Military Keynesianism to the Rescue?

Military Keynesianism to the Rescue? 
January 2, 2009
Robert Higgs

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 income for consumption of 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
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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. 

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