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Defense Spending and the Economy: The Pitfalls of Military Keynesianism


By David Shreve, for MIC50.org

“You cannot qualify war in harsher terms than I will. War is cruelty and you cannot refine it; and those who brought war into our country deserve all the curses and maledictions a people can pour out.”

--William Tecumseh Sherman, September 1864

When departing President Dwight Eisenhower warned of the “grave implications” of the “military industrial complex” in his January 17, 1961 valedictory, two ideas appeared paramount. The first stemmed from Ike’s ongoing concern for fiscal soundness and reflected his belief that an influential and emasculating cadre of newly permanent war contractors (and a university-based “technological elite” who worked increasingly on their behalf) threatened federal budget balance and what Ike implied to be a critical economic balance, “between the private and the public economy.” To many of his Republican cohorts, unable to summon the leavening of Bryce Harlow’s or Ralph Williams’s speechwriting, this secondary peril of imbalance was “creeping socialism,” the surpassing domestic threat to which they devoted great political and rhetorical energy.[1] The second of the key ideas in the outgoing president’s address mirrored his belief that the increasingly outsized budgetary demands of this “complex” threatened also “the material assets of our grandchildren” and, implicitly, in his eyes, the nation’s ability to foster “human betterment.” Here, Ike offered little novelty, for he was merely repackaging the “debt as a burden on our grandchildren” mythology, fought and subdued by Alexander Hamilton in the earliest days of the American republic, but which is also nearly as old as civilization itself and as resistant to a contradictory reality as any longstanding fable.

Though Eisenhower had not just imagined the rise of such a “complex,” which was increasingly powerful and a source of no small number of economic weaknesses, his general economic concern made little sense, betraying his limited knowledge of economic theory and of the sound policy that might flow even from the most superficial command of its most basic precepts. Put another way, Ike’s inability to understand Keynesian economic policy transformed his cautionary address into a treatise on problems that did not exist and which were unlikely to emerge, but which also glossed over the real peril of a military industrial complex and the sub-par, clumsily designed political economy that it helped reinforce.

The most critical error was the 34th president’s conception of deficit spending and public debt. In what remains a very common and unfortunately compelling misjudgment, Eisenhower simply failed to understand that public debt has to be viewed most generally on two critical dimensions, neither of which resembled anything within his ill-formed conception of sound economic policy.

On the first, it represents the assets demanded by a capitalist economy, as a safe productive outlet for the savings it generates. It is precisely this role—creating assets based on the full faith and credit of an entire nation and its economy—that Hamilton envisioned as the bulwark of the new nation, and which moved him to call the federal debt our “national blessing.”

On the second, it is the vehicle by which essential redistribution—without which capitalism cannot prosper or survive—can be transmitted sufficiently enough to provide both an economically critical level of public goods and services and a requisite level of aggregate demand. As Keynes demonstrated, a fiscal policy constructed on progressive taxation always did some of this essential building of aggregate demand—by taxing at higher rates those who tended to save more of their income, and by spending in a way that bestowed the greatest benefit on those who tended to spend more of their income.[2] Regular but varying doses of deficit spending ensured—along with a regime of low long-term interest rates—that this bolstering of aggregate demand via fiscal policy redistribution would be sufficient to deliver full employment (see Figure 1).

What this implies, then, is that the level of federal (or federalist, including state and local) governmental debt has to be predicated upon economic activity, which is predicated largely on other dimensions of fiscal and monetary policy and how it may discourage or exacerbate the economic inequality generated always by the otherwisefreely functioning marketplace for goods and services. If policy exacerbates or leaves untouched natural levels of inequality, in other words, which tend to rise automatically in a laissez-faire economy, it will reduce economic activity, increase savings relative to consumption, and reduce the likelihood that privately generated assets can be secure or profitable enough to absorb the new higher level of savings without significant loss. The resulting equation is simple: if the nation desires full employment and opportunity, rising inequality in a laissez-faire regime or rising inequality in a mixed economy with too little redistribution requires deficit spending and rising levels of debt. Indeed, because the natural tendency toward inequality is so profound in modern capitalist economies, deficits of some magnitude are almost always required and surpluses can be tolerated only briefly and only at the full employment apex of a fairly long period of steady employment growth. This why all eleven periods of annual federal budget surplus in the twentieth century, covering a total of thirty-one years, gave way quickly to periods of officially recognized recessions. (see Figure 2)

