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The Effect of Military Spending on the Economy

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February 09, 2011 – Comments (16)

I spend alot of time arguing. Yeah, I know. I also blog about people with contrary views more often than not. Whether it's MMT or mainstream media or some bloviating politico or banking nuts, I can't ever seem to talk about things I actually like.

So let's do that now:

Less Bang for the Buck - by Thomas Woods

I'm going to walk you through Woods' article on the damaging effects that military spending has on an economy. This is an important topic. I am often fascinated that Americans believe they can fight endless wars for free.

Of course, no one says exactly that, but how many of your friends and family said, "well of course the economy is struggling. Wars cost money." None, right? How many times has an empty suit or skirt on TV made this insight? Never, right?

So if the average American cannot correlate our economic troubles with the vast military complex and adventurism of our politicians, they must not view it as a significant factor. They are dead wrong.

To get a sense of the impact the U.S. military has on the American economy, we must remember the most important lesson in all of economics: to consider not merely the immediate effects of a proposed government intervention on certain groups, but also its long-term effects on society as a whole. That’s what economist Frédéric Bastiat (1801–50) insisted on in his famous essay, “What Is Seen and What Is Not Seen.” It’s not enough to point to a farm program and say that it grants short-run assistance to the farmers. We can see its effects on farmers. But what does it do to everyone else in the long run?

Woods lays the groundwork for valid economic analysis in the opening paragraph. This is a fine place to start. Even academically trained economists fail this litmus test. In order to see the unseen effects of a policy, you must first recognize that there are unseen effects.  Sadly, few economists and even fewer pundits grasp this concept.

Woods continues:

Seymour Melman (1917–2004), a professor of industrial engineering and operations research at Columbia University, focused much of his energy on the economics of the military-oriented state. Melman’s work amounted to an extended analysis of the true costs not only of war but also of the military establishment itself. As he observed,

"Industrial productivity, the foundation of every nation’s economic growth, is eroded by the relentlessly predatory effects of the military economy. …Traditional economic competence of every sort is being eroded by the state capitalist directorate that elevates inefficiency into a national purpose, that disables the market system, that destroys the value of the currency, and that diminishes the decision power of all institutions other than its own." - Melman

On my blog I focus the most on the destuction of currency value, but that doesn't mean I dismiss other deleterious effects. What does Melman mean when he says, "elevates inefficiency into a national purpose?" We can't be sure without the full context, but I can guess.  I suspect he's talking about efficient versus inefficient use of resources. Military spending, particularly the preposterous level it is in America, is an inefficient use of resources. By equating military spending with patriotism (the last refuge of the scoundrel), a country turns inefficient resource allocation into a national purpose.

Back to Woods:

Throughout the Cold War, politicians and intellectuals all over the political spectrum could be heard warning of the catastrophic economic consequences of reductions in military spending. The radical left in particular, as part of its critique of American state capitalism (which it sometimes conflated with pure laissez-faire), lent important support to that position. As Marxists Paul Baran and Paul Sweezy warned: “If military spending were reduced once again to pre-Second World War proportions, the nation’s economy would return to a state of profound depression, characterized by unemployment rates of 15 per cent and up, such as prevailed during the 1930s.”

Yet these politicians and intellectuals were focusing on the direct effects of discontinuing a particular spending stream without considering the indirect effects – all the business ventures, jobs, and wealth that those funds would create when steered away from military use and toward the service of the public as expressed in their voluntary spending patterns. The full cost of the military establishment, as with all other forms of government spending, includes all the consumer goods, services, and technological discoveries that never came into existence because the resources to provide them had been diverted by government.

This would be a good time refresh your understanding of the Broken Window Fallacy.  Although Woods is correct in pointing out how intellectuals fail to see the unseen, it must also be pointed out that these same intellectuals believed that military spending was the reason the economy was doing well in the first place, as if by making bombs and blowing up factories we can improve our economic well being. Although it would be nice if modern day economists had moved beyond such draconian views, the infamous Paul Krugam committed the very same fallacy following 9/11, claiming that the ensuing boom in construction work would be a silver lining. Not much has changed.

Not All Growth Is Good

Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends.

I want to stop for a second and point you to a fantastic article, particularly the first section on the dangers of economic aggregation.  It is fairly simple common sense to know that creating something useful is not the same as creating something that is not useful. Yet econometric modeling has difficulty distinguishing between the two.  This should be a wake up call for metric-centric friends. Instead they plow forward, dismissing common sense criticism as unscientific. What can you do?

