Contrary to a Common Myth, War is Bad for the Economy...
Nobel prize winning economist Paul Krugman wrote yesterday:
Military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups.
(Mr. Krugman has said the same thing many times in the past. And many other influential people have said the same thing.)
I am not a Nobel prize winning economist … but Joseph Stiglitz is.
Stiglitz wrote in 2003:
War is widely thought to be linked to economic good times. The second world war is often said to have brought the world out of depression, and war has since enhanced its reputation as a spur to economic growth. Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon.
Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.
Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. See this, this and this.
A No-Brainer
This is a no-brainer, if you think about it.
We’ve been in Afghanistan for almost twice as long as World War II. We’ve been in Iraq for years longer than WWII. We’ve been involved in 7 or 8 wars in the last decade. And yet still in a depression.
If wars really helped the economy, don’t you think things would have improved by now?
Indeed, the Iraq war alone could end up costing more than World War II. And given the other wars we’ve been involved in this decade, I believe that the total price tag for the so-called “War on Terror” will definitely support that of the “Greatest War”.
Additional Reasons War Is Bad for the Economy
The New Republic noted in 2009:
Conservative Harvard economist Robert Barro has argued that increased military spending during WWII actually depressed other parts of the economy.
Also from the right, Robert Higgs has done good work showing that military spending wasn’t the primary source of the recovery and that GDP growth during WWII has been “greatly exaggerated.”
And from the left, Larry Summers and Brad Delong argued back in 1988 that “five-sixths of the decline in output relative to the trend that occurred during the Depression had been made up before 1942.”
Economist James Galbraith has shown that war always causes inflation, which hurts the average American:
Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.
(Ben Bernanke says that inflation is a tax, and Dylan Grice notes that inflation causes societies to prosecute minorities. And – sorry – but we can’t inflate our way out of our debt trap.)
All of the spending on unnecessary wars adds up.
The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc.
Two top American economists – Carmen Reinhart and Kenneth Rogoff – show that the more indebted a country is, with a government debt/GDP ratio of 0.9, and external debt/GDP of 0.6 being critical thresholds, the more GDP growth drops materially.
Specifically, Reinhart and Rogoff write:
The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies…
Indeed, it should be obvious to anyone who looks at the issue that deficits do matter.
A PhD economist [Michel Chossudovsky] told me:
War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy.
You know about America’s unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs.
But did you know that the defense employment sector is booming?
As public sector spending – and mainly defense spending – has accounted for virtually all of the new job creation in the past 10 years:
The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 10 years:
Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:
Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.
It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:
Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.
But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.
***Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.
Let me finish with a final chart.
Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.
Indeed, Former Secretary of Labor Robert Reich lamented last year
America’s biggest — and only major — jobs program is the U.S. military.
Back to my essay:
Raw Story argues that the U.S. is building a largely military economy:
The use of the military-industrial complex as a quick, if dubious, way of jump-starting the economy is nothing new, but what is amazing is the divergence between the military economy and the civilian economy, as shown by this New York Times chart.
In the past nine years, non-industrial production in the US has declined by some 19 percent. It took about four years for manufacturing to return to levels seen before the 2001 recession — and all those gains were wiped out in the current recession.
By contrast, military manufacturing is now 123 percent greater than it was in 2000 — it has more than doubled while the rest of the manufacturing sector has been shrinking…
It’s important to note the trajectory — the military economy is nearly three times as large, proportionally to the rest of the economy, as it was at the beginning of the Bush administration. And it is the only manufacturing sector showing any growth. Extrapolate that trend, and what do you get?
The change in leadership in Washington does not appear to be abating that trend…[121]
So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.And this shows military versus non-military durable goods shipments:
[Click here to view full image.]
So we’re running up our debt (which will eventually decrease economic growth), but the only jobs we’re creating are military and other public sector jobs.
PhD economist Dean Baker points out that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment:
Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.
A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.
Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.
The scenario we asked Global Insight [recognized as the most consistently accurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…
The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.
The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending.
So we’re running up our debt – which will eventually decrease economic growth – and creating many fewer jobs than if we spent the money on non-military purposes.
As :
It is ironic that America’s huge military spending is what made us an empire … but our huge military is what is bankrupting us … thus destroying our status as an empire.
