Living in New York, you soon see how easy it is to succumb. “Oh, you’re English?” (Scottish actually, but never mind.) “We just love England.”
I have been here nearly two months now and I have yet to encounter anything that could possibly be described as anti-English feeling. By contrast, anti-French feeling is rampant. In the space of just a few days I have been regaled with Gallophobic jokes by an elevator repairman, several students and an Ivy League professor.
And all because the British Prime Minister has more or less uncritically aligned himself with the American President’s policy towards Iraq, which aims explicitly at “regime change” by military means; whereas his French counterpart has made it clear that he opposes a war to overthrow Saddam and will use his veto on the United Nations Security Council to try to prevent it.
To be British in New York is therefore to feel what the British do not always feel abroad: popular. To be French, by contrast, is to be ridiculed. And that is arguably the principal benefit to us of what Winston Churchill called the “special relationship” between the United States and the United Kingdom. When we go there, they are nice to us.
But what, I have recently found myself wondering, are the other benefits? This is a good question to ask Americans, because they never seem to have thought about it. To them – oddly, even to my many American friends who are critical of President Bush’s policy – it remains an obviously good thing that Britain should be America’s most loyal ally. In an increasingly anti-American world, the benefits to the US are self-evident – not so much our military support, which is dispensable, but our diplomatic utility. Throughout the most recent crisis over Iraq, the close cooperation between Mr Blair and the Bush administration has sent an important signal that the US is not acting alone.
That much is clear. The question that is much harder to answer is what precisely Britain gains. There may of course be a good answer to this. For example: Bush is right, Blair is right to support him and when Saddam has gone and a democratic Iraqi government has been installed the two leaders will bestride the globe, triumphant. But the interesting thing is that no one ever comes up with an answer like that. Nor does anyone ever suggest that, in the wake of such a delightful outcome, there might be any material reward to Mr Blair for his loyalty.
From a narrowly British vantage point – and there is something to be said for occasionally considering the national interest – that is slightly disturbing. The costs of backing Bush are immediately obvious: we get to fight a war and perhaps also help with an occupation that is bound to cost at least some blood and treasure, and we become the Islamic zealots’ third-favourite target (don’t forget Israel). The benefits, by contrast, are intangible. One former diplomat recently assured me that President Bush already pays more attention to Mr Blair than to any other European leader. But what precisely can Mr Blair ask of Mr Bush? And would Mr Bush grant it if Mr Blair could think of something to ask for?
The curious asymmetry of this relationship is nothing novel. For this is simply the latest of many chapters in the history of the Anglo-American relationship – a relationship into which one prime minister after another has been drawn, but out of which little of lasting value to the United Kingdom has emerged. I say this more in sorrow than in anger, as a keen Americanophile. I am hugely enjoying my new job here. In almost every respect, I am better off than I was in Oxford. What’s more, I genuinely like Americans. I am even getting to enjoy bagels for breakfast. In short, I know what I am getting out of my relationship with the United States. The question is: do you?
The special relationship was not quite invented by Winston Churchill, but it was he who made it genuinely special. Before Churchill’s time, Anglo-Americans relations were not much better than cordial and sometimes rather worse than cool. It was not just the memory of the War of Independence and the War of 1812. Authors like Dickens were scornful of the crude vitality of American society. Politicians like Gladstone were tempted to back the aristocratic South in the Civil War. Only with the realisation of America’s vast economic potential did that change. For the great imperial statesmen like Salisbury and Chamberlain it was axiomatic by the end of the 19th century that good relations must be maintained with the United States. Already the country’s influence over all the Americas was too extensive for any British government to contemplate a conflict with it.
That was pragmatic. But Churchill – whose mother was herself American – made the relationship romantic. “Westward, look, the land is bright!” he told BBC listeners in the dark days of 1941; he meant that victory in the second world war would only come if the United States could be induced to join it.
Yet Churchill tended to turn a blind eye to the persistent suspicion many Americans felt towards Britain. Roosevelt feared that Churchill “would take advantage of the help given by America” in order to ensure that “Great Britain would have a bigger Empire”. As late as October 1941, only 17 per cent of American voters favoured declaring war on Germany. It took Pearl Harbour and Hitler’s declaration of war on them to bring the Americans into the war.
