By Carlo J.V. Caro*
(FPRI) — Speaker of the House Kevin McCarthy is confident that the debt ceiling deal, negotiated with the White House, will pass in the House, despite some conservative opposition to deficit reductions and work requirement changes in the agreement.
The deal negotiated this past weekend includes a moderate defense spending increase, as proposed by President Joe Biden, leading to a projected $886.3 billion national security budget next year, marking a 3.3 percent increase from current levels. However, some Republicans, like Sen. Lindsey Graham, feel this increase is below inflation and insufficient.
The defense budget compromise may not adequately support modernization and maintenance of capabilities in the face of rising costs and global threats.
Regardless of the deal between McCarthy and the White House through 2025, if the United States were ever to hypothetically default on its debts, the consequences would extend beyond the economy, affecting US military operations, the defense industry, and strategic alliances like NATO.
Throughout history, economic crises have not only affected the economy but also led to political instability and shifts in global power dynamics. Take, for example, the 1930s Great Depression, which indirectly spurred the rise of militarism and the initiation of World War II by destabilizing the economic foundations of the League of Nations. In a similar vein, the 2008 financial crisis caused the West’s economic position to weaken and shifted global power toward the East.
The Great Depression and World War II
The Great Depression provides a historical context of the potential impact of a U.S. debt default in 2023. Like the Depression, a debt default would entail an economic shock that could trigger a deep recession, with far-reaching effects on the economy, government spending, and by extension, military readiness. This could potentially disadvantage the U.S. in any escalating conflict with a well-resourced and technologically advanced military power like China.
Even though a debt default would precipitate a severe economic crisis, it would not exactly replicate the conditions of the Great Depression. The global economic environment has changed drastically since the 1930s and central banks and governments have developed more advanced monetary and fiscal tools to manage it.
However, since US Treasury bonds are considered the safest asset in the world and form the backbone of the global financial system, a debt default would undermine this trust, potentially causing a surge in interest rates as investors demand higher yields to compensate for the increased risk, leading to a drop in the value of the dollar and a global financial shock.
Domestically, a default could trigger a sharp rise in borrowing costs, which would affect everything from mortgages to corporate loans. This could cause a contraction in investment, leading to job losses and drastic cuts to government services, particularly military programs. Over the longer term, economic recovery could be slow and painful, as was the case following the Great Depression.
The Great Depression had a profound effect on America’s readiness for World War II, owing to dire economic conditions, isolationist tendencies, and stringent fiscal limitations, which negatively impacted military preparedness. Post-1929, the government prioritized domestic economic recovery, leading to a decreased defense budget, downsizing of military forces, and reduction in military equipment. With a small and under-equipped military, planners had adopted a strategy focused on the defense of the Western Hemisphere, heavily relying on the nation’s industrial potential.
But by the 1930s, the US Army’s active-duty strength was reduced to about 130,000, causing an “experience gap” in the military and hindering the development of emerging warfare areas. Low military wages and limited training opportunities led to unattractive military service and hampered the evolution of military doctrines.
The physical competence and battlefield skills of personnel waned, leading to issues in adapting to advancing military technology and warfare concepts. This under-preparedness influenced early strategies in World War II, with a notable shift towards a “Europe First” policy and attrition strategy in the Pacific Theater. The inability to swiftly transition from a depression-era economy to a fully mobilized wartime economy was evident. The US military had to significantly mobilize, growing from 1.8 million in 1941 to over 12 million in 1945, but initial setbacks spurred essential changes in military strategy, eventually aiding victory.
The US Pacific Fleet’s limited capabilities and insufficient forces led to losses at Pearl Harbor, the Philippines, Guam, Wake Island, and Hong Kong, forcing defensive maneuvers while the military rebuilt and expanded. Early battles like the defeat at the Kasserine Pass in Tunisia revealed the under-preparedness of US troops against the German Wehrmacht and exposed coordination issues in combined arms warfare, prompting innovative adaptations and adjustments that enhanced operational performance.
