Friday, March 7, 2008

An Economy and Federal Budget That Works-Part Three, Military Spending Works Worst

The recession we are in now is going to get worse. The housing bubble may be popped, but it is not yet fully deflated. Some economists estimate that by the time the housing market has bottomed out, the loss of asset value to individuals and companies will be upwards of $8 trillion—that’s $8 thousand billion, or $8 million million or about $50,000 each for every adult in the country, legal or otherwise. And, to date, we may have only absorbed about half of that eventual loss.

Consumers are already poorer and feeling it; that reality and those feelings, which helped trigger this recession, will continue to fuel it. Built out of a solid foundation of consumer pessimism, rising inequality and poverty, job and benefit losses, mortgage foreclosures, stalled construction, rising commodity prices and other creepy certainties and uncertainties, the recession of 2008 and beyond is going to feel more like the Great Depression of the 1930s than any downturn between then and now.

And because this experience will revive the combination of inflation and economic stagnation, the “stagflation” that dogged the country in the late ‘70s, we will hear a whole lot about how the Fed’s hands are tied—lowering interest rates will fuel inflation, raising rates will increase the severity of the recession, ergo, a powerless Fed.

We will also hear that the Bush-inflated deficit will prevent the federal government from using budget measures (spending on public works, unemployment benefits, etc.) to stimulate the economy. So, no interest rate cuts, no effective federal domestic spending, and no investment-fueled recovery (corporations will invest their money—and ours—overseas where investing will seem more profitable).

But ending the wars in Iraq and Afghanistan and slashing the regular military budget will reduce inflationary pressure and provide billions to invest domestically. Imagine, a whole generation of weapons and war budgets pounded into new public schools, expanded public transportation, health care, rebuilt bridges and more.

A story, almost a parable

Liberal economists say that Henry Ford’s decision to pay autoworkers a higher wage—a wage high enough to allow them to purchase Ford products—created a new market for manufacturing. Paying decent wages a century ago, the story goes, dramatically increased the buying power of working people, and helped create a market for the products that Ford workers made.

Of course, the story is oversimplified, but it helps to illustrate a point. In this case how workers who get poverty wages can’t afford to be consumers of the products they make or of the services they provide. So, if a simple story of an employer and wage workers can help us understand how fair wages can fit into “free” market transactions, can another simple story help us see a way to fight inflation?

I have in mind a story about the military-industrial complex producing items—a cruise missile, say, or a rocket launcher—that no worker in their right mind would be willing to buy. Or, regardless of their state of mind, would be legally permitted to buy or could afford to buy. In that story, decently paid workers with jobs at military contractors produce missiles and tanks that are not available on the open market.

In that story, weapons manufacturers produce nothing for the domestic common market. But their employees, those workers, earning relatively high wages, go out and compete in that market with the rest of us to purchase the goods and services we all require. With more buyers and fixed or even slowly expanding supplies of goods, the cost of food, housing, clothing, autos and other consumer goods is driven up. (Yes, in the idealized market place—which, we are told, is the one we live in—the producers of marketable goods produce more and the price holds. Yeah, maybe, but that would be a much longer story.) Into the bargain, the employees of military contractors create powerful voting blocks in regions of the country that have economies dependent on federal military spending.

The point of this story is that there are budgetary ways to control inflation. Want an expanded constituency supporting peacetime budgeting (and peace) and reduced inflationary pressure? Find a productive way to convert military spending into expanding and maintaining domestic infrastructure and green jobs and get such a constituency and many other swell benefits.

Spending for War and Weapons
Iraq and Afghanistan

Further economic benefits develop from ending the wars in Iraq and Afghanistan. The costs of these wars is not included in the regular budget, but are separate appropriations costing $100 billion per year or more. In 2007, the Center for Economic and Policy Research (CEPR) commissioned Global Insight to do an analysis of the long-term effects of increased military spending on the wars in Iraq and Afghanistan. That study, “The Economic Impact of the Iraq War and Higher Military Spending (referred to in Part I of this series),” showed that an early stimulus provided by war spending would begin to turn negative after five years and worsen in succeeding years.

In other words, the result of spending approximately $135 billion for war in 2003 provided a small stimulus at the time, but will have begun to result in job losses in specific sectors of the economy (almost 45,000 lost in manufacturing) by this year. Continuing war spending worsens the effect—the study projects that by 2013 more than 450,000 jobs will be lost across most sectors of the economy.
[Find out more at the CEPR website:]

The U.S. Military Budget

The United States currently spends more on the military ($623 billion projected for 2008, excluding the military’s share of interest on the national debt) than the combined spending of the rest of the world ($577 billion projected; source, both figures, Stockholm International Peace Research Institute).

New defense priorities that depended more on diplomacy and internationalism and less on the policy preferences of weapons manufacturers would result in immediate and sustained cuts in military spending. And would free substantially more than one trillion dollars over the next decade for housing, public transportation and other infrastructure spending.

Outside of paying people to be soldiers and paying veterans’ benefits, every aspect of the military budget should be examined with at least the same unsympathetic rigor with which the Clinton administration approached welfare reform. As things now stand, the U.S. military budget is a significant source of inflationary pressure. (I leave the actual calculation of how much pressure to a real live economist.)

This tax-workers-buy-weapons (TWBW) policy is probably among the most effective mechanisms ever developed for the transfer of wealth from taxpayers and working families to the executives and shareholders of multi-national corporations. TWBW supports the purchase of weapons systems that we don’t need and that sometimes don’t even work. The fact that we are frequently purchasing weapons that don’t work ought to be a continuing scandal, but it isn’t, which suggests that TWBW is also a foundation for cover-ups, bribes, revolving door transitions from military to civilian careers and lobbyist opportunities, in short, corruption. And, to reemphasize the earlier point, TWBW is inflationary.

So cut the military budget immediately. Disengage militarily as soon as possible from Iraq and Afghanistan, focusing instead on civilian relief and reconstruction in those countries in the hope, probably futile, that a constructive aid program will help to make the transition from war as peaceful as possible. End weapons programs and weapons development that are basically offensive in nature. Eliminate military spending on programs and projects that fulfill the corporate goals of contractors and their investors, but do nothing to enhance the well-being of the country or of working families.

Invest the bulk of the savings from military cuts in domestic social programs. Restore the public school system. Invest in teachers and teacher education. Make college education affordable. Rebuild and expand mass transit and intercity and cross-country railroads. Establish a universal health care system that delivers health and operates efficiently. Invest in conservation, green jobs and managing climate change.

In the process, get these additional benefits: More peace and more peaceful opportunities worldwide; reduced inflationary pressure, a more productive workforce, stronger families, shorter commutes, less traffic congestion, cleaner air, and on and on.

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