The Great Deformation

by David Stockman

  The rising tide envisioned by the Reagan Revolution was based on the expected societal gain from free market capitalism and the sustainable increases in productivity, output, and real wealth which it generates. In a healthy capitalist economy income distribution reflects the economic justice of the marketplace, not the political engineering of the state, and properly so.

  Much of the wealth gain of the last three decades, however, was not the fruit of the free market. As will be seen in part IV, it originated instead in the financial and real estate bubbles which were generated by the profligate borrowing of the state and the money-printing spree of its central banking branch.

  The intense political debate surrounding the nation’s current palpable misdistribution of wealth—the “class war” issue of the 2012 campaign—is thus deeply ironic. The deformations of sound money brought on by Nixon and Reagan sowed the seeds of these untoward results. Yet it is the very free market that their policies betrayed which now collects the blame.

  It goes without saying that the boundaries of the state did not recede, as the Reagan Revolution intended. In both its welfare state and warfare state dimensions, government has become ever more corpulent, even as the tax burden imposed to finance has been repeatedly lightened. Indeed, the Reagan campaign promise that the unstable, stagflationary economy of 1980 would be rebuilt on a foundation of sound money and financial integrity has been roundly repudiated by thirty years of history.

  The hallmark of the past several decades has been a debilitating expansion of household and business debt burdens. Indeed, the nation undertook an international borrowing spree that permitted Americans to consume a staggering $8 trillion more than they produced over the past thirty years.

  These deformations of the Reagan Revolution were, to some degree, implicit in the errors, contradictions, and confusions of the policy playbook itself. On the surface, its core ideas were a seductive alternative to the failed “tax, spend, regulate, inflate” paradigm that defined national policy from the Johnson administration through those of Nixon, Ford, and Carter.

  But once placed on the anvil of governance, the Reagan Revolution fared little better. It eventually proved itself to be a campaign slogan, not a rigorous policy agenda. More importantly, the Republican Party has proven decade after decade since Reagan’s time that the small-government principles of his patented speech were intended to be recited often and loudly but honored only in the breach.

  CHAPTER 5

  TRIUMPH OF

  THE WARFARE STATE

  How the Budget Battle Was Lost

  ARIOTOUS EXPANSION OF THE WARFARE STATE WAS FOREMOST among the policy errors of the Reagan Revolution. Within days of Reagan’s taking office, the White House made a historically devastating mistake by signing over to the Pentagon a blank check known as the “7 percent real growth top line.”

  This massive injection of fiscal firepower nearly tripled the annual defense budget from $140 billion to $370 billion within just six years. More importantly, it fueled powerful expansionist impulses throughout the military-industrial complex at exactly the wrong time in history.

  THE SOVIET NUCLEAR WAR FIGHTING STRATEGY—A NEOCON STRAWMAN

  The decrepit Soviet economy was descending into terminal decline by the early 1980s. While there were clues and signs everywhere of Soviet industrial decay, the neocon branch of the military-industrial complex trumpeted a new version of the phony missile gap that John Kennedy had promoted during the 1960 campaign.

  But the neoconservative version of the alleged “gap” in military capabilities was portrayed as pervasive, ominous, and intensifying. The Soviet Union was hell-bent on acquiring nuclear war–winning capabilities; that is, a first-strike capacity to disable much of the US nuclear deterrent. That was coupled with an alleged massive civil defense system designed to survive any retaliatory strike, even if the Soviets absorbed 25 million casualties or more.

  These threatening strategic nuclear capabilities were alleged to include an entirely new fleet of modern heavy bombers and a drastic increase in the scale and accuracy of its MIRVed strategic missiles. Beyond that the Soviets were purportedly fielding a whole new force of mobile ICBMs and a dramatic expansion of their advanced nuclear attack submarine fleet.

  Every facet of this hydra-headed threat elicited demands for new US weapons while the scary neocon narrative about a Kremlin bent on world conquest reignited cold war fears throughout Washington. The consequent drumbeat for rearmament propelled the Reagan defense plan. But, alas, it was all rooted in a monumental confluence of error.