From the outset, Americans made a distinction between helping Britain and helping her Empire. In an open letter “to the People of England”, published in October 1942, the editors of Life magazine declared: “One thing we are sure we are not fighting for is to hold the British Empire together. We don’t like to put the matter so bluntly, but we don’t want you to have any illusions.”
The American president, Franklin Delano Roosevelt, agreed. As he saw it: “The British would take land anywhere in the world, even if it were only a rock or a sand bar.”
“You have 400 years of acquisitive instinct in your blood,” he complained to Churchill, as if imperialism were a congenital disease.
In 1943 an American draft of the “Declaration on National Independence” went even further: as one British official lamented, “the whole tenor of it is to look forward to the ideal of the dissolution of the British Empire”. Nor did the Americans confine themselves to generalities. On one occasion, Roosevelt pressed Churchill to hand back Hong Kong to China as a gesture of “goodwill”.
Yet no amount of Churchillian bluster in response could alter the fact that Britain now depended on the United States financially; and that gave the Americans leverage. When, in August 1944, Roosevelt heard that Britain was "broke", he expressed ironic surprise. If that was the case, he joked, "I will go over there and make a couple of talks and take over the British Empire."
Representing the UK Treasury in Washington, Keynes came to detest the way the Americans sought to exploit Britain’s financial weakness for political ends. In his own stark metaphor, America was trying to "pick out the eyes of the British Empire". "I always regard a visit [to the US] as in the nature of a serious illness to be followed by convalescence," he told a friend. Nor was Keynes alone in feeling this way. One of his colleagues commented bitterly: "A visitor from Mars might well be pardoned for thinking that we were the representatives of a vanquished people discussing the economic penalties of defeat."
This is not to blame the United States, which had practical as well as sentimental reasons to support the aspirations of colonial peoples to govern themselves. The real question is why successive British Prime Ministers remained so faithful to the Churchillian ideal. For there were many more bitter pills yet to be swallowed after the war’s end.
From the immediate American termination of Lend Lease onwards, Britain was treated less like a close ally and more like a rival. For example, British hopes to have a say over any American use of atomic bombs were swiftly dashed, even when the bombers carrying them were based in England.
Symbolically, in May 1950 Secretary of State Dean Acheson ordered the destruction of all copies of a State Department memorandum about the special relationship. Six years later, when Britain and France intervened to reverse Nasser’s nationalisation of the Suez Canal, the relationship itself seemed to be destroyed. Incandescent at not being consulted, and fearful of the domestic and international ramifications of seeming to back old-style colonialism, Eisenhower once again used financial muscle – the offer of a loan to stem the run on sterling – to force the UK to withdraw from Egypt.
When Acheson, now out of office, famously declared that "Great Britain had lost an empire and not yet found a role," Harold Macmillan was scathing in his response. But within a week the US Defence Secretary Robert McNamara had announced that Skybolt – the missile system the Americans had promised to sell Macmillan – was being cancelled, effectively killing off the idea of a truly independent British nuclear deterrent.
And yet one prime minister after another has refused to bury the dream of specialness. Macmillan fantasised about playing the ancient Greek sage to Kennedy’s virile young Roman. Margaret Thatcher saw herself more as Vivien Leigh to Ronald Reagan’s Clark Gable. But frankly, did he give a damn? It’s usually claimed that Mrs Thatcher derived a tangible benefit from that relationship during the Falklands War in the form of naval intelligence and other assistance. But the political price of that help had to be paid at least twice, in the form of humiliation over the American invasion of Grenada and international and domestic indignation over the American bombing of Libya.
The only exceptions to the postwar rule were Edward Heath (who relished telling Richard Nixon that from now on he would have to deal with all nine members of the EEC as one) and his arch-rival Harold Wilson, who wisely resisted all pressure from the Americans to send even a token force to Vietnam. "Be British," pleaded one American official when George Brown went to Washington in January 1968: "How can you betray us?" Dean Rusk would have settled for "just one battalion of the Black Watch". ("When the Russians invade Sussex," Rusk grumbled when this too was denied, "don’t expect us to come and help you.") Tony Blair used sometimes to be compared with Harold Wilson, when he was still seen primarily as a Labour party moderniser and election winner. Maybe he should have stuck to that role model.
