Nearly a decade has now passed since the onset of the global financial crisis, and scholars still find much to disagree on regarding its origins. Was the crisis idiosyncratic in terms of its causes, or did it share the same DNA as other episodes of financial instability in the United States and globally? Put differently, are local attributes such as excessive risk taking and regulatory failures to blame for the crisis, or does fault lie in more structural factors, such as global economic imbalances?

A Political Economy of American Hegemony belongs primarily in the latter camp. The book examines three postwar U.S. financial crises—the dollar crisis of 1968 that ultimately led to the demise of Bretton Woods, the savings and loan crisis of 1988, and the 2007 subprime mortgage meltdown—and identifies a common culprit behind all three: large preceding jumps in American military spending. Specifically, each time the U.S. government engaged in a military buildup financed by increased borrowing, it sowed the seeds of an unsustainable credit boom that eventually turned into a financial crash. It is no mere coincidence, Thomas Oatley argues, that these three financial crises were preceded by, respectively, the Vietnam War, the American response to the Soviet invasion of Afghanistan in 1979, and the military buildup following the 9/11 attacks.

The book should be of interest to anyone curious about financial crises. While political economy explanations for financial crises have been growing in recent years, they are still rare, and none considers hegemonic military buildups as a key trigger. This book thus joins a growing scholarship on international political economy that has developed insights about the local politics that generate precrisis macroeconomic imbalances. Yet this work is about more than just financial crises. By identifying military buildups as the key element behind boom-and-bust cycles, the larger message seems to be that America’s military power does harm to the international community by making it more financially unstable. This is a provocative thesis.

To achieve the task of connecting military buildups to financial instability, Oatley develops a causal chain that “causally connects events that rarely find themselves connected” (p. 14). The chain begins with military buildups, rare events that start with unexpected (exogeneous) security threats to the hegemon. Yet the gridlock-prone nature of America’s political institutions leaves no choice but to finance such buildups through borrowing. Oatley shows that military buildups have widened the U.S. budget deficit to the tune of 1.5% to 3% of GDP, making military buildups what he calls the “single most important cause of America’s large and persistent budget deficits” (p. 23).

Building from the assertion that military buildups are primarily responsible for U.S. budget deficits, the author moves on to mapping out the connection between budget deficits and banking crises. Here, readers knowledgeable about financial crises in emerging markets are taken down a familiar path. First, large budget deficits lead to large current account deficits. Second, large current account deficits produce large capital inflows, one corollary of which is an overvalued U.S. dollar, which is precarious in itself because it “shifts resources out of manufacturing activities and into real-estate and construction sectors” (p. 138). Even more importantly, strong global capital inflows lead to large increases in private credit (“credit booms”). Finally, drawing on the work of scholars who have attributed banking crises to credit booms (e.g., Enrique Mendoza and Marco Terrones, An Anatomy of Credit Booms and Their Demise, 2012), Oatley closes his causal chain by showing that the 1988 and 2007 banking crises were each preceded by credit booms. The absence of an association between the Vietnam-era military buildup and any subsequent credit boom is chalked up to its coming during a time of lesser international capital mobility. Again, many of these relationships are familiar to scholars of international relations or financial crises, but having all pieces assembled together in one place is a useful accomplishment in its own right.

Oatley’s argument rests on the assertion that postwar budget deficits in the United States are driven by military buildups. Few doubt that America’s large budget deficits of the 1980s and 2000s contributed to its current account deficits, and in turn to capital inflows. But to accept that these budget deficits were primarily driven by military buildups is a different matter, given the variety of other factors at play contemporaneous with each military buildup. These include Great Society spending of the 1960s, Reagan- and Bush-era tax cuts, and fiscal stimulus following U.S. recessions, not to mention external factors such as the policies of China and other surplus countries to accumulate U.S. dollar reserves as part of their export-led growth strategy. These confounding factors are not disregarded by Oatley, and many are incorporated into his regression analyses. Yet given that this buildup–deficit relationship occupies a central piece of his argument, it is important to be as careful here as possible.

Accordingly, here are some possible ways to appease more skeptical readers. To properly rule out the possibility that other large components of the U.S. budget were driving the observed deficits, it may be worthwhile to control for the ballooning of Medicaid/Medicare and health-care spending. Additionally, given the automatic stabilizer–laden nature of the federal budget, it would be useful to cyclically adjust the dependent variable (budget-balance-to-GDP ratio), although Oatley does control for the business cycle by including a proxy in the form of the unemployment rate. Lastly, in its present form, his regression models control for tax cuts by incorporating binary (0/1) variables to connote years in which a tax cut was enacted. This could also be replaced with more direct measures, for example (marginal) tax rates, since using year dummies merely controls for temporal factors alone.

Of the possible confounding factors, tax cuts probably warrant the most attention, since large tax cuts coincided with two of the three military buildups in Oatley’s sample. The author interprets his regression results to conclude that tax cuts by themselves played little role in changing budget balances. Yet, his results (Table 3.1, p. 66) also show a strong and highly significant positive relationship between budget-balance-to-GDP ratio and government revenue, much more significant than the relationship between budget-balance-to-GDP ratio and military spending. To me, this is evidence that we cannot rule out tax cuts as the responsible party for budget deficits.

In conclusion, Oatley posits a causal chain comprised of five main links, which can be summarized as follows: security threat → military buildup → budget deficit → strong capital inflows → credit booms → financial crisis.

To accept his conclusions, one must assess the reliability of each link in the causal chain, which to his credit he has done. Yet many of these links are the subject of debate in the literature. For example, credit booms are probably at most a necessary condition for banking crises, not sufficient. The correlation between strong capital inflows and credit booms is also weaker than often thought (see Puspa Amri, Greg Richey, and Thomas Willett, “Capital Surges and Credit Booms: How Tight Is the Relationship?” Open Economies Review [September 2016]: 637−70). As such, it can be expected that readers will come away more or less convinced regarding some of the causal chain’s links than others.