Wednesday, December 29, 2010

The Feds have thrown away $5 trillion on wasteful "stimulus"

Has American Military Spending Really Been a Form of Keynesian Stimulus?

This is a major issue—major like a hole in the head: The United States spends over 6% of its GDP on the military—more, if you add the money spent on wars in Afghanistan and Iraq. (And by the way: The self-delusion that keeps those two wars “off the books”? Astonishing—but that’s for another time.)
Since the U.S. is the largest economy in the world, that +6% means that America spends more on the military than the rest of the world combined—with room to spare.Right there, you know something’s gone horribly wrong.
In Falling Forward, I argued that this enormous military created the need to find a new enemy, now that the Soviet Union is no more, and the nations of the former Warsaw Pact are busy trying to join NATO, rather than fight it.
But there’s another thing we should be looking at, when we examine this enormous military spending, especially over the last 20 years: Shouldn’t we really be thinking of it as an enormous stimulus program—a Keynesian stimulus program of the first order?
Military spending as a form of Keynesian stimulus is not an original argument—in fact, it’s been advocated, even by a few non-Keynesians: A couple of years ago, Martin Feldstein wrote a piece in the Wall Street Journal called “Defense Spending Would Be Great Stimulus”—the title pretty much says it all.For his part, Paul Krugman wrote a piece back in September called “1938 in 2010”, where he basically argued that World War II deficit spending got the United States out of the Great Depression, and created the conditions for the Post-War Boom—so wouldn’t it be wonderful if something similar happened today (i.e., like a war). Krugman’s argument was not merely flawed—and not merely immoral—but in fact Krugman’s argument depended on fudged data, as I demonstrated here.David Broder also got on the war-is-good-for-the-economy bandwagon: He wrote a Washington Post editorial for Halloween called “The War Recovery?”, essentially spelling out what Krugman was too slippery and chickenshit to say out loud except through mealy-mouthed, throwing-a-rock-and-hiding-your-hand inference: Wouldn’t a war be great to stimulate the U.S. economy into growing again?These three writers are all saying the same thing: American military spending would be a great way to get the U.S. economy back on track.However, these three writers were all making forward arguments: The American economy that is in the doldrums today would improve tomorrow if the economy was stimulated via more military spending—especially with a war.But what about the past? Consider this chart:

U.S. Military spending as percentage of GDP, 1800–2010. Source and data is here. Looking at the chart, you can see that aside from the War of 1812, the Civil War, and the First World War, military spending in the United States rarely crossed the 2% of GDP threshold—up until the Great Depression.It was during the Great Depression that military expenditures began to steadily rise—long before the threat of Nazi Germany and Imperial Japan were readily apparent. It can be seen in the above chart as a percentage of GDP, but it can also be seen more starkly in the chart below, in nominal terms:

