnel rather than going after some of these other costs. And the recent proposal in the budget deal to basically help save money for Pentagon and other expenditures by reducing by one percent the annual cost of living increase for veterans of working age--which, public employees, again, have gone through much worse in recent decades--but there is an active effort underway to actually strip that out of the agreement that was reached to end sequestration on the grounds that veterans are being asked to sacrifice too much.
            So then you move on to the next category there, the white one, which is procurement. Here, actually, you tell a rather similar story. Procurement costs are up 88 percent from 2001, and we are not buying more ships than we were in 2001, we’re not buying 88 percent more airplanes. If Bill Hartung were here he would have told us in great detail about how we’re not buying 88 percent better airplanes. So what has happened is about one-third of Pentagon procurement programs are more than 25 percent over-budget. One-third are more than 25 percent more than they were supposed to cost. Collectively last year the major acquisition programs were $411 billion over initial cost estimates. That’s almost enough to cover the entire defense budget. Why is this happening? Several reasons. Interestingly, when the Pentagon asked itself why it was happening, the number one reason it gave was poor management. Other reasons are the continuing efforts actually to save money by combining platforms and putting more and more fancy systems onto a single platform. It’s a little bit like your iPhone or your smart phone; that your smart phone has to be a camera, a phone, a word processor, a music player, an address book, a calendar; only now imagine that your phone is also a fighter jet, and you start to see the trouble. Oh, and then imagine that after you order phone you change your mind and you call Samsung back and you say, I know I said I wanted it to be able to shoot bullets, but now I want it to be able to shoot tear gas while I’m taking pictures with it. And Samsung throws up its hands and says, well, all right if you want us to do that; but we’re going to charge you $10,000 instead of $200 for it, and instead of being a normal human being and walking, we’re going to say, oh, okay, we’ll just go tell Congress we need that. So that sounds like a ridiculous exaggeration, but it really isn’t, as the numbers I gave suggest.
            So we have created this tech culture where there’s no requirement that’s too much, there’s no point where you look and say, this platform is overloaded. Maybe the best example is the F-35, the new generation stealth fighter jet. Here I’m going to refer to Bill Hartung’s notes for a minute, so please forgive me while I do that. This plane—it’s the sort of super-new fancy stealth fighter. But who is it supposed to fight? Are we going to have aerial dogfights with the Chinese? Are we going to bomb Chinese cities with conventional weapons? We can’t fight Al Qaida with these super-fancy fighter jets. We wouldn’t fight the Syrians with super-fancy fighter jets. One of these plans would cover the entire Syrian defense budget for a year, which then raises the question of would you send one there, and if it got shot down, you would have wasted that much money. So what are we building this thing for?
            And then the idea was we would save money by building three different versions of the same plane. Now, again, imagine that you’re sitting in your office, and you have three different academic departments that all want a copy machine. And the English department really needs it to be able to collate and staple, and the economics department really needs it to be able to do super-fancy computer functions for all of their private sector consulting that they’re doing, and the biology department really needs it to do super-high-powered graphics for the gene imaging that they’re doing. And then before you know it, you are buying the most expensive copier on the market, and you’re adding extra features to it, and you’re compromising and it doesn’t do any of those things all that well. And interestingly, again, university procurement being what it is, government procurement being what it is, this has happened over and over and over again. And as weapons have gotten more and more complicated, we haven’t changed who goes into procurement work. And going into procurement work is not the way to be a general. The way to be a general is to fight battles, is to jump out of airplanes, is to blow stuff up. So we still have the same folks, we’re still training folks the same way to do procurement that we did when procurement involved jeeps and rifles and cash registers.
            And then you have this very self-contained system where the folks who do procurement for 20 or 30 years retire and go to the companies, and become the gatekeepers for who can and can’t do business with the Pentagon. So you’ve created this very broken and self-contained system; and I think actually the health care debacle, where you try to imagine how a government agency can create a website, actually gives a fair amount of insight also into some of the crazier aspects of Pentagon procurement where, on the one hand, you have the most sophisticated, the most groundbreaking, the most interesting new technologies, and on the other hand, the most stupid strategic decisions that you can imagine coming out of the same people.
            So the last category here that we should talk about, and this is a little bit verging into Linda’s territory, is the wars. So you look at this and you say, well, isn’t this all because of the wars? If you just cut the blue area down by two-thirds it wouldn’t be that bad. It would be down back to Cold War levels. A couple of points to make about that, one being, as I said, the existence of the wars has amped up all the other areas. But the other note to make that the expectation around what the US military does and where it does it has inflated here. So remember, this is the base budget, not that red area for the wars, which goes on top of that. So you have numbers like special forces. Special forces are supposed to be the future. They’re supposedly cheap because you don’t have to invade countries. But a special forces soldier is more expensive than a regular solider. We’ve doubled the number of special forces since 9/11, but tripled the budget. So again, everything we do—it’s not just that we’re doing more of it; it’s getting more expensive as we do it. So the idea that getting out of the wars is going to magically return the budget to Cold War levels or to previous levels unfortunately is not going to happen.
            So then you say, well, how about sequester? Because sequestration was supposed to take the equivalent cuts out of both defense and non-defense discretionary spending. The Pentagon has been saying, oh, it’s so terrible, we can’t train, we can’t take care of our people, we’re hamstrung, we can’t send carriers to the Persian Gulf. So here you see a depiction of what sequester actually did and what the deal that was announced last month does.  The darker green line is constant dollars; the lighter green line is nominal dollars. And you see this cut, which isn’t a very big cut, that takes place in FY ’12 and FY ’13, and you see that even under full-on sequester, spending was going to start to go back up, that this was the worst year coming up. The deal basically cuts the slope in half, and then you start, your growth resumes, although it’s slow enough that in real terms it’s almost negligible. Now again, if you’re a domestic department in the US government this looks great to you, this real dollar curve looks great to you. But if you’re the Pentagon, and what you’re used to is the slope that we saw, and you’re now confronted with this slope, yet your health care costs are going up every year, your health care costs are 10 percent of the non-war budget now, they’ll be 14 percent in 2030, they will continue to increase faster and faster after that; so your costs in all the areas I talked about, your costs are going up much much faster than this. So we’re at this very interesting moment where the professionals inside the Pentagon are looking at the cost curves and looking at the politics and saying, we know this is unsustainable and there has to be change.
            So using Richard’s metaphor of how would we grade the Obama administration just because it’s fun, if we were grading the administration and Congress on results, we we’d be giving out F’s and a few C’s and D’s, depending on how much of an [?] curve we use.
            But if we don’t use that metaphor, and we instead think about it as a patient, and we think we have a medical or even a psychiatric problem here, the good news is that patients are aware that there is a problem. And fascinatingly, at the recent Ronald Reagan National Defense Conference, every panelist whose job currently depends on the voters said the defense budget’s not going up any further. Panelists whose jobs don’t depend on voters said, oh, we need to raise the defense budget. But if you’re an elected official, or if you were in a senior position in the Pentagon, and you said, there’s no more money coming, the question is how do we make do with what we have. And that is a tremendous sea change and a very interesting development.
            So several positive things going on around that: The Pentagon itself actually has a non-partisan, non-political commission on health care and retirement benefits overhaul whose results are due in May. And that is going to be very interesting, and this is where I begin to shift from economics to politics. You see a great deal of the fighting that you’re going to see about retirement benefits in recent months, including this, I said, one percent reduction in the rate of increase for cost-of-living benefits for working-age veterans, is going to be hotly fought over, and you already have several members of Congress tripping over themselves to try to get rid of it because that sets the stage for this bigger battle which is coming in May and next year, where you have people inside the Pentagon getting ready to make really somewhat significant recommendations to change pay and benefit structure.
            Marty Dempsey, the current Chairman of the Joint Chiefs of Staff, says we need to do this, we need to do it once. He says, don’t come back and take another bite out of us every year; but we do need to do it. And the interesting point here is you’ll hear rhetoric from veterans’ groups saying, oh, you know, you have to keep faith with the troops. Then some of the active duty guys will come back and say, well, the first way we keep faith with the troops is making sure they have equipment and training they need to fight. And if all the money is going to health care, then you’re not doing equipment and training; so instead of the guns versus butter debate that many of us here spent years in or around or that the peace movement might think of, this is a guns-versus-guns debate, or a guns-versus-doctors debate.
