10/21/09 – Donald Losman – The Scott Horton Show

Okay, y'all welcome back to the show, it's Anti-War Radio on Chaos 95.9 in Austin, Texas.
Of course, we're also streaming live at chaosradioaustin.org and at antiwar.com slash radio.
And our next guest on the show today is Donna Lossman.
He's a professor of economics at the Industrial College of the Armed Forces National Defense University in Washington, DC.
His views belong only to him, and they do not represent the views of the National Defense University or the United States Department of Defense.
Welcome to the show, Donald.
How are you doing?
I'm doing fine, Scott.
Nice to talk to you.
I really appreciate you joining us on the show today.
Did I get your disclaimer right?
Yes, you did.
It was a fine job.
Thanks.
Okay, that's good.
Donald Lossman owns his opinions, although I hope you will share them with us.
I was really fascinated by this study that you did for the Cato Institute back in 2001.
My good friend from the other side of the planet Earth, Tim, there in Australia, sent me this link, and it's called Economic Security, a National Security Folly.
Of course, this is, again, it came out just a month or so, a little bit more than a month before the War on Terrorism began, which I think makes for interesting context here.
But it's about the distinction that you draw between national security and economic security, and how these things began to get blurred together, I think, especially, you say, with the oil shocks of the 1970s.
Is that right?
That's correct.
When we developed this sort of oil paranoia, we attributed everything that went wrong in the 1970s, and I don't know your age, Scott, but it was a terrible decade, high unemployment, terribly high inflation, and high oil prices, and a number of other slow productivity growth, almost none.
We attributed every problem to the oil embargo, and that became the source of all ills, when in fact, it really was a very minor element of that national disaster decade.
Well, on the other side of the balance sheet, I learned to walk, so it wasn't that bad.
That's a good thing.
But, you know, we have the Federal Reserve, the folks in Congress, a terrible price control and allocation system for energy.
Now, hold on right there, slow down there, and let's talk all about that.
Richard Nixon got elected in 1968, took office in 1969, closed the gold window in 1971, and I guess the term stagflation was created to describe the fall of Keynesian theory, high inflation and high unemployment at the very same time.
I know there's pictures, because again, I was just a little baby at the time, but I've seen the pictures of everybody with their big 70s cars all lined up at the gas stations and all the shortages and so forth, but take your time here, explain exactly what was going on here.
I think it's pretty clear you're saying that oil was sort of, you know, the problems with oil was in effect, not the cause.
That's correct.
It was foolish policy.
We had the Nixon price controls, and what was happening was that the OPEC was really producing at maximum capacity at the same time the rest of the world was demanding more and more oil, and by around 73, 74, our prices, because of various controls, had been going down relative to what they were, while the world price of oil was going up.
Now, our prices were constrained by the government, manipulated by the government, so the price signal to Americans was that, well, our prices are relatively cheap here for oil, so I can buy a big car, live in a big energy-guzzling house, and so forth, but the world prices are going in the exact opposite direction, and even after we got the alleged OPEC oil shock, we continued to keep controls on prices and allocate oil supplies here in a very injudicious way, so that by the end of the decade, our prices were well below the real world price.
And you know, when Americans or any other people see cheap prices, they buy.
And we built a whole infrastructure based, that's, you know, highways to get to the suburbs, big houses, driving big cars based on fictitious or artificial prices.
And then, so what caused the actual shocks, then?
Well, the shocks themselves were due to, okay, allegedly, the 1973 shock was due to the October 73 war between Israel, Egypt, and some other Arab states.
However, OPEC was in the process of meeting at the very time that the war broke out for the purpose of raising prices, and again, OPEC kept raising prices because the world, and particularly the United States, was guzzling like crazy, and particularly because our prices were artificially controlled.
They were too low.
And I think this was a great, convenient economic cover for what was basically a political act.
Hey, let's declare that we're so offended by the Israelis and their Western supporters, the United States and Netherlands, that we'll cut production.
And that's what really caused it, by the way.
The problem was that when OPEC cut production, because they knew they could get away with it, the world prices would go even higher, which it did, because the United States, but particularly the United States, was hooked on cheap energy.
