Institutional Foundations of Financial Power 9 economic growth with all the attendant advantages for international competition, including a larger tax base and political stability.Access to cheap and abundant credit thus permits states to raise substantial funds and to do so in a way that lowers the economic costs of sustaining military conflict. This is not to suggest that government deficits are good for economic health. Prolonged deficits and debt accumulation can lead to higher interest rates,which raise the costs of borrowing for private actors.Given that a state has international ambitions that require extraordinary expenditures,however,a tax-smoothing pol- icy based on the use of public debt is the most efficient strategy for financing those expenditures.30 Thus our argument speaks to the contrast between different strategies of public finance for states involved in international competition but is silent as to whether those states could do better by retreating from their inter- national ambitions in the first place. This logic helps link Rasler and Thompson's argument about public debt to other strands of the literature on hegemonic rivalries.31 Two prominent schools deserve mention.32 "Long cycle"theorists,such as Modelski,and Modelski and Thomp- son,have emphasized the role of sea power in establishing global leadership and defeating potential challengers.33 They show that every hegemonic power man- aged to amass overwhelming power projection capabilities-primarily naval power, but also long-range aircraft and intercontinental missiles."World economy"theo- rists,such as Wallerstein and Chase-Dunn,have argued that global leadership rests on a combination of economic,commercial,and financial power.34 While acknowl- edging the role of public credit,they consider uneven economic growth to be the primary factor in determining the relative power of states.Global leaders,in this view,were those states that managed to outgrow their competitors economically. Rather than contradicting these arguments,we suggest both depend in part on differential access to public debt;indeed,this factor links the two strands in a hitherto unappreciated way.States that prevailed in the conflicts identified by this literature were able to amass and sustain preponderant power projection capabili- ties and to do so without compromising economic growth.As we just saw,effi- cient use of public debt plays a crucial role in making this possible. 30.While access to credit makes tax smoothing possible,it does not guarantee that states will al- ways enact such a policy.Other factors,such as short-term political needs or international strategic conditions,affect the actual mix of taxes and debt that states use to finance any particular war.During World War II,for example,Britain departed from 200 years of tradition and relied heavily on the taxation of capital income,largely because of the ideas and influence of Keynes.Cooley and Ohanian show that postwar economic growth in Britain was lower as a result of this policy than it would have been if the government had kept taxes level and raised the same amount of money through debt.See Cooley and Ohanian 1997. 31.Rasler and Thompson 1983. 32.For a more complete comparison of the long cycle and world economy schools,see Thompson 1983b. 33.Modelski 1978;see also Modelski 1983;and Modelski and Thompson 1988. 34.Wallerstein 1979;see also Wallerstein 1980;and Chase-Dunn 1981.Institutional Foundations of Financial Power 9 economic growth with all the attendant advantages for international competition, including a larger tax base and political stability. Access to cheap and abundant credit thus permits states to raise substantial funds and to do so in a way that lowers the economic costs of sustaining military conflict. This is not to suggest that government deficits are good for economic health. Prolonged deficits and debt accumulation can lead to higher interest rates, which raise the costs of borrowing for private actors. Given that a state has international ambitions that require extraordinary expenditures, however, a tax-smoothing pol￾icy based on the use of public debt is the most efficient strategy for financing those expenditure^.^' Thus our argument speaks to the contrast between different strategies of public finance for states involved in international competition but is silent as to whether those states could do better by retreating from their inter￾national ambitions in the first place. This logic helps link Rasler and Thompson's argument about public debt to other strands of the literature on hegemonic ri~alries.~' Two prominent schools deserve mention." "Long cycle" theorists, such as Modelski, and Modelski and Thomp￾son, have emphasized the role of sea power in establishing global leadership and defeating potential challengers.33 They show that every hegemonic power man￾aged to amass overwhelming power projection capabilities-primarily naval power, but also long-range aircraft and intercontinental missiles. "World economy" theo￾rists, such as Wallerstein and Chase-Dunn, have argued that global leadership rests on a combination of economic, commercial, and financial power.34 While acknowl￾edging the role of public credit, they consider uneven economic growth to be the primary factor in determining the relative power of states. Global leaders, in this view, were those states that managed to outgrow their competitors economically. Rather than contradicting these arguments, we suggest both depend in part on differential access to public debt; indeed, this factor links the two strands in a hitherto unappreciated way. States that prevailed in the conflicts identified by this literature were able to amass and sustain preponderant power projection capabili￾ties and to do so without compromising economic growth. As we just saw, effi￾cient use of public debt plays a crucial role in making this possible. 30. While access to credit makes tax smoothing possible, it does not guarantee that states will al￾ways enact such a policy. Other factors, such as short-term political needs or international strategic conditions, affect the actual mix of taxes and debt that states use to finance any particular war. During World War 11, for example, Britain departed from 200 years of tradition and relied heavily on the taxation of capital income, largely because of the ideas and influence of Keynes. Cooley and Ohanian show that postwar economic growth in Britain was lower as a result of this policy than it would have been if the government had kept taxes level and raised the same amount of money through debt. See Cooley and Ohanian 1997. 31. Rasler and Thompson 1983. 32. For a more complete comparison of the long cycle and world economy schools, see Thompson 1983b. 33. Modelski 1978; see also Modelski 1983; and Modelski and Thompson 1988. 34. Wallerstein 1979; see also Wallerstein 1980; and Chase-Dunn 1981