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Wednesday, November 24, 2010

Trading for Security

Americans tolerate a costly global national-security apparatus in part because they believe the country would be economically vulnerable without it. After all, we use resources from all over the world—oil being only the most prominent example. What if an embargo cut us off from supplies?

Anyone expressing skepticism about this is sure to be confronted with the oil embargoes of the 1970s. According to popular belief, Americans suffered in that decade because the OPEC nations stopped oil shipments in retaliation against the U.S. government’s Middle East policy. The nation was at the mercy of malefactors who held its lifeblood in their hands. That crisis had American officials talking about war (the “low-cost option,” one high-ranking bureaucrat called it), and the military was restructured accordingly.

The lesson? America must not let foreigners control its economy through access to needed resources.

Except that’s not what happened.

U.S. Policy

As Donald Losmam wrote in a 2001 Cato Institute paper, “Far too much of the economic debacle of the 1970s has been attributed to OPEC and the price hikes and far too little to U.S. government policies—both pre- and post-embargo.”

People forget that in 1971, two years before the first embargo, President Richard Nixon imposed price controls on the U.S. economy in an ill-conceived attempt to curtail inflation. For Americans, oil and gas were kept artificially cheap, pumping up demand—and creating shortages and long gas-station lines—when world demand and prices were already rising. “[D]omestic price signals were misleading and promoted vulnerability to price and supply disruptions,” Losman wrote. The government tampered with the price system, and an economic debacle resulted. Where have we heard that before?

What effect did the 1973 Middle East war have on things? “When war broke out in the Middle East October 1973, an OPEC delegation had been in Vienna negotiating with the big oil companies for yet another round of price increases,” Losman wrote. “The timing was fortunate for Arab suppliers, who would drape their price-raising production cutbacks in the flag of Pan-Arab rhetoric. Acting opportunistically, non-Arab cartel members went along for the ride.”

Note this well: “Despite the embargo, U.S. oil stockpiles fell only slightly, and, by March 1974, they were growing again” (emphasis added).

In other words, the embargo was a flop. As the Saudi oil minister put it, “[T]he embargo was more symbolic than anything else.” How can that be? The minister had the answer: “[T]he world is really just one market.”

The FEO Crisis

Losman explained: “[S]upplies meant for other consuming countries were diverted to the United States.” But that did not ease things for American consumers because the U.S. government still controlled domestic prices. The regulators raised them, but not nearly as much as the world price had risen. As economist Paul MacAvoy summed up: “[R]egulation created the effects of the embargo . . . and the FEO [Federal Energy Office] gets the credit for the energy crisis perceived by consumers in 1974.”

The terrible seventies, then, were not the result of anti-American oil sheiks shrewdly manipulating the U.S. economy for political or religious purposes. The injuries were self-inflicted—or U.S. government-inflicted, to be precise.

The lessons from that decade, then, are these:

1. Don’t interfere with the price system, and

2. Don’t worry about embargoes.

The second may seem more controversial, but think about it: Oil producers need to sell their oil. They have nothing else to do with it. If they won’t sell it to Americans, they will sell it to someone who will. That’s true for other commodities as well. Keep the trade channels open, and we have little to fear. We don’t need to be perpetually prepared for war to save the economy. What believer in the efficacy of markets could disagree?

This point was made recently by Bruce Fein, a conservative lawyer who worked in the Reagan administration and at the Heritage Foundation. Writing in The American Conservative magazine, Fein quotes President Dwight Eisenhower as an exemplar of the view he plans to demolish. Eisenhower said:

From my viewpoint, foreign policy is, or should be, based primarily upon one consideration. That consideration is the need for the U.S. to obtain certain raw materials to sustain its economy and, when possible, to preserve profitable foreign markets for our surpluses. Out of this need grows the necessity for making certain that those areas of the world in which essential raw materials are produced are not only accessible to us, but their populations and governments are willing to trade with us on a friendly basis.

Imperialist, Not Liberal

Before getting to Fein’s response, I note that Eisenhower’s position, which faithfully captures the ruling elite’s historic approach to foreign policy, violates the classical-liberal spirit as well as free-market principles, since it inevitably assigns a major economic role to politicians, bureaucrats, and generals in the service of special economic interests. Furthermore, it sullies the freedom philosophy by associating it with a picture of the less-developed world as a mere convenience for the United States, both as supplier of raw materials and as consumer of what American manufacturers can’t sell domestically at desirable prices. In other words, it rhetorically links the free market with empire, although these things have no true relationship whatever. Unsurprisingly the U.S. record on the ground is less free-market and more imperialist. This criticism did not originate with Marxist-Leninists but with free-market advocates like Richard Cobden and John Bright. Joseph Schumpeter later elaborated the point.

Fein, author of the newly published American Empire Before the Fall, rejects Eisenhower’s statement completely: “[I]t is founded on a myth. Neither the United States nor any other nation has ever been deprived of essential goods and brought down by economic warfare. Smuggling, bribery, and middlemen eager to make money invariably evade the tightest embargoes.”

The economic-security argument for a war-ready global military presence is worse than wrong. It’s dangerous since it is sure to create peril instead of averting it.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.