            At the same time, interestingly, the House has just created a commission to look at procurement reform. And there was a fascinating article that appeared in The National Journal on New Year’s Day questioning whether the defense lobby had lost its political force. Now, again, if we have any political scientists in the room, most of us growing up, whether we thought it was a good thing or a bad thing or just a fact of life, didn’t question the idea that between military veterans’ groups and the defense industry you had an unbeatable force in American politics, that you have defense manufacturing in every state, defense installations in almost every state; that this was an unbeatable force. Now, that cut there was never supposed to happen. And if you remember, all of sequester was never supposed to happen because it wouldn’t be possible to make the defense cuts. Both parties—and I’ve been told this by people who were in the rooms for the negotiations—were confident that the other party would save them from defense cuts. The Republicans were sure that the Democrats wouldn’t want to look weak; the Democrats were sure that the Republicans were too beholden to do it. But it turns out both sides were willing to do it, and, interestingly, the defense industry ended up red-faced that it claimed that there would be massive employment dislocation and massive effects to the economy; and somewhat embarrassingly for them they had record profits and record CEO pay last year.
            There’s just a new study out expecting the defense industry to grow by about 5 percent a year, which, again, looks pretty good if you’re in some other industries. And the defense industry actually fired its media strategy group after the 2012 elections in which there was an effort to go after a number of incumbent senators and representatives, saying, you know, Senator X supported cutting the defense budget; and none of those people lost.
            So that’s really something that those of us who study this field, we have to change the way we think about it. Because on the one hand I’m not going to sit here and say to you, oh, you know, the defense industry, they have to have a bake sale now. But the power and the unquestioned access is not what any of us thought it was two years, five years, ten years, much less twenty years ago; and this little slope here is an interesting demonstration of that.
            At the same time, we have the much bigger question of what is it that the US needs to do in the world, needs a military for; how do we think about that, how do we talk about it as a society. And on the one hand, you have the Obama administration having decided to issue new national security guidance, and it has a new quadrenniel defense review, which is the every-four-year process that instructs the Pentagon, basically specifically on how to do what it does. So those are two opportunities this year to lay out potentially a more modest set of goals for the military side of national security policy and potentially align strategy a little bit better with a resource curve that looks like the dark green line instead of the light green line.
            Now, having just laid all that out as the sort of positive, exciting, there-is-actually-interesting-change-happening side, there are some significant obstacles that we should also talk about. And really the most important one in my view is that we don’t have a national consensus, and neither of our political parties has an internal consensus about what our national security strategy is and what role the military plays in it. And I will just tick off a number of the conflicts which you’ll see bubbling up in various ways, and we can talk more about them in the Q&A.
            So, because Michael Lind was not able to be with us, we’re not talking about the pivot to Asia; but should the epicenter of our military thinking and planning, our security strategy, be focused in Asia, or in the Middle East? If you have a White House that can only handle one crisis at a time, should it prioritize Asia, or should it prioritize the Middle East; and what does it mean to do one or the other?
            Is the military’s primary job to fight and win wars, or is the military’s primary job to act in humanitarian, training, working with partners, counter-insurgency, winning-hearts-and-minds-type operations? Can it do both, or does doing both inevitably make it bad at both? Is that sort of like bad to my smart phone shooting tear gas example?
            It’s the 21st century. Is the most important system in the military people, or is the most important system in the military technology? Should your marginal dollar be going into fancier technology? Should your marginal dollar be going into people?
            The Israeli air force expects to phase out human pilots by 2040. Is that a cost-saving measure? Is that an ethical thing? Is that an efficient thing? Or where do you need the human factor and how do you think about the human factor? And do we as a society have a larger stake in who does our fighting? In addition, the questions: So do we have robots or people doing our fighting? Who serves in the military? What are they there for? How do we get them there? Active duty versus veterans versus guard and reserve. And here you have intense local politics. Again, does your marginal security dollar go to meet your commitments to people who already served? Does it go to meet the needs of people who are serving today? Does it go to maintain a large guard and reserve force that could be called up if you need it to fight a land war in Asia, but use drones—this a gross oversimplification—for more of the missions you’re doing on a day-to-day basis? What’s the right mix, and again, what’s the mix from a strategic point of view?
            What’s the mix from a national interest point of view? How do you trade off military and non-military effects? So just because you can carry out targeted killing, how do you decide moral questions and also the practical questions? When does killing a terrorist kill a terrorist and disable a terrorist group, and when does killing a terrorist create five more terrorists?
            And we know how to do this on a military level; we don’t know how to do it as a society on the strategic level. Our tactical abilities, which in many senses is that growth at the end of the curve, have dramatically outstripped our ability to think about and plan for them at a moment where, over all, our government is getting smaller and smaller and our ability to plan and our time horizons for planning are shrinking.  So if you can’t think through that kind of strategy, how on Earth are you going to make smart decisions about what to spend less money on?
            The Pentagon sends out dramatically mixed messages about this itself, and one of the really fun things to watch over the next year is going to be vicious infighting. Land wars in Asia, land wars in West Asia, were really really good for the Army. Sea lane protection in the Pacific is really really good for the Navy and really really bad for the Army, because the Army has nothing to do in the Pacific. So you can already see—there was just a very quarrelsome Op Ed piece I was reading this morning by someone complaining that the Army was trying to steal the Marines’ mission. How dare the Army fly helicopters and land them on ships! So you’re going to see even within services—So for example, does the Navy want nuclear submarines, or does it want surface ships? And what if the Navy decides it wants surface ships, but the nuclear folks decide we can live with less than a triad, and the part of the triad we should keep is the submarine part? And so then you have the Air Force and the Army saying to the Navy, no, you have to keep the nuclear subs, and the Navy saying, But we want more aircraft carriers for the Chinese to blow up with their cheap anti-aircraft defenses. So you have all of those sort of not necessarily very strategic resource competitions going on, which makes it a really fun moment to study all these issues from a political perspective.
            And then lastly you have the problem of American politics around security and that we’re now more than a decade after 9/11, and on the one hand, the public has made it very clear this past year that it was not interested in war as a choice in the Middle East, that decision makers in Washington were stunned by the outpouring of public opposition to President Obama’s proposed operations in Syria. They’re still frankly sorting through what that meant. They’re still debating what it means in terms of Iran. So you have that kind of public perception that we’re done with land wars in Asia.
            On the other hand, the public says Pentagon spending has been cut enough. Don’t cut Pentagon spending anymore. Keep promises to our troops. Maintain readiness. Keep us safe. And it continues to be possible at any given moment, if something happens, to excite public anxiety around security issues such that most members of Congress will look anxiously over their shoulders when asked to cut defense spending. And all national security politics are local in that you’re not just maybe looking weak; but you’re also potentially cutting your own base. Suppose you say, yes, sure, we don’t need a nuclear triad; but I’m from North Dakota where the missiles are based, so we have to keep the missiles; we’ve got to get rid of the subs. No, I’m from Connecticut, where the subs are based. We have to keep the subs.
            So, for example, for several years now the military has been asking Congress for permission to hold a base-closing round and save some money by closing facilities. Well, guess what. Congress every year puts a rider in the Defense Authorization Act for bidding around the base closures, so even the BRAC process which was designed to get around the politics of closing bases, Congress has now figured out a political way to block the process that it set up for itself. 
            So in this unsettled time where you have Chris Christie and Rand Paul fighting in the Republican Party over national security policy, the extreme dysfunction in the Republican Party masking similar levels of disagreement in the Democratic Party about what national security strategy should look like—again, you saw this over Syria—, and the advent of mid-term elections with a cranky public, the impetus to do anything even as bold as ironically what the military wants to do with its budget, it is likely to be stymied for the foreseeable future; which means the military, again, knows that this curve is the best it’s going to get, and it’s unlikely to get clear guidance on a lot of the bigger strategic questions I laid out. So what we have coming up is a really fascinating war of all against all, if you will, where you’ll have parochial and all kinds of—and I use parochial in the most loving way; I’m of parochial interests myself—but you’re really going to have small-p politics, guerilla warfare, whatever metaphor you want to use, settling these questions of security economics.
            And with that maybe I’ll turn to Cyrus to talk about one specific area, which is a fascinating one, which you’ll immediately notice is not really reflected in the kind of parochial political considerations I just outlined.

