Saturday, November 14, 2009
Would Our Government Really Start a War to Try to Stimulate the Economy?
I've written two essays attempting to disprove "military Keynesianism" - the idea that military spending is the best stimulus. See this and this.
In response, a reader challenged me to prove that anyone would advocate military spending or war as a fiscal stimulus.
In fact, the concept of military Keynesianism is so widespread that there are some half million web pages discussing the topic.
And many leading economists and political pundits sing its praises.
For example, Martin Feldstein - chairman of the Council of Economic Advisers under President Reagan, an economics professor at Harvard, and a member of The Wall Street Journal's board of contributors - wrote an op-ed in the Journal last December entitled "Defense Spending Would Be Great Stimulus".
And as the Cato Institute notes:
Bill Kristol agrees. Noting that the military was "spending all kinds of money already," Mr. Kristol wondered aloud, "If you're buying 2,000 Humvees a month, why not buy 3,000? If you're refurbishing two military bases, why not refurbish five?"Professors of political economy Jonathan Nitzan and Shimshon Bichler write:
***This is not the first time that defense spending has been endorsed as a way to jump-start the economy. Nearly five decades ago, economic advisers to President Kennedy urged him to increase military spending as an economic stimulus...
Similar arguments are heard today. The members of Connecticut's congressional delegation have been particularly outspoken in their support for the Virginia-class submarine, and they haven't been shy about pointing to the jobs that the program provides in their home state. The Marine Corps' V-22 Osprey program wins support on similar grounds. Despite serious concerns about crew safety and comfort, the V-22 program employs workers in Pennsylvania, New Jersey, Delaware and Texas, and a number of other states.
Theories of Military Keynesianism and the Military-Industrial Complex became popular after the Second World War, and perhaps for a good reason. The prospect of military demobilization, particularly in the United States, seemed alarming. The U.S. elite remembered vividly how soaring military spending had pulled the world out of the Great Depression, and it feared that falling military budgets would reverse this process. If that were to happen, the expectation was that business would tumble,unemployment would soar, and the legitimacy of free-market capitalism would again be called into question.Are they right about NSC-68?
Seeking to avert this prospect, in 1950 the U.S. National Security Council drafted a top-secret document, NSC-68. The document, which was declassified only in 1977, explicitly called on the government to use higher military spending as a way of preventing such an outcome.
Well, PhD economist Robert Higgs confirms the importance of NSC-68:
Previously administration officials had encountered stiff resistance from Congress to their pleas for a substantial buildup along the lines laid out in NSC-68, a landmark document of April 1950. The authors of this internal government report took a Manichaean view of America’s rivalry with the Soviet Union, espoused a permanent role for the United States as world policeman, and envisioned U.S. military expenditures amounting to perhaps 20 percent of GNP. But congressional acceptance of the recommended measures seemed highly unlikely in the absence of a crisis. In 1950 “the fear that [the North Korean] invasion was just the first step in a broad offensive by the Soviets proved highly useful when it came to persuading Congress to increase the defense budget.” As Secretary of State Dean Acheson said afterwards, “Korea saved us.” The buildup reached its peak in 1953, when the stalemated belligerents in Korea agreed to a truce.And Chalmers Johnson - Professor emeritus of the University of California, San Diego, and former CIA consultant - writes:
This is military Keynesianism — the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.You can read NSC-68 here.This ideology goes back to the first years of the cold war. During the late 1940s, the US was haunted by economic anxieties. The great depression of the 1930s had been overcome only by the war production boom of the second world war. With peace and demobilisation, there was a pervasive fear that the depression would return. During 1949, alarmed by the Soviet Union’s detonation of an atomic bomb, the looming Communist victory in the Chinese civil war, a domestic recession, and the lowering of the Iron Curtain around the USSR’s European satellites, the US sought to draft basic strategy for the emerging cold war. The result was the militaristic National Security Council Report 68 (NSC-68) drafted under the supervision of Paul Nitze, then head of the Policy Planning Staff in the State Department. Dated 14 April 1950 and signed by President Harry S Truman on 30 September 1950, it laid out the basic public economic policies that the US pursues to the present day.