The US quickly developed techniques and organizational structures for amphibious operations despite initial shortcomings. Issues in submarine warfare due to fiscal and technological constraints were addressed by mid-1943, leading to a more aggressive approach. Improvements in jungle warfare training and the introduction of the Joint Chiefs of Staff marked a shift towards integrated planning.
The attack on Pearl Harbor highlighted the need for effective intelligence, prompting the military’s intelligence reorganization. Challenges in strategic bombing were addressed over time, and the U.S. leveraged its economic potential and invested in war production, overcoming initial hurdles, and significantly increasing military output.
American factories, dormant during the Depression, were suddenly tasked with producing vast amounts of military equipment. This dramatic conversion posed an immense challenge, testing the country’s industrial flexibility and resilience. Despite initial difficulties in converting civilian industry for war production due to laissez-faire economic policies, the government responded with public works programs and stabilization policies. The War Production Board and the Office of Price Administration were established to coordinate war production and control wages and prices.
Even though the U.S. had robust manufacturing capabilities and a large labor force, the redirection of these assets for war was challenging. Integration of the available labor force into war industries and a shift to mass production techniques strained the industrial sector. Despite these challenges, the mobilization process exemplified the nation’s resilience.
Impact of a Debt Default
A debt default could affect the Department of Defense’s budget, global military operations, and America’s ability to counter global instability. This could result in severe budget constraints, leading to a potential reduction in troop numbers, a slowdown in military modernization, and a decline in operational readiness.
In the wake of a default, the Pentagon’s budget would inevitably face scrutiny, with repercussions potentially affecting morale, retention rates, and operational capabilities. Further, it could disrupt military operations abroad, empowering adversarial actors, destabilizing regions, and escalating the risk of conflict.
Moreover, budgetary constraints could compromise the military’s technological edge by impacting modernization efforts. This could also result in the slowing of replacement rates for aging military equipment and reduced funding for research and development programs, thereby eroding American technological edge and operational readiness.
There would be significant implications for the transition to Multidomain Operations (MDO) and potentially weaken U.S. strategic dominance across multiple domains. Funding for research, development, training, and implementation of MDO could be severely compromised. China could take advantage of the situation, strengthening its respective A2/AD capabilities and presence in strategic areas, thereby posing more significant challenges to the MDO transition.
The legal complexities associated with MDO, particularly in newer domains like cyberspace and space, could be further complicated due to reduced funding for policy development, legal research, and international negotiation efforts. In essence, the U.S. military’s ability to effectively adapt to the changing landscape of warfare would be affected and could result in strategic vulnerabilities.
The consequences of a debt default could also permeate into intelligence and cyber operations. A constrained budget could disrupt the operations of the intelligence community, impairing strategic and tactical capabilities, and leading to a heightened risk of strategic threats.
Historical events, like the collapse of the Soviet Union and the rise of the Islamic State, underline the dangers of potential intelligence gaps caused by budget cuts. In addition, these constraints may affect the recruitment and retention of talented personnel, diminish the quality of intelligence analysis, and lead to policy errors with significant repercussions.
Simultaneously, a debt default could affect the nation’s ability to execute and counter cyber operations,. U.S. Cyber Command could face obstacles due to budget reductions, potentially impacting the development and deployment of advanced cyber weaponry, and leaving critical infrastructure and military command systems vulnerable.
A debt default could also drastically impact the defense industry. Diminished defense spending could undercut America’s defense industrial base. This would hinder the country’s ability to maintain technological superiority over potential adversaries.
Additionally, a debt default could significantly the production of military hardware. The resulting diminished orders, job losses, and potential closures of defense firms could erode the capacity of the United States to regenerate military capabilities swiftly during crises. This could increase reliance on foreign-made components, potentially exposing the US military to greater risks of espionage and sabotage.