Keynsean Chart

Figure 1. The Keynesian Recipe for Full Employment

 

Those made uneasy by the very idea of indebtedness—like Ike or Virginia’s Senator Harry Byrd—could have logically assuaged their anxiety, then, by attending to inequality first and by promoting sufficient indebtedness while policy chipped away at inequality. As it always has, the resulting increase in demand, employment, and revenue would then begin to lessen annual deficits and overall debt precisely when they become less necessary for overall economic balance. To make matters even simpler, most of the heavy lifting in this regard could have been and still can be done simply by imposing graduated income taxes and spending the proceeds on goods and services that modern civilization requires (roads, public safety, education, and health care), goods and services that everyone needs in such a civilization, and which employ a lot of not-so-rich citizens to make it all happen. Given the stubborn persistence of discrimination, disability, and dislocation in the real world, direct aid (“welfare” or “transfer payments”) is always necessary, too, but if the core business of taxing progressively and spending on required public goods is done fully and consistently enough, such direct aid need not be very large, and the required amount is likely to shrink rather than grow.

 

 

Surplus Years

Officially Recognized Recessions

1901-03

September 1902-August 1904

1906-07

May 1907- June 1908

1911-12

January 1913- December 1914

1916

August 1918-March 1919

1920-30

May 1923-July 1924

 

October 1926-November 1927

 

August 1929-March 1933

1947-1949

November 1948-October 1949

1951

July 1953-May 1954

1956-57

August 1957-April 1958

1960

April 1960-February 1961

1969

December 1969-November 1970

1998-2001

March 2001-November 2001

Figure 2. U.S. Budget Surplus Years & Recessions

      

Taking a cue from Ike and Harry Byrd, instead, by ignoring inequality and by attempting to reduce debt only by limiting its issuance, would only introduce a vicious cycle and make progressively larger the amount of debt that corresponds with full employment and widespread prosperity. And though Eisenhower was rebuffed by his own affinity for highway building, by the preservation and occasional expansion of the New Deal at the behest of a still robust Democratic opposition—particularly in housing assistance, agricultural subsidy, and Social Security—and by the lagged effects of the Korean War spending bulge, he did successfully impose debt limitations of this second, counterproductive type. Budget surpluses were engineered in 1956 and 1957, and again in the presidential election year 1960, and recessions followed immediately thereafter in each case, running from August 1957 to April 1958 and from April 1960 to February 1961. While the maintenance of a fairly progressive federal tax structure ensured that the austerity “offset” did less overall damage to the economy than it would have in its absence, in his second term Ike also ignored what Keynes considered the “general” imperative of his General Theory, pushing up interest rates instead in a futile attempt to stave off inflation and making it harder still for savings to find sufficiently secure and profitable assets of any type. And since 1951 was also a budget surplus year—followed by all too modest deficit spending in 1952 and 1953, Ike seemed to be setting a troubling pattern, having presided over the first of his administration’s three recessions only months into his first term, in this case from July 1953 to May 1954.

