The old paradigm, which was on display in virtually every meeting I had in Washington, views national security and economics as separate disciplines. I met with the top people on the economics team at one of the capital’s leading think tanks, and then I met with the national security people down the hall. The economists didn’t doubt that our financial systems might be vulnerable, but they questioned why anyone would want to attack them. They were confident that the market would financially punish those who tried to manipulate our system. The defense experts fully understood that our enemies would be willing to suffer harm to achieve their objectives, but they didn’t grasp the seriousness of the financial risk. Each discipline keeps to itself and doesn’t cross-pollinate the other.
The first step to restoring our security is simple. We have to recognize that we have a problem. There is a global economic war (or financial war, as Zarate calls it), and it threatens our national existence. Admiral Mike Mullen, a former chairman of the Joints Chiefs of Staff, hinted at the scope of our financial peril when he declared that our debt was “the most significant threat to our national security.”3 But the danger goes beyond our debt, as I have explained in this book. There is a broad array of economic vulnerabilities. We must acknowledge our vulnerabilities and respond to them. The good news is that we can do so if we will wake up to the challenge. Zarate holds out this hope: “More than any other state and culture, America—enabled and accelerated by globalization and new technologies—still enjoys a comparative advantage in leveraging power and influence in ways that are commensurate with our enduring strategic security heritage and our prosperity.”4
He’s right. We’re in a position to win the global economic war. But we have to decide that we are in it to win it.
Step Two: Take Reasonable Precautions
The United States should take a few reasonable precautions to protect its financial system and infrastructure. These measures are not costly, but they will provoke opposition from some powerful interests that benefit from the status quo, so they will require political will.
First, we should prohibit naked short selling and naked credit-default swaps. These transactions are ways of manipulating shares that you don’t actually own and haven’t even borrowed, and they played important roles in the collapse of 2008. While Wall Street would likely balk at their prohibition, the risks they pose to our financial system are too great to leave unaddressed. Germany eliminated such transactions in 2010.5 The many warnings of calamity that would follow such a ban6 were not fulfilled,7 and the European Union followed suit in 2011.8 There is no reason for the United States to continue to tolerate what have been called “financial weapons of mass destruction.”9
Under the leadership of Representative Ken Ivory, Utah passed legislation developed by the state’s accountants and businesses that is a model for other states and the federal government.10 Intended to ensure Utah’s “financial earthquake preparedness,” the legislation establishes a Fiscal Risk Management Commission to address a variety of economic threats.11 Representative Matt Krause of Texas introduced similar legislation in the Texas legislature, but it died in committee in the 2013 session.12
Another initiative at the state level that merits attention is the Texas Bullion Depository, proposed by Representative Giovanni Capriglione with support from Governor Rick Perry13 and the approval of Jim Rickards, the author of Currency Wars.14 If the measure had passed, the state would have sold the billion dollars’ worth of physical gold that it held in New York and bought an equivalent amount to be stored in Texas. The depository would be open to anyone seeking physical protection for his gold, making Texas an economic leader in the event of dollar catastrophe. There were even discussions about providing depositors with the equivalent of an ATM card, enabling them to exchange gold for goods, with electronic record keeping down to small fractions of an ounce. With a Texas gold card, you could buy a pack of gum or cup of coffee with gold and never have to hold paper currency. Gold would be added to the seller’s account or converted into dollars for exchange. As long as the dollar held up, there would be no need to move to such a system. But in the case of a dollar failure, wouldn’t it be good to have a contingency plan ready to go?
Second, we should also look into ways to strengthen the cybergrid. The military has developed a Cyber Command, and that is a start.15 But we have little in the way of private-sector defense.16 It doesn’t have to be this way. If we recognize that a war is already under way, we can mobilize national priorities to protect one of our most vital assets. We must go on the offensive to win.17
Third, we should reinstitute the civil defense measures that were maintained during the Cold War. There was a time when every school-child in America had an action plan in case of an attack.18 Such lessons have long been forgotten. If a cyberattack were to take down the electric grid, is anyone prepared to respond? The National Geographic Channel’s American Blackout depicted what could happen in a prolonged power failure, and it wasn’t pretty.19 Yet some simple civil defense preparations could mitigate the worst effects.