NATO, a bulwark of international security, is susceptible to member states’ financial instability. The 2008 financial crisis highlighted this vulnerability, inducing defense budget constraints and spurring a new “Smart Defense” strategy of prioritization, specialization, and collaboration among members. However, this induced regional imbalances, as wealthier nations focused on high-end capabilities, while others were assigned niche areas.
The global financial crisis amplified calls for burden-sharing among alliance members. US defense spending was curtailed by the 2011 Budget Control Act. Additionally, the crisis impacted NATO’s relations with other powers. Russia exploited the situation to challenge NATO (e.g., the 2008 Georgia War), while China used it to enhance global economic influence in hard-hit countries like Greece and Portugal, thereby testing the transatlantic bond.
Operational and logistical challenges also emerged for NATO, as the U.S. withdrawing some support from Europe. Initiatives like the European Air Transport Command were set up to optimize limited resources. The crisis impacted NATO’s operational tempo, with financial constraints forcing members to reduce troop contributions to operations like Afghanistan and the Balkans.
A future crisis, such as a US debt default, could dramatically affect NATO. A debt default would affect America’s ability to contribute to the Atlantic alliance and hurt the economies of other NATO members. Such a crisis could undermine collective security, destabilize the alliance, force policy reassessment, disrupt internal dynamics, and potentially fragment the alliance. Increased European defense autonomy could arise, along with disputes over strategic priorities and resource allocation.
Historical internal disputes could intensify, impacting decision-making, security responses, and trust within the alliance. This could lead to a security dilemma and regional tension. The potential NATO fragmentation could boost bilateralism in international security affairs, emboldening assertive global actors like China, or adversaries like Russia, to exploit the situation. Non-state actors could also exploit a diminished NATO response capacity.
A U.S. debt default might significantly impair NATO’s cyber defense capabilities. Reduced U.S. contribution could expose the alliance and its members to increased cyber threats, having serious strategic implications. Operational and logistical challenges could intensify, with possible downsizing or termination of planned projects, potentially leading to capability shortfalls among European NATO members. In summary, financial instability among NATO members could significantly impact the alliance’s overall function and effectiveness.
If the United States ends up defaulting on its debt, triggering a global economic crisis, Washington should consider a range of policies to mitigate the impact on America’s defense posture. The United States, in this scenario, could implement the following strategies:
Sovereign Defense Bonds: A revival of World War II-era strategies, like issuing defense bonds, might be considered. Citizens could purchase these bonds as a means to support the country’s defense during the crisis.
Mandatory National Service: Another potential approach could be to institute a form of mandatory national service for young adults. This could be a cost-effective way to maintain a sizable and capable military force, even in times of economic hardship.
Space-Based Solar Power (SBSP): The U.S. military could invest in developing SBSP, a renewable source of energy that could support military operations while also providing commercial benefits.
Implementation of AI and Automation: Accelerating the use of AI and autonomous systems could reduce human resources costs and improve efficiency in certain areas of defense, including logistics, surveillance, and routine maintenance tasks.
Gamification for Training and Recruitment: The military could leverage the popularity of online gaming to recruit and train personnel, reducing costs of traditional recruitment and training methods. Crowdsourcing intelligence through a platform where users analyze real-world data can process large volumes quickly and inexpensively. Gamified training programs can enhance the learning process for new analysts, while games can model potential scenarios, informing decision-making.
Micro-Satellites for Surveillance: Rather than investing in larger, costlier satellites, a network of micro-satellites could be deployed for surveillance and communication, possibly with a partnership with private companies.
Decommissioned military equipment has significant repurposing potential for cost savings and revenue generation. It could be refurbished for civilian sectors like construction or emergency services, or recycled for valuable materials in aircraft or electronics. The equipment could also be used for training without risking frontline assets or sold to allied nations for revenue and alliance strengthening.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.
*About the author: Carlo J.V. Caro is a political and military analyst. He holds a graduate degree from Columbia University.
Source: This article was published by FPRI