Military Keynesianism to the Rescue?
Military Keynesianism to the Rescue?
by Robert Higgs, The Independent Institute
(posted by the request of The Independent Institute)
Writing in the Wall Street Journal on December 24, 2008, Martin Feldstein gives us an article entitled “Defense Spending Would Be Great Stimulus.” The title tells you everything you need to know: military Keynesianism is the medicine being prescribed by a leading figure of the politico-economic Establishment—a Harvard professor, former chairman of the Council of Economic Advisers, former president of the American Economic Association, president emeritus of the National Bureau of Economic Research, and member of the President’s Foreign Intelligence Advisory Board. That a man so drenched in professional honors and attainments would be peddling such long-discredited claptrap speaks volumes about the state of mainstream economics. When you think it can’t sink any lower, it does.
Feldstein opines that “countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer.” This statement encapsulates the essence of vulgar Keynesianism. It would seem that Feldstein, like nearly every other lion of the mainstream economics profession, failed to notice that by the very empirical-test standard the profession considers sacrosanct, this theory was decisively refuted by the events of 1945-47―or perhaps the mainstreamers believe that after their model had, as they see it, proved its mettle so beautifully on the upside from 1940 to 1945, its abysmal failure to predict from 1945 to 1947 need not be taken seriously.
As if this blindness were not enough, it gets worse, because the blind economist not only proposes to employ vulgar Keynesian measures to brake the current recession, but he also proposes that the blind lead the blind down the worst possible path: don’t simply increase government spending in general; increase government military spending and other ostensible national-security outlays in particular. “A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that [Obama administration] increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.” Feldstein foresees the creation of some 300,000 jobs as a result of flinging money helter-skelter at military personnel increases, training, equipment, and procurement of major items such as fighter planes, transport aircraft, and combat ships.
Thus, “a substantial short-term rise in spending on defense and intelligence would both stimulate our economy and strengthen our nation’s security.” Feldstein speaks as if the U.S. military is currently a sagging, depleted thing, desperately in need of essential repair, replenishment, enlargment, and modernization, notwithstanding that no nation on earth comes close to presenting a serious military challenge to the United States and that ragtag gangs of Islamist fanatics in the caves of Pakistan and the back alleys of Europe and Asia’s big cities pose, at most, a police problem, not a threat to U.S. national security. He seems not to appreciate that the government is already spending more than a trillion dollars a year for military-related purposes.
Feldstein’s article reminds us that the elites who rule this country have a high threshold for embarrassment. They will shamelessly trot out any sorry intellectual apparatus to justify snatching the taxpayers’ money and funneling it to privileged corporate contractors and to the horde of drones on the government’s payroll. However intellectually contemptible military Keynesianism may be, though, it has a proven record of getting the Establishment where it wants to go.
For decades, secretaries of defense helped to justify their gargantuan budget requests by claiming that high levels of military spending would be “good for the economy” and that reduced military spending would cause recession. So common did this argument become that Marxist critics gave it the apt name military Keynesianism. On both the right and the left, people believed that huge military spending propped up an economy that, lacking this support, would collapse into depression. Such thinking played an important part in the political process that directed about $15 trillion (in today’s dollars) into Cold War military spending between 1948 and 1990. Nor did the argument disappear even after the Soviet Union unsportingly left the playing field.
Military Keynesianism has enough surface plausibility that it garnered a substantial following in certain quarters even before Keynes’s General Theory gave it apparent intellectual respectability. In his 1944 book As We Go Marching, John T. Flynn noted as a fact “this devotion of the conservative elements to military might,” and he emphasized that “militarism is the one great glamorous public-works project upon which a variety of elements in the community can be brought into agreement.” He understood, however, that military public-works spending has far graver consequences than ordinary Keynesian pyramid building. “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.” Flynn deserves high marks as a prophet.
Keynesian economics rests on the presumption that government spending, whether for munitions or other goods, creates an addition to the economy’s aggregate demand and thereby brings into employment labor and other resources that otherwise would remain idle. The economy gets not only the additional production occasioned by the use of these resources, but still more output via a “multiplier effect.” Hence comes the Keynesian claim that even government spending to hire people to dig holes in the ground and fill them up again has beneficial effects: even though the shovelers create nothing of value, the multiplier effect is set in motion as they spend their money income for consumption goods newly produced by others.