You know, if you buy a brand new gas guzzler, and two weeks later, gas prices go up, you can't get rid of the guzzler so easily.
And so we were hooked.
So basically, they did a perfectly rational economic move based on our political, I'm sorry, on our economic stupidity.
Well, you know, this is so interesting.
I'm just reading Charles Goyette's new book about the coming dollar meltdown, and he talks about how this is where all the anti-French propaganda came from, was that Richard Nixon, the American politicians, were basically issuing dishonest money, and the French said, no deal.
And they started redeeming all their paper money for gold as fast as they could, because they knew this was the end game.
And everybody said, oh, you French, you surrender to the Nazis, and oh, you French, you're terrible for all these reasons.
But the real reason was because they were first to basically protect themselves from Richard Nixon's depredations.
Well, that was coming all along, despite who was president, mainly in the late 60s, that we had these continuing balance of payments deficits, so that the rest of the world was piling up dollars.
The dollar was fixed to the price of gold in those days, $35 a fine ounce, and some people who held gold, particularly our French friends, decided they should cash some in.
I think that probably would have happened under any administration, would personalize Nixon.
But the fact of the matter was that we were having these balance of payments deficits, and the only way to rectify it was to control our inflation, and we weren't willing to do so.
So the most nervous holders cashed in fast.
And eventually we had to break our promise about $35 a fine ounce, and we eventually got off that fixed system.
Well, this is sort of, at least the rumors going around about the rest of the powers on earth right now wanting to abandon the dollar for a market basket of currencies, including gold, to be the new global reserve currency.
It's a very similar story, sir.
You're well read, and what I would say here is that it's going to be very difficult.
We need to clean up our house.
We need to reduce the balance of payments deficits.
But the Chinese, who have a tremendous amount of our debt and our currency, really can't afford at this point to cash it all in.
We have something similar to a national security expression.
You remember mutual assured destruction, the Mad Doctrine?
If we have bombs and the Russians have bombs, neither one of us should use it, because we will blow each other up.
The Chinese really can't afford to use that currency.
They can't dump all their dollars and drive the dollar down, because they'd be destroying their own wealth.
And the Asians in general, and the Chinese in particular, are very judicious.
The world will probably try to rebalance their asset portfolios a little bit out of dollars.
But there's not a lot we can go into.
A little bit more into the euro, but there isn't a major world currency out there, and the difficulties of creating another currency are very, very great.
So I suspect that despite what some would call our profligacy, the dollar will still remain the biggest single currency for a while.
Well, as my friend Greg Powell says, if you owe me $1,000, you're in trouble.
If you owe me $1,000,000, I'm in trouble.
That's absolutely true.
In fact, Hitler proved that in the 30s.
He was owing a lot of countries, particularly Latin America, big amounts of money, and he was known as a ruthless debtor.
And of course, they never got much back.
All right.
So now, here's the deal.
All we've done is really lay the groundwork that you draw out in your article.
Again, it's Donald Lossman, Economic Security, a national security folly.
The point of this article is that when the oil-producing states had to adjust what they were doing in order to account for the American government's deficit spending, etc., etc., this embedded in the mind of, I guess, American policymakers and certainly the general public that these, since we're net importers of oil, that these sheiks over there in the Middle East, they have us, well, I'm trying to think of a way to say it for the radio.
So that's why that was the invention of the Carter Doctrine, right?
Middle Eastern oil is our business, and we declare hegemony in that region, and that's what we're dealing with today.
Basically, yes.
So we stood up something, which you know is called the Rapid Deployment Joint Task Force, which has morphed into what we now call CENTCOM, the Central Command.
And the purpose was to be able to get to the oil fields and chase people away, and make sure the bad guys are in control, and so forth.
And my paper was twofold.
One to suggest that that is a needless exercise.
Use economic means to attain any economic good, to include oil with semiconductors, cobalt, anything else you want.
Don't use military means.
The economic goods and goals are not an appropriate military objective.