Given the way in which Truman administration austerity dovetailed with that of his successor, Eisenhower’s contention that the Korean conflict may well have been avoided if Truman had not removed U.S. troops from South Korea in 1948—to reduce that year’s federal budget—remains both ironic and prophetic.  When Eisenhower moved aggressively to reduce defense expenditures on his own, from an estimated $526 billion at the beginning of his presidency to $382 billion at the end (in 2011 dollars), he did so largely by introducing what he called the New Look national security strategy—substituting inexpensive covert action and a massive nuclear threat for relatively expensive troops and bases and tanks and artillery. A plausible argument can be made that it was the overarching emphasis on covert action and nuclear brinkmanship inherent to the New Look transformation that trapped the U.S. in Vietnam in the late 1950s, stoking civil war and communist predation and necessitating a fateful choice between compete abandonment or a potentially difficult and protracted hot war response in the 1960s. At the least, Defense Secretary Wilson’s blindness to any criticism of this approach—even from the ranks of the military’s general officers—made it appear that this fateful dilemma was not emerging  to any extent, critical or not, and the American people soon became “trapped by success” in Southeast Asia.[3] However idiosyncratic and irrational the diplomacy of that period may have been—driving outcomes that may be regarded also as idiosyncratic—two lessons were felt and could be at least dimly comprehended in retrospect: defense reductions made not in the name of conversion or efficiency but budgetary austerity alone could possibly engender a dangerous power vacuum; and, though much less clearly or powerfully felt, the same austerity, however it may been generated, was very likely to produce also increased joblessness and recession.

These still very resonant historical lessons, however, are felt much more readily than they are understood and are still viewed much too completely through a glass darkly. We like and expect Keynesian results, but we accept Keynesian policy only when it is disguised, clothed in military armor or in the agreeable tailoring of “trickle down” tax cuts. We can get low long term interest rates, in other words, if there is a serious recession or a need to recapitalize banks, but it cannot be introduced, as Keynes urged, in the form of conventional policy and as a critical part of a “general” theory, for times good and bad. We can get some measure of deficit spending, too, but only as a temporary stimulus and, especially in the most recent generation, only when the deficits are generated mostly or completely by tax cuts or by additions to the nation’s military budget. When Dick Cheney argued that “deficits don’t matter,” it was precisely this rationale that substantiated his otherwise odd and somewhat surprising declaration.

 Moreover, because deficits generated in this manner automatically weaken the essential redistributive power of deficit spending, they tend to convince casual observers of two counterproductive economic policy myths: that Keynesian deficit spending in general is either completely ineffective or much less effective than it once was; and that the tax cuts or the military spending increases, by which the deficits are now often introduced, were in themselves the principal, even irreplaceable catalysts but simply too small or too temporary to do the requisite economic stimulus. Few ever see through to the essential reality: that deficit spending per se remains a critical tool for economic stimulus, full employment, and even the survival of capitalism, and that the generation of deficits with tax cuts and defense contracts only dilutes their impact and the cogency of a policy constructed around them.

The first lesson of the Eisenhower years, in which defense cuts threaten national security, is also greatly misconstrued. It is typically accepted by some as a story of principal cause and effect, in which cuts of any type equal insecurity. But it is really something else all together, transforming economic and social insecurity abroad and the fateful passions of nationalism and revolution that often coincide with such insecurity, into prolonged conflict, not because of reduced military spending in general but because an emphasis on reduced spending of all types fundamentally altered the way in which military spending was undertaken.  New military schemes and postures—put into motion by a strange combination of austerity and the false bravado of the strategic bombers—likely had some role in trapping us in a conflict that few expected or estimated accurately, even if defense spending reductions, per se, were not the critical factor.

Fast forward to the Lyndon Johnson administration, and we see the same misunderstanding and policy confusion in its diametrically opposed form. In an administration that understood and embraced Keynesian fiscal and monetary policy, and which fostered the kind of basic redistributive taxation, public investment, and low interest rate policy that can alone deliver the economy we’ve always been promised, such policy has usually been ignored. Spending for the ugly war in Vietnam garners both far too much credit for the positive economic results that ensued and too much blame for the unraveling of the economy afterward, in the 1970s, when policymakers used Vietnam (too much spending, on “guns and butter”) to reject Keynes even while continuing to expect Keynesian results.

