Military Spending is INCREASING Unemployment and REDUCING Economic Growth

I have written extensively on the fact that this is not a normal cyclical recession, and we’re not in the type of “jobless recovery” which we’ve had a couple of times in the last 50 years. Unemployment will continue rising in America for some time, which will make a real, sustainable recovery very difficult.

The heads of two Federal Reserve banks are now saying something similar:

Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.

But instead of doing anything to encourage a sustainable recovery in employment – such as rebuilding America’s manufacturing base, or breaking up the too big to fails so that the smaller banks have a chance to grow and lend more to individuals and small businesses (see this and this) – the government has simply thrown money at the banks.

Moreover – contrary to what you might have heard – PhD economist Dean Baker pointed out yesterday that America’s massive military spending on unnecessary and unpopular wars actually lowers economic growth and increases unemployment:

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

Note 1: Global Insight is:

Recognized as the most consistently accurate forecasting company in the world.

Note 2: A paper published in 2007 by the The Political Economy Research Institute at the University of Massachusetts, Amherst entitled “The U.S. Employment Effects of Military and Domestic Spending Priorities” concludes:

We present in Table 1 our estimate of the relative effects of spending $1 billion on alternative uses, including military spending, health care, education, mass transit, and construction for home weatherization and infrastructure repair…

As we see, defense spending creates 8,555 total jobs with $1 billion in spending. This is the fewest number of jobs of any of the alternative uses that we present. Thus, personal consumption generates 10,779 jobs, 26.2 percent more than defense, health care generates 12,883 jobs, education generates 17,687, mass transit is at 19,795, and construction for weatherization/infrastructure is 12,804. From this list we see that with two of the categories, education and mass transit, the total number of jobs created with $1 billion in spending is more than twice as many as with defense.

Note 3: I honor the brave veterans and active-duty soldiers who have served our country. They are not responsible for the policies of the civilian leadership. Indeed, if you talk to soldiers, many will tell you they think we are involved in wars we shouldn’t be in.

Note 4: I am for a strong defense. That’s not what this is about.

But we got into the Iraq war based on the false linkage of Saddam and 9/11, and false claims that Saddam had WMDs. Nobel prize winning economist Joseph Stiglitz says that the Iraq war will cost $3-5 trillion dollars.

And experts say that the Iraq war has increased the threat of terrorism. See this, this, this, this, this and this.

(Incidentally, torture also reduces our national security).

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  • http://www.blogger.com/profile/08454222098667643650 Tom Hickey

    Ike warned about the "military -industrial" complex. Well, it's now become the military-multinational complex. US policy is based on a particular world view based on neoliberal economics, which in a global context involves neo-imperialism and therefore neocolonialism. The military is needed to secure an uninterrupted flow of necessary resources, especially petroleum. Noam Chomsky has delineated this in detail in his work. He calls it "the Mafia principle."US foreign policy is straight out of the mafia

  • http://www.blogger.com/profile/09443857766263185665 Ralph

    Military spending reduces economic growth? So where did the Internet, the jet engine, radar, satellites, microchips all start out: in military laboratories wasn't it? Not that I'm advocating military spending for the sake of the technology it brings.Also aggregate employment levels are determined by factors like aggregate demand and labour market efficiency. These factors have just about nothing to do with how much a country spends on its military. Dean Baker: 3/10 and see me after the lesson.

  • http://www.blogger.com/profile/06467044364932771815 terry freeman

    Too true! The problem is even worse: Dean Baker comments only on the incremental 3% or so of GDP attributable to the middle-east war; but the "baseline" for "defense" spending was already far greater than the baseline used by any other country. Objectively, does a nation protected by two oceans, sharing borders with friendly nations, really need to spend ten times as much on "defense" as any other nation in the entire world? Spending in excess of objective needs for defense is really a vast corporate welfare program, which plunders the rest of the economy, costs jobs, and reduces our standard of living. If you're worried about anthropogenic global warming, you might consider that the entire military-industrial complex has a vast carbon footprint – but that's another argument for another day.

  • http://www.blogger.com/profile/08454222098667643650 Tom Hickey

    The economic problem with military spending is that it is non-productive in the sense that the defense industry does not produce goods and service for the domestic economy, so the money spent that goes into the economy increases demand without being offset by supply. This creates more money chasing fewer goods, which influences prices.Some economic good does arise from military spending, as Ralph observers, because the military has a carte blanche from the government for research and development. Industry, which must rely on investment, could never hope to match this extravagance and market constraints would never permit it. But the government could do this anyway, without the necessity of a military "excuse" if there were the political will.And as terry freeman observes, the externality that the military involves greatly offsets any contributions from R&D. And the cost of externality is socialized.

  • http://Anonymousnoreply@blogger.com Anonymous

    It's not the 'defense industry'; it's the offense industry. How many more innocent civilians and people who are just trying to protect their resources from invaders will we have to kill before we can see what we are doing??? Our tax dollars are being spent to murder people.

  • http://Stolenoreply@blogger.com Stole

    Look, everything in our nation works as a whole, yes you might say that the defense is killing us as far as our budget goes, and you can also say that military spending is needed to protect us that way we can keep doing what we do everyday, that is true. What is also true though is, although our military is unquestionably needed at all times, we should have avoided some areas we have invaded because that would have saved the US so much money. In simple terms, hush it up cause we can't change the past, who did what? why? blah blah blah! you are all fixed on the past, instead, try to come up with solutions, historians usually are good for nothing except figuring out how things came to be. Thank you

  • jk2001

    Wars used to have a temporary Keynesian stimulus effect, but with this current trend of outsourcing war services instead of hiring more relatively well paid troops, and really reducing the number of people hired to fight wars (thanks to technology), it’s mostly going to send money to the defense contractors. They’re top heavy with well paid workers, so they won’t stimulate the economy as much as the average person who spends money directly into the markets (rather than socking money away in investments).

 

 

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