Book Reviews
The Price of Liberty: Paying for America’s Wars
By Robert D. Hormats. 2007. New York, NY: Times Books, Pp. 368, $27.50 hardcover.
The Price of Liberty is an important book because its author is a business economics superstar. Robert Hormats is the Vice- Chairman of Goldman Sachs (International) and a managing director of Goldman Sachs &Co. He is active in many organizations including being on the board of directors of the Council on Foreign Relations. You may have read one of his many previous books or articles in the Wall Street Journal, New York Times, Financial Times, or seen him on CNBC. In public service, his first Washington job was at the National Security Council, where he was an economic assistant to Henry Kissinger. Also, he was a deputy U.S. Trade Representative and an assistant Secretary of State. Hormats’ next job might be Secretary of the Treasury. One objective of the book might be to demonstrate that he is up to the task.
Hormats is known as an international economist who is an energetic advocate for trade liberalization. He consistently argues for freer trade and against moves that would reduce trade. He emphasizes the benefits of globalization as outweighing their costs. These views are often at odds with those who share his general political philosophy.
The phrase, “The Price of Liberty,” may stimulate one of those seldom-used history neurons. It was the phrase Alexander Hamilton used in the First Report on Public Credit, to defend the proposition that the Revolutionary War debt be repaid in full. Hormats’ book begins with the saga of the financing of that war and its aftermath. Much of the war was financed by debt held by France and the Netherlands. Others argued that the debt need not be paid or, although the debt was made in gold, it could be repaid in inflated Continentals. Hamilton and his supporters understood that the fledging nation faced many future challenges, including a possible resumption of war with England or new wars with France about land to the north or Spain about territory to the south. More loans might be needed. Faithfully repaying the loans was the continued “price of liberty” that future Americans had to pay. While not mentioned explicitly, it was almost a public finance textbook discussion of matching an immediate expenditure of funds for a bridge or a hydroelectric dam with a long-term stream of benefits.
As might be expected from the subtitle of the book, the remaining chapters sequentially describe the history of financing our major wars: the War of 1812, the Civil War, World Wars I and II, Korea, Vietnam, and the Cold War. Because of the brevity of the presentations, the descriptions will appeal to the modern policy community rather than professional business or economic historians. However, because the descriptions are compact, timely, and done in a journeyman manner by a person with a Ph.D. in economics, the book might find itself on lots of supplemental academic reading lists outside of the contemporary policy community.
This latter group and the general reader interested in domestic political policy is the target for the book. While the threads are in the chapters, the final chapter is where Hormats’ historical compilation is woven together. He argues that, with exceptions in the recent past, there was shared sacrifice in war finance in that, though troops were generally from the lower income class, the upper income class paid higher taxes and were exhorted to buy war bonds. He finds that situation to be in sharp contrast to the present, where the additional funds are from abroad and taxes were cut on top brackets. This contrast is part of the theme of the book. He is also critical of both the Administration and Congress for not reducing general spending and taking other specific actions, such as reducing earmarked spending that would have reduced the deficits. In addition, he is critical of funding the war effort by supplemental appropriations. He argues that this practice results in important budgetary tradeoffs not being made. On the positive side, he is encouraged by the return to the PAYGO rules.
He downplays the criticality of deficit financing in the current Iraq conflict by comparing its cost relative to the GDP and previous wars. WWII cost 40 percent of GDP, Korea 15 percent, Vietnam ten percent, and Iraq less than one percent. Instead, he identifies Social Security, Medicare andMedicaid as being the major financial challenges. He views these and other entitlements as crowding out all discretionary spending and constraining both conventional defense expenditures as well as the new priorities of Homeland Security.
The book is remarkable and unique in several ways. The issues are contentious, and at virtually every place where a decision could be made Hormats takes the road to smooth differences. For example, where he could throw red meat to fiscal conservatives he does not trash the supply side advocates, saying that there was a possibility that weakness in the economy could have warranted a tax cut. He thus maintains a Keynesian view and does not inflame the opposition. However, he adds that although the tax cutsmight have been needed as a countercyclical policy, they should not be locked in place. This indicates that while he is flexible he will not be a pushover but will be a good advocate. He is also able to resist the temptation to engage in class warfare in discussing the tax cut.