Even Admiral Mullen seems to agree:
The Pentagon needs to cut back on spending.
“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”
Indeed, Mullen said:
For industry and adequate defense funding to survive … the two must work together. Otherwise, he added, “this wave of debt” will carry over from year to year, and eventually, the defense budget will be cut just to facilitate the debt.
Former Secretary of Defense Robert Gates agrees as well. As David Ignatius wrote in the Washington Post in May:
After a decade of war and financial crisis, America has run up debts that pose a national security problem, not just an economic one.
***
One of the strongest voices arguing for fiscal responsibility as a national security issue has been Defense Secretary Bob Gates. He gave a landmark speech in Kansas on May 8, invoking President Dwight Eisenhower’s warnings about the dangers of an imbalanced military-industrial state.
“Eisenhower was wary of seeing his beloved republic turn into a muscle-bound, garrison state — militarily strong, but economically stagnant and strategically insolvent,” Gates said. He warned that America was in a “parlous fiscal condition” and that the “gusher” of military spending that followed Sept. 11, 2001, must be capped. “We can’t have a strong military if we have a weak economy,” Gates told reporters who covered the Kansas speech.
On Thursday the defense secretary reiterated his pitch that Congress must stop shoveling money at the military, telling Pentagon reporters: “The defense budget process should no longer be characterized by ‘business as usual’ within this building — or outside of it.”
While some might want to start another war, America’s top military leaders and economists say that would be a very bad idea.
Indeed, military strategists have known for 2,500 years that prolonged wars are disastrous.
Note 1: Security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle East weakens national security and increases terrorism. See this, this, this, this, this and this.
Terrorism – in turn – terrorism is bad for the economy. Specifically, a study by Harvard and the National Bureau of Economic Research (NBER) points out:
From an economic standpoint, terrorism has been described to have four main effects (see, e.g., US Congress, Joint Economic Committee, 2002). First, the capital stock (human and physical) of a country is reduced as a result of terrorist attacks. Second, the terrorist threat induces higher levels of uncertainty. Third, terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. Fourth, terrorism is known to affect negatively specific industries such as tourism.
The Harvard/NBER concludes:
In accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5 percent of GDP.
So the more unnecessary wars American launches and the more innocent civilians we kill, the less foreign investment in America, the more destruction to our capital stock, the higher the level of uncertainty, the more counter-terrorism expenditures and the less expenditures in more productive sectors, and the greater the hit to tourism and some other industries.
Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001).
So military adventurism increases terrorism which hurts the world economy. And see this.
Note 2: True conservatives are anti-war.....
War Is Great for the 1% … But Makes the 99% Poorer....
War Profiteers: The 1%
The heads of the big defense firms make huge salaries off of war, and are part of the .01%. They not infrequently fund and sell arms to both sides of wars … and make a killing in the process.
Top economists have also proven that war is horrible for the 99%.
Congress members – part of the 1% which has made money hand over fist during this economic downturn – are heavily invested in the war industry, and routinely trade on inside information … perhaps even including planned military actions.
Similarly – as detailed below – the Federal Reserve helps to start wars by financing them (no, I’m not talking about the billions the Fed sent to Iraq or Gaddafi’s Libyan bank or other recently-disclosed shenanigans).
War is a Racket
Investment legend Jeremy Granthan says that President (and former general) Eisenhower’s warning about the military-industrial complex has come true.
Eisenhower was not the first. “War is a racket“, according to one of the most highly-decorated military men of all time (and the hero who stopped a coup against FDR ).
“Overgrown military establishments,” George Washington said in his own farewell address of 1796, “are under any form of government inauspicious to liberty.”
As Liberal economist James Galbraith wrote in 2004:
Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.
***
There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short — due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices — but many of them don’t. Instead, they raise prices to meet their income targets and hope that the market won’t collapse.
***
Libertarian Congressman Ron Paul agreed in 2007:
Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.
The result of this arrangement is inflation. And inflation finances war.
***
Blanchard Economic Research pointed out in 2001:
War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.
***
David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History … finds that … periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.
***
Other economists agree with Professor Fischer’s link between inflation and war.