  In truth, this Soviet nuclear war–fighting strategy never really existed. Moreover, the huge US military buildup mounted to counter it allocated almost nothing to strategic weapons and countermeasures. Instead, the Pentagon poured hundreds of billions into equipping and training a vast conventional armada: land, sea, and air forces that were utterly irrelevant to the imaginary Soviet nuclear first strike.

  Ironically, the Reagan conventional force buildup was still cresting when Boris Yeltsin, vodka flask in hand, mounted a tank and stood down the enfeebled Red Army. Future presidents were thus equipped to launch needless wars of invasion and occupation, mainly because owing to the Reagan armada they could.

  THE GREAT DISCONNECT: THE $1.5 TRILLION PENTAGON WINDFALL

  The Reagan defense buildup was fraught with budgetary confusion and disconnects from the very beginning. The quantum jump in five-year defense spending from the 7 percent top-line plan was not based on one scintilla of bottoms-up program detail or even a single hour of professional analysis. It stemmed from a comedy of errors within days of Reagan’s inauguration.

  It started with candidate Reagan’s September 1980 “Chicago speech” which outlined a comprehensive economic and budget program, including a promise of 5 percent annual real growth in defense. However, that figure had not been blessed by the campaign’s coterie of neocon advisors led by super-hawk Senator John Tower, who wanted 8–9 percent increases. Instead, the 5 percent growth figure had simply been shoehorned into the plan by Reagan’s chief economic advisors—Alan Greenspan and Marty Anderson. It had been designed to show that the numbers weren’t impossible—that is, the nation could have a sweeping across-the-board tax cut, a major military build-up, and a balanced budget, too, and all by 1983.

  A new administration would normally resolve deep military spending differences through several months of analysis by expert task forces focused on threat assessments and budget resource trade-offs. On the eve of the inauguration, however, two developments conspired to eliminate this rational course of action entirely.

  First, the Carter administration had been harshly attacked during the campaign for “gutting” national security, but now its outgoing budget plan proposed to increase real defense spending by 5 percent annually. That eliminated on the spot any willingness by the Reagan White House to adhere to its own Chicago speech growth rate.

  Even more importantly, the new administration promised to deliver a comprehensive economic recovery program and five-year fiscal plan by February 18. That meant that it had less than four weeks to essentially redo the entire federal budget.

  With no time to develop any bottoms-up defense plan, we resorted to a primitive expedient; namely, a single “placeholder” number for total defense spending for each year of our five-year fiscal plan. The numbers were agreed on during a half-hour meeting at the Pentagon ten days after the inauguration.

  From a national security perspective, these five magic numbers were virtually content free. Indeed, the two principals at this four-person meeting, the new secretary of defense and the budget director, knew almost nothing about defense. By the same token, their two neocon deputies, who had already agreed upon the outcome, maintained a discreet conspiracy of silence.

  In truth, the very purpose of the meeting, to get a defense top line, was an insult to expertise. There were “no charts, no computer printouts, no color slides, and no colonels with six-foot wooden pointers.” The o
nly implements on the table were “a Hewlett Packard pocket calculator and a blank piece of paper.”

  Defense Secretary Caspar Weinberger, who had not even studied his defense brief, observed that Carter’s 5 percent growth plan wouldn’t do and that the 8–9 percent demanded by the Tower group was probably too much. Accordingly, he proposed 7 percent. I made a few taps on the Hewlett Packard keypad. The largest five-year defense plan in recorded history was thus agreed upon.

  But that wasn’t all. The defense budget was in a state of turmoil and rising rapidly owing to continuous add-ons and supplementals. After the hostage rescue fiasco in Iran, sentiment on Capitol Hill intensified in favor of strengthening the military, and the Republicans’ hawkish campaign rhetoric about the Soviet threat added further impetus.