Finally, there is promising legislation aimed at preventing disaster from an electromagnetic pulse—either natural, from solar flares, or from a deliberate missile attack—that should be adopted. Representative Andrea Boland pushed through some groundbreaking legislation in Maine that can serve as a model for other states.20 Representative Trent Franks has sponsored critical legislation at the federal level.21 A natural EMP disaster is only a matter of time,22 but its impact can be mitigated with prior planning. The cost of preparation for the electric grid would amount to a few extra cents each month on everyone’s electric bill.23 In fact, the total combined cost of the measures I have outlined here would be only a fraction of the $700 billion spent on the bailout of the financial system after Lehman Brothers failed.
The key is to take sensible steps in response to the reality that we face a global economic war. Now is the time to prepare—before disaster strikes.
Step Three: Get Money Moving without Money Printing
Since 2009 the Federal Reserve has conducted three rounds of “quantitative easing.” It has pumped trillions of dollars into the system, and yet the economy remains stagnant. Just before the 2008 crash, the Federal Reserve’s balance sheet was around $800 billion. Five years later it was in the range of $3.6 trillion.24 The unemployment rate has barely dipped, and that minimal decrease is attributable to workers’ getting discouraged and giving up the search for a job.25
So why isn’t all this new money from the Fed making the economy strong? The answer from economists is that the “velocity of money” is too low. In plain English, that means that individuals and businesses have been hoarding cash. Consumers have been reluctant to spend, and companies have been slow to expand.
So where has all the money gone? Corporations now hold a record amount of cash, and they have kept almost $2 trillion of that overseas.26 A mere eighty-three companies hold almost $1.5 trillion among them. The reason that American companies hold so much cash in offshore accounts is our tax code. The United States has the highest official corporate tax rate in the world.27 Even accounting for various deductions and manipulations that allow companies to pay less than the stated rate, we are ranked ninety-fourth out of one hundred nations in tax competitiveness.28
Great American companies that have plenty of cash to spend and grow are unwilling to bring that cash back home. Instead of building a plant here, they will build or buy one abroad.29 The New York Times reports: “Kathleen M. Kahle, a finance professor at the University of Arizona, said, ‘As risk increases, executives get nervous and they want to hold cash for a rainy day. . . . I have little doubt that the United States corporate tax code is causing companies like Apple to hold cash overseas.’”30
Corporate leaders have made it clear that if the U.S. tax system didn’t penalize them, they would invest and spend at home. Cisco’s John Chambers has pleaded for tax reform so he can spend and invest at home. But if the current system remains
intact, he will be creating jobs overseas. Of Cisco’s $446 billion, 80 percent is stored in foreign countries because of our 35-percent tax rate.31
There are a lot of proposals to encourage the return of that cash. Any effective strategy would rely on the free market rather than top-down government mandates. As an example, the government could grant a “tax holiday” if corporations used the cash for domestic acquisitions, paying dividends for shareholders, or investing in something that creates jobs. The goal would be to let the corporations define the specifics.
Contrast that with government-controlled “stimulus” projects that are so subject to politics that virtually nothing gets achieved. The American Recovery and Reinvestment Act will wind up costing taxpayers over $800 billion. Yet according to the nonpartisan Congressional Budget Office, the act created somewhere between 200,000 and 1.5 million jobs. Each job, in other words, cost somewhere between $540,000 and $4.1 million.32
At least half of the $2 trillion sitting idle overseas might come home with the right opportunity. And the return of that cash would contribute far more to economic growth than government borrowing and spending. The new jobs created would generate tax revenues and reduce government welfare expenses. The investment of that enormous mountain of cash would strengthen the American economic position substantially, helping us win the global economic war.