Cyrus Bina:     
            I am Cyrus Bina from the University of Minnesota. I’m teaching political economy, trans-national economics and globalization, and I’ve been working on the oil sector, the aspect which is related to economics of oil as well as the politics of oil for more than four decades.
            I think I’m fortunate to speak after Heather. One of the reasons, of course, is two points that I’ve selected from her talk—there are very many more but it’s very important—which is in a theoretical sense is embedded in my work altogether. But of course my work is specific on oil and I’m specifically dealing with the so-called security of oil, oil security; but then again this also connected to entire transformation of the post-World War system in the United States. Pax Americana altogether.
            And what happened to oil is also a reflection of what happened to the Pax Americana. Normally I don't see much literature in political science, industrial relations, or in economics and political economy. So I hope that that would create a kind of positive impact to be able to have conversation on these issues.
            So the two points that I was referring to were the question of proportionality of the cost increases which you cannot assign to one rather than the other. All the categories are increasing, and that refers to, this supports my argument that there are security and pseudo-security issues involved in this.
            And the second point also which Heather raised here was the competition of military segments in the military. And then going for the toys, which are very more expensive, higher than our pay grades as a nation. And in that particular case would not have very much relationship or connection with the goals of defending this country, which of course is embedded again in my argument that oil is sui generis, categorizing what this security has been, thank you very much.
            Now before that, I think before my talk generally I thought we’d have more time to introduce you to this categorization or periodization of oil from World War II, or maybe from Achnacarry, 1928 cartel, International Petroleum Cartel. Very quickly, five or six minutes, and then I’ll cut this off, and then go to the main body of my talk.
            I have been working on the notion of cartelization of oil, and I’m going to speak of oil and petroleum, talking about entire oil, United States, outside the United States and so on.
            So I recognized three different eras. One is the cartelization era, or the no-cartelization era after 1911 trust busting  [unionizing and so on…?]. And that connects to the notion of pre-1928 cartelization, which is dealing with the Rockefeller empire, the cartelizations in the Caucasus, and so forth and so on. And then starts in 1928 the Achnacarry Agreement—this pronunciation, I was in Scotland, it’s a Scottish word, even the Scottish couldn’t tell me if I’m really pronouncing it right or wrong. Anyway, it’s a castle over there, and in that Achnacarry Castle in September of 1928, the heads of three big oil companies, Standard Oil of New Jersey, Royal Dutch shell, and BP, which was Anglo-Persian oil company, Persia in 1928 because the name was not changed to Iran till 1934.
            So these big guys got together, and of course they were maybe a dozen-and-a-half of smaller companies sitting to find out how they can divide the entire world amongst themselves, entire world in the sense of petroleum—production, exploration, refining, transportation, gas stations, everything else. And anybody who did not attend that—called them independent, and put them on their list, which would be very significant later.
            Now of course the same cartel, International Petroleum Cartel, which of course the name came to our attention as public in the United States after the oil crisis 1973-74, some of us may remember that.  There are not many people in this room that can remember that. Anyway, here, because of the [Senate?] committee’s  investigation of the question of the crisis, and the difficulties around it, the embargo, and so on and so forth. Lots of documents, public documents about this, and they really found that this is international petroleum cartel. But there is one document which is published in 1952 just before the 1953 coup d’etat in Iran, which was against nationalization of oil, which of course is published. It’s a [?] document, and it refers to the name International Petroleum Cartel.
            This International Petroleum Cartel was gone, finished, in 1972; but none of this, not very many people who were dealing in oil talk about this. In other words, the first phase of cartelization came to a halt by 1972. In 1950 and 1951, given the nationalization of oil in Iran, given the misgivings about 50-50 profit-sharing, and so on, which I’m going to go through very quickly, what happened was that there was a period in which there was transition. Transition to what? Transition to what happened in 1972, prior to 1973-1974 crisis.  And this I would call the crisis of decartelization and competitive globalization.
            So we have three phases, and of course the politics associated with it is also very well known, because there are names. We can talk about these things in the Q&A. So in particular sense the reflective characteristic of the first cartelized era or period was colonial oil concessions, 60 years of colonial concessions. Saudi Arabia, Kuwait, Iran, and so on.  And of course there was also the rise of the independent oil companies, which were not really linked to the cartel. They were either blackballed or bought altogether. So there was a fight in this particular sense. And the notion for our economists, the notion of the so-called entry and exit years is very important because these were independent oil companies which are smaller actually. And of course you can see the names during the 1953 coup, Iranian oil nationalization the names would come to the fore that [they stood?] to this cartel. And then of course there was implosion within the cartel itself which led to the globalization, in the competitive sense. I use competition not in the ordinary neoclassical sense. I’m using it in the Schumpeterian sense. So the competition is not at the marginal; it’s at the center of the whole thing. And of course we can refer to writers of Schumpeter and others, classical political economists.
            And then, of course, when you look at the events of the 1953 CIA coup, formation of OPEC in 1960—all these things are extremely important. And the formation of OPEC itself is a fracture within the cartel itself, even though it is a legitimate argument by the producing countries to be able not to cut the posted price, which is a given price by the cartel itself, to cut a third of it, which is legitimate within the argument, within the framework, within the whole thing; but nevertheless, because the cartel was transforming capitalism, developing in those areas altogether. In other words, the macroeconomic framework was determining the transformations, and of course the transformation of societies of themselves, and the representatives of those societies.
            And then the crisis, and of course the defeat of monopoly by competition. Of course my thesis is against the so-called monopoly capitalism on the left. There might be certain colleagues of mine, I totally disagree with that in my papers, and I demonstrate that what monopoly which is defined based in the neoclassical terms and of course even Lenin, V. I. Lenin, was [?] that altogether.
            Now, this is another panel. If you look at it, maintaining a market share. What was that Achnacarry? What was the argument in 1928, in September? There were many points over there discussed within the cartel. Later on we found out the market shares would be as is providing facilities which belonged to everyone, adding facilities, not in an ad hoc manner, but by forming and formulating the demand first and then producing. That’s a cartel. And then maintaining each producing area’s financial advantage. In other words, decide that if you produce from one area, produce and consume in that area, do not let that area to have impact on other areas. In other words, do not let impact from the Persian Gulf oil, oil from Persian Gulf, to have impact. You come to the eastern border of the United States. It happened in 1958.
            And then, observing the principles that would benefit not only the industry, but the consumers. This is just the sort of gimmick that the oil […?].
            Of course the characteristics of the colonial era, there are several that you can see. And also the transitional period, you can see what happened so that we call it transition, transition from one particular society, particular way of doing things in an economic sense, in a political sense, in a socio-economic sense, altogether. In ideological sense as well. And actually the so-called 50-50 profit-sharing which was, of course—this is a big topic, and very much misunderstood topic. I have it in my latest book right there. Take a look at it if you want. Nationalization of oil by Mossadegh.
            And then de-nationalization of oil, coup d’etat of 1953, in my judgment, and I’ve demonstrated that, was denationalized then. Iran and oil went back to the cartel. And then formation of OPEC for the price cut and rise of oil independence.
And then you have globalization of oil, decartelization and competitive globalization of oil.  In 1972, as I said, the collapse of the International Petroleum Cartel. Objectification of the highest cost oil producer, i.e., the newest one, within the 48 states of the United States as a center of gravity of long-term price, this is very important. Most of the time they talked about marginal things, marginal—what margin? They have to go specifically to see what is determining. One has to go back to classical political economics in a very very serious way. That’s my argument. And then, of course spot and future market prices, and abolition of posted prices as if prices, which was cartelized prices in the Persian Gulf. And parodies of security, dependency, fiscal access. But of course these are the elements, reflections that we need to deal with. And oil war and so forth and so forth. In other words, my argument here is that United States didn’t go to Iraq. This raised the issue a long time ago, the first Gulf War. Then this one. The cause is not oil. We have to go deeper than that. That’s the key. And of course transformation of global oil, hegemony and nature of leadership in the United States - Drawing on Antonio Gramsci’s view. We can discuss that if you want.  
And there is spontaneity of hegemony, which is consensual as well.  You know you don’t [?] people and then tell them this is hegemony.  This is not hegemony; this is domination – internally arising, historically sanctioned, holistically undivided, structurally synthetic and institutionally mediated.  If the institutions of hegemony are gone [?].
And then, post-war Pax Americana – more detail about it. If you want to put your fingers on the hegemony, you have to be able to identify the institutions in a concrete manner.  So in that particular sense, one has to be able to identify the institutions of hegemony – Bretton Woods, and so on.  Bretton Woods is gone in 1971.  It was not gone because Richard Nixon said, “My fellow Americans, I disconnected the relationship of the dollar with gold.”  Not that.  We heard it in 1971.  I saw it with my own eyes.  Because Richard Nixon could not do anything else.  And of course, the World Bank, Marshall Plan,  these are very important.  The United States was the hegemon, was very important. We have to recognize that. And then of course, GATT, the Agency for International Development, at that time this was a name only.  Universal land reform programs, very very important elements of transforming the third world development.  And of course, the unfolding spread of capital and capitalist relations – capital as a social relation, not just as money.  And of course, transnationalization of social capital.  I use social capital in the macro sense. 
And the rest is history.  This is just the preamble for what I wanted to say before I talk about my paper.  This is my talk here.  Because we had more time, I thought it would be more concrete to be able to explain that.  Otherwise, I would not have.