  In this context, the fiscal 1980 budget of $142 billion had been the piñata attacked by Republicans during the election campaign as evidence of the Carter administration’s failed national security policies. Crucially, it had also been used as the starting point for the 5 percent defense growth commitment in the Chicago speech.

  In the interim, however, the defense committees first increased Carter’s fiscal 1981 budget to $170 billion, and then raised it further to more than $180 billion via mid-year supplemental appropriations. The lame duck Defense Department further ratcheted up the numbers, raising its request for fiscal 1982 to $205 billion.

  Even this bloated figure was found to be woefully inadequate by the neocons. So Senator Tower secured a pledge from the White House, even before Reagan took office, for a military pay raise and other operations-type add-ons in what was called a “get well” supplemental. Another $17 billion was thereby added.

  When the dust finally settled, the fiscal 1982 defense budget stood at $222 billion—a figure nearly 60 percent larger than the $142 billion piñata that had been so roundly attacked during the campaign. Yet it was from this vastly elevated prospective budget for 1982, not the allegedly deficient actual 1980 spending level, that the annual growth rate calculation was applied.

  In the flash of an eye, therefore, the laws of compound arithmetic joined hands with the raw power of the military-industrial complex. The result was a lunatic miscarriage of governance.

  Given the inflation assumptions used at the time, the Chicago speech plan of 5 percent real growth would have resulted in a fiscal 1986 defense budget of about $250 billion. But based on 7 percent real growth and the much higher starting point, there was a stunning new number: projected defense spending of nearly $370 billion for fiscal 1986.

  In short, before even one dime of domestic spending had been cut, to say nothing of the promised massive tax reductions, the out-year defense budget was 50 percent bigger than had been previously assumed. The fiscal math of the Chicago speech, the only attempt that the Reagan campaign had ever made to reconcile the candidate’s warring fiscal objectives, was now on the scrap heap.

  I was dumbfounded when I learned about this calamitous result a few days later. The Pentagon’s runaway top line amounted to nearly $1.46 trillion over 1982–1986. It was greater than Jimmy Carter’s entire federal budget for the previous three years combined, including defense, interest, Social Security, the medical entitlements, the safety net, the national park service, and the tea tasters’ board, too.

  It all seemed so outlandish. In fact, I was certain the numbers would be scaled back at a later date when a conventional bottoms-up defense plan had been developed. Under the heading of wishful thinking, however, that turned out to be an entry for the ages.

  THE DOD SPENDING STAMPEDE

  No fresh start or strategically coherent defense plan was ever developed by the Reagan administration. This immense, content-free “top line” was simply backfilled by the greatest stampede of Pentagon log-rolling and budget aggrandizement by the military-industrial complex ever recorded.

  In a process that went on week after week for the better part of a year, the huge swaths of empty budget space under the new defense “top line” were converted into more and more of virtually everything that inhabited the Pentagon’s vasty deep. Much of it, which had languished for years and decades on the wish lists of the brass and the military contractors, now got funded without much ado.

  With defense funds being virtually slopped onto the waiting plates of the four military services, it is not surprising that much of it went to the conventional forces. Notwithstanding all the scary stories about the nascent Soviet nuclear first-strike capabilities, there really weren’t many concrete programs to counter it except for a new strategic bomber and an MX missile upgrade.

  At the heart of the Reagan defense buildup, therefore, was a great double shuffle. The war drums were sounding a strategic nuclear threat that virtually imperiled American civilization. Yet the money was actually being allocated to tanks, amphibious landing craft, close air support helicopters, and a vast conventional armada of ships and planes.

  These weapons were of little use in the existing nuclear standoff, but were well suited to imperialistic missions of invasion and occupation. Ironically, therefore, the Reagan defense buildup was justified by an Evil Empire that was rapidly fading but was eventually used to launch elective wars against an Axis of Evil which didn’t even exist.

