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American War Economics 101

2010 July 4
by Ian Welsh

I recently wrote that Obama has chosen to stay in Afghanistan because war spending is one of the only reliable forms of stimulus he has. I am baffled by many of the responses to that article. What do readers think would happen to the US economy if all that spending stopped and wasn’t replaced by anything?

25 Responses
  1. July 4, 2010

    California’s already limping economy would collapse is the first thing that comes to mind.

  2. July 4, 2010

    Well…, on 11/11/08 I responded to a post on The Agonist in which the poster hopefully suggested that the election of Obama could mean, “…a withdrawal from Iraq, or at least a sharp reduction in US personnel there.”

    You won’t see it for three years…,

    Obama may shift personnel to Afghanistan…, but this “war” is the last cylinder of the economic engine still firing. If Obama puts the Bullet Builders on the unemployment lines this Financial Crisis will turn into an Economic Catastrophe before he begins his campaign for re-election. When that campaign starts in three years…, look for significant draw downs. He will win political points for that…, and not have to deal with the economic hangover until he is safely re-elected.

    The war was rushed into by Georgie so that the economic factors would have time to resonate through the economy before his re-election campaign began. It worked…, helped along by massive spending on Homeland Security. George E. learned the lessons of his father’s first Gulf War. Though it wasn’t started for economic reasons…, it was started too late in GH’s term to benefit him. Bill Clinton rode that wave after he took office…, and with a big help from the Dot Com Bubble…, Clinton got undue credit as an economic mastermind.

    Make no mistake about it…, this war was never about security, oil, or ideals. The Military Industrial Complex is still alive and well in America.

    So…, that would still be my prediction…, “Economic Catastrophe”…, if we pulled out now.

    If your question was regarding my earlier post here…, I was just quibbling over whether the continued spending should be termmed “stimulus” at this point in time.

    I do however…, question the morality of the decison being made.

  3. anon2525 permalink
    July 4, 2010

    Ian Welsh has set up a scenario that assumes that nothing else would be done if military spending were to be cut. If military spending were cut drastically and nothing else changes (because everything else is “off the table”) then there would be a fall in aggregate demand and, consequently, a fall in GDP. The current situation is that the first condition (drastically cutting military spending) is “off the table.” But it is only because the first condition is off the table that the second condition (no other public spending will take its place) is off the table. If the first condition were no longer true, then it is not “obvious” that the second condition would continue to be true.

    (What happens when all of those engineers and managers and owners at the weapons makers become unemployed? Who do these people vote for? Suddenly, one of the right wing’s voting blocks needs jobs. Similarly, what are the political pressures generated when large numbers of the military are “sent home” and the mercenaries (“military contractors”) no longer have their out-sized incomes? Is gov’t. spending on domestic infrastructure projects still “off the table”?)

    Further complicating this scenario is the manner in which military spending would be cut. It would not be cut; it would be phased out. Ending the two occupations would take between six and eighteen months, by most estimates (guesses?) that I have seen. If the decision was made tomorrow, there would be zero economic impact between now and November. Or, it could be argued that it would have a positive economic impact because the plausible argument could be made that the long-term gov’t. deficit will be reduced and therefore spending for unemployment insurance and assistance to states and cities is “fiscally responsible” within the parameters of the “blue dogs” thinking. This spending would then either help slow the increase in unemployment between now and November or stop the increase. If this spending is not done, then, if the cuts in spending in Europe go forward, we should expect unemployment to increase as exports decrease and as the housing bubble continues to collapse.

  4. anon2525 permalink
    July 4, 2010

    I recently wrote that Obama has chosen to stay in Afghanistan because war spending is one of the only reliable forms of stimulus he has.

    Not to nit-pick, but you did not write that. What you wrote was that Obama had chosen to expand&continue the occupations, but that due to the economic conditions that exist, he now has no choice but to remain there.

    Here are the key statements:
    To whit, Steele said that Afghanistan is a war of Obama’s choosing, and that everyone who’s occupied Afghanistan has come to grief over it. Now one can quibble a bit over the details of who came to grief and who didn’t, but basically he’s right.

    and
    Now here’s a truth that Steele didn’t tell. Obama has to stay in Afghanistan because war spending is one of the only reliable forms of stimulus he has.

    P.S., Although I disagree with Ian Welsh’s logic, I agree with the sentiments.

  5. Mad Hemingway permalink
    July 4, 2010

    As a candidate for president in 2012, my position is to:

    1. Bring all the troops home, close all the military bases around the world, and expand the UN.

    2. Use the troops and military budget to rebuild the US highways, high-speed rail, repair bridges, expand the park system, increase veteran benefits (there should be no homeless vets).