Yet even Wilson was not wholly immune to American blandishments. "The ceremonies of welcome went far beyond anything I have had before," he told Barbara Castle, one of his cabinet ministers, after a visit to Washington in 1975. That gives us a clue as to why so many British premiers have stuck to the special relationship, even when its fruits have been so hard to discern. It’s simply more pleasant to visit the White House than the Elysée Palace, much less the German Federal Chancellery. The language is much less of a problem and even misunderstandings are opportunities for transatlantic humour rather than faux pas. And of course American presidents have that most alluring of things: they have power. Given the choice between Brussels and the Beltway, most British politicians (Heath alone excepted) instinctively prefer the latter.
In some ways, it is surprising that this has turned out to be true of Tony Blair too. He was, after all, supposed to be the great Europhile, Tuscan man. Clinton’s magnetism was bound to have some effect; but Bush as Blair’s best buddy? Who would have predicted when Tony Blair was elected that his muted but detectable religiosity would contribute towards his transatlantic reorientation, and thereby, perhaps, to his downfall.
It may turn out otherwise. War and victory may come swiftly. But even if that does happen, we shall still have to ask a question. If the spoils do go, as they traditionally do, to the victor, what share will the victor’s spear-carrier get? It’s highly unlikely – to give just one example – that British oil companies will secure the "level playing field" they have called for in developing the oilfields of a postwar Iraq. And the next time President Bush feels the need to raise a tariff for domestic political reasons, don’t expect British exporters to be exempted.
The only consolation I can offer Mr Blair is this. If, as begins to seem possible, his decision to back Bush ends up costing him his job, there is a country where he will always be guaranteed a warm welcome. ‘Oh, you’re English?’ they’ll say, not recognising him at all. ‘We just love England.’
Niall Ferguson is Herzog Professor of Financial History at Stern School of Business, New York University. His latest book, Empire, will be published this month in the US by Basic Books.
Since former Federal Reserve Chairman Ben Bernanke uttered the word "taper" in June 2013, emerging-market stocks and currencies have taken a beating. It is not clear why talk of (thus far) modest reductions in the Fed's large-scale asset-purchase program should have had such big repercussions outside the United States. The best economic explanation is that capital has been flowing out of emerging markets in anticipation of future rises in U.S. interest rates, of which the taper is a harbinger. While plausible, that cannot be the whole story.
For it is not only U.S. monetary policy that is being tapered. Even more significant is the "geopolitical taper." By this I mean the fundamental shift we are witnessing in the national-security strategy of the U.S.—and like the Fed's tapering, this one also means big repercussions for the world. To see the geopolitical taper at work, consider President Obama's comment Wednesday on the horrific killings of protesters in the Ukrainian capital, Kiev. The president said: "There will be consequences if people step over the line."
No one took that warning seriously—Ukrainian government snipers kept on killing people in Independence Square regardless. The world remembers the red line that Mr. Obama once drew over the use of chemical weapons in Syria . . . and then ignored once the line had been crossed. The compromise deal reached on Friday in Ukraine calling for early elections and a coalition government may or may not spell the end of the crisis. In any case, the negotiations were conducted without concern for Mr. Obama.
The origins of America's geopolitical taper as a strategy can be traced to the confused foreign-policy decisions of the president's first term. The easy part to understand was that Mr. Obama wanted out of Iraq and to leave behind the minimum of U.S. commitments. Less easy to understand was his policy in Afghanistan. After an internal administration struggle, the result in 2009 was a classic bureaucratic compromise: There was a "surge" of additional troops, accompanied by a commitment to begin withdrawing before the last of these troops had even arrived.
Having passively watched when the Iranian people rose up against their theocratic rulers beginning in 2009, the president was caught off balance by the misnamed "Arab Spring." The vague blandishments of his Cairo speech that year offered no hint of how he would respond when crowds thronged Tahrir Square in 2011 calling for the ouster of a longtime U.S. ally, the Egyptian dictator Hosni Mubarak.