Okay, well, but if the Iranian Revolution had not been contained by American support for Saddam Hussein in the 1980s, and the Iranians had been able to take over the oil-producing parts of Saudi Arabia, which is mostly where the Shiites in Saudi Arabia live, and if they'd been able to dominate southern Iraq, and maybe even overthrow the Ba'ath regime, like George Bush Jr.'s helped them do now, and so forth, if the Iranians had all that power, then they could have, you know, post-Iranian Revolution, 1979, they could have completely withheld all their oil from us, and they could destroy our whole society.
You want to cede them the ability to do that?
Well, I wouldn't for a couple of reasons.
I think if we believe in the United Nations, and that countries that don't do, you know, that boundaries mean something, for that greater political principle, we might intercede.
But let's take your example here, and go all the way with it.
Let's say all that happens.
Now what will the Iranians, who now rule almost all the Middle East oil fields, what will they do with the oil?
Will they drink it?
You can't drink oil!
Oil only has value for them if you sell it.
They must export.
They must export.
Yeah, but they'll just sell it all to China, and we won't get any of it.
No, China can't absorb all of it.
China can absorb more, but probably not that much more, because even at lower prices, I mean, they have infrastructure problems, you know, to run a car you need roads and bridges and things like that.
We would end up getting it, much like when the United States and Netherlands were boycotted or embargoed in 1973.
We got the oil anyway, it just went to a different place and then was trans-shipped.
We consume 25% of world oil, and you've got to sell to us if you want to sell, or indirectly to us.
So, I would say what would happen in that scenario is that the price of oil would go uncomfortably high, because they would try to, you know, squeeze blood out of a barrel.
On the other hand, they would sell to us, and we would have to, you know, make some adjustments.
We would have to have more realistic pricing.
Oil should probably be priced here in our country at a much higher rate, because the costs of oil, particularly today, are more than just extraction, refining, and shipping.
If we were getting all our oil from Norway, that might be okay, but when you get it from the Middle East, and some Middle Easterners take that money and they convert it to guns and terrorism and attack us, either here or overseas, the oil is really much more expensive than you think it is.
Therefore, we might be forced to go to the prices that it should be at, and it should be significantly higher.
And the other thing we can do, which we have done to a significant degree, is have a strategic petroleum reserve, so that if something like this happens, we can blunt it.
We also have an international energy-sharing agreement with our best allies, and that's probably the best you can do.
I mean, there's all sorts of vicissitudes of things that happen when there are earthquakes and revolutions, and societies survive.
And nobody dies.
It's interesting the way you draw out the balance sheet there, because I guess that's not the way most people calculate it.
You're saying, well, for example, if occupying Saudi Arabia brings blowback in the form of terrorist attacks against the United States, that then become the justification for even further interventions, an invasion of Iraq and Afghanistan, and permanent occupations there, which could generate more attacks against us, and on and on like that.
You're absolutely correct, that's how it started in the first place.
So you could say, when you're doing pro and con for the oil, well, we need the oil, we've got to secure the oil, but that's the actual cost, these trillions is the cost that we are ultimately, in a sense, spending just to secure that oil, then really it would be much better to just buy it from whoever was the dictator in the region, it wouldn't even matter.
You know, in the 1990s, Iraq under Saddam Hussein, who hated us, we had him hemmed in with Northern Watch and Southern Watch, we had economic sanctions put on us, he was our 8th largest supplier every year, and could have been, he would be happy to have sold us more if we were willing to buy it.
Well, you know, the real worst case scenario I should have drawn instead of the Iranian Revolution, because of course that's what's happened, is George Bush has reversed the Reagan policy and imported the Iranian Revolution into Iraq, at least, if not Saudi Arabia.
But I guess the worst case scenario that, you know, you'd find at National Review or something, would be Osama Bin Laden in charge of the Islamo-fascist caliphate that rules all the land from Spain to Indonesia, or whatever.
And I thought it was, you know, worthy of note that, at least according to Michael Scheuer, the former chief of the CIA's Bin Laden unit, Bin Laden himself used the exact same phrase that you use, that we can't drink it, it will be for sale, we just don't want you people setting the price artificially low and taking all the oil and leaving us poor.
And that's actually like, you know, in a lot of his old jihads from before, or fatwas, from before September 11th, a lot of it was about the oil wealth, and setting the price in a way that he thought was unfair.
