US ’Military Keynesianism’ Worrying Economists

How the War Machine is Driving the US Economy

Military Keynesianism 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 achieve.

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 so on."

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 United States.

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."

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