Mr. Obama backed the government led by Mohammed Morsi,after the Muslim Brotherhood won the 2012 elections. Then the president backed the military coup against Mr. Morsi last year. On Libya, Mr. Obama took a back seat in an international effort to oust Moammar Gadhafi in 2011, but was apparently not in the vehicle at all when the American mission at Benghazi came under fatal attack in 2012.
Syria has been one of the great fiascos of post-World War II American foreign policy. When President Obama might have intervened effectively, he hesitated. When he did intervene, it was ineffectual. The Free Syrian Army of rebels fighting against the regime of Bashar Assad has not been given sufficient assistance to hold together, much less to defeat the forces loyal to Assad. The president's non-threat to launch airstrikes—ifCongress agreed—handed the initiative to Russia. Last year's Russian-brokered agreement to get Assad to hand over his chemical weapons is being honored only in the breach, as Secretary of State John Kerry admitted last week.
The result of this U.S. inaction is a disaster. At a minimum, 130,000 Syrian civilians have been killed and nine million driven from their homes by forces loyal to the tyrant. At least 11,000 people have been tortured to death. Hundreds of thousands are besieged, their supplies of food and medicine cut off, as bombs and shells rain down.
Worse, the Syrian civil war has escalated into a sectarian proxy war between Sunni and Shiite Muslims, with jihadist groups such as the Islamic State of Iraq and Syria and the Nusra Front fighting against Assad, while the Shiite Hezbollah and the Iranian Quds Force fight for him. Meanwhile, a flood of refugees from Syria and the free movement of militants is helping to destabilize neighboring states like Lebanon, Jordan and Iraq. The situation in Iraq is especially dire. Violence is escalating, especially in Anbar province. According to Iraq Body Count, a British-based nongovernmental organization, 9,475 Iraqi civilians were killed in 2013, compared with 10,130 in 2008.
The scale of the strategic U.S. failure is best seen in the statistics for total fatalities in the region the Bush administration called the "Greater Middle East"—essentially the swath of mainly Muslim countries stretching from Morocco to Pakistan. In 2013, according to the International Institute of Strategic Studies, more than 75,000 people died as a result of armed conflict in this region or as a result of terrorism originating there, the highest number since the IISS Armed Conflict database began in 1998. Back then, the Greater Middle East accounted for 38% of conflict-related deaths in the world; last year it was 78%.
Mr. Obama's supporters like nothing better than to portray him as the peacemaker to George W. Bush's warmonger. But it is now almost certain that more people have died violent deaths in the Greater Middle East during this presidency than during the last one.
In a January interview with the New Yorker magazine, the president said something truly stunning. "I don't really even need George Kennan right now," he asserted, referring to the late American diplomat and historian whose insights informed the foreign policy of presidents from Franklin Roosevelt on. Yet what Mr. Obama went on to say about his self-assembled strategy for the Middle East makes it clear that a George Kennan is exactly what he needs: someone with the regional expertise and experience to craft a credible strategy for the U.S., as Kennan did when he proposed the "containment" of the Soviet Union in the late 1940s.
So what exactly is the president's strategy? "It would be profoundly in the interest of citizens throughout the region if Sunnis and Shiites weren't intent on killing each other," the president explained in the New Yorker. "And although it would not solve the entire problem, if we were able to get Iran to operate in a responsible fashion . . . you could see an equilibrium developing between Sunni, or predominantly Sunni, Gulf states and Iran."
Moreover, he continued, if only "the Palestinian issue" could be "unwound," then another "new equilibrium" could be created, allowing Israel to "enter into even an informal alliance with at least normalized diplomatic relations" with the Sunni states. The president has evidently been reading up about international relations and has reached the chapter on the "balance of power." The trouble with his analysis is that it does not explain why any of the interested parties should sign up for his balancing act.
As Nixon-era Secretary of State Henry Kissinger argued more than half a century ago in his book "A World Restored," balance is not a naturally occurring phenomenon. "The balance of power only limits the scope of aggression but does not prevent it," Dr. Kissinger wrote. "The balance of power is the classic expression of the lesson of history that no order is safe without physical safeguards against aggression."
