Even less understood is how the political decisions of the late 1970s are tied to the current simultaneous financial and foreign policy crisis. Nor is it understood how Washington and Wall Street set the stage for America’s financial downfall by using Afghanistan as an investment bank throughout the 1980s to renew the Cold War instead of reinvesting in America’s civilian economy.
Much like today, the America of 1979 faced a crossroads. Vietnam, two oil shocks, a disintegrating infrastructure, a beleaguered manufacturing base and the loss of strategic ally Iran had shown that America was a vulnerable colossus. Thirty five years of economic Cold War against the Soviet Union and China had produced a vast arsenal of nuclear weapons that were proving as useless as they were unusable. World War II had set the stage for the happy marriage of war production to business — pulling the U.S. out of the depression by doubling the Gross National Product in one year (1940). The Cold War ushered the financial benefits of the 1940s into the 1950s and 1960s. But these expenditures came at a massive expense to the civilian economy and not just in terms of tax dollars. Weapons development of the post World War II years lured America’s best and brightest away from the civilian economy and even the real world of guns, tanks and armies into a world detached from time, space and money. While Germany and Japan rebuilt their civilian industries free from defense spending, the U.S. moved into ever higher levels of technology, glorifying and expanding the influence of the defense industry into every fabric of American life.
Originally termed Military Keynesianism to describe the buildup of the German defense industry prior to World War II, America’s military Keynesianism of the Cold War was the unseen hand of government supporting the American economy, balancing the cyclical ups and downs of the market by providing 16 percent of the Gross Domestic Product in 1950s and 9 percent in the 1960s. By 1963 defense spending accounted for 52 percent of all the research and development done in the United States. But by the mid-1970s, a stagnant American economy combined with the Arab oil embargo and inflation brought on by the Vietnam War exposed the weakness in the system. As German and Japanese manufacturers battered their American competition in the marketplace, the defense-heavy American economy faltered.
Born of necessity, diplomatic overtures to China and détente with the Soviets offered the first chance since World War II to get off the wartime treadmill. To that end, for most of the decade the U.S. and Soviet Union pursued Strategic Arms Limitation Talks.
Endorsed by President Nixon in 1972, it was hoped that the agreement signed by President Carter and General Secretary of the Communist Party of the Soviet Union Leonid Brezhnev would enable the United States to back away from weapons manufacturing and reinvest those resources in the civilian economy. But the Soviet invasion of Afghanistan changed all that.
Our involvement in this story began in the summer of 1979 when we began production of a documentary we called Arms Race and the Economy: A Delicate Balance. During the next months numerous experts including economist John Kenneth Galbraith lent their experience to our understanding of the unseen damage that a massive new diversion of tax dollars and capital investment would represent to the civilian economy. The arms race wasn’t just about defending the United States. The arms race was also about jobs and money in a dark world of business, science, and politics ruled over by a self-described “priesthood” of experts. Galbraith insisted that accelerated defense spending and renewing the Cold War, which the neoconservative right was lobbying hard for at the time, would ultimately destroy the civilian economy. He was convinced that the Cold War had already helped rigidify the capitalist system by bureaucratizing a large part of production for non-productive uses. He saw American industry becoming more and more like the Soviet Union, ruled by a military-industrial-academic establishment immune from reality, living in a planned economy designed to suit its own needs at the expense of society.
Galbraith jokingly referred to his “First Law of Executive Talent” that he had formulated to describe the thinking of America’s military-industrial leadership. “It was that all great executives come to resemble intellectually the products they manufacture. Until you had done business with top officers of the steel industry, you didn’t really appreciate the intellectual qualities of a billet of steel.” So it was with the defense department. America’s militarized economy was already in essence a Soviet-style “planned economy,” to make it an even larger part of the economy would only lock the U.S. into the same dismal fate.
That fall, in Washington, the Arms Control and Disarmament Agency was one of the last holdouts of sanity in a rolling sea of hysterical accusations about American security. Was the Soviet Union really planning a sneak attack on the United States with nuclear weapons as the right wing claimed? Was SALT II really just a public relations scheme by Moscow to put the U.S. off its guard?
In hindsight we know that these claims were absurd. The Soviet Union was dying, driven to SALT by its weakness, not its strength. But when the Soviets crossed their southern border into Afghanistan that December of 1979 it played out on America’s TV screens like a World War II Hollywood B movie. Afghanistan was a far off South Asian country of no particular interest to the United States. A half dozen administrations had refused Afghan requests for military assistance. Eisenhower’s Secretary of State John Foster Dulles’s callous and careless diplomacy drove Afghanistan towards Moscow in the mid 1950s and its politics followed close behind. A low priority remnant from Britain’s colonial empire, President Carter labeled the invasion, “the greatest threat to peace since the second World War.” But the script had already been written long before the Soviet’s crossed their southern border on December 27, 1979.
A trap had been set to give the Soviets their own Vietnam and the Soviets had taken the bait. But no one outside a handful of policy experts and Wall Street wizards were supposed to know that. Instead, a crop of neoconservative experts appeared on the scene claiming the Soviets were running out of oil and using Afghanistan as a staging ground for Middle East conquest.
By the time our program aired that winter, the argument was no longer whether our government should call a halt to the nuclear arms race and reinvest in the civilian economy. The U.S. had stepped into the mirror with the media echoing a return to 1947 style Cold War rhetoric, and the debate refocused not on whether, but on how much was to be spent to counter Soviet aggression.
In the planning stages for most of the decade, the new right’s military stimulus program regained for them a strategic hold over the economy, raising American investment in new weapons systems to a new high, while setting in motion a series of changes to the fundamental economic order endemic to the previous iteration of the Cold War.
As it had in the 1950s and 1960s, military spending once again drove the American economy, accounting for up to 6.2 percent of GDP by 1984. But where previous defense spending had been carefully balanced against America’s industrial output as a percentage of GNP, the so-called Reagan agenda or Reaganomics required massive borrowing to finance the military budget while reducing regulation and oversight of where it was spent. This change would transform American thinking about the economy, sending it into a star wars unreality and more importantly from a creditor to a debtor economy.
Always detached from the real economy, the Reagan budgets lifted the arms race and its Wall Street backers into the stratosphere, focusing the nation’s attention away from the depression era roads, bridges, dams, schools and industry that were in desperate need of attention. Instead, America became transfixed by the phantom of an ever present danger of Soviet troops in Afghanistan and a stock market driven by the military’s expansion.