The arithmetic of deterrence and its discontents

According to the headline supplied to this column, Taiwan has for the first time fired a U.S.-provided HIMARS rocket system in the direction of the Taiwan Strait — a deliberate signal, presumably, that the island's defenses have acquired a new and credible reach. I will not pretend to recall the military literature that has accumulated since my own time, nor will I play the strategist. But I am an economist, and no economist worthy of the name can look at a live rocket fired across one of the world's most consequential trading waterways and see only a military event.

Let me acknowledge the rational case first, because it deserves respect. The logic of deterrence holds that a credible defensive capability reduces the probability of aggression; that demonstrating readiness today forestalls the far greater cost of conflict tomorrow. As an argument in isolation, it is not foolish. I spent enough time at the Treasury watching men bargain from weakness to understand that a party with no visible capacity to resist is an invitation, not a partner.

And yet — and here is where the macroeconomist must speak — the rationality of the individual signal does not guarantee the rationality of the sequence it initiates. What each party calculates as a measured, defensive step looks, from the other side of the strait, like escalation. The aggregate of locally rational moves is not itself rational. I called this the paradox of thrift in a different context; the logic is the same. When every actor saves, nobody spends, and the economy collapses. When every actor signals resolve, nobody de-escalates, and the spiral tightens. (This inference is mine, not drawn from a dossier.)

The economic stakes require no inference at all — they are simply visible. The Taiwan Strait carries a staggering share of global container traffic; Taiwan's semiconductor industry underwrites a material fraction of the world's productive capacity in ways that would have astonished me, had I lived to see it. (Inference: based on widely reported facts about the strait and semiconductor geography that postdate my era.) A sustained deterioration of confidence in that corridor would suppress investment globally, not locally. Animal spirits — that volatile compound of expectation and fear that I argued drives investment far more than any rational calculus — would curdle across Pacific supply chains long before a single additional shot was fired.

What I learned at Bretton Woods in 1944 — and it was a hard lesson to extract from men who thought only of their own nation's position — is that the architecture of stability must be designed in advance, by parties sitting at a table, before the crisis that makes sitting at a table impossible. The international monetary order we built was imperfect; I said so at the time. But it was an order, and an order has value beyond its technical provisions. What I see in the Taiwan Strait, viewed through an economist's eye, is the absence of an equivalent architecture for managing the security and economic interdependencies of the Pacific. Military hardware fills the vacuum that diplomacy has left.

I will not prescribe a foreign policy — that is above my station and outside my competence in this modern age. But I will say this: the economic consequences of political and military settlements are always underestimated by the men who make them, and always overestimated in their tolerability by those who inherit them. The negotiators at Versailles believed the indemnity was sustainable; the German economy, and eventually European democracy, demonstrated otherwise. The lesson is not that strength is wrong, but that strength without a framework for resolution is simply a more expensive path to the same catastrophe. The time to build that framework is before the missiles are counted, not after they are fired.