    3. Finally, disband the military.

  6. anon2525 permalink
    July 4, 2010

    … rebuild the US highways, high-speed rail, repair bridges,

    I would rather that we abandon road/bridge repair and high-speed rail in favor of low-speed rail, that is, electrified streetcars (yes, with all of the ugly overhead wires, if no alternative can be devised), as the country had up until the end of the second world war. It is a proven solution as a non-oil transportation system. Until low-speed rail is available, there’s no point in telling people to give up their cars. Once low-speed rail is available, high-speed rail can be considered. In the meantime, high-speed rail is getting in the way of considering low-speed rail.

  7. BDBlue permalink
    July 4, 2010

    This is why, IMO, the war machine will never be stopped unless and until we restructure the economy. It’s the key to everything else (which is why the current regime has no interest in turning it around).

  8. Tom Hickey permalink
    July 4, 2010

    When government disburses funds into the economy to purchase goods and services, it is supposedly doing so to advance public purpose. Obviously defense is a part of public purpose in that this is named specifically in the Preamble. But the question is what constitutes adequate defense.

    The level of US defense expenditure looks suspiciously like pursuit of empire instead of necessary defense of the homeland. And the behavior looks like it, too. Not to mention the crony capitalism, to boot. Most Americans seem to be too overshadowed by the propaganda machine to notice, however.

  9. Tom Hickey permalink
    July 4, 2010

    BD Blue, the US military is provides a free protection service to the petroleum industry. The obvious way to restructure the economy is through alternative energy. Powerful interests are aligned against that, just as powerful interests are aligned against dismantling the military-industrial-governmental complex and reforming FIRE (finance, insurance and real estate). All of these interests are extracting a huge amount of wealth from the country.

  10. anonymous permalink
    July 4, 2010

    Wouldn’t there be a few years of military spending just to get our equipment back to where it was before? I haven’t read anything lately, but a few years ago there were lots of articles about how the tanks and planes and such were damanged and in disrepair and it would take a buttload of money to bring them back to snuff.

    Besides that, a cut in military spending would help with the deficit. Might not help the economy, but maybe it would make certain folks STFU about killing Soc Sec.

  11. Bernard permalink
    July 4, 2010

    that the whole topic of SS sustainability is out there due to the Cat Food Commission, thanks to Obama, and is proof of the success of the propaganda. Social Security doesn’t have a deficit now nor is it danger until 2045 or so. the taxes used to fund SS are what we pay into now. the SS system taxes earning up to and stops at $106,000. any earnings over that amount is not taxed for SS. So our wages are taxed only up to the $106,000 as far as Social Security is concerned. another out right lie to steal our money. you and i only pay taxes for SS up to the $106,000 limit.

    this is part and parcel of the propaganda machine that is working so successfully to blow smoke and lie outright. Choosing to lie about SS and the deficit is another strategy to deflect the topic from the waste of the industrial congressional military complex.

    talk about one great way to steal money for the Rich from the working class. lie, lie and lie again. it’s working very well, indeed!!

  12. July 4, 2010

    “What do readers think would happen to the US economy if all that spending stopped and wasn’t replaced by anything?”

    Frankly, what do you think would have to happen to stop all that spending and/or not replace it with something?

    I know what you are trying to say, but I don’t see the point. This is a useless hypothetical. The relevant question is, what resources are bound to the military, what resources are expended by the military, and what services does the military provide? Then you have to ask, what are the alternatives? If you have a lot of engineering capability and jobs currently dedicated to weapon making, what other products can this capacity create? If the military provides a protection service to a fuel supply chain, yet is one of the biggest consumers of the same fuel supply, can you address one without the other, and if so, how?

    This reeks of historical determinism. By this rationale, no pre-WW2 economy could have been re-purposed for war, and no post-WW2 economy could have been re-purposed for production of goods other than war. Any cutback on military spending would have triggered a recession.

    However, if a society can debate, govern, and blather itself into accepting 10-15 percent unemployment for 10+ years, it can certainly make other sweeping re-allocations of resources, idiotic or smart. The problem is not the military machine itself, but the elite interests it serves, and the distortion of the political system resulting from a budget reflecting the resource allocations primarily designed to sustain the careers of those supporting military expenditures.

    The political system is broken, and it is broken primarily because The People have become untethered, and unable to apply common sense to politics. If The People ever pull their collective head out of their collective arse – before their brains run out of oxygen entirely – things will change rather rapidly, for better or for worse.