In its conclusions, NSC-68 asserted: “One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living”.
With this understanding, US strategists began to build up a massive munitions industry, both to counter the military might of the Soviet Union (which they consistently overstated) and also to maintain full employment, as well as ward off a possible return of the depression. The result was that, under Pentagon leadership, entire new industries were created to manufacture large aircraft, nuclear-powered submarines, nuclear warheads, intercontinental ballistic missiles, and surveillance and communications satellites. This led to what President Eisenhower warned against in his farewell address of 6 February 1961: “The conjunction of an immense military establishment and a large arms industry is new in the American experience” — the military-industrial complex.
By 1990 the value of the weapons, equipment and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in US manufacturing. From 1947 to 1990, the combined US military budgets amounted to $8.7 trillion. Even though the Soviet Union no longer exists, US reliance on military Keynesianism has, if anything, ratcheted up, thanks to the massive vested interests that have become entrenched around the military establishment.
Leading political journalist John T. Flynn wrote in 1944 :
Militarism is the one great glamorous public-works project upon which a variety of elements in the community can be brought into agreement.But Flynn warned that:
Inevitably, having surrendered to militarism as an economic device, we will do what other countries have done: we will keep alive the fears of our people of the aggressive ambitions of other countries and we will ourselves embark upon imperialistic enterprises of our own.Indeed, the creator of the theory of military Keynesianism himself warned that those who followed such thinking would fearmonger, appeal to patriotism and get us into wars in order to promote this kind of economic "stimulus". As The Independent wrote in 2004:
I disagree that this is a partisan issue. The Independent piece portrays the "neo-liberal right" as special warmongers; I don't believe there is much difference with the "neo-liberal left", or "neo-conservative right", or whatever. Indeed, political labels are fairly meaningless. What is important is the actions one takes, not his rhetoric about his actions.Military-fuelled growth, or military Keynesianism as it is now known in academic circles, was first theorised by the Polish economist Michal Kalecki in 1943. Kalecki argued that capitalists and their political champions tended to bridle against classic Keynesianism; achieving full employment through public spending made them nervous because it risked over-empowering the working class and the unions.
The military was a much more desirable investment from their point of view, although justifying such a diversion of public funds required a certain degree of political repression, best achieved through appeals to patriotism and fear-mongering about an enemy threat - and, inexorably, an actual war.
At the time, Kalecki's best example of military Keynesianism was Nazi Germany. But the concept does not just operate under fascist dictatorships. Indeed, it has been taken up with enthusiasm by the neo-liberal right wing in the United States.
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Conservatives are being disingenuous when they say that fiscal policy is ineffective to stimulate the economy. That's just a ploy to direct fiscal policy away from social spending and into military (crony) spending. Both social and military spending are stimulative. The dollars spent into the economy are all the same. In the case of social spending they go into socially beneficial programs. In the case of military spending they go into the military-multinational complex.
ReplyDeleteAccording to conservatives government spending on social program is "wasteful," "fiscally irresponsible," "picks money from people's pockets," "Indentures future generations," and "results in higher taxes." Conversely, military spending is "vital to national security." That is a myth based on a political choice. It is grounded on conservative values, and it involves misrepresentation of how the economy actually works.
The fact is that all government spending increases non-government net financial assets and all surpluses decrease these assets. A sovereign government that is the monopoly provider of a non-convertible currency in a flexible exchange rate regime is not revenue constrained. The government needs neither to borrow nor tax in order to spend, as households do. Because of this erroneous analogy, the fiscal responsibility meme resonates with those ignorant of the monetary system and national accounting.
The only constraint on the creation of HPM or base money (physical currency and bank reserves) is real. As long as the government is not competing with non-government for goods and services already produced or capable of being produced without exceeding full capacity, demand-pull inflation as increase of money in excess of production is not a problem caused by government spending.
The problem with military spending is that it is inherently inflationary because the dollars spent are not counterbalanced by domestic goods and services, creating a excess of money in relation to goods and services for purchase in the domestic economy. This is OK when there is an output gap, but it is not OK when there is not. But military spending is independent of the domestic economy and is not normally cut back when the economy reaches full capacity. This produces inflation unless some of the excess is extracted, e.g., by raising taxes. Most politicians haven't got a clue about how the monetary system works anyway, and even if some do, raising taxes is difficult politically for any reason.