Do you see where Woods is going? Sure, we can measure military spending and just lump it in with everything else to see how we're doing as a nation, but what good is that?  Military spending subtracts from the wealth of the nation. It doesn't add to it.

Granted, if you can invade a country, steal its resources, and then efficiently integrate them into your home economy, that could be a boon.  But if you don't trust government to run a health care program, how naive are you to believe that they can run trillion dollar resource-capture and extraction plan?

Military spending constitutes the classic example of parasitic growth. Melman believed that military spending, up to a point, could be not only legitimate but also economically valuable. But astronomical military budgets, surpassing the combined military spending of the rest of the world, and exceeding many times over the amount of destructive power needed to annihilate every enemy city, were clearly parasitic. Melman used the term “overkill” to describe that portion of the military budget that constituted this kind of excess.

Woods doesn't come out and say "all military spending is parasitic", nor did Melman. This is bit of a cop out, but understandable. It would take another 10,000 words to explain why state directed conquest is always parasitic and how that can be diffentiated from just defense. Since America has no military aim that can be considered just defense, at least in my point of view, that should tell you where I stand.

By the 1960s the U.S. government, in its strategic aircraft and missiles alone, was capable of unleashing in explosive power the equivalent of six tons of TNT for every person on Earth. “Now that we have 6 tons of TNT per person in our strategic missiles and aircraft alone,” Melman wondered, “have we become more secure than when we had only 1 ton of TNT per human being on earth?”

The labor, time, and other resources that were used to produce this overkill material were taxed away from the productive population and diverted from the creation of civilian goods.

The scale of the resources siphoned off from the civilian sector becomes more vivid in light of specific examples of military programs, equipment, and personnel. To train a single combat pilot, for instance, costs between $5 million and $7 million. Over a period of two years, the average U.S. motorist uses about as much fuel as does a single F-16 training jet in less than an hour. The Abrams tank uses up 3.8 gallons of fuel in traveling one mile. Between 2 and 11 percent of the world’s use of 14 important minerals, from copper to aluminum to zinc, is consumed by the military, as is about 6 percent of the world’s consumption of petroleum. The Pentagon’s energy use in a single year could power all U.S. mass transit systems for nearly 14 years.

Still other statistics illuminate the scope of the resources consumed by the military. According to the U.S. Department of Defense, during the period from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plants, equipment, and infrastructure (capital stock) at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock.

Woods' statistics are illuminating, but what hits home with me is the hypocrisy of the progressive vision for America. After all, this worldwide empire, currently the designs of filty neoconservative scum, dates back to the progressive vision of making the world safe for democracy (whatever that means - and appearantly everywhere except Egypt.) 

Yet, how did progressives think such an outcome was going to be possible without extracting trillions of dollars from programs at home, without causing the annihilation of societies, without damaging the environment far more than any coal mine operator could wet dream, and without turning the state into a militant vulture?

After we take into account the total impact of military efforts, doesn't it seem that making the world safe for democracy runs directly counter to every other progressive ideal? 

Ok, back to Woods:

Military Corporatism

Then there are the damaging effects on the private sector. Since World War II, between one-third and two-thirds of all technical researchers in the United States have been working for the military at any given time. The result, Melman points out, has been “a short supply of comparable talent to serve civilian industry and civilian activities of every sort.”

Government jobs, whose funding source – taxation – is unavailable to private firms, have been able to offer substantially higher salaries than those in the private sector. By the 1960s major companies were already complaining of being unable to meet their hiring targets for new researchers.

Meanwhile, firms servicing Pentagon needs have grown almost indifferent to cost. They operate outside the market framework and the price system: the prices of the goods they produce are not determined by the voluntary buying and selling by property owners that comprise the market, but through a negotiation process with the Pentagon in isolation from market exchange.

A basic understanding of how government purchasing and bureaucracy "work" would help to accentuate Woods' point. Bureaucracies generally have no interest in cost-cutting measures. It's true that policies are implemented to mimic market behavior, typically by increasing the red tape involved in making purchases or by increasing bureaucrat awareness of market strategiees, but these are superficial at best.  At worst, they create a culture of ignorance in which the department heads truly believe they are working in a market system when they are clearly not. Remember, bureaucracy is a battle for funding. The unnecessary bureaucracy sees its funing cut or occasionally eliminated. But how do we judge what is necessary? Without a market system, there is no way. So bureaucracies maximize their budges, come up with new areas where they are "needed", implement new projects, etc. It's a simple survival strategy. The Pentagon is simply another bureaucracy competing for funds.