 We tend to forget, for example, that from 1962 to the end of 1966, military spending declined as a percentage of GNP, from 9.5% to 7.3%. Blinded, perhaps, by our hatred of the war that came into our living rooms at the end of this period and a sense that LBJ must have desired it as both an economic crutch and an outlet for his Lone Star ego or cowboy madness, we also forget that he understood better than almost every president before and after him the waste and inefficiency of defense spending. On December 4, 1963, only days into his presidency, President Johnson met with Columbia University professor, Seymour Melman, a well-known scholar of the economics of “conversion,” under which military spending would be transferred propitiously into more socially useful and economically beneficial channels.[4] It was an initiative that he hoped to undertake and sustain, even if it required a carefully calibrated politics and no small measure of traveling quietly under the radar. “I’m catching more hell for seeing [civil rights activist James] Farmer and Melman and all that group than I ever caught from anybody,” LBJ told Assistant Press secretary Andy Hatcher later that month.[5]

He continued to press the case forcefully, despite the political backlash, especially with friends and allies such as United Auto Workers leader Walter Reuther, with whom he spoke on the same evening that he had complained to Andy Hatcher. “I’m closing up all these archaic bases,” Johnson told Reuther, “and I’m stopping the WPA atomic bomb projects, where we’re building atomic bombs that we don’t need, and I’m going to try and give them for human needs….we’ve got 150 Russian submarines. We’ve got 4,000 anti-submarine nuclear weapons, that cost half-a-million apiece. And we’re still building them out of our ears. So let’s save 25 million [dollars] now, and give it to grandma, inside my poverty project.”[6]

To Ambassador Henry Cabot Lodge, early the following year, LBJ issued a lament well known among those who worked with him on a daily basis: “Generals know only two words—spend and bomb.”[7] And a year later he scolded the Joint Chiefs at a private White House meeting: “You’ve done a good job of protecting my two girls for years, but you’re the biggest wasters and spenders in the country.”[8] Even with escalating Vietnam expenditures as a backdrop, there could be little doubt: President Johnson sought Melman’s brand of conversion whenever possible.

We also forget that LBJ never desired the war as a substitute for an economic policy he was somehow too timid or confused or ignorant to bring about. After months of hearing the same message from the president fall increasingly on deaf ears, key Johnson administration economist Walter Heller spoke out in mid-1968: “War in Vietnam—or elsewhere—is not necessary to create jobs and to keep factories humming in America. Nor is it such a drain on the economy that we have to give up our wars on poverty, slums, ignorance, and pollution here at home…wars do generate demand and thus enlarge total spending, income, jobs, profits, and production. But today we can do all of these things in other ways and do them far better.”[9]

 In effect, Heller was echoing the Keynesian insight he had absorbed as a young economist at the U.S. Department of the Treasury in the 1940s. Writing in 1936, Keynes underscored the same blindness and economic policy timidity that LBJ and Heller tried vainly to abolish. “Pyramid building, earthquakes, even wars may serve to increase wealth,” Keynes noted, “if the education of our statesmen on the principles of classical economics stands in the way of anything better.”[10] After comparing pyramid building and wars to the absurd example of filling old bottles with banknotes, burying them in “disused coal mines,” and then paying citizens to unearth them again, he closed with an implicit challenge: “It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”[11] In retrospect, Keynes may well have been guilty of speaking too indirectly and he may have committed a sin many of his colleagues saw him commit repeatedly throughout his brilliant and illustrious career: assuming that most other people were as sensible as he was, and that they would not misjudge intentionally absurd comparisons designed to underscore plain, unequivocal ideas.

History tells us, however, that policymakers and many citizens have failed utterly to comprehend Keynes’s subtle logic and have failed, therefore, to understand his comparison of military spending to “pyramids and earthquakes.” Even though very few read Keynes in the original, his ideas have often been transmitted poorly and even more poorly understood in their secondary rendering, and we continue to pretend that wars and defense spending represent optimum fiscal policy, if only because powerful opposition, inertia, and widespread miseducation on fiscal and monetary policy encourage political timidity, an intellectually lazy reading of economic history, and both a geographically and temporally limited outlook. We’re likely also victimized by the psychological tendency to misapprehend the very positive outcomes connected to basic progressive economic policy and to conversion—building houses instead of Hummers, as Keynes may have explained it today. On those rare occasions when we have moved in this direction and have met with predictable success, particularly in the 1960s and the 1990s, we have been plagued by the paradox of prosperity; when public policy changes matter a lot, we’re seemingly hard-wired to imagine that they matter little, and that our intrinsic talent and our dedicated effort combine to make the principal difference. Precisely when there is “proof in the pudding,” in other words, when opportunities to exploit talent are magnified, and effort, creativity, and innovation are significantly encouraged—by improved public policy, there exists also the unique challenge of convincing a resistant citizenry that this public policy transformation is worth knowing and sustaining.         .

