IKE’S NIGHTMARE

IGOR RIVIN

On January 17, 1961, the then departing US President Dwight D. Eisenhower gave his last public address, where he gave a number of warnings to the country he loved and served for his entire adult life. The full text of the Address can be found in the Appen-dix, while the video can be found here: http://vimeo.com/98865802

Among the warnings Eisenhower makes are the following:

• The enormous armaments industry created during the Second World War (and perpetuated during the following Cold war) will subvert public policy, if left un-checked.

• The big money research infrastructure will subvert the intellectual freedom of the academic establishment.

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• The temptation to spend money now is great, but it will bankrupt the future generations, and and will lead to less freedom in the short and the long term (when the bankruptcy will lead to social unrest).

In addition, while he is emphatic that the US should be sympathetic to universal freedom, he is quite clear that he does not mean that this should be effected through American arms.

(I urge you to hear what the man himself has to say, and not take my word for it).

Eisenhower’s address is mostly remembered today for the first point, and is usu-ally referred to as “the military-industrial complex speech”, but as the interested lis-tener will see, it is much broader in scope. Eisenhower, as the modern-day Cincinna-tus, was a republican (as well as a Republican), and he was all too well aware that the US, which was already by far the most powerful country on the planet, was in danger of moving closer and closer in the direction of becoming an empire, with all that en-tails both externally and (more importantly to Eisenhower) internally.

Interestingly (though not surprisingly), despite the enormous respect the Ameri-can people felt for Ike, his advice fell on deaf ears, and already the Kennedy (and then Johnson) administrations, which came to power three days after the Eisenhower ad-dress, greatly increased the power of the Federal government internally, and the scope of American imperialism and adventurism internationally. So, where are we now?

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In the early 1980s, the author was a graduate student in Mathematics at Princeton, but also a “visiting graduate student” at the MIT AI lab. At the time, seemingly every mathematics professor at Princeton was funded by the federal government, even though (at the time, this changed later), the Princeton Mathematics Department was very pure. This means at at the time, 2/11th (around 19%) of every Mathematics profes-sor’s salary was paid by the Federal government. In addition, the university got around half that amount in overhead payments. At the same time, the AI Lab was funded entirely by the Defense Department, and (I can only conjecture) was a profit center for MIT. Many of the better graduate students and faculty left the lab to organ-ize (or work for) start-up companies, whose only customer [remember, the consumer electronics revolution was just starting then] was, again, the Federal government (and more precisely, the Defense Department). I worked in one of the more prominent start-ups - Symbolics, Inc, which “commercialized” AI Lab research on symbolic computing (its primary business was the Lisp Machine, though they also commercialized the MACSYMA symbolic computation system). “Commercialize” is in quotes, because all of the Lisp Machine (and MACSYMA) customers were Defense contractors, and the Lisp Machine (which had some very interesting technology) was later killed by a stroke of a pen (and billions of dollars were made for Andy Bechtolsheim and Scott McNealy), when DARPA decreed that its grantees should use Unix workstations (which, at the time, meant Sun, Inc line of workstations). It should also be noted that the spin-off of Symbolics was very controversial, and Richard Stallman’s leadership in (indeed, creation of) the Free Software and Open Source movement was a reaction to what he viewed as an evil use of public money and intellectual property for private gain.

Somewhat later in that same decade, I worked as a research staff member at Stan-ford, in John McCarthy’s group. My salary as (as a recent PhD) was higher than it would have been in the industry, and DARPA (which was funding the project I was working on) was also funding much of the IT infrastructure (much of which was obso-

RESEARCH

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lete -- the tax payers were spending $100,000 a year on maintaining an obsolete main-frame because McCarthy preferred the editor to the ones one could get on the far cheaper DEC VAXes and Unix workstations). A subcontractor on the project was Lu-cid, Inc (which was created, nurtured, then killed by the same stroke of a bureaucrat’s pen as Symbolics).