    You can conjure alternatives from “Mars, Bitches!” to a PV on every tinfoil hat, but the important point is no that the tax revenue could not be spent, or the engineers could not engineer, or the factories not produce, but that there is simply no push by the sovereign to uncompromisingly end the career of every single politicians that does not deliver, from their earliest career steps onwards. By the time they are in Congress or the White House, it is a bit late, but then, for such creatures, creature comforts alone would pale if they were ostracized despite their paymasters generosity, and frankly, in a society where voting has been replaced by Nielsen ratings, turning off any channel that presents unacepptable retreads of the political retainer class would end those careers swiftly.

    You do democracy with the people you have, not the people you wish for, and if it didn’t work out, then it was the people that did you in. You can’t run around blaming the elites without accepting oligarchy.

  13. Tom Hickey permalink
    July 4, 2010

    Eisenhower secured funding for the national highway system on the grounds that is was needed for national security. The same argument can be made today for a Manhattan project to develop and deploy an energy plan to free the nation from its dependence on petro-based energy. During WWII, Detroit was converted from auto production to tank production almost overnight. The same could have done for large swaths of the defense industry and energy without a lot of economic dislocation. Many of the companies that eat up the funds are the high-tech ones.

  14. July 5, 2010

    Indeed, Tom. Simply cutting military spending will never happen. Repurposing that money is a possibility, especially if done so that much of the money still flows through the high-tech companies.

    Of course this should have been done in the 90′s and sold as the “peace dividend” and/or restructuring or national security priorities to account for less foreign oil consumption.

    I’m afraid that we’ll ride the imperial war machine right into the ground, because we lack any degree of actual leadership…we’ve only got politicians. The choice between saving the Republic and continuing the empire is already upon us and the decision appears to be made. The only questions that remain is exactly how and when the fall will come.

  15. dude permalink
    July 5, 2010

    It seems to me our nation could operate without war being central to its operation, but we are unprepared to accept the consequences. As said above, we have had a functional economy in periods without war or a military-industrial complex in our past; however, I think history would show we did this at times when we were not the sole engine of the world’s economy or guarantor of so many other nations’ security. We had, in short, real economic and political competition—-something we, as Americans aren’t suppose to fear, but rather embrace.

    Would we embrace a place in the world more or less equal to our position in the World Cup? Contender, but not leader? Big, but not the biggest? Powerful, but not the most powerful?
    Respected, but not feared or deferred to?

    I agree with Ian’s basic idea: we are using the war as a prop to the economy. I don’t think we must necessarily do this.

    Obama is , in my opinion, not thoughtful enough to imagine a world where America has receded from its present position in the world. Policies that even hint that are barricaded by the interests that support him. They are in a box they cannot think out of.

  16. dude permalink
    July 5, 2010

    Of course, sometimes the box thinks outside of us:

    http://news.bbc.co.uk/2/hi/world/middle_east/10505386.stm

  17. July 5, 2010

    Ian: Yep. A good way to understand this is to drive the Dulles Airport Highway in Virginia, and do it back and forth a few times, and visit Tyson’s corner and so on.

    From the Pentagon to the airport, mile after mile of Northrop Grumman, Sikorsky, Lockheed Martin, etc, etc. People think that’s all going to get turned around in a day?

  18. Formerly T-Bear permalink
    July 5, 2010

    An Act of War

    BBC reports Iran reporting its commercial planes are being denied fuel in Britain, Germany and UAE.

    http://news.bbc.co.uk/2/hi/world/middle_east/10511420.stm

    The new war has started, the Washington – London – Berlin – Paris – Tel Aviv Axis of evil is on the attack.

  19. Ian Welsh permalink*
    July 5, 2010

    Oh, it’ll happen. It was unthinkable to cut military spending in Russia/USSR too. But they did at the end, didn’t they?

  20. Ian Welsh permalink*
    July 5, 2010

    If you want to turn it around before collapse, what you do is reorient them towards other businesses. “You are now in the high speed train business. We know that you’ll be more inefficient than someone actually in the business, but we give you X years to get your act together.”

    and so on.

    And in some cases, you just have to let them go under. One of the big problems with the war industry is it pays about twice as much as anything else for the same people. While I generally don’t believe in reducing wages, in this case, it’s necessary (I’m talking engineers/scientists.)

    Get them doing something useful.

  21. anon2525 permalink
    July 5, 2010

    “You are now in the high speed train business. We know that you’ll be more inefficient than someone actually in the business, but we give you X years to get your act together.”