            I wish to be faithful to the overall aim of this session on security without compromising my focus on the International Petroleum Cartel, IPC, emerged through the Achnacarry Agreement of 1928 – 1972, and delivered a definitive economic and political control to the United States in the post-war period.  Indeed, the term security has no meaning other than control in this context.
            If one examines cartelized oil, that [fit?] the US foreign oil policy until the collapse of the IPC, through the full blown crisis of the early 1970s.  I’ll speak briefly on the security of oil real or imagined which then led to that easy settlement within the Justice Department and the State Department, through the catchall notion of national security in the Eisenhower administration, in 1959. The transformation of oil from cartelization to decartelization and competitive globalization is interlaced with the rise and the fall of American hegemony.   That is to say, each of these transformations is closely linked to an interstate power structure that is contrary to one another from the stance of theory, policy, and practice in both political economy and international relations. 
            The American ascendency in the post-war is grounded upon full-blown cartelized oil as an all exclusive lens represented by the International Petroleum Cartel.   This is the story of old colonialism, which with all intents and purposes had carried over and conveyed by the rubric of Pax Americana before becoming history in the past.   When I say, history in the past, Pax Americana starts with the International Monetary Fund in 1944/45, and then in my judgment, ends in 1974.  It’s done in 1974. We don’t have Pax Americana in 1974, the last year of Jimmy Carter.   This was the end of a history and the beginning of the new one, which turns Fukiyama’s “The End of History,” on its head. 
            As for oil security, it is already obtained to competitive globalization, a mechanism that transmits long term prices through competitive profits and differential oil rents commensurate with productivity at those competing oil regions.  And on the long run prices, set by the cost of oil in the lower 48 states of the United States.
            In other words, this globalization that we’re talking about includes the United States not in a very marginal way. It’s a very holistic way, altogether. And then the people who argue that we are going to be independent because in North Dakota, near my state actually, there are all these gases and fracking and things are happening, and so on and so forth, we are going to be independent. We are not independent. We are now trying to shift that to China. We are not independent. Interdependence is very important. The short-run oil crises are subject to this, but future market crisis gravitating in the long run US costs. This should have a profound implication for the claim that insists on both US hegemony, i.e., American exceptionalism, and old-fashioned control of oil in the era of globalized oil.
            Now, let me give you a few words on OPEC. The outgrowth of OPEC is the tale of two different settings. The former was semi-colonial and controlled; the latter is post-colonial and competitive. The two settings are like day and night, with no chance of common [?] either in theory or in practice. OPEC of the 1960s was a thorn in the side of IPC, International Petroleum Cartel, not so much for the fact that it may have shown a bit of resistence, but because of the fact that OPEC was a paradox, a manifestation of an in-house diagnostic tool that measured the magnitude of cracks and the splinters that were already multiplying in the foundation of the Achnacarry  
            So given that, and of course we can begin discussing and talking about in the Q&A, OPEC then becomes part and parcel of the globalization through its extracting rents; but the mechanism of the formation of the different [?] is through competition of the regional different oil regions around the world. So in that sense OPEC is a reflection, is an effect, is not a cause after globalization.
            Now, allow me to talk about four cases. I wanted to talk about security, but very very quickly I’ll go through it.
            Case one: That this security is pseudo-security actually […?]. Case one: The CIA coup and training Mossadegh for IPC. In other words, the coup was because of the cartel, not because of the Cold War. The Cold War in my judgment was—and I investigated that thoroughly—was almost like a catalyst that caused the real cause. So in that sense, if you look at the process of what happened to Mossadegh one can see why oil was the key.
            The umbilical cord analogy of the United States foreign policy cannot be more fitting than in the case of nationalization of oil in Iran in 1951, and the subsequent 1953 coup d’etat as a result. This is a crystal-clear case as to the cause and effect of the coup. And of course, given the US and the UK declassified government documents and testimonies that would be witness to those. We can discuss that if you want.
            And of course the Cold War trade was employed as a parody first by the British and subsequently by the Eisenhower administration and then exploited as a policy point to get the job. There’s no time. I’m going to go to the Case two.
            The 1959 oil [quota?]. Again, the priority for safeguarding the principal as is in the Achnacarry Agreement and the US symbiotic desire for control of oil can be revisited in the late 1950s. […?] much cheaper oil from the Persian Gulf  [basing point?] was transported to the Suez and across the Atlantic to the markets in the Eastern shore of the United States. So this is a no-no according to Achnacarry. And this time Soviet surplus oil also found is way to the cartel-dominated world oil market. And particularly added to the drama of the US national security, particularly in the wake of Nikita Kruschev’s 12-day visit in September of 1951 to the United States. So the flow of Soviet oil was indeed a pretext for masking the real transformation which was underway, and by then gaining further strength little by little, market by market, and region by region, across the dominion of IPC. The rise of oil independent companies led to the violation of the cardinal rules of Achnacarry, and of course later on led to the destruction of the IPC altogther. So that’s Case two.
            Case three: National security and OPEC. To be very brief, I’m referring to one State Department document. Here is the passage from the 1964 US-UK Memorandum of Conversation shedding light on the role of the US State Department. Also it is the early idea of countervailing oil consumer groupings against OPEC long before 1970. I quote:
            “We envisage, said Sir Geoffrey Harrison Deputy Foreign Secretary of Britain, that confrontation on OPEC issues might take place in different ways: 1) We might find ourselves in a position to support the companies. This would have many drawbacks, including the invoking of Arab nationalist sentiments that provide potential for Soviet meddling and creating internal political difficulties in the countries concerned. Because of these fears the Shah [of Iran] was prepared to get out in front in order to avoid enactment of sanctions at the 24  December 1963 Riyadh OPEC meeting. He, in fact, blocked sanctions against companies.  2) A confrontation might arise from the Western European consuming governments…if difficulties over OPEC should lead to an interruption in the supply… And 3) A price rise would likewise provoke the Western European consumer combination to oppose OPEC. However, we incline to belief that a rise in prices will come about in any event and the European governments will just have to learn to live with it…Mr. Kelly [US Assistant Secretary of the Interior for Mineral Resources] expressed agreement in principle with everything Sir Geoffrey had said…We are also worried about the consumer/producer confrontation, and there is a chance we might provoke this sooner than necessary.” And so on and so forth. This was anticipated before the international area agency is [formulated?].
            But then after four or five years or six years, they did not recognize it, these two countries, Britain and the United States. And then George Ball, Undersecretary of State  wrote a cable to the embassies in 1965: “The US-UK policy of neutrality and non-commitment toward OPEC detailed in CA-386 (paragraph 8)has not prevented the OPEC from obtaining recognition from international organizations, specifically ECOSOC and UNCTAD, and Austria has granted diplomatic status to the organization… In the light of these and other successes by OPEC, the US government intends to review the present policy towards OPEC.”
            So, these are four cases that security is not as secure […?].
            Okay, conclusion: The 1973-74 oil crisis was not an ordinary disruption. This was not only the mother of all crises within its own specific social and economic conflagration, but a part of a larger crisis in a series of turmoil and instability that inaugurated and ushered the beginning of the end of the Pax Americana, 1945-1979. The irony of history in this scenario, in Fukuyama’s witty rendition, would make the “last man” the very last US president in charge of the now defunct Pax Americana.  In the larger context, the awful events of 9/11 were a visible and powerful shot across the bow not so much for the attack by a crafty bunch of barefooted, discrete, non-English-speaking natives from a faraway land but for the fact that the arbiter of time let them [do this…?]. Yet, the perpetrators of 9/11, aside from foreign policy considerations, have accomplished a most sinister mission which advertently or inadvertently has struck at the heart of civil society in America. In Antonio Gramsci’s terms, they pitted political society against the civil society in America by prompting the former to outdo the other by the agony of constant surveillance across the homeland. They tossed the Trojan Horse a blanket of suspicion right in the middle of America’s civil society in an atmosphere of fear and intrigue unleashed, and utilized by the state. Hence, the world of full-blown paranoiac state which is by far more dangerous and self-destructive than the witch hunts of the McCarthy […?].
            In the absence of Pax Americana, speaking of US hegemony is in the past. At the same time, the post-hegemony polity in the making where there would be no hegemonic power that could exercise global hegemony, for hegemony is vested in capital as an all-embracing social relation beyond any one nation-state; so that China’s [issue?] in my judgment is [out?]. Therefore, speaking of China becoming the next global hegemony is not only hypocritical but a […?] that would drive the arms race by the supposed preemption. There’s an article in [the December 2013 EPS Quarterly]. You can take a look at it. This is a very good nice article about China and the arms race. One of the significant differences between today’s economy and polity and one under Pax Americana is the exigency of the spontaneous diffusion of global political power despite the infatuation with voluntarism, exceptionalism, unilateralism and preemptive politics in the global affairs. Yet these anachronistic agitations by the United States are not only the confirmation of powerlessness and vulnerability in themselves, but also harming the stability of world peace.
            To glimpse the scale of intensity of such destruction, these self-inflicted wounds, look at Iraq; what happened to us as citizens of this country?  We paid for it, injured by it and so on in such an amazing way. In this particular case one has to look at post-intervention Iraq, Afghanistan, Yemen, Libya, and now Syria. In a nutshell—I’m quoting a paragraph from my newest book:
            “The world is now grappling with the loss of American hegemony and the debilitating after-effects of reckless US reactions. The epochal train had already departed from the good old station, and the passenger was running wild in the opposite direction through the rear cars is running out of time.”  No amount of military intervention, power projection, frantic cries for oil security would reverse the course of this [?]. What is done cannot be undone. Thank you.