What that implied in the 19th century was that Britain was the "balancer"—the superpower that retained the option to intervene in Europe to preserve balance. The problem with the current U.S. geopolitical taper is that President Obama is not willing to play that role in the Middle East today. In his ignominious call to inaction on Syria in September, he explicitly said it: "America is not the world's policeman."
But balance without an enforcer is almost inconceivable. Iran remains a revolutionary power; it has no serious intention of giving up its nuclear-arms program; the talks in Vienna are a sham. Both sides in the escalating regional "Clash of Sects"—Shiite and Sunni—have an incentive to increase their aggression because they see hegemony in a post-American Middle East as an attainable goal.
The geopolitical taper is a multifaceted phenomenon. For domestic political as well as fiscal reasons, this administration is presiding over deep cuts in military spending. No doubt the Pentagon's budget is in many respects bloated. But, as Philip Zelikow has recently argued, the cuts are taking place without any clear agreement on what the country's future military needs are.
Thus far, the U.S. "pivot" from the Middle East to the Asia Pacific region, announced in 2012, is the nearest this administration has come to a grand strategy. But such a shift of resources makes no sense if it leaves the former region ablaze and merely adds to tension in the latter. A serious strategy would surely make some attempt to establish linkage between the Far East and the Middle East. It is the Chinese, not the Americans, who are becoming increasingly dependent on Middle Eastern oil. Yet all the pivot achieved was to arouse suspicion in Beijing that some kind of "containment" of China is being contemplated.
Maybe, on reflection, it is not a Kennan that Mr. Obama needs, but a Kissinger. "The attainment of peace is not as easy as the desire for it," Dr. Kissinger once observed. "Those ages which in retrospect seem most peaceful were least in search of peace. Those whose quest for it seems unending appear least able to achieve tranquillity. Whenever peace—conceived as the avoidance of war—has been the primary objective . . . the international system has been at the mercy of [its] most ruthless member."
Those are words this president, at a time when there is much ruthlessness abroad in the world, would do well to ponder.
Mr. Ferguson is a history professor at Harvard and a senior fellow at Stanford University's Hoover Institution. His most recent book is "The Great Degeneration" (Penguin Press, 2013).
For much of the last decade, Mexico and Brazil were a study in contrasts. "Brazil Takes Off" was a typical magazine cover, depicting Rio's huge statue of Christ literally blasting off. The equivalent story for Mexico was "The War Next Door: Why Mexico's Drug Violence is America's Problem Too."
In the past two years, however, the roles have been reversed. Riots in São Paulo and the downfall of billionaire Eike Batista have badly dented Brazil's glamorous image. Meanwhile, a succession of bold moves by Mexico's charismatic new president, Enrique Peña Nieto, have finally awakened foreign observers to the fact that Mexico is Latin America's new "country of the future."
Not only is Mexico's per capita GDP back above Brazil's, according to International Monetary Fund data, but over the past five years investors in the Mexican stock market have enjoyed nearly three times the returns of those who put their money into much-hyped Brazilian equities. Jobs are being created so fast in Mexico—more than two million since early 2010—that the problem of illegal immigration to the United States may soon be history.
In the 1980s and 1990s, Mexico was almost as well known for its financial crises as for its drug wars. Those days are gone. Although growth has been sluggish this year, thanks in large part to the troubles of the construction sector, the IMF predicts a rapid rebound between 2014 and 2018.
The catalyst for Mexican economic change has been political. In 2000, after 70 years of such complete dominance that Mario Vargas Llosa labeled it "the perfect dictatorship," the Institutional Revolutionary Party (PRI) lost power in free elections. Two successive center-right administrations under the National Action Party, or PAN, struggled to deliver the kind of radical changes that Mexico required. Instead, after a dozen long years in the political wilderness, the PRI renewed itself. In July 2012, it returned to power thanks to a highly effective campaign by Mr. Peña Nieto, the youthful former governor of Mexico State.