Same source as above.As you can see, the Hoover administration cut military spending with the advent of the Great Depression—but the Roosevelt administration increased it dramatically, even though there was no imminent threat of war.Military expenditures for 1935—the first big bump up—were decided in 1933–‘34: No one would argue in 1934 that world war was even remotely a possibility—especially considering the United States’ isolationist stance following the First World War. No one even in 1939 would have argued that a war involving the U.S. was imminent. After September of ‘39, maybe one could argue that there might be a European war—though the Phoney War/Sitzkrieg of ‘39–‘40 would have severely undercut the argument for an imminent European war. That the United States would be dragged into a possible European war? No way, especially considering the prevalent notion (in 1939) that France was more than a match for Germany.So the only way to interpret the rise in American military expenditure between ‘34 and ‘40 was as part of the New Deal spending to stimulate the economy: In other words, it was Roosevelt who invented the notion of military spending as a way to prop up the economy—Keynesian militarism.There are a number of reasons why I am extremely leery of government spending programs as a way to stimulate the economy: One is, Keynesian stimulus is often as not ham-fisted, misallocating resources so badly that it might as well be thought of as throwing money away. A second is, Keynesian stimulus creates an economic dependence of the private sector on the public sector. In a democracy, this creates the incentive for the dependent private sector to lobby politically, so as to maintain the “stimulus”, which becomes like an addictive drug—a necessary prop for economic survival. A third objection—relevant to the specific case under discussion—is that Keynesian stimulus spending on the military creates a larger military, and a momentum to actually deploy that military; that is, Keynesian military spending stimulus creates the incentive to launch wars of aggression.From a Keynesian perspective, however, a growing military is an ideal way to stimulate the economy: By definition, all military spending is consumption, not investment. Military equipment will either be destroyed in war, or discarded for the sake of newer equipment. Therefore, government spending on the military is a sure-fire way to pump demand into the economy—Keynesians’ idée fixe. (Using the French is so much better than using a good ol’ American word like hobbyhorse, or maybe fixation, or maybe even mania.)If the increase of military expenditure from 1934 to 1940 was nothing more than Keynesian stimulus, then the military spending from 1941 through 1991 was for real. The only way to look at that period of historically disproportionate American military spending was as a byproduct of the United States fighting both World War II and the Cold War (which I will analyze in a future post as a single continuing Long War).I don’t have any objection to the military spending between ‘41 and ‘91, and I don’t think anyone else should, either—it was obviously necessary. Why? Because the war between ‘41 and ‘91 with the Romantic Totalitarian Dictatorships (Nazi Germany, Imperial Japan and Soviet Russia) was a life-and-death struggle—a struggle for the survival of Enlightenment ideals of democracy, secularism, egalitarianism, the Rule of Law, and generalized decency.However, following the end of the Long War in 1991—as I argued in Falling Forward—the United States did not embark on a period of de-militarization. Instead, military spending continued apace—even though there was no imminent need or threat.In other words, since most of the military spending the U.S. carried out between 1991 and 2010—including the entirety of the unnecessary, illegal, immoral war in Iraq—was not strictly necessary in order to preserve the existence of the United States, then that military spending should be thought of as nothing more than government stimulus spending à la Keynesian economics.

Keynesian stimulus, AKA mothballed fighter jets.The key assumption of my argument is that nothing following the collapse of the Soviet Union—including the terrorist incident of Sept. 11, 2001—has come even close to representing a true threat to the existence of the United States. This is an easy assumption to defend—especially in light of the real threats posed by Nazi Germany, Imperial Japan and Soviet Russia during the Long War. Any confused soul who thinks that Islam represents an even remotely comparable existential threat to the United States as the Romantic Totalitarian Dictatorships needs to seriously get themselves to the library.To briefly defend this key assumption: No potential military adversary of the United States has had any military or territorial designs on either American soil, American allies, or American interests since 1991. This includes all of the top ten largest militaries in the world, including the European Union member states, China, post-Soviet Russia, India, or any other nation with a credible military power, including Iraq under Saddam Hussein.Therefore, if we consider that historically, the U.S. has only needed to spend on average about 1.5% of its GDP in order to defend itself, we can think of the difference as the amount of stimulus the Federal government injected into the U.S. economy.To make the math easy, let’s assume an even 2% of GDP is the cost of effectively defending the United States. And let’s assume that a true “peace dividend” would not have begun immediately after the end of the Cold War in 1991, but rather in 1994, when it was certain that the Soviet Union was gone and the surviving nation-states were clearly no military threat.Using the data I sourced above: Subtracting 2% of GDP from the actual figures for the years 1994 to 2010—not including what has been spent on the wars in Afghanistan and Iraq, which are kept off-book—I get a total savings of $4.7 trillion.$4.7 trillion—that’s the amount of Keynesian stimulus the excessive military spending wrought on the American economy between 1994 and 2010.Or think of it another way: If we include the interest on Treasury debt added roughly 20% to the tab, then more than 40% of the total U.S. Federal government debt—$5.6 trillion—is due to the excessive military stimulus spending.Military spending is non-productive consumption—it is waste. So that’s how much the United States has wasted on needless military Keynesian stimulus spending:$4.7 trillion. Plus interest.The next time some Keynesian Klown tells you that what the U.S. economy really needs is for the Federal government to “get serious and put more stimulus into the economy—the last stimulus package just wasn’t enough”—go ahead and mention the $4.7 trillion of military stimulus, and $5.6 trillion of debt.How’s that for some stimulation?

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