RK:
            Thank you, Cyrus. I want to congratulate both Heather and Cyrus for the way they have focused on aspects of our national security policy which are often overlooked. And similarly, Linda Bilmes has concentrated on an aspect of national security which has been practically ignored except in cases of anecdotal situations involving particular veterans and their injuries and their travails. But sort of the macro aspect of what is going on in military medicine has not been the subject of sufficient analysis until Linda Bilmes began her work.
            So I want to kind of summarize what she would have spoken about at this meeting and point out that she concludes that the most serious challenge to US national security policy will come not from an external threat from some other country or group of countries, but with the task of coping with the legacy of Iraq and Afghanistan. And that legacy will be years, will be decades in the coming to actual fruition. It includes the immediate and long-term medical care to the wounded, the structural increases to the military health care systems, as well as the depreciation and replacement of the equipment and weapons that were used in the wars and the restoration of readiness not only in the military, but among the National Guard units and the Reserves.
            Linda estimates that medical care and disability benefits are the largest accrued liability of the two wars. Historically the full costs do not come due for many years. And in fact, as she points out, the World War I peak year for paying disability compensation occurred in 1969, more than 50 years after the war. And the largest expenditures for World War II veterans was in the late 1980s. The bills for Viet Nam are still coming in, and it will take several decades before they’re all in.
            In a sense this is a scoring problem. The costs have been there, the costs have been paid; we just haven’t really paid attention to when they were paid and for what, and to the fact that these are costs of war, much delayed. We don’t think about them during the war. We don’t think of them for a long time. We have a kind of Gone With the Wind mentality. We’ll think about these things tomorrow, or next year, or whenever. But it doesn’t matter when we think about them; we still have to pay for them.
            In addition, the way the wars were financed by the Bush administration […?] was entirely through borrowing. We didn’t increase taxes during the war as we […?] have done in the past; we just kept in effect borrowing the money from the general public, which has to pay the cost and the interest rates on the borrowed money, [that] by her estimate will add about $2 trillion to the national debt before the bill is [totally paid?].
            The huge medical costs, by the way, do not include the fact that in many cases family members have to become full or part-time caregivers after the veteran leaves the military service or the VA hospital or rehab center. It’s the families that have to take care of the needs such as they are for disabled veterans. And these—and this a quote—“These costs”—from Bilmes—“These costs are not paid by the government, but are born by the individuals, families, and communities. […?] conclusions, Bilmes asks, what did we buy for the trillions of dollars spent […?] two wars? I pointed out her estimates of the full costs in my opening remarks, which are somewhere from $4 to $6 trillion for the two wars. And what did we buy for those costs?
            “We could have hoped for a peace dividend,” she writes, “with the ending of the wars, but the long-term costs such as using up large quantities of basic equipment, military assistance to the regions, financing the conflicts with debt, and the way the large expansion of medical care and disability payments take place just totally negates the possibility of a peace dividend. There will not be a postwar Iraq or postwar Afghanistan peace dividend. “
            Bilmes makes another prediction which goes to the heart of some of our current concerns. The legacy of budgetary restraints will tilt the US towards fewer military personnel and will favor “greater investment in unmanned weaponry, robotics, and other technological solutions. Hence the decision in the army to phase out pilots from their aircraft program, the use of drones in countries which we may or may not be at war with,” and she [puts in?] other technological solutions.
            Well, that concludes our presentations. There’s time for some questions, so we’ll be happy to respond to any that you all have.