The democratic world today is so lacking in Mr. Peña Nieto's kind of strategic leadership that the visitor is rather taken aback to encounter it. The day after his inauguration, President Peña Nieto signed the so-called "Pact for Mexico," a framework pre-committing the PRI and its opponents—the PAN and the left-wing Party of Democratic Revolution (Partido de la Revolución Democrática)—to support key reforms in telecommunications, education and finance. It was a bold move, reminiscent of the 1977 Moncloa Pacts, which were the basis for Spain's transformation from Francoist pariah to integrated European democracy.
Then came a succession of confident initiatives. In February, the government arrested the teachers union leader, Elba Esther Gordillo, for alleged embezzlement. Most Mexicans had thought Ms. Gordillo—notorious for her French couture and villas in southern California—was untouchable. The final education reform bill, passed in September, was a still bigger blow against her union, creating independent teacher training institutes to replace the union-controlled university that had trained educators. The reform introduces performance testing to evaluate teachers and increases funding for new schools and learning centers.
The government also passed a telecom reform that most observers thought would never happen. The law boosts competition by encouraging new entrants to the telecom market with the ultimate goal of lowering prices for users. Raising income taxes on higher earners, as the new fiscal package does, is not too popular in the business community. Yet, it is politically smart for Mexico to invest in education and transportation infrastructure, while at the same time making the tax system more progressive.
Thanks to the "Pact for Mexico," the budget for 2014 easily passed last month. No government shutdown, no debt-ceiling drama (public debt is just 38% of GDP)—just agreement on the essential priorities.
Instead of compromising the independence of the central bank, as in Argentina or Venezuela, the Peña Nieto administration has diligently followed the recommendations of the Banco de Mexico to introduce deep structural reforms from education to antitrust laws. The government understands that only with consistently low inflation can the central bank keep interest rates low. In Mexico there is no wishful thinking that easy money could somehow substitute for real reform.
The most important project, however, is the liberalization of the energy industry, long held back by the state-owned Pemex monopoly. The same party that nationalized the country's oil fields 75 years ago is now embarking on a reform whose primary objective is to bring foreign capital and expertise back in. The PRI understands that only with outside assistance can the country develop its extensive shale resources and deep-water oil reserves. Many thought this reform would not pass, but the government delivered it ahead of schedule on Dec. 12.
Modern technology will take time to install. But thanks to the North American Free Trade Agreement—the fierce critics of which have gone silent—cheap U.S. natural gas will soon be flowing down north-to-south pipelines. This will make Mexican industry, which is already beating China on labor costs, even more competitive. That will in turn support a growing Mexican middle class.
The government has not lost sight of income inequality and low productivity. But Mr. Peña Nieto's key insight is that attacking the mere symptoms of economic underdevelopment is not the answer. It is rare indeed to witness a president talking about "raising family incomes for all Mexican families through elevating and democratizing productivity," as Mr. Peña Nieto said during his state of the union in September. If social ills like drug violence stem from a lack of opportunities, then successful economic reforms should reduce them. Almost all measures of violence have fallen during Mr. Peña Nieto's first year of government.
Even in a lousy year for emerging markets, Mexico has future prospects that are the brightest in the region. Under the revitalized PRI, the country is on its way to a new kind of institutional revolution: one that could permanently transform it from Latin America's laggard into North America's new engine of growth.
Mr. Barbieri is a former fellow at Harvard University's Belfer Center for Science and International Affairs. Mr. Ferguson is a professor of history at Harvard.
It is politics that explains why, according to the Congressional Budget Office, the federal government will likely run a deficit every year from now until 2038. It is politics that explains why President Obama and Congress have been unable to agree on the reforms of taxation and entitlements that are so manifestly needed. And it is politics that explains why, before too long, Washington insiders will be back to the usual brinkmanship over government funding and borrowing.
Most economists would agree that the politicization of monetary policy has undesirable consequences, like pre-election rate cuts and high inflation. Hence independent central banks. Yet there is no chance whatever of legislatures giving up control of the budgetary process to independent fiscal technocrats. So are there any alternatives? The obvious one is to enact budgets for longer than a single year.