 Ignoring or spurning the political challenge of this lesson, we stymie economic opportunity and progress in two distinct ways. First of all, we are simply blinded to the potential of genuine progressive economic policy and of Keynesian economics that goes beyond mere deficit spending. For while the compensatory effect of deficit spending is critical, as is a backdrop of low long term interest rate policy, it all works well or not so well depending upon the way in which fiscal policy choices—for taxing and spending—produce ample or somewhat less than ample redistribution. When we accede to significant levels of military Keynesianism, where this effect is weak, we reduce the compensatory power of deficit spending and we ensure that we need bigger doses and, simultaneously, that the potential power of such countercyclical spending becomes both less obvious and much more politically circumscribed.

Secondly, especially if the blindness persists for very long, we also introduce unique structural deficiencies that arise out of a heavy reliance on a degraded military Keynesianism. In significant but not readily observed ways, these deficiencies only magnify the corrosive economic (and political) effects tied directly to the sub-optimal compensatory function noted above. There are at least six of these not commonly recognized structural deficiencies.  

 

The Pitfalls of Military Keynesianism

Low Spin-off potential

As suggested already, compared to spending on education, health care, transportation, or public safety, military spending delivers far less bang for the buck and is a poor choice for stimulus dollars, due mostly to the relatively top-heavy distribution of compensation among military contractors and the increasing absence of mid-20th century mass production or consumer market integration within the ranks of these same corporations. In the run-up to the debate on what would become the American Recovery and Redevelopment Act of 2008, for example, this weakness was underscored clearly in an October 2007 study by Robert Pollin and Heidi Garrett-Peltier at the University of Massachusetts-Amherst. Their conclusion was unequivocal: investment in education, transportation, and health care in particular all helped to create many more job opportunities than comparable investment in the nation’s military; any economic stimulus legislation ought to focus its investments, then, on the segments of the public sector most likely to spur economic activity and job creation (or preservation).[12]

Taking a somewhat longer view than Pollin and Garrett-Peltier, however, reveals an additional and related problem associated with military contracting, a deficiency that weakens further still the already relatively low multiplier associated with a choice to buy more guns than butter. Unlike World War II and even the Vietnam era, in which most military contractors were also producers of goods and services for civilian markets, today’s defense contractor tends to do little else than serve the nation’s war machine, limiting the spin-off effects of research and development and the productive capacity and efficiency of the nation’s key consumer markets. This is true even in the case of increasing amounts of university research and development, where militarization of contracts has proceeded apace largely in an effort to maintain the funding of some basic and applied research. While swords could once much more easily be beaten into ploughshares, and while the production of swords often even subsidized the production of ploughshares on a significant scale, instilling comparatively larger economic advantages in more markets and for more people in the long run, the defense contracting environment today offers far less of this offsetting advantage. One would expect, therefore, to see a long-run multiplier for investments in national security and defense even lower than that suggested by the important Pollin and Garrett-Peltier analysis.