Step Four: Achieve Energy Independence
One of the areas in which we could let American companies invest that overseas cash is energy. The same government that wants to tax corporations’ overseas cash at 35 percent set aside $80 billion of the $800 billion stimulus for green energy.33 While not all of that money was spent, at least thirty-four of the recipients of this federal subsidy have already gone bankrupt, taking billions of taxpayer dollars with them. Were these projects chosen solely because of their economic merit? Not according to the Hoover Institution’s Peter Schweizer. In Throw Them All Out, he writes that 71 percent of the Obama Energy Department’s grants and loans were given to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party. . . .”34 Politico reported in late 2011, “The Energy Department’s inspector general has launched more than 100 criminal investigations related to 2009 economic stimulus spending.”35 Everyone knows about Solyndra’s bankruptcy (costing taxpayers a half billion) and should understand that the government isn’t the ideal venture capitalist.36
There is an understandable interest in developing new forms of energy with the hope that they will create jobs and strengthen our economy. But when you contrast the government failures with private-enterprise successes, you begin to see why we should promote the free-market approach to energy development. Apple is building a massive new solar power farm.37 We can be certain that Apple thinks the project makes economic sense. What would happen if Apple were able to use its $100 billion in cash hoarded overseas on domestic investments without a tax penalty?38
Which is the better idea—tax Apple, take its cash, and hand it out as political favors, hoping that something useful gets developed, or let Apple keep its cash to invest profitably, benefitting shareholders and later generating taxes at home?
Germany has made important progress in alternative energy by leaving control with individuals and communities. In 2011, renewables contributed 20 percent of Germany’s electricity; 65 percent of these renewables are owned by individuals or communities.39
Alternative energy is only one step toward American energy independence. What if we allowed some of that corporate cash to accelerate fossil fuel development as well? Every day the United States sends about $1 billion overseas just to keep up with its hefty energy appetite. If that money were spent on domestic energy instead, we would generate as much as $1 trillion per year in new economic activity, raising GDP by perhaps 2.5 percent—which would double the growth rate from recent levels—and creating as many as three million new domestic jobs.40
Thanks to technological advances like hydraulic fracking and horizontal drilling, we are already reducing our dependence on foreign energy. In fact, Citigroup analysts estimate that we could eliminate every foreign energy source except Canada in as little as five years. Doing so, they calculate, would strengthen the dollar as much as 5.4 percent.41 The United States is now projected to surpass Saudi Arabia in oil production by 2017.42
What if American corporations were allowed to repatriate foreign cash if they invested to promote energy independence? What if government allowed the pipelines we need and opened federal lands and offshore opportunities to development? Wow! Sadly, none of that is happening. As Daniel Kish, a senior vice president of policy at the Institute for Energy Research, said, “Where the feds are in charge, production is sucking wind. Where they aren’t, we’re breaking records.”43 The Daily Caller reported the Obama administration’s shameful record: “While production booms on non-federal lands and boosts U.S. exports, production on federal lands is lagging. In fact, all of the increased oil production from 2009 to 2012 took place on non-federal lands. . . . [O]il production on federal lands was down 31% from 2011 levels, while production on state and private lands increased by 15%.”44
Some argue that fracking is not worth the risks, but experts disagree.45 Even Daniel Yergin, who was an advisor for Barack Obama on shale gas, dismisses the danger of contamination of drinking water, expressing concern only about “manag[ing] the waste water that is produced with drilling” and “maintaining air quality because you have a lot of diesel engines pumping away.”46