James Grant, the respected editor of Grant’s Interest Rate Observer, supplies us with the most timely perspective on the effect of war on inflation in the September 14 issue of his newsletter:
“War is inflationary. It is always wasteful no matter how just the cause. It is cost without income, destruction financed (more often than not) by credit creation. It is the essence of inflation.”
***
Libertarian economics writer Lew Rockwell noted in 2008:
You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.
***
Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919
One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.
***
In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn’t have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.
***
If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.
And progressive economics writer Chris Martenson explains as part of his “Crash Course” on economics:
***
If we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.
***
So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.
***
The bottom line is that war always causes inflation, at least when it is funded through money-printing instead of a pay-as-you-go system of taxes and/or bonds. It might be great for a handful of defense contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.
***
And as discussed above, liberals such as James Galbraith and conservatives such as Ron Paul agree that we wouldn’t get into as many wars – and the wars which we did wage would be ended more quickly – it if the people were required to pay for them directly instead of war being paid out of the “hidden tax” of inflation.
The father of modern economics – Adam Smith – agreed:
Were the expence of war to be defrayed always by a revenue raised within the year [instead of financing it with long-term public debt], the taxes from which that extraordinary revenue was drawn would last no longer than the war. The ability of private people to accumulate, though less during the war, would have been greater during the peace than under the system of funding. War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. The seasons during which the ability of private people to accumulate was somewhat impaired, would occur more rarely, and be of shorter continuance. Those on the contrary, during which that ability was in the highest vigour, would be of much longer duration than they can well be under the system of funding.
No wonder many of the “Occupy” protesters are railing against the war profiteers … part of the 1%.....
Reading through a NY Times story about defense cuts led me to one of the most, oh I don’t know, stupid statements it has been my misfortune to read in a while (one of the joys of being a blogger is I don't have to dress up my comments - stupid is stupid).
And apparently it passes for penetrating analysis. The thrust of the story, or at least the claim made in the story, is that the Pentagon has made no plans for the sequestration cuts mandated by the failure of the Supercommittee.
To be clear, DoD is working on the first $450 billion in cuts mandated by the Obama Administration. Those will already cut deeply into its capabilities over the next few decades.
This new round of cuts will go beyond “fat” and cut into muscle and bone. An idea of where cuts will have to be made is provided by some defense analysts:
They laid out the possibility of cutbacks to most weapons programs, a further reduction in the size of the Army, large layoffs among the Defense Department’s 700,000 civilian employees and reduced military training time — such as on aircraft like the F-22 advanced jet fighter, which flies at Mach 2 and costs $18,000 an hour to operate, mostly because of the price of fuel.
Other possibilities include cutting the number of aircraft carriers to 10 from 11 — the United States still has more than any other country — as well as increased fees for the military’s generous health care system, changes in military retirement, base closings around the country and delayed maintenance on ships and buildings.
And that brings us to a statement I find difficulty characterizing as anything but stupid. Perhaps to be less provocative, I ought to characterize it as woefully uninformed. I’ll emphasize it for you:
Right now, the F-35 Joint Strike Fighter, the most expensive weapons program in history, is the top target for cuts. (The Pentagon plans to spend nearly $400 billion buying 2,500 of the stealth jets through 2035.) Other potential targets include the Army’s planned ground combat vehicle and a “next-generation” long-range bomber under development by the Air Force.
As a result, the military industry is already in full alarm. “The Pentagon has been cutting weapons programs by hundreds of billions of dollars for three years now,” said Loren B. Thompson, a consultant to military contractors. “There’s not much left to kill that won’t affect the military’s safety or success.”
Other analysts argued that the United States had such overwhelming military superiority globally that it could easily withstand the cuts, even to the point of eliminating the Joint Strike Fighter. “We have airplanes coming out of our ears,” said Gordon Adams, who oversaw military budgets in the Clinton White House. “We’re in a technological race with ourselves.” Nonetheless, he said, the automatic cuts make life difficult for Pentagon budget planners and are “a terrible way to manage defense.”
No … we’re not in a “technological race with ourselves”. And yes, we have lots of airplanes. Worn out airplanes two or three decades old that have been at war for a decade.