Q:
            I know it was just a little green stripe, but what about the nuclear capability. I mean those things—we can’t fire those anymore. We don’t even know the technology that built them.

HH:
            If Bill Hartung were here he would have talked about that at great length; so I’ll say a couple of things. It’s $35 billion a year, which is tiny on that graph but of course, again, if you’ve run Head Start, it sounds pretty good; or even within the military, again, if you would rather have a destroyer than a nuclear sub, it’s starting to sound good.
            It’s interesting to note the administration has managed to get rid of one nuclear program, the CMRR, which was basically building new triggers for new weapons that we were never going to build, but we were building the triggers. They have opted not to go aggressively at cutting other parts of the nuclear infrastructure, the theory having been that there was going to be a series of agreements with the Russians and a build-down that would look strategically conservative, if you will—small ‘c’ conservative; but that would also jump-start a global effort to reduce nuclear weapons.
            Now, on the one hand, the Russians not having the huge conventional security overhang that I demonstrated, have proven rather uninterested in further lowering some of their categories of weapons, and the administration has not found it useful or expedient to decide to go further down unilaterally below the levels that we’re negotiating with Russia and [the new start?] agreement a couple of years ago. So frankly the sort of possibilities for budgetary pressures lowering—or any pressures—reducing nuclear expenditures have not really born out the way many people hoped in 2009.
            Now, I actually think that is going to change in the next couple of years because of the war of all against all inside the Pentagon rather than for strategic reasons or for, frankly, the reasons that President Obama came into office saying he was going to—just because the boys with the toys would rather spend the money on other toys.
            Now the other really fascinating thing about nuclear weapons from the political science perspective is that their unique destructive power is not as unique as it once was; that the emergence of precision-guided conventional munitions increasingly means that the US and a few other countries will have the ability to almost match their destructive power with conventional weapons, which, interestingly, on the one hand, has the result of making nuclear weapons less important, so you could get rid of them. On the other hand, it makes them more important, because if you’re Pakistan, say, and you’re afraid that the US could take out your nuclear weapons with conventional weapons, what’s the answer? More nuclear weapons. So we’re actually at this very troubling threshold which, in an interesting way, I think there are some cartel analogies with nuclear weapons to what you were talking about, where the optimist can look at the scenario and say that the salience of nuclear weapons is declining for the US military, for everybody. Alternately, you can look at it and say, well, nuclear weapons become one more tool in a diversified arsenal, and actually the reasons to have them get bigger rather than smaller. So that’s a very compressed answer to what could have been a whole presentation all by itself.

