The War Machine Is
Driving The US Economy
By Andrew Gumbel
Might get Bush Re-elected, But it is Starting to Worry Economists
Published on Tuesday, January 6, 2004 by the lndependent/UK
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
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.
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."
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
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
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
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.
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."
© 2003 Independent