Sunday, November 27, 2011

Taking on the Military Keynesians

War: The Wrong Jobs Program

By Mark Engler via Foreign Policy in Focus

More than 40 years ago, long before anyone had ever heard of Barack Obama, before the collapse of Bear Stearns, and before contemporary debates about bailouts and debt ceilings, two authors, Paul Baran and Paul Sweezy, considered a tricky problem. In times of downturn, the government must spend to stimulate the economy. Yet getting the political establishment to agree on one particular program of spending seemed nearly impossible.

Baran and Sweezy phrased the conundrum as a question: "On what could the government spend enough to keep the system from sinking into the mire of stagnation?"

After assessing the political realities that steer America's power elite, they could find only one response. It was not what typically comes to mind when we think of economic stimulus or government-led job creation.

Their answer: "On arms, more arms, and ever more arms."

The authors did not approve of military spending as a strategy of economic development.

But, even at the very outset of the Cold War, they saw the deep hold that it had on decision-makers in Washington, DC.

We can see the continuing hold it has today. This fall, responding to high and persistent unemployment, President Obama called for a federal jobs act. Among its measures, the act proposed investment in schools and infrastructure. Conservative opponents responded with cries of derision. The critics charged that the plan "doubles down on a failed government stimulus strategy." It means "adding more money to the same broken system" they said. Finally, they insisted, “It comes to a point that you can’t keep borrowing in a futile attempt to stimulate the economy when the increased debt itself is weakening the economy.”

Obama's proposals were considered political non-starters, certain to be stonewalled by the Republican Congressional majority. But for all the right-wing insistence that government should end stimulus spending, cut federal budgets in order to reduce the deficit, and generally leave the market to its own devices, our country already has a massive spending program, and it enjoys strong bipartisan support. America's jobs program is its military—and the immense industry that provides the military with services and armaments.

Our country's existing jobs program goes by many names: The Permanent War Economy, Military Keynesianism, The Iron Triangle, Perpetual War. The real question it raises is not whether the government should spend. It is whether the government has been spending well.

Thanking the Russians for Making Capitalism Work

Scholars have long debated whether massive outlays on the armed forces can pull a country from a recession, or whether ongoing spending of this type is a drain on private enterprise. The views of two thinkers, an economist and an engineer, have come to define opposite poles in the discussion.

Michal Kalecki was a Polish economist, influenced by Marx, who saw Hitler's plunder of Europe from his post at the Oxford Institute of Statistics. Kalecki spent much of the 1930s studying capitalist business cycles and observing the way in which government spending could influence them. In doing so, he arrived at conclusions quite similar to his more-often-remembered contemporary, John Maynard Keynes. In fact, some argue that, based on priority of publication, Keynesianism should not be called Keynesianism, but “Kaleckianism.”

Following World War II, Kalecki sought to understand Nazi Germany's successful rise from the depths of the Great Depression to achieve full employment by the late 1930s. Theories popular at the time—and embraced by many U.S. Republicans of the era—held that military spending necessarily occurred at the expense of other sectors of the economy. The Wall Street Journal would later express this position, stating in 1980 that "'Defense spending…. is the worst kind of government outlay, since it eats up materials and other resources that otherwise could be used to produce consumer goods.''

Countering such ideas, Kalecki examined how military buildup could actually serve as a stimulus to other industry. Starting with his 1943 essay, “The Political Aspects of Full Employment,” he began to theorize what has become known as “Military Keynesianism.” Kalecki argued that private capital preferred military spending over other forms of government investment because it contributed to private profits without competing with business activity in more conventional economic markets.

This would prove an influential proposition. Baran and Sweezy, Harry Magdoff, and other Marxist writers from the 1960s on elaborated on Kalecki's ideas. Conventional economists had regarded war and militarism as aberrations, phenomena external to their models for how commerce should normally function. ("Peace reigns supreme in the realm of neoclassical economics," Magdoff noted in 1970.) But such assumptions did not square with a reality in which war was almost constant. The Marxists showed how vast arms spending, even during "peacetime," had become an essential state support for the economy. As one pair of writers working in this tradition wrote in 1972, "Without militarism the whole economy would return to a state of collapse from which it was rescued by the Second World War."