Such theorizing never faced squarely the underlying reason for the initial idleness of labor and other resources. If workers want to work but cannot find an employer willing to hire them, it is because they are not willing to work at a wage rate that makes their employment worthwhile for the employer. Unemployment results when the wage rate is too high to “clear the market.” The Keynesians concocted bizarre reasons—downwardly inflexible wage demands, a “liquidity trap”—to explain why the labor market was not clearing during the Great Depression and then continued to accept such reasoning long after the depression had faded into history. But when labor markets have not cleared, either during the 1930s or at other times, the causes can usually be found in government policies—such as the National Industrial Recovery Act of 1933, the National Labor Relations Act of 1935, and the Fair Labor Standards Act of 1938, among many others—that obstruct the labor market’s normal operation.
So, government policies created high, sustained unemployment, and Keynesians blamed the market. They then credited the government’s wartime deficits for pulling the economy out of the Great Depression and praised continued military spending for preventing another economic collapse. In this way, sound economics was replaced by economic ideas congenial to spendthrift politicians, military contractors, labor unions, and left-liberal economists—and eventually even to purportedly conservative economists, such as Martin Feldstein.
How much better it would have been if the wisdom of Ludwig von Mises had been taken to heart. In Nation, State, and Economy (1919), Mises wrote: “War prosperity is like the prosperity that an earthquake or a plague brings.” The analogy was apt in World War I, in World War II, and during the Cold War. It remains apt today. Contrary to the claims of Keynesian economists, government’s deficit spending will not generate something for nothing; it certainly will have opportunity costs. When the government’s spending goes to maintain a bloated military-industrial-imperial apparatus, the opportunity costs are even greater, because they include lives and liberties, as well as the usual economic sacrifices.
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Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.
Full Biography and Recent Publications
Also from The Independent Institute:
Is Israeli Policy Crazy? by Ivan Eland
I think this subject is probably one that will open up quite a debate. I was emailed the following article this morning also, which goes right along with the above article. Please leave your thoughts after you read.
Going Along to Muddle Along, at Get Liberty.org., Americans for Limited Government.
“[T]rying to dig out of this recession by adding a lot of new permanent programs, or by expanding existing programs, will only accelerate this fiscal tsunami… This does not mean the government cannot spend -- it is fairly obvious that serious deficit spending is needed immediately.”—Senator Judd Gregg (R-NH), “How to Make Sure the Stimulus Works,” The Wall Street Journal, January 5th, 2009.
Will anyone in Congress stand in the way of the bailout mania?
If Senator Judd Gregg’s recent commentary in the Wall Street Journal is any indication, it appears that not only has Keynesian economics—the economics of stimulus through deficit spending and “pump priming”—experienced a resurgence in 2008, but that it will be the order of the day for some time to come.
By ceding even an inch in the upcoming Congressional session, Senate Republicans will give up leagues. “Going along to get along” will only hasten the nation’s descent into financial ruin. If conservatives are unwilling to take a principled stand against the maddening explosion of the national debt—even a stand that fails in the near term—the American people will once again be devoid of opposition to the unprecedented growth of Big Government in response to a crisis it helped create.
Mr. Gregg apparently believes that Republicans cannot win a debate against excessive deficit spending during an economic downturn and so is trying to water down President-elect Obama’s $1 trillion economic “stimulus” package. Or he actually thinks that said “stimulus” is necessary.
Either way, he is unnecessarily ceding ground in a debate where being wishy-washy will only result in the American people wishing they had washed their hands of tepid Republicans all the sooner.
Barring a miracle resurrection of the Blue Dog Democrats in the House, the credible threat of filibuster in the Senate is the only way Republicans will achieve any meaningful concessions in the coming session. To be fair, this is what his piece appears aimed at doing—for example he writes that if there must be infrastructure projects, make sure they are necessary projects, or that “when compiling the initiatives that drive this stimulus package, the priority should be on one-time items do not create recurring out-year costs such as expanding social welfare programs”.