The government's stimulating the economy when there is a significant output gap with high unemployment does not result in inflation unless it is continued after the output gap is closed and full employment is reached. (Inflation can also occur through excessive credit money being generated by bank lending. But commercial bank leverage and the shadow banking system are another story.)
The question then arises, if military spending were shifted to domestic social programs that are permanent, hence independent of the economic cycle, wouldn't this be inflationary in the long run also. Not as long as the spending is balanced with corresponding non-government production for the domestic economy, so that government spending is not competing with private sector demand for scarce goods and services.
The reality is that at the time this strategy was embarked upon, the USG had little or no experience with big ticket/programs except for the military. Even as late as the Kennedy Administration, Defense was still the major expenditure. WWII in particular was the first war to highlight the impact of USG R&D in terms of rocket technology, radar, jet aircraft, etc.
ReplyDeleteSince the 1950, we now have other examples of USG embarking on indirect economic stimulation by spending in areas that the private sector doesn't otherwise operate in. Partenering with the military has provided a good segueway: NASA is a good example of this. Weather forecasting, telecommunications, broadcast, etc. are all examples of industries that have arisen as a result of the NASA investment.
Another investment that was embarked upon initially for a quasi-military reason was the Interstate road system. The original impetus was to be able to move military equipment across the country efficiently. The end result was a road system that greatly improved civilian mobility and created spaces for incubators for new business: think of all those small startups around beltways of big cities.
Basic science R&D at universities is another example of USG investment in areas that most private entities would regard as too distant for a ROI to invest in.
The point is that the USG has plenty of other places to dump lots of spending that would prove quite productive in the long run. Some better places for Keynesian investment would be upgrading the nation's electrical grid or building some high speed rail lines between large cities in the Midwest (think Chicago to Houston). Leave air travel for the crowded coasts and transcontinental.
Your blog is the top public affairs blog on the web. Witness the response your post generated on Zero Hedge. Congratulations...keep firing!
ReplyDeleteIn response to the title of this article, the answer would be, "Uh, is the Pope Catholic?"
ReplyDeleteI just had a look thru NSC-68. The above mentioned characterisation of it by Jonathan Nitzan and Shimsshon Bichler is totally false.
ReplyDeleteThey claim, to quote from above that "the expectation was that business would tumble, unemployment would soar". They also claim that NSC-68 "explicitly called on the government to use higher military spending as a way of preventing such an outcome".
NSC-68 certainly argues that the US needs to spend large sums on the military to deal with the Soviet threat. And it is possible that the HIDDEN motive was as JN and SB claim (in which case they need to produce the evidence). But certainly the central thrust of this document is NOT to promote military spending as a way of boosting the economy. Indeed I did'nt see ANYTHING to this effect.
To Ralph
ReplyDeleteThe NSC-68 recommends increases in military spending and reductions in civilian spending:
“A substantial increase in expenditures for military purposes adequate to meet the requirements for the tasks listed in Section D-1.”
“Reduction of Federal expenditures for purposes other than defense and foreign assistance, if necessary by the deferment of certain desirable programs.”
The report then claims that such a shift from civilian to military spending would have the following impact:
“From the point of view of the economy as a whole, the program might not result in a real decrease in the standard of living, for the economic effects of the program might be to INCREASE the gross national product by more than the amount being absorbed for additional military and foreign assistance purposes. One of the most significant lessons of our World War 11 experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living. After allowing for price changes, personal consumption expenditures rose by about one-fifth between 1939 and 1944, even though the economy had in the meantime increased the amount of resources going into Government use by $60 $65 billion (in 1939 prices).”
These quotes to me fairly straightfoward.
Regarding the quote from Chalmers Johnson, "By 1990 the value of the weapons, equipment and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in US manufacturing."
ReplyDeleteis there any more up to date 2009 information on the current value of weapons, equipment and factories devoted to the Department of Defense?
If it was 83% 19 years ago, it could only have grown.
How was this estimate arrived at?