    Or, “Detroit, you were able to turn your businesses on a dime in the 1940s. We would like for you to do it again. We’re going to start a multi-decade plan to spend $100 billion per year on street cars and light rail through aid to municipalities. Are you up to the challenge?”

    One of the big problems with the war industry is it pays about twice as much as anything else for the same people. While I generally don’t believe in reducing wages, in this case, it’s necessary (I’m talking engineers/scientists.)

    It has been pointed out that Blackwater mercenaries were paid multiples of what enlisted military personnel were paid. Nice work if you can get those “cost-plus”, “no-bid” contracts. American “free-market enterprise” at its finest.

    Another minor problem is that people refer to the “war economy” and “war industry,” which helps those who want to justify their actions and helps those who want to scare the populace.
    These are even worse than the propaganda terms “defense department” and “defense spending.”

  22. anon2525 permalink
    July 5, 2010

    What do readers think would happen to the US economy if all that spending stopped and wasn’t replaced by anything?

    If you’re the finance minister of France, those would be called “growth-friendly spending cuts.” link (h/t calculated risk)

    Subtracting public spending increases confidence. Confidence makes households borrow to buy houses, cars, and appliances. It makes builders borrow to construct new houses. This will work. Have confidence. Finance ministers and central bankers are experts at “economics.”

    “If you want sustainable growth, then you have to restore confidence and to do that you need to have balanced and sustainable fiscal policies in place,” he [European Central Bank President Jean-Claude Trichet] added, stressing this would fuel household, business and investor confidence alike.

  23. July 6, 2010

    The “extra” spending for these wars is more than the $98.8 billion spent on the military by China. China is the second largest military spender on the earth but spends 2.0% of its GDP on the military vs. 4.3% for the U.S. (all figures are from Wikipedia and are for 2009)

    The U.S. spends more total dollars on the military than the next 16 countries combined. Only two of those 16 countries spend a higher proportion of GDP on the military than the U.S. Those two are Saudi Arabia (39.257 billion and 8.2%) and Israel (14.309 billion and 7.0%). Other countries spending a higher portion of GDP on the military are the United Arab Emirates (13.052 billion and 5.9%), Oman (4.003 billion and 7.7%), Iraq (3.814 billion and 5.4%), Georgia (665 million and 8.5%), Chad (412 million and 6.65) and Eritrea (327 million and 20.9%). Otoh, 144 countries spend a lower portion of GDP than the United States.

    Unlike the other 7 big spenders, we face neither immediate outside threat or immediate internal threat and disruption. Unlike WW II, the U.S. military does not directly employ a large number of people. We had a peak 16 million Americans in uniform during WW II and have something less than 10% of that number today despite having double the population.

    The money is going to businesses and much of it goes to profits, investors, or top executives. This is not an effective and certainly not an efficient stimulus.

  24. Ken Hoop permalink
    July 6, 2010

    http://www.amconmag.com/blog/war-makes-us-poor/

    Here’s an economic take from the antiwar Right on war’s debilitating effect on the economy.

  25. July 6, 2010

    “Get them doing something useful.”

    Exactly.

    The 21st century equivalent of Eisenhower’s strategically important highways is concentrated solar power – throw the more malleable part of the US weapons manufacturing industry at ground-based desert plants and a national powergrid (with free-for-all fiber optic network as a bonus), and put the rest of the lot on aerospace engineering for orbital solar power. If you want to maintain the US aggressive posture against everybody else on the planet, the prospect of orbital infrastructure should make you happy, and it neatly repurposes those mobs of Republican-voting Mormon engineers hell-bent on inventing yet another way to destroy intelligent life.

    But the problem with the elites and their retainers is that they have absolutely no imagination. Greed does not give, ever. Hence, you get crisis reformism such as

    http://en.wikipedia.org/wiki/Reign_of_Terror
    http://en.wikipedia.org/wiki/October_Revolution
    http://en.wikipedia.org/wiki/German_Revolution_of_1918%E2%80%9319
    http://en.wikipedia.org/wiki/Machtergreifung
    http://en.wikipedia.org/wiki/American_Revolutionary_War

    which almost always burns through several batches of “replacement elites” rather rapidly before natural selection brings about the peace of the graveyards for a generation or two.

    In a twisted way, the stupidity of the elites is the only hope for averting a “stable necrosis in the transcend” (nod to Vinge). But it comes at a terrible price for us peasants at the bottom of the trophic pyramid.

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