Later yet, I came as a (mathematics) professor to Temple University where I have spent (and continue to spend) a lot of time and nervous energy on hiring. One constant of the hiring process was that we were not allowed to even consider candi-dates who did not have government funding. This has had an extremely disruptive ef-fect on departmental politics and has completely skewed the ranking of possible re-search areas - the a priori preferred areas are ones which are highly funded by the NSF, DOE, and NIH, whatever their perceived intellectual merit or, indeed, relation-ship to mathematics as a field (in other words, people in highly funded “mathematical sciences”, which means that they would ordinarily find themselves in engineering de-partments or industry). NIH funding is particularly prized, since the levels are much higher (so are the expenses, but that is generally overlooked by university administra-tors, since they are judged on the amount of funding they bring in, not P/L.

What is particularly interesting is that while pure mathematics as a whole has no particular need of NSF funding (there is no experimental equipment, and mathemat-ics graduate students have historically been supported via teaching), the levels of fund-ing were initially quite high, and then slowly withdrawn from certain areas. If one did not know better, one would suspect social engineering.

To summarize: while the material in this chapter is almost completely subjective, my experience in a quite wide area of mathematical sciences indicates that Eisen-hower’s prediction has come true with a vengeance - the government has effected a complete takeover of basic mathematical sciences, to the point where it now dictates the discourse completely.

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To illustrate Eisenhower’s point, all we really need is the following couple of charts (which comes from the Wikipedia article on Military spending (we don’t like to play along with the propagandists by calling it Defense spending). As we will discuss later, we are dubious about the government’s computation of inflation, but here both charts

use the same rate, which makes them comparable.

THE MILITARY-INDUSTRIAL COMPLEX

CHAPTER 3

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You can see that from 1967 on, per capita defense spending has gone up by 35%, while the median income has gone up some 20% (the median income is given by the red “Middle Quintile” line), so the average American household spends 10% more on defense than in 1967. What makes this even more egregious is that the US has with-drawn from the Vietnam misadventure and “won” the Cold War in the interim. Some would say that we are now in the midst of the War on Terror, but that is a rather spe-cious argument: note that the United Kingdom had experienced decades of terrorist acts at the hands of the IRA, which did cause it to maintain a (relatively small, by US standards) military presence in Northern Ireland, but did not cause it to, for example, invade the Republic of Ireland, which served as the base of the IRA, nor did it cause it to inflict tens (if not hundreds) of thousands of civilian casualties on Ireland or (say) the Basque Country (which, to me, is the closest analogue to the US invasion of Iraq).

To bolster this point, here are some (generally) comparable UK data.

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As you can see, in the same fifty year period, the UK defense spending has de-clined drastically in relative terms, despite the fact that the UK is still a world power. Of course, a more careful examination of the chart is a bit more disturbing - defense spending has gone up considerably in the last fifteen years -- much faster than in-comes have. Still, our primary concern is the US, not the UK, so we now move on to the obvious question of where the money is going. While there are plenty of explana-tions (veterans’ benefits, pensions, debt service, etc, etc), I think the real answer is con-tained in the following chart, where we compare the historical returns of the equities of various large defense contractors to that of the S&P 500 (the prices are always ad-justed for dividends, stock splits, and the like). You will see that the defense stocks (I had picked General Dynamics, United Technologies, Lockheed-Martin, Boeing, and Raytheon) as a group has outperformed the S&P by a phenomenal amount (partly through the magic of compounding -- their yearly outperformance was only 3-5%, with the exception of Raytheon, which only did as well as the S&P. What is also very interesting is that Sharpe ratios (so, risk-adjusted returns) of each of these companies is comparable to (and, in several cases, exceeds) that of the whole S&P500, without the benefit of diversification, and is much better than that of most fund managers.

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Defense Stocks vs the S&P 500

S&P total return GD Total Return LMT Total Return UTX Total Return RTN Total Return BA total return

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The last of Eisenhower’s warnings to his contemporaries was to not live beyond their means and stick their children with the bill. As we will see momentarily, this has, in fact, already happened, we are those children, and our children are having it even worse. What we will see in a collection of data below is that at the moment, the stan-dard of living is slipping, and the only way this is being masked somewhat is why con-tinuing borrowing (hence, passing on the cost to future generations).