Q:
            I’m curious about Iran. I mean part of the reason that Iran seems to want, at least to want to be able threaten to have nuclear weapons is that everybody’s got weapons aimed at it. What’s the game there?

HH:
            Want to go first on that one? I defer to you.

CB:
            […?]
            […?] but that’s okay.

HH:
            To me the debate over what happens if—Basically you have three outcomes, right? One outcome is at some point the Iranians just say, the heck with all of you. We’re going to go all the way and we’re going to dare you and see what happens next.
            Outcome number two is you have successful negotiations that make it clear that Iran can’t and never will have a weapon. By the way, there is no military option that achieves that goal, because, number one, you can’t bomb knowledge; and number two, the Iranians understand very well what our capabilities are and what the Israeli capabilities are, and if you ask the US military, they will tell you that you cannot with confidence destroy the Iranian program. You can set it back a number of years, but you can’t destroy it. So there is no option under which the possibility of Iran being able to make a bomb goes away.
            In my view, the best case scenario is one where Iran’s government—and this is true whatever government Iran has, by the way, in my view; this isn’t something that would magically go away if you had a different Iranian government; you may disagree—the Iranian government can tell its people, we have the power to build a bomb anytime we want; but we’re not gonna because we don’t need to. Our neighbors just need to know that we could. And that to my mind is the best case scenario. And then that keeps the Saudis, the Egyptians, the Turks in a similar state of not going any further. It doesn’t really help you with Pakistanis, but it doesn’t hurt you any further with Pakistanis or the Israelis.

