How the war machine is driving the US economy
Military Keynsianism1 might get Bush re-elected, but it is starting to worry economists
By Andrew Gumbel in Los Angeles
06 January 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 defence programme. 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." Much more at The Independent.
06 January 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 defence programme. 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." Much more at The Independent.
Both parties are fond of military spending increases. This is partly why I consider myself a Libertarian Socialist2. The only way that military spending adds real value to the economy is when the goods produced are exported at a profit. It seems like the theme today is "borrowing our way into depression", but this needn't be so. Reining in traditional military spending, and pouring a fraction of that sum into the intelligence services seems a more than reasonable way to confront the threats of the early 21st century.
Although I am prime benfactor of the Bush tax cuts, I cannot see how they can become permanent, and have a vibrant economy. There are lots of unfunded, or underfunded programs in this country that could use an infusion of cash. Where is that money going to come from? Should we allow our national governance to further mortgage away our children's futures, or should we adopt a more 'pay as you go' spending policy? I think the answer is clear to anyone that has had to balance a budget..But this may not be as obvious to someone that has never had to worry about where money comes from. The current resident of 1600 Pennsylvania Avenue certainly fits this mold. Let us have both the wisdom and the courage to make well reasoned, responsible choices.
1 | Keynesianism - A school of economics inspired by the theoretical contributions of John Maynard Keynes (1883-1946), an English economist. Keynes argued that government spending and investment function as means of disbursing purchasing power into the economy and, hence, affect the demand for consumer goods in the same way as private investment. He suggested increasing government expenditures during deflationary periods and decreasing it during inflationary periods as a means of manipulating aggregate spending and income. By prescribing governmental intervention to maintain adequate levels of employment, Keynesianism paved they way for the growth of the welfare state in the wake of the Great Depression.
2 | Libertarian Socialism - A social system which believes in freedom of action and thought and free will, in which the producers possess both political power and the means of producing and distributing goods.
So kids, the next time your mom says you're reading "pure bs, " tell her that it's educational!
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