The data we will see concerns the ten year period from 2003 to 2013, for which reasonably complete (and stable) information is available. It should be noted that dur-ing this period the official US government CPI has been rising at the rate of under 2% a month (this causing considerable worry about deflation in the monetary policy cir-cles). We will see below how accurate the numbers are (and the interested reader can read about why the numbers do not correspond to reality on http://www.shadowstats.com) First, we will remark that the mean rate of income growth for median household income in the US over the 10 years (from December 1 2003 to November 30 2013) was 1.74% per year, as per the US census. Thus, the “change of purchasing power” column in many of the following tables is computed by reducing the (mean) increase of the cost of the item in question by 1.74%. It should be noted that the median household income tells nowhere near the whole story - the dis-tribution of incomes have become very uneven, and we will talk about this towards the end of this chapter. Now, the baseline is the government’s own CPI statistic, and this was at 183.960 in 2003, and 232.957 in 2013, for an annualized inflation rate of 2.38% over the ten year period. This already indicates an erosion of purchasing power of the median household, but, as we will see, this is nowhere near the whole story. It is, how-ever, interesting that the Social Security Cost of Living Adjustments (COLA) have been (by law) very close to the published CPI, and so have exceeded the increase of purchas-ing power the average American.

“OUR GRANDCHILDREN WILL PAY”

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Now, let’s begin. The first thing we looked at was the Morris County, NJ (some-what anecdotal) price lists of food and household staples, which the interested reader can find here: http://www.gti.net/mocolib1//prices

As

usual, red indicates negative numbers, and we see that while those on an ice cream and pine-apple diet could be quite pleased by the developments, the rest of the (median) popula-tion has been losing on average around 5% of food and staples purchasing power a year!

Since ten years is a rather long period, the numbers, on the whole are quite reli-able (though food prices do tend to be somewhat volatile).

Intrigued by this result, I decided to investigate some other categories of ex-penses. Since people don’t only need to eat, but also need a roof over their heads, the next thing is to look at housing costs. Here the go-to statistics is the Case-Shiller in-dex, which, in inflation-adjusted terms was equal to 183.67 at the end of 2003, and equal to 153.63 at the end of 2013. This means that once the smoke clear, the house-purchasing power of the average American was increasing at close to 1% per year - somewhat encouraging.

Now that we have food and housing, we must concern ourselves with transporta-tion, and here the news are a bit distressing - see the chart:

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As you see the average loss in purchasing power (in energy costs, public transit fares, and road usage fees) has been in the 7% range, again indicated a purchasing power loss of some 5% a year over a ten year period.

Perhaps, however, there is a light at the end of the tunnel. Let’s look at some other hard to avoid costs, such as health care and university education:

We see that health purchasing power is going down by close to the aforemen-tioned 5% a year, while education presents a somewhat interesting story - purchasing power of the average American is deteriorating in both the public and the private sec-tors, but it is deteriorating far faster in the public sector. Note, however, that the pri-vate sector picture is almost completely irrelevant - the average American (with a $50,000 per year household income) has long been priced out of Stanford and Yale. If his children were sufficiently well-prepared to be admitted to these places (a very un-likely event, since attending a good private school [which the average person cannot afford] is a great help in getting into a top university), the children would have to pay nothing. That’s the good news. The bad news is that the vast majority of college stu-dents go to mid-range public universities, and there, due to the collapse of local and estate budgets, the rates have been going up much faster than even the inflation rates for food, energy, and health care.

At this point, the mythical Everyman might want to go out to a movie or a ball game to cheer him(or her)self up, but the news there are not so encouraging either:

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The prices for entertainment seem to be going up a bit slower than the prices for the necessities - curiously (or, come to think of it, not so curiously) he service most people use - cable TV - is going up the fastest.

To add the last insult, the biggest bill of all - the one for Government - is also go-ing up in relative terms; Government has been eating up an average of 3.55% more every year. In other words, an average American is forced to pay 1.7% more in relative terms for the highly successful governance he receives. Note, however, that since 3.55% is much less than the empirical inflation rate (of around 6-7% a year), Every-man is getting fewer services for his tax bill, and given that the rate of increase of mili-tary expenses (which produce nothing of use) has been higher than the aggregate rate, the decline in useful services is quite rapid.