But Republicans are not going to win any debate by saying, “Your deficit-spending stimulus is not the right one. Ours is better.” Simply put, they will not effectively argue against the Obama administration’s $1 trillion deficit-spending plan by advocating for it.
As radio host Mark Levin notes nightly, government spending is never reduced. In good times or bad, politicians always have an excuse to deficit-spend. Under those circumstances, the debt will never be eliminated.
By ceding the very principle over which the debate on “stimulus” will turn, Republicans miss an opportunity to argue against expanding the national debt yet more in 2009. And if Republicans cannot argue against debt expansion after the monumental debt explosion of 2008 (the debt ceiling now tops $11 trillion), they may well have consigned themselves to the scrapheap of political history.
Conservatives will have an opportunity—a slim one—with the incoming session to take a stand against the bailout mania that has engulfed Washington. How can yet more deficit spending even be considered by lawmakers when taken together the financial obligations created by the federal government in 2008 have topped $8 trillion?
How can the U.S. dollar regain its strength if government borrows and prints yet more Monopoly money with hasty abandon? What are the real implications tomorrow of today’s “stimulus”? Many analysts are projecting that the excessive expansion of the monetary base will eventually result in inflation. Are any lawmakers at all concerned by these projections?
These questions must be answered. And yet they are not.
National debt and excessive money creation is not just money that piles up without consequence. For every action, there is a reaction. And moves made by the government in 2008—and now, apparently, 2009—will have profound economic consequences for decades to come.
With the recent confirmation of Al Franken as Minnesota’s next Senator, Republicans cannot afford a single defection on any issue of importance to their caucus. And on the issue of deficit-spending—their Achilles heel when it comes to their credibility with the American electorate—there may not be a more vital time for them to take a stand than in the coming session.
Republicans do not need to be more like Democrats in order to get along. They can offer amendments that call for making the Bush tax cuts permanent. That strengthen the dollar by eliminating the dual mandate at the Federal Reserve. That once and for all privatize the mortgage industry. And that reduce the national debt. If their colleagues across the isle do not wish to consider those proposals, they can vote Nay.
Conservatives should be demanding that every penny of the national debt—and any other financial obligations the federal government has taken upon itself including the expansion of FDIC insurance—be accounted for, and construct a plan that obligates reducing and eventually eliminating that debt.
When conservatives cede that debt expansion is acceptable at a time when the financial obligations of the nation are exceeding what the nation is ever capable of paying back, it is clear that not only has the economics of Keynes experienced a resurgence, but that conservative proposals may well be dead on arrival through the coming session. The key for the GOP—if it is to regain any credibility with the American people—is to utilize every Senate rule (however obscure) to make certain the excessive stimulants are equally as moribund.
Robert Romano is the Editor of ALG News Bureau.
What do economists say about NDP, Net Domestic Product?
Never heard of it? That is not surprising.
A businessman that doesn’t know the difference between Gross and NET is a pretty dumb businessman. Maybe the economists are pretty dumb or maybe they just want us to be.
John Kenneth Galbraith was one of the early Keynesians but he wrote about the planned obsolescence of automobiles in 1959, 13 years after Keynes’ death and 10 years before the Moon landing. What do economists say about it today? How old was Obama in 1959?
There have been 200,000,000+ cars in the United States since 1995, more cars than there were Americans in the 30s. But how much do Americans lose on the depreciation of automobiles every year? It won’t show up in NDP because economists only care about the depreciation of CAPITAL GOODS. But they don’t point that out to us even in their economics books.
At $1,500 per car per year that is $300,000,000,000 per year.
The economy depends on consumers being dumber than economists.
http://discussions.pbs.org/viewtopic.pbs?t=28529
psik
Posted by: psikeyhackr | February 14, 2009 at 05:34 PM
The FY'10 DoD budget was approved but it is being widely discussed that there will be a 3% budget reduction in the 1st Quarter 2009. I'm not sure how that tracks with the premise, but as far as I remember (and I'm not going to look it up), both the DoD and DHS FY'10 budgets were + YOY. What happens in FY'11 remains to be seen (and will likely be based on "events").
Posted by: Stormwarning | January 06, 2009 at 06:17 PM