It was not just voices on the left stating this position. Business leaders themselves acknowledged the advantages of military buildup. In a speech given by Harvard economist Sumner Slichter to a convention of bankers in October 1949 (and cited more recently by authors John Bellamy Foster, Hannah Holleman, and Robert McChesney), the speaker contended that Cold War arms spending made severe depression "difficult to conceive." The prolonged conflict, Slichter said

increases the demand for goods, helps sustain a high level of employment, accelerates technological progress and thus helps the country to raise its standard of living…. So we may thank the Russians for helping make capitalism in the United States work better than ever.

Elevating Inefficiency to a National Purpose

Although Kalecki would influence many with his economic theories, a contrary view would come from an industrial engineer and longtime Columbia University professor. Seymour Melman was raised in the Bronx during the Great Depression. That downturn, he would later say, "made a deep impression on me then and to the present day because whole neighborhoods were clearly made impoverished. Unemployment was rampant, and almost any day if you walked out on the street you'd see, in one or another side street, the belongings of a family out on the sidewalk."

Melman put himself through college by working 15-hour overnight shifts in his uncle's knitting factory. He lived briefly on a kibbutz in Israel as a young man, and he also served two years in the military, getting a first-hand look at the workings an institution he would later criticize in detail. Initially interested in the social sciences, he ended up pursuing graduate studies in industrial engineering at Columbia, where he went on to teach for many decades.

Skilled at examining the industrial operations of different sectors of the economy, Melman became involved in the 1950s in analyzing a newly emerging realm: the Military-Industrial Complex. Subsequently, for more than 40 years, Melman would serve as an outspoken critic of massive public investment in the military, charging it with producing a growing weakness in America's civilian manufacturing capabilities. He would also become a leading proponent of "economic conversion," the idea that defense assets and infrastructure should be converted to more productive non-military uses.

In 2003, near the end of his long career, Melman wrote: "[A]t the start of the twenty-first century, every major aspect of American life is being shaped by our Permanent War Economy." Because he used language similar to that employed by analysts of Military Keynesianism, Melman might seem as if he were part of a similar school of thought. But, in fact, he considered himself staunchly opposed to their line of thinking. The theorists of Military Keynesianism examined how arms spending had been deeply integrated into the economy, providing a government support for business; Melman, in contrast, regarded military expenditures as a crippling drain on the country's economic health.

In a 1991 article in The Nation, he stood by his 1974 assessment of the "economic consequences of military state capitalism":

Traditional economic competence of every sort is being eroded by the state capitalist directorate that elevates inefficiency into a national purpose…. Industrial productivity, the foundation of every nation's economic growth, is eroded by the relentlessly predatory effects of the military economy.

In his analysis, Melman emphasized both the opportunity costs of military spending and the manner in which defense industries take up "economic space," depleting the resources available to the rest of the economy. In 1995, he argued, "The Cold War has bled our civilian economy by preempting capital resources, taking the lion's share of top scientific talent as well as federal research and development funds, and appropriating government funds that would otherwise have been available for the development of our infrastructure."

In an interview from the same period, Melman noted that approximately 30 percent of the country's scientists and engineers worked for the military, directly or indirectly. "The loss to the civilian economy," he said, "is incalculable.”

In 2006, historian Thomas Woods, writing for the libertarian Ludwig von Mises Institute, penned a fascinating tribute to the late engineer. In Woods' view, "Melman’s normative conclusions"—that government should undertake a thorough-going program of economic conversion for the benefit of civilian society—"were altogether conventional and uninteresting, and far removed from libertarianism. But his positive analysis was anti-statist to the core, and provides us with an array of important and typically neglected costs of large military establishments."