Lifting the ban on offshore drilling could result in a million new American jobs, according to some estimates, and reduce our reliance on foreign oil.47 Our energy future is bright—if we don’t foolishly spoil it. Stephanie Catarino Wissman, the executive director of the Associated Petroleum Industries of Pennsylvania, makes the case for a smarter energy policy: “With the right policies in place, America could meet 100% of its liquid fuel needs through safe, reliable North American sources by 2024. . . . Hydraulic fracturing provided $62 billion in additional government revenue in 2012 and will provide more than $111 billion in 2020. 1.7 million jobs are currently supported by unconventional oil and natural gas activity, and that number grows to some 2.5 million jobs in 2015, 3 million jobs in 2020, and 3.5 million jobs in 2035.”48
There is troubling evidence that those who decry fracking are funded by interests such as the United Arab Emirates and Vladimir Putin—economic enemies of the United States. The late Hugo Chavez of oil-exporting Venezuela, Putin, and various oil sheiks all opposed fracking.49 Prince Alwaleed bin Talal of Saudi Arabia frets that his country’s economy will be hurt by foreign fracking. “The world’s reliance on OPEC oil, especially the production of Saudi Arabia, is in a clear and continuous decline,” he writes, adding that “rising North American shale gas production is an inevitable threat.”50 Russia, which sits on $13 trillion of natural gas deposits, attacks shale gas as “unsafe,” “uneconomical,” and “irrelevant.”51
Developing our domestic energy resources is essential to our fight in the global economic war. James Woolsey, a former director of the CIA, warns, “By and large, it is oil money that is funding the madrasas that teach little boys that becoming suicide bombers is a good, reasonable life choice for them. Next time you go to a filling station, you will know where that money is coming from. So, to put it mildly, we are paying for both sides of this war on terrorism.”52
We must and we can do more to achieve energy independence. We can unleash entrepreneurs like Tesla’s Elon Musk. Not only has he created a sensation with his electric luxury car, but also he’s made a lot of investors very wealthy.53 He has plans for a high-speed train known as the Hyperloop, which would use solar power and yet cost a fraction of what other proposed systems would cost.54 There are doubters, to be sure, but given Musk’s track record, doesn’t it make sense to encourage his entrepreneurship?
We can encourage promising developments in transportation like automobiles that run on compressed
natural gas or methanol. It will require investment but is certainly doable. That’s the vision of Clean Energy Fuels and T. Boone Pickens.55 The major barrier to getting America off foreign oil and on to domestic natural gas, says Pickens, is the need for investment capital. To him, it’s a no-brainer and a matter of time.
We can achieve energy independence and are in fact tantalizingly close to doing so. We can achieve it by unleashing American ingenuity and expanding domestic production. In an era of economic warfare, energy independence is a matter of life and death.
Step Five: Reduce Regulation
A couple of years after President Ronald Reagan left office, I had the privilege of presenting him with the Adam Smith Award for Individual Excellence in Free Enterprise. Reagan’s modest response was: “Really, all I did was get the government the hell out of the way so good people like you could grow the economy.”
Since the end of Reagan’s presidency, however, the regulatory burden has grown uncontrollably. Back in 1974, Reagan, then the governor of California, complained about forty-five thousand pages of new federal regulations.56 Today there are about 175,000 pages of new regulations.57
Accumulated regulation has been enormously costly. America’s nominal GDP in 2011 was $15.1 trillion. One study calculates that if regulation had remained at the same level as in 1949, GDP in 2011 would have been about $53.9 trillion. That’s a difference of $129,300 per person.”58 The Competitive Enterprise Institute finds that compliance with federal regulations costs about $1.8 trillion—roughly 11 percent of 2013 GDP—per year.59 To put it starkly, federal regulation has made the average American 75 percent poorer.60
Now, we know that some regulation is necessary. But much of the regulation we live with is the “nanny state” at work. We have built an unaccountable regulatory regime that employs quite a few people but chokes economic growth. It is a slow form of economic suicide. The implementation of Obamacare’s regulations—which are estimated to impose 127 million hours of paperwork per year61—is going to make the situation even worse.
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