Ike’s Warning Revisited
On the 50th anniversary of President Eisenhower’s farewell address, his thoughts on the “military-industrial complex” still resonate today, says his grandson David Eisenhower.
Many investors today do not remember the wise words of Dwight D. Eisenhower in his farewell address. This year marks the 50th anniversary of President Eisenhower’s famous speech, a Presidential address considered one of the most noteworthy—and prophetic—ever given. Often compared with John F. Kennedy’s historic inaugural three days later, Eisenhower’s farewell peered from 1961 down “the long lane of history yet to be written.” Like Kennedy, he spoke about the responsibilities and challenges confronting popular government, including his famous call to “guard against the unwarranted acquisition of influence, whether sought or unsought, by the military-industrial complex.”
In a recent Bloomberg BusinessWeek article, David Eisenhower, director of the Institute for Public Service at the University of Pennsylvania’s Annenberg Public Policy Center, reflected on his grandfather’s famous speech given when David was only 12 year’s old. An excerpt:
“We… must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.
Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, and the hopes of its children.”
Having witnessed, as the Supreme Allied Commander in World War II, what can happen when a totalitarian movement succeeds in reducing citizenship to spectatorship, Eisenhower believed active and effective citizens were the best antidote to fear. He believed in popular control of institutions formed to meet great problems. Taking office a mere eight years after the war and at the height of the Cold War, he worked to defuse international tensions and to restore normalcy in national affairs, believing that prosperity and freedom could not survive a state of perpetual crisis. This meant downsizing the military establishment, without relaxing the guard against the Soviets, and reversing the trend toward big government.
He succeeded in cutting government spending, especially defense spending. Budgets were balanced and the share of economic output consumed by the defense industry fell from more than 40 percent of gross domestic product in 1945 to roughly 10 percent in 1961, even though defense issues—and scares—predominated in his second term.
The surprise in Eisenhower’s farewell speech was the way he likened the defense industry to other pressure groups in Washington, as a “complex” serving a vital role but positioned to corrupt national policy by capitalizing on public anxiety and credulity.
My grandfather seldom talked about the speech after he delivered it, and as a 12-year-old when he left office, I was oblivious to it. When I started hearing about it years later, Republican friends suggested the warning about the military-industrial complex, coming from a conservative military man, must have been just words written for him by a speechwriter. They didn’t know him as I did. The striking feature of his speech is its authenticity. Watching segments of it today, no one who knew Dwight Eisenhower can doubt the earnestness of his words or that they are his own. The underlying themes reflected his experience and his advice to friends and family, in which he always stressed education, dedication to job, and lively interest in public affairs. A moralist, Eisenhower prized hard work and self-reliance. His farewell message conveyed his deeply held values: his dedication to America’s “adventure” in free government and our “charted course toward permanent peace and human betterment.”
Because of burgeoning deficits and the estimated trillion dollars spent annually on all aspects of national security, Eisenhower’s warnings about prudence and economy resonate today. His general reflections on the challenges facing democracy will pertain for as long as Americans value democratic self-government. Were he leaving office today, Eisenhower might well speak of globalization and the social, political, and economic implications of the trillions of dollars managed by four or five New York financial institutions, a concentration of power as potentially dangerous as the military-industrial complex of his day.
Ike was not the first to identify that complex, nor the first to warn of the self-interested and self-perpetuating nature of large corporate-public “complexes.” But he memorably spoke of these things as a President while freshly affirming a basic truth valid then and valid today: that America’s freedoms and our quality of life ultimately depend on tens of millions of active citizens, a sense of confidence in the future, and mutual respect.
If we look at the collective US consumer balance sheet on the next graph, the consumer looks healthy. Consumer assets are much higher than liabilities, the personal savings rate is going up for the first time in 30 years, and the household debt service ratio is back to where it was in 1980 according to research from JPMorgan.
The federal government is a different story. Continued deficit spending and the accumulated debt are unhealthy. The $14.5 trillion debt is well known, but most of the government liabilities are off balance sheet. Social programs like Social Security, Medicare, and Medicaid liabilities are not seen on the radar of a balance sheet. Estimates of these liabilities run in the $50 to $70 trillion range. Inflation is one of the tools the government has used over the last 50 years to reduce the value of future liability payments.
The next two charts contain tables of price comparisons from 1960 to 2010. For some of us, this will be a walk down memory lane and bring back remembrances of the “good old days.” For all of us, it should be a stark contrast of the effect of inflation and the weakening dollar on our purchasing power.
One example is particularly strong. The price of a gallon of gas in 1960 was $0.31. In 2010 it was $2.35. This is a large change in the price of a commodity and it demonstrates the powerful effect of inflation and the change in our cost of living. This is a period where the rate of inflation averaged 4.1%.
If you take out the effect of inflation and use 2009 dollars as the constant value for the comparison, the price of gas in 1960 would be $2.37! Therefore, this large rise in gas prices has only kept up with inflation. There has been no real increase (growth above inflation) in the price of gasoline.
On the other hand, in 1960 the price of gas and the price of a haircut was the about the same. Today a haircut runs $15 to $25. This is real growth which makes the price of all this expensive gasoline seem relatively cheap.
Protecting against inflation is always important and may once again become as important as it was in the hyperinflation of the 1970s. We have calculated the correlation of different asset classes to inflation. Assets that are correlated positively to inflation, like Commodities, MLP, TIPS, and Hedge Funds are best for protection against inflation.
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