The Hidden and Unacknowledged Corporate Cost Problem  

The nature of these increasingly specialized contracts also tends to produce super-sized profits, keeps more and more affected industries stuck in the “youthful” stage—where monopoly and specialized pricing power reign supreme—and encourages less investment in sustainable business structures built on lower but also much more stable levels of profit. Regarded as permanent features in a political economy that extends steady support to military Keynesianism, these effects damage future economic prospects in two important ways: they encourage and offer a suitable rationalization for expensive top-level compensation that cannot possibly work well in a ‘normal” economy and which engenders significant economy stifling inequality, and they build in relatively opaque inflationary costs that often spur ill-targeted and destructive interest rate increases, as if production worker costs or excess demand were the source of the inflationary momentum. So locked in are we to the false notion that inflation of this type is an indicator of excess demand and that Federal Reserve control of short-term interest rates the only useful tool with which to combat it, that the best we can muster as an alternative to a purely reflexive interest rate response to inflation is the so-called “Taylor Rule,” which recommends interest rate changes based on inflation and the gap between actual and potential output. And even though the prevailing anti-Keynesian or military Keynesian bias has preserved a yawning gap between actual and potential output—keeping Taylor rule monetary policy far enough away from counterproductive and ill-targeted interest rate increases in recent years—this general tendency remains an integral part of our conventional economic policy toolkit, if for no other reason than the way in which defense contractor cost accounting encourages the misapprehension of inflation and the policies that may be used to reduce it. Taken far enough, of course, this is the ancient recipe for stagflation, by which the higher interest rates do two counterproductive things at once: reduce employment by making private investments less profitable and attractive; and increase costs (and the inflation they are designed to control) by ratcheting up the capital costs of the dwindling number of businesses that remain solvent or profitable within such a monetary squeeze. Too remote and opaque to garner much serious attention, this hidden cost problem has shortchanged American productivity and prosperity for decades.

“Gunbelt” Hot and Cold Spots

Such overreliance on a version of Keynesianism that eschews the most universally useful and socially productive economic channels also tends to produce economic hot and cold spots. Though we hear often about the spreading of the wealth of the military contracting regime and the not infrequent efforts to sprinkle these contracts into as many congressional districts as possible, this is limited significantly by sunk costs, by the prevailing power of committee-based appropriation, by the low spin-off potential noted above, and by the ultimately limited political geography of the “gunbelt.”[13] While everyone can get a little, perhaps, the nature of military contracting ensures that initial outlays give rise to ongoing outlays and that this weak form of public “investment” automatically introduces wide geographic disparities. What this generates, in turn, is an economic geography marked increasingly by hot and cold real estate markets, by increasing real estate speculation that marks such a landscape, by impaired labor mobility and affordability crises tied to this speculative gap, by a brain drain to increasingly isolated industries and areas, and by increasing educational inequality, geared as that is to localized fiscal policy (property taxes) and the prevailing geographic inequality.[14] And when such geographic disparity leads to interstate battles—to pry loose or defend the advantages of prevailing hotspots—it leads also to a counterproductive “race to the bottom,” in which corporate tax cuts function both as popular (but fairly ineffective) recruiting tools and as a brake on educational investment in areas that can least afford to let it fall. Like the hidden and associated corporate cost problem, these problems often accumulate slowly and silently, rendering the hot-cold problems of labor scarcity and labor shortage, of housing affordability and housing market stagnation, and of increasingly prominent educational finance imbalances as seemingly “natural” features of the modern economic landscape. Though they are often created and are greatly encouraged by military Keynesianism, in other words, these problems are seldom connected directly to the scourge of this corrosive economic strategy, spawning mostly vain attempts to combat or ameliorate them with ill-suited or mostly ineffective policy tools.

Military Keynesianism, De-unionization, and Inequality (Again)

Banking significantly on defense industries in this way also connects the threat of work stoppage or labor influence to national security, encouraging an already powerful political momentum for de-unionization. Since this exacerbates inequality at the same time that it encourages the unsustainable top-heavy compensation common to such de-unionized sectors and industries, this blunts the overall demand for goods and services, reduces the inducement to invest (in anything but these isolated industries, but also less robustly overall) and magnifies the need for compensatory deficit spending and the issuance of expanded government debt. There is little doubt: as members of an industry marked by hyper-profitability and resilience, defense contractors encourage these counterproductive tendencies in two ways—directly, by pleading on behalf of national security, and indirectly, by standing as a model for other industries and companies that wish to mimic their apparently useful and exemplary labor practices.