  Among the costly programs which had precious little to do with the alleged strategic nuclear threat was the fabled six-hundred-ship navy. The latter entailed hundreds of billions in new procurement for mostly surface ships and carrier battle groups. These vast iron flotillas had no role whatsoever against a Soviet first strike, save perhaps to burn the last candles for civilization after it was over.

  Likewise, hundreds of billions more were absorbed by conventional land and air forces, including 13,000 new main battle tanks and Bradley fighting vehicles. Over the next decade the Reagan buildup also funded about 18,000 new tactical aircraft and helicopters, and hundreds of thousands of cruise missile and guided munitions.

  During the first year or two, however, even the Pentagon could not spend money on big-ticket items fast enough to consume all the top-line dollars. So the military services launched a once-in-a-lifetime shopping spree for spare parts, ammo, tools and equipment, electronic components, and every other kind of material on their stock lists. Spending for some items grew by 50 percent annually for several years.

  By contrast, only a tiny fraction of this $1.46 trillion defense bonanza actually went into strategic nuclear procurement. For example, about $30 billion—or 2 percent of the total—went to the B-1 bomber, which was based on obsolete pre-stealth technology. Ironically, the last batch of the 100 B-1 bombers was delivered in May 1988—six months before the Velvet Revolution in Prague triggered a swift end to the rickety Soviet empire.

  What actually kept the Soviets at bay was the retaliatory desolation that the thousands of submarine based Trident missile warheads would rain down upon its cities, along with an equal number of independently targeted warheads launched from land-based minuteman ICBMs. The Soviets had no defense against these land- and sea-based retaliatory forces and had no prospect of developing one.

  This deterrent force was what actually kept the nation safe and had been fully in place for years. American nuclear security in 1981 required hardly an incremental dime of expenditure—and certainly not the $20 billion MX “peacekeeper” missile, which was an offensive weapon that undermined deterrence and wasn’t actually deployed until the Cold War was nearly over.

  Indeed, virtually none of the Reagan defense build-up impacted the strategic nuclear equation. The tried-and-true doctrine of mutual assured destruction (MAD), based on 656 Polaris submarine missiles and 1,054 Minuteman ICBMs already bought and paid for, kept the nuclear peace until the last day of the Soviet Union in 1991.

  So the idea that the Reagan defense buildup somehow spent the Soviet Union into collapse is a legend of remarkable untruth. The preexisting nuclear balance of terror never really changed during the 1980s, and the United States spent no serious money to threaten the Evil Empire. The
Soviet leadership did end up feeling beleaguered and imperiled, but it was due to the epochal economic failure of an ossified state socialism, not the new US armada of conventional ships, tanks, and planes.

  Indeed, the original notion that the Soviet Union was bent on developing global military superiority and nuclear war–winning capability was never plausible. Even at the time, there was no evidence to support it, and it was embraced by no more than a tiny but vocal minority of the national security community.

  The now open Soviet archives also prove there never was a Soviet defense-spending offensive. By the early 1980s Soviet military outlays were growing at only 1–2 percent per year, and even that figure was based on the dubious statistics of a command economy which was falling apart.

  On the scary weapons front, the Soviets’ heavy fixed-silo ICBMs turned out to be far less accurate than claimed, meaning they were never close to being the deadly first-strike weapons the neocons had ballyhooed. The new mobile ICBMs were not accurate enough to function as first-strike weapons, either.

  Nor was there any heavy long-range bomber program—only an intermediate range aircraft that could not have actually threatened North American sites. Likewise, there was no massive civil defense program, just a mishmash of disorganized and poorly resourced local boondoggles.

  In short, the neocon case against MAD was based mostly on fantasy. The Soviet leadership was not prepared to launch a world-ending first strike because it did not even remotely have the capabilities to do it, even if it had succumbed to suicidal impulses.

  The far more relevant truth, which had been evident to free market libertarians all along, was that the Soviet economy was on an inexorable path toward failure. This militated heavily against the prospect that it could have initiated a nuclear war–winning strategy or carried out significant conventional force aggression beyond its own border regions, such as the morass it sunk into in Afghanistan.