And also giving our support for what he called apostate regimes, he doesn't believe that the Saudi family is a legitimate set of rulers, that they're un-Islamic and so forth.
And since we made friends, and of course, why do we make great friends with the Saudis, who have a completely different culture, I have nothing against the Saudis, I have several Saudi friends, but we're not a naturally close ally, because our cultures are so different, but the friendship and the political tightness is all due to oil.
All right, now, and you talk about here, in this article, it's not simply a utilitarian accounting, you talk about the morality of, you know, ultimately what we're talking about is killing people, in order to secure these resources with military action, and you say that when any other country behaves this way, we condemn it in the highest moral tones.
I mean, do you have any actual examples of that?
Well, certainly, in World War II, Hitler moved into adjacent countries, because he needed what he called Liebensraum, growth room, we need these resources, or our people and the German society will not prosper.
The Japanese were constrained with resources, so they had to go into China and Korea and so forth, because they needed to safeguard resources for their economy.
So that was, you know, an excuse, and an alleged motivation, but you see, with the lessons of the war, what the Japanese have learned, is that we don't have to kill anybody to get oil or anything.
We can produce things so good that the world wants it.
They'll sell us their goods, they'll provide, you know, money to us when we sell our goods to them, and then we'll buy what we want.
So there's more than one way to get other resources, and the way we should do it, I mean, we called it fascism when they did it, yet some of our national security strategy documents said, basically, we will kill for oil.
They didn't say that, they said, we will deploy our military resources, if necessary, to have a secure and stable supply of oil.
We don't need to kill...
Euphemism worthy of George Carlin.
Yeah.
Funny.
Well, it seems to me like perhaps most people probably understand that empire is a net loss.
What is the problem, really, is that the connected interests in the country, in the society, whether it's the arms manufacturers, or the biggest oil companies in Houston, or the bankers on Wall Street, they use their access, and they gain so much as the money goes out, you know, of our tax money.
As the money goes out, that's where they're making their money.
It's not a classical empire just robbing the rest of the world, but it seems like the American people, who are the ones, as well as the people of the Middle East, who are being completely fleece here, we don't really have an ability to stop it.
I mean, what's the American people versus the military industrial complex, the oil companies, and bankers, when it comes to what our foreign policy should be?
Well, it's very difficult.
This is a great challenge for democracy, that we have to have people who point this out, because these, whether it's the banking industry, the energy industry, I mean, every industry in the country amasses money to influence Congress to get favorable policies.
And I know it's better to have a political and economic philosophy that minimizes the role of government, so that you can minimize the ability of individual sectors to bend national policy in their own direction, at the expense of everybody else.
And this is the great challenge of democracy, and we need to inform our citizen body of this, a much better job than we do currently.
Right.
Yeah, well, we certainly don't want to shrink the government in a way that it's powerless to stop any of these interests, but still powerful enough to benefit them in perpetuity, you know?
We've got to make sure which parts of it we downsize first.
Well, that's always a delicate balance.
Yeah.
Well, now, this whole idea of economic value as national security, you kind of talk about how after the fall of the Soviet Union, man, jobs, jobs, jobs, and we have this giant military, what good is it if we can't use it, as Madeleine Albright said, and that kind of thing.
But I wonder...
That's scary.
Is that really a change, though?
Is this not the same thing as National Security Council Directive 68 at the dawn of the Cold War?
Is that really a change from containment of the Soviet Union?
Well, I'm not sure I know exactly what you mean, Scott.
Is that really a change?
I mean, the policy to pursue economic interests...
Oh, yeah.
Yeah.
No, it's a definite change.
It's a definite change.
When we oppose the Soviets, we oppose armies marching into countries.
And about the only way you can do that is with the threat of military force.
In fact, we tried using some economic things, like economic sanctions, when we had a grain embargo in 79 against the Soviet invasion of Afghanistan.
Well, but we had coups in Guatemala and Iran and the Congo, Zaire, right?
Well, yeah.
But the question is, you know, you can't intervene in every coup in the world.
And even if it's a place, again, that is wealthy with oil, cobalt, titanium, it's almost impossible to go everywhere.