 

Hyper-financialization of the U.S. Economy

Lastly, by making possible the vast majority of historic venture capital investment—almost always tied in significant measure to military contracts and their supercharged profitability—economic reliance on military contracting has transformed Wall Street casino “investment” into a segment of our economy that can much more readily pretend to function as a vehicle for genuine investment, that presumably allocates capital efficiently and leads to significant job creation. It seldom does either of these things, but the gloss of venture capitalism, underwritten by the massive shift to military Keynesianism in the post-World War II era, has critically reinforced this myth, transforming the conventional venture capitalist from a creature actually dependent upon socialized investment and insider knowledge of the same into a mythical and heroic figure of bootstrap capitalism always worth emulating. And due to the limited numbers and geographic focus of the projects socialized extensively enough to sustain real long term investment, profitability, or socially useful spin-off, the progressive aping of this behavior only serves to increase the speculative (or even overtly criminal) financialization and volatility of our economy. “Speculators may do no harm,” Keynes noted, “as bubbles on a steady stream of enterprise, but the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes the by-product of the activities of a casino, it is likely to be ill-done.”[15]As Keynes also noted then, “the measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism.”[16] This remains true today, largely due to the way in which military Keynesianism has sustained the century-old mythology of Wall Street and its most visible speculators.

 

And In the End…

Taken collectively, these structural deficiencies amount to economic handicaps that are as damaging as they are imperceptible.  And because they sap the strength of the already bastardized Keynesianism built on the weak reed of the defense industry multiplier, the lingering advantages of Keynesianism itself become attenuated even further, devalued and increasingly misconstrued in political circles, and felt only perversely by most affected citizens. “Making the eagle scream” as John Dos Passos once described it, to compensate partly with ever increasing military expenditure, can postpone some of the reckoning, just as it did in the last days of the Soviet Union, but it cannot stave off the inevitable weakening of the overall economic fabric.

If the only thing that changes then in such a confusing mélange of timid policy choices, tepid economic performance, and an increasingly confused citizenry is to disregard further the basic tenets of Keynesian economics—low long term interest rates, essential fiscal policy redistribution, and compensatory deficit spending— the odds are quite good that performance will go from tepid to calamitous, that more citizens will be more confused than ever before, and that political audacity will emanate only from the poisonous wellspring of unreason and reaction. In the event, the military-industrial complex can say, as one commentator recently described it, “keep paying us or the economy dies,” and we might succumb to the extortion, unwilling to see or incapable of understanding the range of preferred alternatives.[17] If we choose to take a closer look, however, to see the modern capitalist economy for what it is, and to begin to understand again how it works and how it falls apart at the seams, we can seize these alternatives and declare, as Dean Baker has asserted, that if our proposed military spending “doesn’t make sense in terms of advancing national security, then it doesn’t make sense, period.”[18]   

 




[1] Harlow was Eisenhower’s speechwriter and congressional liaison reputed to have coined the “military-industrial complex” label. Williams was an Eisenhower speechwriter who co-authored this presidential valedictory (with fellow speechwriter Malcolm Moos).

[2] This is usually termed the Keynesian consumption function, described explicitly in the General Theory as a “fundamental psychological law.” It is my contention that popular criticisms of this fundamental concept fall very short, especially with regard to its significant macroeconomic implications (how redistribution affects aggregate consumption and saving and the overall level of economic activity). For cogent early, later, and recent defenses of the Keynesian consumption function, see Gardner Ackley, Macroeconomic Theory (New York: MacMillan, 1961), 208-251; James S. Duesenberry, Income, Saving and the Theory of Consumer Behavior (New York: Oxford University Press, 1967); Gardner Ackley, Macroeconomics: Theory and Policy (New York: MacMillan, 1978), pp. 157-70, 533-73;  George Hadjimatheou, Consumer Economics After Keynes; Theory and Evidence of the Consumption Function (New York: St. Martin’s, 1987); Karen Dynan, Jonathan Skinner, and Stephen Zeldes “Do the Rich Save More?” Working Paper 7906, National Bureau of Economic Research, 2000.