Now, a well-known sociological theory states that people’s absolute incomes don’t matter as much as relative incomes (if everyone is poor, then, maybe, no one no-tices). If that is so, the situation is much more dire yet, as we can see by looking at the chart on page 6 of this study, where the reader can see that while (even according to government statistics) all the strata of the population are doing worse, the highest tiers are doing “less worse”, so the income disparity is growing.

Now, the reader may ask (and some already have) - how is it possible to have price inflation in excess of income growth? The answer is simple, through the moneti-zation of government debt. In simple terms, the Federal Reserve buys debt, which cre-ates money out of thin air. The government then uses this fresh money to buy up re-sources, which creates a relative scarcity, which drives up the prices. The effects are equally simple: people’s savings are decimated, since they need more money to live than their income provides (and even people who have a nest egg don’t find it trivial to keep up with inflation, see the table below - the S&P 500 just barely beats inflation at the cost of considerable risk, though, as previously noted, the defense contractors have been a better investment - even that is likely to stop being true as the economy de-clines further), and often drives these savings deeply negative. There is an inherent transfer of wealth from the working poor (since there is no other way to describe the

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middle American these days) to the retired (who also can’t keep up with inflation), and the very wealthy, who use the very cheap money to place levered bets, which are

essentially guaranteed to win, since the Fed controls the yield curve along its en-tire length (and, as we have seen in 2008, uses its money-printing power to rescue the banks when they get into too much hot water).

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Three days from now, after half a century in the service of our country, I shall lay down the responsibilities of office as, in traditional and solemn ceremony, the author-ity of the Presidency is vested in my successor.

This evening I come to you with a message of leave-taking and farewell, and to share a few final thoughts with you, my countrymen.

Like every other citizen, I wish the new President, and all who will labor with him, Godspeed. I pray that the coming years will be blessed with peace and prosperity for all.

Our people expect their President and the Congress to find essential agreement on is-sues of great moment, the wise resolution of which will better shape the future of the Nation.

My own relations with the Congress, which began on a remote and tenuous basis when, long ago, a member of the Senate appointed me to West Point, have since ranged to the intimate during the war and immediate post-war period, and, finally, to the mutually interdependent during these past eight years.

In this final relationship, the Congress and the Administration have, on most vi-tal issues, cooperated well, to serve the national good rather than mere partisanship, and so have assured that the business of the Nation should go forward. So, my official relationship with the Congress ends in a feeling, on my part, of gratitude that we have been able to do so much together.

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We now stand ten years past the midpoint of a century that has witnessed four major wars among great nations. Three of these involved our own country. Despite these holocausts America is today the strongest, the most influential and most produc-tive nation in the world. Understandably proud of this pre-eminence, we yet realize that America's leadership and prestige depend, not merely upon our unmatched mate-

FULL TEXT OF EISENHOWER’S ADDRESS

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rial progress, riches and military strength, but on how we use our power in the inter-ests of world peace and human betterment.

IIIThroughout America's adventure in free government, our basic purposes have

been to keep the peace; to foster progress in human achievement, and to enhance lib-erty, dignity and integrity among people and among nations. To strive for less would be unworthy of a free and religious people. Any failure traceable to arrogance, or our lack of comprehension or readiness to sacrifice would inflict upon us grievous hurt both at home and abroad.

Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology-global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily the danger it poses promises to be of indefinite dura-tion. To meet it successfully, there is called for, not so much the emotional and transi-tory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle-with liberty at stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.

Crises there will continue to be. In meeting them, whether foreign or domestic, great or small,there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in newer elements of our defense; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research-these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we which to travel.

But each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs-balance between the pri-vate and the public economy, balance between cost and hoped for advantage-balance between the clearly necessary and the comfortably desirable; balance between our es-sential requirements as a nation and the duties imposed by the nation upon the indi-vidual; balance between action of the moment and the national welfare of the future. Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.

The record of many decades stands as proof that our people and their govern-ment have, in the main, understood these truths and have responded to them well, in

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the face of stress and threat. But threats, new in kind or degree, constantly arise. I mention two only.