Right now the Russians are developing a very good 5th generation fighter, the T-50 (also known as the PAK FA). The Chinese 5th generation aircraft is the J-20. We, on the other hand stopped a planned buy of F-22s at 180 out of 2,000. And now we’re talking about cutting the F-35 (a buy of 2400 and supposedly the fighter to fill the gap left by the curtailment of the F-22 buy) as well? That’s national defense suicide.
If we cut the JSF, in 10 years we’ll have the same 4th generation aircraft we have now as our front line of defense against the newest generation of fighters that you can bet both Russia and China will export. Ours will be technologically inferior.
Yes, we enjoy a technological edge now. But that is because we’ve always made its maintenance a national security priority. What Gordon Adams is trying to do is wave away the need to maintain that edge with an absurdly simplistic and utterly incorrect “we’re in a technological race with ourselves”.
What we do now will effect our national security for decades to come. These fighters are planned to be the front line of defense for about 40 years. And while an F/A 18 is a hot jet in 2011, it will not be a hot jet in 2031 when refined and technologically superior T-50 and J-20 aircraft will command any airspace in which they fly.
For those who don’t understand what that means, it means no close air support for troops on the ground. It means an enemy having air superiority over a battlefield (or at least air parity) and making our ground troops vulnerable to air attack for the first time since the Korean War.
It means we’ll have lost the technological race that is required to maintain air dominance and will be hard pressed to catch up anytime soon.
The old term “penny wise and pound foolish” comes to mind. We’re about to validate that saying. And the lack of leadership from this administration in outlining priorities concerning national defense and our future is terrifying. Instead of making national defense a priority, this administration would spend elsewhere.
The technological edge we’ve maintained over the decades is a perishable thing. There are other countries out there actively trying to steal it from us.
And we have so-called defense analysts like Gordon Adams making stupid – yes there’s that word again – statements like “we’re in a technological race with ourselves”.
We make further cuts, such as those demanded by sequestration, at our peril. One of the primary functions of government, as outlined in our Constitution, is to provide for the national defense. It should be one of, if not the primary focus of any national government. To say we’re playing with fire with deeper cuts than those already contemplated is an understatement. If you’re comfortable with your grandson or granddaughter flying 40 year old jets in the near future against technologically superior enemies who we are getting ready to abandon the field too in 2011, then you’ll be happy to support cutting defense to the bone now....
The big trap is end strength. We don't have enough people to do the job today. On December 7th, 1941, the US was a nation of about 132 million people. Our active duty forces numbered 1.45 million. In September 1945, we had 8.3 million men under arms. Interestingly, today there are 308 million Americans and our active duty forces number 1.45 million. The money is personnel cost - active, and retired.
The only places to cut are procurement and maintenance. Procurements add capability and often result in reduced O&M. The depots are enormously wasteful and over manned with civil servants who do not understand how to repair the hardware. As a defense contractor, I often received multiple stand alone requests for proposals (RFP) for small quantities from buyers in the same office. When I asked them to combine the hardware, offering economies of scale, they refused. The government grades these buyers based on the number of RFPs they process with little concern for cost. It would be cheaper and better to rely on civilian depot maintenance from the factory.
Intermediate maintenance could also be improved by having civilians doing the repairs and line maintenance just removing and replacing boxes. As the product line manager for an avionics system, I was summoned to a major air command headquarters and in a open meeting accused of delivering faulty hardware. We knew the problem was that the crews seldom exercised the systems and maintenance did not know how to fix them.
We put together a briefing and bid a one-time inspection, repair and ops and maintenance training session at cost ($250K). Maintenance officer told me he had trained technicians, spares and didn't need our help. During the briefing, a maintenance supervisor asked about a piece of equipment (time domain reflectometer) on one of our slides. The picture was taken from his maintenance Tech Order. I stopped the briefing and asked two questions, If you have the parts, people, equipment and know - how, why did you call me? And if your maintenance is so shit hot, why do your systems suck? Ops guys laughed and repeated my question.
If the military wants to cut manpower, get rid of offices like social actions, base beautification, civilian personnel, contract out finance to ADP, shut down the base hospitals and let everyone see real doctors downtown.....