Another unique feature is that the footnotes have no numbers in the text. They are listed as endnotes with partial quotes and you have to hunt them down. Given the target market, having no annoying citation of facts and references probably makes reading easier. Another unique feature is that he gives credit to his literary agent. While it is unusual for an economist to have a literary agent, authors who acknowledge them usually just list them by name. Those outside the book world rarely know their names.
Finally, the book appears to have been seen bymany eyes before it went to the printer. In terms of content, lots of folks have looked at it; and he gives credit to a range of people, some of which I would expect and some surprises, including Glenn Hubbard and Douglas Holtz-Eakin. In terms of exposition, it appears to have had several levels of first-class editing and is very polished.
Robert Hormats endeavors to discuss an important domestic financial issue by assembling facts and analyzing them in a way that leads to reasonable solutions without inflaming the increasingly hostile political environment. He achieved his objective.
Review by Gerald L. Musgrave
Economics America, Inc.
Basic Economics: A Citizen’s Guide to the Economy
By Thomas Sowell, 2007. New York, NY: Basic Books, Pp. 460, $39.95, hardcover. (The review of this book is based on the CDs, Blackstone Audiobooks, $29.95, pleasantly and intelligently read by Brian Emerson.)
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, and the recipient of many awards, including the Bradley Prize in 2003.
After stating that economics is the study of the utilization of scarce resources, Sowell immediately turns to a discussion of how prices in a free market economy provide signals to both suppliers and consumers of scarce goods and services. Throughout the book, Sowell uses examples that are relatively well known to illustrate his points, so that the book is a useful educational tool or a refresher for the practicing economist.
Early in the book, Sowell presents, as one of many examples, how rent controls in a number of countries during the post-World War II period resulted in reducing the supply and investment in new residential construction and in discouraging property owners from maintaining or improving their property. He then demonstrates how the abolition of rent controls dramatically increased the supply and quality of available homes.
Additional illustrations provide examples of government controls of other goods and services, almost invariably resulting in misallocation of resources, supply shortages, and a lower standard of living. For example, in the former Soviet Union, the control of output and the allocation of scarce resources by a central planning agency resulted in surpluses of goods left to rot in warehouses and in shortages that lowered the overall standard of living. In the United States and other countries, agricultural products have at times been purchased by the government to take them off the market and send prices higher. While this process may have benefited large agricultural enterprises, crops were often destroyed while pockets of starvation in the country were evident.
Sowell also has an interesting discussion of the role that profits and losses play in the success or failure of an enterprise. Profits and losses in a free market economy send signals to producers, whether they are using scarce resources efficiently or whether the resources should be used elsewhere. An example is the failure of Montgomery Ward under the chairmanship of Sewell Avery, who accumulated investments to prepare for a recession that never occurred. Avery’s super-conservative leadership forced Montgomery Ward ultimately into bankruptcy as competitors expanded rapidly in new consumer shopping malls during the post-World War II period. Another example is the demise of the A&P Tea Company stores. A&P failed to recognize that consumers had changed their buying patterns from small local stores offering limited merchandise and located in residential areas to larger, less expensive, more efficient stores located in suburban shopping centers. The growth in the ownership of automobiles was the primary cause of this change.
Another example reflecting the shift in consumer tastes was the disappearance of the White Castle Hamburger stores and the growth of McDonalds into an international business that served millions of customers quickly, conveniently, and inexpensively with its drive-through stores.
A further illustration of a significant shift in consumer preferences has been the decline in the circulation of local newspapers as more people rely on their news from television and the Internet. This book or the CDs make an excellent gift for someone who is interested in learning more about economics without working through the economic jargon, graphs, charts, and equations usually found in textbooks.
Another use might be as a refresher for business economists who want to get back to basics and think about economic fundamentals. An additional use might be improving the framing of arguments or presentations in every day situations.
Review by Edmund A. Mennis
Investment Management Consultant Palos Verdes Estates, California