  

[3] For a glimpse of the skeptical or disdainful reaction of American general officers to Eisenhower’s New Look strategy, see Lewis Sorley, Honorable Warrior: General Harold K. Johnson and the Ethics of Command (Lawrence: University Press of Kansas, 1998), pp. 112-14. For persuasive analyses of the Eisenhower years in Vietnam and the unique vulnerabilities of the New Look strategy, see David L. Anderson, Trapped by Success: The Eisenhower Administration and Vietnam, 1953-61 (New York: Columbia University Press, 1991); and Seth Jacobs, America’s Miracle Man in Vietnam: Ngo Dinh Diem, Religion, Race, and U.S. Intervention in Vietnam (Durham: Duke University Press, 2004).  

[4] See, for example, Seymour Melman, The Peace Race (London: Gollancz, 1962); Melman, The Defense Economy: Conversion of Industries and Occupations to Civilian Needs (New York: Praeger, 1970); Melman, Pentagon Capitalism: The Political Economy of War (New York: McGraw-Hill, 1970); and Melman, The Permanent War Economy: U.S. Capitalism in Decline (New York: Simon and Schuster, 1976);

[5] Lyndon Johnson to Andy Hatcher, 23 December 1963, 10:15 p.m., Tape K6312.16, PNO 20 and 21, Robert David Johnson and David Shreve, editors, The Presidential Recordings: Lyndon B. Johnson: The Kennedy Assassination and the Transfer of Power: Volume II (New York: W.W. Norton, 2005), p. 773.

[6] Lyndon Johnson to Walter Reuther, 23 December 1963, 9:18 p.m., Tape K6312.16, PNO 6, Robert David Johnson and David Shreve, editors, The Presidential Recordings: Lyndon B. Johnson: The Kennedy Assassination and the Transfer of Power: Volume II (New York: W.W. Norton, 2005), pp. 745-48. The “WPA” reference, of course, was to the New Deal program LBJ greatly admired, the Works Progress Administration, which ran from 1935-1943, and which, in its National Youth Administration subdivision, employed Johnson as Texas state director, from 1935-7. Its principal aim was to employ millions of unskilled American workers in useful public works projects.

[7] Quoted in Larry Berman, Planning a Tragedy: The Americanization of the War in Vietnam (New York: W.W. Norton, 1983), p. 34.

[8] Quoted in Eric F. Goldman, The Tragedy of Lyndon Johnson (New York: Knopf, 1969), p. 383.

[9] Walter Heller, “Getting Ready for Peace,” Harper’s, April 1968, p. 57.

[10] John Maynard Keynes, The General Theory of Interest, Employment and Money (London: Macmillan, 1936), p.129.

[11] Ibid.

[12] Robert Pollin and Heidi Garrett-Peltier, “The U.S. Employment Effects of Military and Domestic Spending Priorities,” (Washington, D.C.: Institute for Policy Studies, 2007). In a different context, such as the one that prevails in 2011—where debates revolve around what and how much to cut rather than spend—a corollary lesson can be derived from this study: all cuts would reduce employment levels and harm the economy, but cuts to military spending would raise unemployment and dampen economic activity less than corresponding cuts to education, transportation, and other non-military outlays.

[13] For a persuasive historical analysis of the rise of the “gunbelt,” see Ann Markusen, Peter Hall, Scott Campbell, and Sabina Deitrick, The Rise of the Gunbelt: The Military Remapping of Industrial America (New York: Oxford University Press, 1991).

[14] Only in the rare case of a state like Hawaii, which finances public education within a unified state system, or in a few other states, which have made an effort to displace local funding with a generous state funding formula, has this been avoided to some degree.

[15] Keynes, The General Theory, p.159.

[16] Ibid.

[17] Spencer Ackerman, “Defense Industry: Keep Paying Us or the Economy Dies,” Wired, 27 October 2011.

[18] Dean Baker, “The Military Spending Fairy,” Center for Economic Policy and Research blog, 26 October 2011, http://www.cepr.net/index.php/cepr-blog/. Accessed 28 October 2011.

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