As it turns out, both liberals critical of the arms industry and free market enthusiasts wary of big government could agree when Melman paraphrased sociologist C. Wright Mills' wary appraisal of conventional wisdom in Washington: "Military Keynesianism," Melman wrote, "has become the 'crackpot realism'… of the American economy."

The Glamour of Guns Over Butter

In the decades since their debate commenced, neither the intellectual kin of Kalecki nor members of Melman's "depletionist" school have decisively prevailed. Those who have reviewed the evidence point to some weaknesses in each approach. Economists such as David Gold suggest that Military Keynesians may have overestimated the overall stimulus provided by government spending on the military—especially as the American economy has grown ever larger. On the other side, analysts contend that the depletionists go too far in their assessment of how the military saps the private sector.

Yet, ultimately, the differences between Kalecki and Melman may be less important than the common ground they share. Marxist analysts of Military Keynesianism, after all, never argued that arms spending was a particularly productive use of public funds. Nor did they endorse it as a way to keep the capitalist economy afloat. They merely highlighted the political realities that make it the most acceptable form of government spending for monied elites, and to the way in which the strategy becomes entrenched once pursued.

This point has been acknowledged by observers across the political spectrum. Libertarian Robert Higgs points to a 1944 book, As We Go Marching by John T. Flynn, in which the author describes militarism as "the one great glamorous public-works project upon which a variety of elements in the community can be brought into agreement.” Flynn then warns, presciently, that, "Inevitably, having surrendered to militarism as an economic device, we will do what other countries have done: we will keep alive the fears of our people of the aggressive ambitions of other countries and we will ourselves embark upon imperialistic enterprises of our own."

Today's arms contractors are geniuses at spreading production facilities over a wide range of Congressional districts, and they are not hesitant to spend millions for lobbying and campaign contributions. As a result, they have deftly reinforced the loyalty that elected officials feel toward military spending projects in their home states. And they have locked the country into an economically tragic pattern of public spending. For while it is debatable whether the military crowds out more productive activity in the private sector, it is clear that it leaves far less room in government budgets for social programs.

The trade-off of "guns versus butter," now used as a textbook example in economics of an either-or choice that nations face, has been invoked by a wide range of lofty orators. Eisenhower famously remarked, "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed." Martin Luther King, Jr. added, "We hear all this talk about our ability to afford guns and butter, but we have come to see that this is a myth… [W]hen the guns of war become a national obsession, social needs inevitably suffer."

A "Badly Under-Resourced" Military?

Melman may have had intellectual disputes with economists such as Kalecki, but his true adversaries were not theorists. They were defense hawks who not only agreed with the proposition that the military was propping up the economy, but who advocated for tax dollars to be devoted to this very purpose. Such figures continue to exist today. They include Martin Feldstein, the former chief economic advisor to President Reagan who argued in a 2008 Wall Street Journal op-ed that the Pentagon should be a primary recipient of government stimulus funds.

Also among their number is the American Enterprise Institute's Frederick Kagan, who insists, "Defense spending has long been recognized as one of the single strongest stimulants to any economy." Kagan's view of Pentagon budgeting is extreme enough to exhibit a certain through-the-looking-glass quality. Despite the historic expansion of military spending in the new millennium, Kagan considers today's military "badly under-resourced for nearly two decades by both Democratic and Republican administrations." Therefore, he sees few worthier recipients of public aid. When the military, he writes, "is so severely strained and billions of dollars in stimulus money are being sloshed around, refusing to give some of that money to the best and bravest Americans who need it badly—to say nothing of demanding that their budget be cut—is just wrong."

Although the stimulus debate of 2008 and 2009 brought out some Military Keynesian arguments, the stakes have since been raised. In the wake of the debt ceiling compromise negotiated between President Obama and Congressional Republicans in August, the guns-versus-butter dilemma has become starker than ever.

Eisenhower may have always been right on a metaphorical level about arms merchants stealing bread from the hungry. Yet the trade-off has not always been so direct. In past years, politicians have often chosen both to fill Pentagon coffers and to support a measure of social spending, even if it meant sustaining budget deficits.