In my article, I pointed out that semiconductors today have a much greater value than oil.
And we better be prepared, if we're going to do that, to go to war over semiconductors.
You just...
You can't do that.
We don't have the resources.
And from a serious national security perspective, like armies attacking you, giving the military economic responsibilities in addition to their national security responsibilities only dilutes their power to achieve any one mission.
You're watering them down.
And the military should be kept for those missions that are strictly military.
Well, now, I'm no expert in all this, and I guess there's always a lot of debate about peak oil and whether, you know, there's a lot of hype about it, but it's partially true, but it's going to be later than they say, or the whole thing's fantasies, there's enough oil to last for a thousand years, or I don't know.
But let's just pretend for the sake of argument that we already passed peak oil production compared to demand is going to do nothing but go down.
Does that change the argument at all?
I mean, it seems like a lot of policy is about the Caspian Basin here.
You know, look at Georgia policy, for example.
If we have peak oil, and I do not believe in that theory at all, but if we did have it with continuing growing populations in the world, particularly in China and India, the demand for oil would go up and the supply would not, if you believe in the peak oil theory, and the price would go up.
So that would make us, one, very interested in other sources, such as Caspian, but also, if we allow the price to go up, it will be the greatest subsidy in the world, an incentive, without being a direct subsidy, to oil substitutes, to wind power, to oil sands, and so forth.
So if you let the price mechanism do what it's been designed to do, and generally does well, unless you mess with it, a solution will occur.
Again, the expression was that the stone age did not end because the world ran out of stones.
The oil age won't end because we run out of oil.
We will move to bigger and better things when conditions are appropriate.
Now, if the world price goes up, it's a greater incentive to move to other things.
Well, now, what about in Washington, D.C.?
Does anybody understand what you're talking about when you say this?
I mean, is it the Congress and the policymakers, the National Security Council, do they really believe that we have to occupy Eurasia in order to guarantee our energy resources?
I think that, you know, the military establishment takes orders from the civilian establishment.
They're good Americans, and they've come to believe this myth about economic needs.
But there are a lot of people in Washington that do understand.
Unfortunately, we get back to what we spoke to earlier, and that is, in terms of making policy, vested interests like energy companies, like banks, and so forth, swing much greater weight.
And we need people to be able to explain this, and I hope your program is contributing to a broader understanding of what's going on.
But unless you have, you know, 300-plus million listeners today...
I'm not.
Well, you're such a sight's eye.
Move your decimal point over a few.
Well, I mean, the point is, we have to spread the word, because there are interests that gain, and that's the way democracies, in fact, are supposed to work.
But the interest of using national security appropriately, and the fact, and the myth that oil is so dominant, is something that we have to disabuse ourselves of.
All right, well, this article is a great way to do it.
And by the way, are there later versions of this?
Because this is the one my friend sent me, which I thought was so great.
I did not write a later version.
However, somebody else at Cato, in the last three or four years, has written another article, and has come up, of course, with just about the same thing that I've said.
Well, anyway, this is great.
And in fact, years ago, I don't remember exactly who it was.
It could have been Ivan Eland, or somebody.
Years ago, someone brought up your semiconductor example out of this article on this show, about, see, we don't need to secure Taiwan, or whatever.
We just send ships back and forth.
It works great.
Well, you see, in a case like that, the other thing that we would like to do is try to diversify supply.
But it's not a national security.
And if I were the king, I would have built semiconductor plants in northern Mexico.
And then resigned, right?
Pardon?
And then resigned.
Probably.
But, I mean, you see, if there's an earthquake in Taiwan, or in that strait there, the whole world is going to be very bent out of shape.
We can't get semiconductor.
If you have a dependency, what you want to do is have multiple suppliers, and hopefully not concentrated.
And you don't need military forces.
It's an economic solution to economic problems.
Well, that's going to be a great segue into our next interview.
Tom Hayden, coming up right after this.
Thanks very much for your time.
It was a pleasure, Scott.
Everybody, that's Donald Lossman.
And, again, he owns his own views, and they do not belong to the Department of Defense, as you might have been able to tell by listening to what he said.
The article is at Cato.org.
It's called Economic Security, a National Security Folly?