How the War Machine is Driving
the US Economy
Military Keynsianism Might get
Bush Re-elected, But it is Starting to Worry Economists
by Andrew Gumbel
lndependent/UK, January 6, 2004
What do the war in Iraq and the economic
recovery in the United States have in common? More than one might
expect, to judge from the last couple of rounds of US growth figures.
The war has been a large part of the justification
for the Bush administration to run ever-widening budget deficits,
and those deficits, predicated largely on military spending, have
in turn pumped money into the economy and provided the stimulus
that low interest rates and tax cuts, on their own, could never
The result, according to economists, is
a variant on Keynesianism that has particular appeal for Republicans.
Instead of growing the government in general - pumping resources
into public works, health care and education, say, which would
have an immediate knock-on effect on sorely needed job creation
- the policy focuses on those areas that represent obvious conservative
and business-friendly constituencies. Which is to say, the military
and, even more specifically, the military contractors that tend
to be big contributors to Republican Party funds.
"It may be very inefficient and obviously
not fair, but it is nevertheless causing almost 5 per cent more
money to be pumped into the economy than is being taken out in
tax revenues," observed Robert Pollin, professor of economics
at the University of Massachusetts at Amherst. "At the same
time, it fits into the broader ideological goals of the administration
because they can paint it as part of a national emergency, the
fight against terrorism, the fight against Saddam Hussein, and
During the second quarter of 2003, when
the war in Iraq was in full swing, some 60 per cent of the 3.3
per cent GDP growth rate was attributable to military spending.
Expenditure on manpower and weaponry was relatively flat, according
to Professor Pollin's analysis, while the lion's share of the
stimulus came from the multi-billion dollar contracts handed out
to Halliburton, Bechtel and other private contractors.
A smaller proportion of the roaring 8.2
per cent growth recorded for the third quarter was directly attributable
to the military, but Professor Pollin and others argue that it
is still the military that is driving the deficit, and the deficit
- budgeted at about $500 billion (270bn) for next year - that
is driving the recovery.
Just last month, the Pentagon awarded
a $4 billion contract to California company Northrop Grumman to
work on the Star Wars missile defense program. It is the sort
of figure that can regenerate the economy of an entire region.
California - the state where US economic booms have a tendency
to begin and end - is also a beneficiary of the boom in security-related
spending, since much modern security paraphernalia depends on
Silicon Valley computer technology.
The Bush administration itself prefers
to attribute the recovery to its tax cuts, targeted disproportionately
towards the richest Americans. Many non-administration economists,
however, say this is nonsense, and that the tax cuts are far more
political than they are stimulative. A more significant role has
been played by buoyant household spending, helped by low mortgage
interest rates which have inspired many homeowners to borrow against
the rising value of their properties. But there are signs that
interest rates are now on their way back up and that the refinancing
fad has ended.
"The administration is conducting
a highly irresponsible fiscal policy, and there is no legitimate
economist on the face of the earth who doesn't say the tax cuts
are just loony," said Kent Sims, a San Francisco economic
consultant and public policy expert. "The chosen weapon for
dragging the economy off the floor - now that an election is coming
- is the deficit. Military expenditure is usually the least effective
of short-run ways of spending money, because it doesn't build
infrastructure that give you returns over time. But it does create
a short-term lift."
Military-fueled growth, or military Keynesianism
as it is now known in academic circles, was first theorized 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
Ronald Reagan famously resorted to deficit
spending, using talk of the Evil Empire and communist threats
from Central America as his excuse to ratchet up the military
budget. In 1984, the deficit rose to a whopping 6.2 per cent of
GDP. Consequently, the economy grew by more than 7 per cent that
year, and he was re-elected by a landslide.
The corollary of the Reagan military boom
was a sharp cutback in social spending, something that was not
reversed under Bill Clinton and is now back on the agenda with
George Bush. State and local budgets are all in crisis because
of the recession of the past two years. The fact that the White
House is not using federal dollars to help them finance schools,
hospitals and police forces hurts all the more because these things
have now been underfunded for a generation.
The Bush deficit has not yet reached Reaganesque
proportions (it stands at roughly 4.5 per cent of GDP). But Professor
Pollin, for one, predicts that the resulting debt burden could
rapidly rise to the levels seen in the 1980s, with interest repayments
eating up as much as 18-19 per cent of the overall federal budget.
Professor Pollin does not share the Clinton
administration view that deficits are always bad. In classic Keynesian
fashion, he believes they are necessary and desirable to pull
countries out of recession. But he, like the generation of economists
who criticized Reagan's policies, thinks the priorities are wrong
- as well as overtly bellicose - and will have repercussions for
years or even decades to come.
"The long-term effects of military
Keynesianism are obviously negative on public infrastructure,
health, education and so on, and there are limits on how long
you can keep it up," he said. "What we borrow we will
eventually have to pay back, with interest."
Reordering America's Priorities/Reducing U.S. Military