Beginning in the 1960s, the Department of Defense required the military-oriented firms with which it did business to engage in “historical costing,” a method by which past prices are employed in order to estimate future costs. Superficially plausible, this approach builds into the procurement process a bias in favor of ever-higher prices since it does not scrutinize these past prices or the firm’s previously incurred costs, or make provision for the possibility that work done in the future might be carried out at a lower cost than related work done in the past

This "hitorical costing" is exactly the type of superficial strategy I referred to. It's not a market based exchange but it allows the uninformed to be duped into thinking the Pentagon is becoming more efficient.

Full Article

I'm going to skip to the end, not because the rest can be glossed over (it's very good), but to save time.

Real Conservatism

Out with the phony conservatives, the Tea Party movement says. We want the real thing. But the real thing, far from endorsing global military intervention, recoils from it. The conservative cannot endorse a policy that is at once utopian, destructive, impoverishing, counterproductive, propaganda-driven, contrary to republican values, and sure to increase the power of government, especially the executive branch.

The conservative temperament shuns utopian schemes, and seeks instead those finite but noble virtues we associate with hearth and home. These are the things the conservative is supposed to delight in and defend. Nathaniel Hawthorne once observed that a state was about as large an area as the human heart could be expected to love, and G.K. Chesterton reminded us that the genuine patriot boasts not of how large his country is, but of how small it is. As Patrick Henry said, “Those nations who have gone in search of grandeur, power and splendor, have always fallen a sacrifice and been the victims of their own folly. While they acquired those visionary blessings, they lost their freedom.”

I'm not sure what Woods means by real conservatives. But I want to add a point about utopianism.

In libertarian circles, we get hit with the baseless charge of being utopians all the time. It's baseless because libertarianism promises nothing! We don't offer a better world, a more equitable world, a more fair world, etc.

On the other hand, modern day economic and political doctrine is based on utopian visions of past pseudo-intellectuals, making the charge of libertarian utopianism incredibly ironic.

Paper money - derivied from utopain dreams of a moneyless, cheap-credit economy
Social contract theory - derived from utopian ideas about a mythical benevolent state
Egalitarianism - derived from utopian visions of pre-capitalist economies
Environmentalism - derived from Garden-of-Eden like theories about a pre-industrial pristine world.

So, uh, yeah, I don't have alot of time for people that slap the utopian label on libertarianism. Although it is simply a sign that have never actually investigated libertarian theory, so I guess I should have more patience with them. :)

David in Qatar

16 Comments – Post Your Own

#1) On February 09, 2011 at 2:03 PM, Donnernv (< 20) wrote:

Lord, you love to hear yourself talk/type, don't you.

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#2) On February 09, 2011 at 2:14 PM, whereaminow (20.94) wrote:

Lord, you love to hear yourself talk/type, don't you.

Running my mouth turns my fiancee off, and since I like to get laid, I'm better off spewing it here.

David in Qatar

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#3) On February 09, 2011 at 7:24 PM, Option1307 (29.73) wrote:

Ha ha ha best comment ever David!

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#4) On February 09, 2011 at 8:50 PM, mhy729 (32.45) wrote:

I enjoy your blogs, and read much of what you write.  I don't agree with all of your views, but I appreciate that they are your own and that you've spent a great deal of time and mental energy evaluating and formulating them.  I do have one question for you re: environmentalism.  Do you find no merit at all in the premise that the natural environment is worth protecting/preserving, and that unrestricted/indiscriminate development may and likely will cause irreparable harm?

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#5) On February 09, 2011 at 9:53 PM, whereaminow (20.94) wrote:

mhy729,

One can appreciate and respect the environment while simultaneously holding disdain for modern environmentalist movements.  

David in Qatar 

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#6) On February 09, 2011 at 10:58 PM, russiangambit (29.25) wrote:

Military is like financial sector - necessary but let it become too big and powerful and it becomes a parasite. I am actually very surprised at how supportive americans are of military sending ( or "defense" spending as it is referred so that it souds more friendly) given that nobody in their right mind will attack the US and for madmen an army is not a deterrent.

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#7) On February 09, 2011 at 11:41 PM, GenericInvestor (87.56) wrote:

you mean it's not worth it to fight wars for israel?

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#8) On February 10, 2011 at 9:27 AM, binve (< 20) wrote:

David,

Great post! I have not read all of it yet (I will do that today), but your first few paragraphs set the tone.

Does spending = sustainable economic activity? The answer is no. We might say that some amount of military spending is necessary, that it is within national interests, but we have to realize and never lie to ourselves that *it is a resource drain!*. 