IVA vital element in keeping the peace is our military establishment. Our arms

must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little relation to that known by any of my predecessors in peace time, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments indus-try. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the de-fense establishment. We annually spend on military security more than the net in-come of all United State corporations.

This conjunction of an immense military establishment and a large arms indus-try is new in the American experience. The total influence-economic, political, even spiritual-is felt in every city, every state house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to com-prehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwar-ranted 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 demo-cratic processes. We should take nothing for granted only an alert and knowledgeable citizenry can compel the proper meshing of huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direc-tion of, the Federal government.

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Today, the solitary inventor, tinkering in his shop, has been over shadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has expe-rienced a revolution in the conduct of research. Partly because of the huge costs in-volved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation's scholars by Federal employment, pro-ject allocations, and the power of money is ever present and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself be-come the captive of a scientific-technological elite.

It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system-ever aiming toward the supreme goals of our free society.

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Another factor in maintaining balance involves the element of time. As we peer into society's future, we-you and I, and our government-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 sur-vive for all generations to come, not to become the insolvent phantom of tomorrow.

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Down the long lane of the history yet to be written America knows that this world of ours, ever growing smaller, must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect.

Such a confederation must be one of equals. The weakest must come to the con-ference table with the same confidence as do we, protected as we are by our moral, eco-nomic, and military strength. That table, though scarred by many past frustrations, cannot be abandoned for the certain agony of the battlefield.

Disarmament, with mutual honor and confidence, is a continuing imperative. To-gether we must learn how to compose difference, not with arms, but with intellect and decent purpose. Because this need is so sharp and apparent I confess that I lay down

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my official responsibilities in this field with a definite sense of disappointment. As one who has witnessed the horror and the lingering sadness of war-as one who knows that another war could utterly destroy this civilization which has been so slowly and pain-fully built over thousands of years-I wish I could say tonight that a lasting peace is in sight.

Happily, I can say that war has been avoided. Steady progress toward our ulti-mate goal has been made. But, so much remains to be done. As a private citizen, I shall never cease to do what little I can to help the world advance along that road.

VII

So-in this my last good night to you as your President-I thank you for the many opportunities you have given me for public service in war and peace. I trust that in that service you find somethings worthy; as for the rest of it, I know you will find ways to improve performance in the future.

You and I-my fellow citizens-need to be strong in our faith that all nations, under God, will reach the goal of peace with justice. May we be ever unswerving in devotion to principle, confident but humble with power, diligent in pursuit of the Nation's great goals.

To all the peoples of the world, I once more give expression to America's prayer-ful and continuing inspiration:

We pray that peoples of all faiths, all races, all nations, may have their great hu-man needs satisfied; that those now denied opportunity shall come to enjoy it to the full; that all who yearn for freedom may experience its spiritual blessings; that those who have freedom will understand, also, its heavy responsibilities; that all who are in-sensitive to the needs of others will learn charity; that the scourges of poverty, disease and ignorance will be made to disappear from the earth, and that, in the goodness of time, all peoples will come to live together in a peace guaranteed by the binding force of mutual respect and love.

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Eisenhower was a wise man, who also lived through (and saw close-up) the decline of the British Empire, so he was all too well aware of the costs of empires, both economic and moral. It seems clear that he knew that he was predicting the future (since the forces he mentioned were already in full flower at the time of his speech), but phrased it as a warning, since he could not bear the thought of his predictions coming true. This author finds it difficult to bear this thought either, but, sadly, reality is a little hard to ignore. The reader will not find any prescriptions in this essay - the author wrote it mostly to try to deal with his own feelings of despair about the situation we are in.

ABOUT THE AUTHOR. Igor Rivin is a mathematician with many other interests. He has worked on Artificial Intelligence (at the MIT Artificial Intelligence Labora-tory), mathematical computing (he was one of the main early developers of the Mathe-matica system), physical chemistry, and, most recently, quantitative finance and money management. Igor was born (and lived for the first twelve years of his life) in the Soviet Union, which may well have shaped his political beliefs.

EPILOGUE

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