Current demands for austerity have changed that. The debt compromise not only mandated an initial round of budget cuts, it also charged a congressional “super committee” with finding between $1.2 trillion and $1.5 trillion in further reductions to the 10-year federal budget. If lawmakers do not meet this requirement by the end of November, the deal will "trigger" an automatic $1.2 trillion in cuts, half of which would come from "defense and security." To avoid these automatic cuts, hawks will be pushing hard to instead put social programs on the chopping block.

Given the Military Industrial Complex's canny instincts for self-preservation and the loopholes included in the compromise agreement, there is some doubt about how severe cuts at the Pentagon would actually be, even in a most extreme case. Nevertheless, the threat of a budget squeeze has been real enough to prompt an aggressive counter-offensive by arms lobbyists.

In mid-September the Aerospace Industries Association (AIA) launched the "Second to None" campaign, designed to "educate the public on [the] impact of indiscriminate budget cuts." According to AIA President and CEO Marion Blakey, the debt agreement "dangles a Sword of Damocles over our national security." Furthermore, he says, "the cuts to defense proposed in the ‘trigger’ deal are so draconian that it’s hard to believe they are even on the table."

Wary of openly embracing pork-barrel politics, politicians and their beneficiaries in the arms industry have traditionally avoided being too overt about touting the economic benefits of a given defense initiative. Hawks have usually been careful to put national security at the fore, and to keep the Keynesian implications of their endeavors in the background. But now, with public concern about unemployment at the center of national debate, arms merchants have increasingly made job creation one of their key selling points.

Loren Thompson, chief operating officer at the industry-funded Lexington Institute, has been a vocal spokesperson in this drive. Writing for Forbes, Thompson warned that "Defense Cuts Could Destroy A Million Jobs." He painted President Obama's jobs bill as especially counterproductive, since "the cuts mandated by the Budget Control Act to reduce deficits could grow bigger if the president’s jobs bill passes." As a result, Thompson writes, "the government could end up destroying many thousands of good [defense] jobs to create lots of not-so-good jobs in areas like construction. What kind of a tradeoff is that?"

Elsewhere Thompson asked, "Does Washington really believe that building a new bridge in Kentucky creates jobs, but a defense plant or military base there does not?"

The Economic Value of a School

In fact, there are good reasons to hold that allocating funds to build a bridge—or to open a hospital, or to staff a school—is a superior path to creating jobs than spending the same amount of money on arms. These reasons are based in morality and public interest, as well as in economics.

First, the moral argument. In the 1960s student activists at MIT were calling for an end to military research on campus, which was consuming an increasing portion of the university's attention. However, as Stuart Leslie relates in his book The Cold War and American Science, not all of their peers were convinced. One graduate student, dismissive of protests, told The New York Times: "What I’m designing may one day be used to kill millions of people. I don’t care. That’s not my responsibility. I’m given an interesting technological problem and I get enjoyment out of solving it.”

Needless to say, building a bridge or hiring an educator has less dubious moral implications than supporting such military research. Bridges and schools also create long-term economic value, something most defense procurements cannot claim. An educated child becomes a more productive member of society. A bridge becomes part of the country's infrastructure, facilitating further commerce. On the other hand, when we build bombs, the best we can hope for is that they are never used.

Melman argued, "whatever else you can do with a nuclear-powered submarine that is almost as long as two football fields… you can’t wear it, you can’t live in it, you can’t travel in it, and there’s nothing you can produce with it.” Author and attorney Ellen Brown elaborates on this point, explaining the many quirks and inefficiencies that distinguish military spending from other economic activity:

Military spending is the very essence of "built-in obsolescence": it turns out products that are designed to blow up. The military is not subject to ordinary market principles, but works on a "cost-plus" basis, with producers reimbursed for whatever they have spent plus a guaranteed profit. Gone are the usual competitive restraints that keep capitalist corporations "lean and mean."… Yet, legislators looking to slash wasteful "entitlements" persist in overlooking this obvious elephant in the room.