The balance of economic activity within an economy must be productive for it to be sustainable in the long term. 

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#9) On February 10, 2011 at 10:08 AM, whereaminow (20.94) wrote:

Thanks binve!

We might say that some amount of military spending is necessary,

I suppose, but wouldn't it be helpful if we had a national discourse on what exactly constitutes necessary military spending? That's taboo in America. I can see both sides of the blogosphere from Wonkette to RedState frothing at the mouth, ready to call me a racist neo-confederate isolationist for even mentioning that perhaps, just perhaps, there is such a thing as just defense. And that perhaps, just perhaps, what we do today goes just a bit too far.

David in Qatar

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#10) On February 10, 2011 at 11:21 AM, GraemesPSP (99.49) wrote:

I also don't always agree with a some of your opinions, but this blog I think is your best yet.  Very well thought out.

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#11) On February 10, 2011 at 11:22 AM, whereaminow (20.94) wrote:

Thank you GraemesPSP!

David in Qatar

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#12) On February 10, 2011 at 11:25 AM, 08PortfolioModel (76.63) wrote:

I once printed a bumper sticker that said:

"A troop surge is not an economic recovery"

It didn't sell.

 

The original definitions of conservative and liberal implied the following:

Conservation of power within the rightful hands of the aristocracy.

Liberal dispersion of state powers to the people. 

What it means now is "Keep listening to me, instead of thinking for your self."

 

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#13) On February 10, 2011 at 11:54 AM, rhc41 (< 20) wrote:

THANK YOU DAVID 

I have seen the waste first hand.  Granted - redundancy creates survivability, but excessive redundancy is parasitic.  2 eyes - ya loose one and can function fine and fight/survive another day.  10,000 eyes and you have to eat everyone else's carrots to keep your sight! ;)

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#14) On February 10, 2011 at 12:49 PM, whereaminow (20.94) wrote:

08PortfolioModel,

Very well said!

rhc41,

It took me a couple reads to get the analogy!

David in Qatar

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#15) On February 11, 2011 at 9:38 AM, smartmuffin (< 20) wrote:

David,

 I'm incredibly jealous if you run in social circles where people don't always blame military spending for the recession.  Personally, I'm in my mid-20s and live in a college town.  I can't throw a rock without hitting someone giving a 30 minute speech declaring we'd be a Utopian paradise if only we spent less money on the military.  Also, I take it you don't listen to rap, as it's pretty much a requirement for every rap CD to have at least one song dedicated to the same theory.

 Anyways, I agree with most of the minor points you present.  The DoD IS a breaucracy like any other, it DOES operate outside the free market, it IS rife with fraud, waste, and abuse, etc.  I'm not entirely sure how that affects "the economy" though, although I guess it depends on how we define "the economy" and what we believe a "good economy" really is.

I mean, you stated that the DoD operates outside of the free market, so if that is true, how is their spending relevant to the free market?  With the possible exception of the labor market, the DoD isn't really competing with Microsoft or Apple or Ford or P&G or whoever, they compete with other government agencies, the DoE, DoI, etc.

Let me phrase this in a hypothetical question.  Let's say that tonight, we somehow achieve "world peace".  Everyone agrees that a military is no longer necessary and we completely disband the DoD.  All of that money is now available to be used on other, more productive things.  What do you think the government decides to do with this "found money"

 a)  Balance the budget, use any excess towards paying down the debt

b)  Return it to the people in the terms of tax cuts/rebates

c)  Use it to produce substantial improvements into essential government services that people actually want (police, roads, education, etc.)

d)  Create a bunch of new entitlement programs, welfare programs, handouts, bailouts, subsidies, grants, and transfer payments.

Guess which one I think is most likely?  The reason I can't get outraged about DoD spending (and yes, it is excessive and wasteful) is that at least it's wasteful spending on something that actually IS a legitimate purpose of government.  IMO, that's far preferable to the alternative, which would most certainly be wasteful spending on things that AREN'T legitimate purposes of government (free medicine for everyone!).

Thinking that the government would actually use any money saved by the DoD on legitimate purposes of government is where you start to sound like a Utopian  :)

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#16) On February 16, 2011 at 2:14 PM, whereaminow (20.94) wrote:

smartmuffing,

Thanks for the interesting read. 

Thinking that the government would actually use any money saved by the DoD on legitimate purposes of government is where you start to sound like a Utopian  :)

Read my stuff more often and you'll see that I advocate no such thing.

David in Qatar

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