CB:
            I think I agree with most of the points absolutely. One has to realize that going nuclear in the sense of technology, of nuclear [process?], started in the Shah’s time. He was very cozy with the United States—

HH:
             We sold them the stuff.

CB:
            Exactly. And of course some of us will remember that. Not everybody can. Anyway. So that’s one point.
            Second, I think if one really studies the [MPT, the …?], the international agreement on nuclear disarmament, it is that knowledge of nuclear, gaining knowledge is not prohibited. In other words, being capable is not prohibited. And if there is any lawyer in this town or anywhere else, I would challenge that person.
            So the question then is, why the Iranian government, given recent negotiations in [...?] are [kind of happy?] with that. Because they put that point on. Why? Because if you listen to […?] talks about not being able to do so. The Iranian government should not be able. […?] And then they say, okay. They don’t say it expressively. What they say is that Iran is different, is […?]. And the of course there is a discussion that they have rationality, they’re not going to kill themselves. So the question comes to the following point: that Iran—this is my promise actually. They will have capability to be able to produce anything; but they will not. Never. Given what we see, given what inside information I have, given 40 years of studying Iran, and so on. I think this is a [plus?] actually […?] Obama administration. I think this is almost like a [?] for Obama administration, if you want to balance […?].
            And the question is that Obama administration should accept. It’s almost like accepting 1967 in Israel. That’s a sure thing. That’s the key. Of course. Some of us who really work on the issue know that. This is exactly like that. Yeah, you’re capable, but you never do that.

Q:
            In [Bilmes’s?] paper you started talking about her estimations of the true cost of the wars, and you said that those included opportunity costs. Can you talk a little bit on you go about calculating something like the opportunity costs?

CB:
            Well, I didn’t say that.

HH:
            I think I’m the one said that. So I am most definitely not [?], I’m not Linda, and I don’t want to pretend to be Linda, and you should read her book because it’s fabulous and it really is groundbreaking work that she did.

?:
            Are you familiar with the book? It’s called The Three Trillion Dollar War. It came out in 2006. It’s by Joe Stiglitz and Linda Bilmes. And so in the book they go into detail about how they calculated—

HH:
            But one back-of-the-envelope thing which is also very relevant to the budget and deficit debate: For years there has been this argument made that you can’t cut military spending because it’s job-creating. And there was some really interesting work done that basically, if you take a marginal dollar, and you want to invest it anywhere and anyplace that the US government could put money, it is the least job-creating; the multiplier is the worst if you put it into national defense. So if you think again, even if you think about just the red area on that first graph I put up, and you think about the opportunity costs of not having put that money into infrastructure, into tech, into education, into cutting taxes—whatever your favorite […?] of what to do with taxpayer money is—but basically any of those produces more returns than a marginal dollar put into defense does. So that already gives you one really significant chunk of opportunity costs. And I know her method is much more sophisticated than that; but that gives you a sense of the magnitude of what she’s talking about.

CB:
            Let me add one more thing. Opportunity costs of course as you know refers to not out-of-pocket costs, […?] accounting costs. For instance, if somebody is sitting here, paid airplane tickets and so forth for coming here, this time of yours that could have been spent on something else is spent here. That’s the case. They approximated that. They look at the cases, and then the tendencies, all the questions that would approximate that. That’s why they said between four trillion and […?]. It’s an approximation.

HH:
            I have seen the argument made—and again, I’m way out of my depth here—but they, she and Stiglitz raised the question of would we allowed the bubble to get as far as it got if we hadn’t been so distracted by what we were doing overseas, and/or, if we hadn’t needed that kind of good news at home to distract us and separate us from the [?] reality of what was going on overseas, which is something that’s hard to quantify. But again, if you think, as I increasingly do, that even or especially a society as large and powerful as this one can really only handle one, one-and-a-half crises at a time. And you read some of the—Peter Baker’s book on the Bush-Cheney relationship, and you think about, again, whatever you think of Bush and Cheney, they certainly didn’t want the economy to end the way it did in their administration. So that’s a whole other genre of opportunity costs you can think about.
            For example, if you ask yourself, for example, would the Arab Spring have come sooner if not for the example of what happened Iraq. If it had come sooner, would it have happened in a way that it could have unfolded more gradually and successfully than it has done? Is that an opportunity cost in some way? Was the last best chance to make peace between Israel and Palestine missed during this period? That’s a big opportunity cost. Did the US presence in Asia, which we didn’t talk much about, either in a cooperative way or a competitive way, are those opportunities that were missed? So those are all—

?:
            Another couple of things that are in the book that they specifically talked about was they quantified the cost of all of these wounded soldiers who are not in the productive workforce, both wounded soldiers and killed soldiers who would have otherwise been part of the productive labor force. So that’s a quantifiable number if you accept that six million dollars is the cost, the work life cost of a human in America.
            And another one that they said was that in February of 2002, the cost of oil was $25 a barrel, and in 2006, when they wrote the book, it was $80, or something like that. So conservatively they discussed a lot and decided to conservatively say that the war would account for ten percent of that rise. Then you can count how much money that has taken out of the economy.

Q:
            It just seems to me that any kind of an estimation of this is going to be an underestimation—

?:
            Yes. They actually said that in the book, is that we chose to be as conservative as we possibly could for a reason.

RK:
            And by the way, up till their book cost estimates for the war were a fraction of what they came up with.

?:
            Yah, a magnitude of 10.

RK:
            They took some before their conclusions […?].

CB:
            This is in addition to the cost of the prestige of this country, which is gone forever. I’m sorry to say that. Done.

RK:
            We have time for one more questions.

Q:
            Is that […?]-dollar figure a net [?] figure, […?].

CB:
            I think they did some discounting.

RK:
            Oh sure, they discounted, absolutely.

?:
            And that gives you a range right there.

RK:
            And they put everything in real terms, so they were comparing apples and apples.
            Well, I guess that winds our presentation of this very interesting session and roundtable discussion. And we appreciate everybody who came, the questions that were asked.

?:
            First I want to thank Heather and Cyrus for actually making it here.

 

           

 

 

Economists for Peace and Security
http://www.epsusa.org