This idea is not without precedent. A recent example of a multiyear budget comes from Israel, where one of us served as finance minister. The biennial budget approved in July 2009 (for the years 2009-10) was the first two-year budget in Israel’s history, and it was followed by biennial budgets for 2011-12 and 2013-14. Although Israel is going back to annual budgets in 2015, other democracies that have experimented with two-year budgets include Hungary and Spain. And a number of other states — including Austria, Canada and Slovenia — have moved toward rolling budgets, presenting two annual budgets at a time.
The idea has American precedents. In 1940, 44 states enacted biennial budgets. Today, however, only 20 do. And, while the idea of two- or three-year federal budgets has been floated many times in Washington, it has never made it to the statute books.
The principal arguments against multiyear budgets are, a) that they reduce the flexibility of fiscal policy in the event of sudden macroeconomic changes, b) that they rely on forecasts up to 30 months ahead, which are even less dependable than those for the next 12-18 months and, c) that, precisely for these reasons, two-year budgets would end up being revised after a year anyway.
Moreover, any legislature that reduces the frequency with which it tugs the purse strings loses power to the executive. That’s why Bismarck insisted on a seven-year military budget, to reduce the democratically elected Reichstag’s power over an army dominated by the Prussian aristocracy.
Yet longer-term budgets have important advantages. They reduce uncertainty for the ministries, agencies and private companies that depend on government funds. Public investment in infrastructure is a good example; so are defense contracts. In each case, long-term engagements need to be made with contractors and the results take years to materialize. But the danger always exists of unexpected budget cuts that terminate unfinished projects at high cost to all concerned.
A more subtle advantage of longer-term budgets derives from the argument of the Nobel laureates Finn Kydland and Edward Prescott that rules are often preferable to discretion in the realm of economic policy. A good example is investment in fixed assets. A short-sighted government might be tempted to set low taxes on business to encourage investment, but then raise them on installed capital after the fact. But investors who suspected such “time inconsistency” would simply not invest. Thus, a rule that bound a government from raising the tax rate on past investments would lead to higher investment.
Today, there is reason to believe that many Americans, contemplating the vast liabilities of the federal government, expect higher taxes and lower post-retirement entitlements. The rational response is to reduce consumption.
One of the main defects of the 2009 stimulus bill was that it was not accompanied by any credible plan to restore the federal budget to balance within, say, 10 years. If people had been more confident about future policy, they might have been more ready to spend rather than simply save their stimulus-generated dollars. While a direct causal link has yet to be established, in Israel the implementation of biennial budgets amid the global crisis was followed by an impressive 36 percent increase in fixed investment in the years 2010-12.
Longer-term budgets also have political advantages. Passing a budget in the United States, as in Israel, involves prolonged talks between the executive and legislative branches. True, this process is at the heart of democracy. Nothing connects a congressman to his constituents more than a vote on a tax hike or a spending cut. But does the horse-trading need to happen on an annual basis?
With annual budgets, much of the year is devoted to budget preparation. No sooner is the process over than it has to begin again. This treadmill leaves little time for ambitious structural reforms, or for legislators to scrutinize how public money is actually spent. In what other arena does budgeting so completely dominate implementation?
Economics is a world of double standards. For nearly two decades, the World Bank and the International Monetary Fund have recommended that developing countries adopt Medium Term Expenditure Frameworks. Yet this is not expected of developed economies, even though it is the United States, Japan and European countries that have the world’s biggest public debts.
America’s fiscal problems will not be solved without some bipartisan agreement. Biennial budgets might just be the place to start. After all, this is an idea that was supported not just by Ronald Reagan and both Bushes, but also by Bill Clinton, Al Gore (leader in 1993 of the National Performance Review) and the current Treasury secretary, Jacob Lew.
Moreover, Israel’s experience has been a great advertisement. Not only did it enjoy an impressively rapid recovery from the financial crisis under the system of biennial budgets; more remarkably, when directors-general of Israel’s government ministries were polled in 2010, not one of them favored returning to what one called “the Dark Ages and the madness of the single-year budget.”
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University. Yuval Steinitz is the Israeli intelligence minister and a former finance minister.