Adding to these considerations is what Melman dubbed the "overkill" problem. To a certain extent, one could argue that building up a military arsenal served the economy by protecting private property, deterring foreign invasion, and allowing the nation to conduct its business in peace. But this notion became more and more dubious as the United States amassed ever-greater military might. By the time the U.S. armed forces were able to destroy every possible enemy nation many times over, the continued investment of billions of dollars per year in new military technology ceased to have nearly as much value.

Also worth noting is the fact that our "overkill" investments have a uniquely risky downside: With an army of soldiers and an unmatched arsenal of armaments sitting around, politicians are inevitably tempted to think they should be put to use. And that is an economically costly proposition indeed.

Doing Right On Jobs

What is true for the economy generally is also true in the realm of employment: When it comes to jobs, not only would it be a great day for our kids if the schools got all the money they needed and the Air Force had to a hold bake sale to buy a bomber—this would be a great day for American workers, too.

The most compelling recent study on this point was produced in October 2009 by Robert Pollin and Heidi Garrett-Peltier of the University of Massachusetts, Amherst. Using data from the Department of Commerce, the authors looked at four areas of investment: education, the military, renewable power, and fossil-fuel energy.

"By a significant margin," Pollin writes in a Boston Review article describing the report's conclusions, "education is the most effective source of job creation among these alternatives—roughly 29 jobs per $1 million in spending." This included both direct employment (of teachers and other personnel), jobs created indirectly by investment in this sector (those, say, of suppliers selling photocopiers or paper to the schools), and "induced" jobs (in businesses supported when teachers spend their salaries on other good and services). "Clean-energy investments are second, with about seventeen jobs per $1 million of spending. The U.S. military creates about twelve jobs, while spending within the fossil-fuel sector creates about five jobs per $1 million."

There are several reasons why military spending ends up near the back of the pack. The inefficiency of the "cost-plus" system is one. Pointing to another, analyst William Hartung of the Center for International Policy explains, "more of the military dollar goes to capital, as opposed to labor, than do the expenditures in the other job categories." He cites the example of the F-35 Joint Strike Fighter. With the cost of materials and other overhead high, a mere 1.5  percent of the money spent on each aircraft goes toward labor costs for manufacturing and assembling planes in the F-35's main plant in Fort Worth, Texas.

A third issue is "leakage." Military spending that takes place outside of the country—say, in Iraq, Afghanistan, Libya, or one of the many U.S. bases abroad—has less economic benefit for the United States, since some of the stimulus created instead benefits foreign economies. Green technology, as a counter-example, produces more significant ripple effects at home.

Nevertheless, Pentagon boosters such as Loren Thompson are not persuaded. They argue that military-related jobs tend to pay more, and therefore workers in this industry have a greater impact on the rest of the economy. Yet this is not true compared to education, Pollin notes, where average pay is higher than in defense. Nor is it, in itself, an adequate reason to support a given sector. No doubt, public efforts to spur employment must be attentive to producing jobs that pay living wages. But this cannot be the only measure of value for public spending.

Melman offered a wider vision for doing right on jobs. The years following World War II—when America converted much of its war-making industrial might into civilian manufacturing capability—loomed large in his proposals for a demilitarized society. Through the end of his life in 2004, he pictured military laboratories becoming public hospitals, bases becoming industrial parks and green spaces, and arms factories being retrofitted to make farm machinery or communications satellites. His was the noble prophecy of swords beaten into ploughshares, re-imagined for an America in its industrial prime.

Yet even if we undertake nothing so ambitious as what Melman dreamed, we can be smarter about what we choose to support with our public funds, and what we decide to cut from our government's budgets. "Arms, more arms, and ever more arms" is no path to a just society. And it is no worthwhile strategy for creating jobs.

Mark Engler is a senior analyst with Foreign Policy In Focus and author of How to Rule the World: The Coming Battle Over the Global Economy (Nation Books). He can be reached via the website Research assistance provided by Eric Augenbraun.

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