Budget Deficit Blowback
One of the striking things about about the deficit crisis that seems to loom over the United States is the probability that it will force a massive change in American expectations. In Newsweek this week Niall Ferguson beats the deficit drum. His fear is that US will have to give up its position as superpower:
As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon’s present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.
Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.
This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America’s debt crisis.
Ferguson fears the consequences of a withdrawal of American hegemony. But there’s a different threat here too. The US has relied on the military to provide economic benefits for a long time.
The military is our secret Keynesian weapon. William Kristol was the first to say that if we needed to spend stimulus money, it should be most quickly and efficiently spent through the Pentagon. It is often overlooked how much we depend on the military to provide jobs, vocational training and government subsidies to industry.
Many have argued that this is a very inefficient way to achieve those economic goals.
But it is the way we’ve chosen since the Reagan build-up began 30 years ago. Like the massive overhaul in our entitlement programs that will be forced by the deficit spending on financial system bailout, the loss of military Keynesianism will cause great disruption within the American economy.
Source:
An Empire at Risk
by Niall Ferguson
Newsweek; November 30, 2009
http://www.newsweek.com/id/224694
November 30th, 2009 at 9:08 pm
Ferguson mentions both defense spending and how empires fade. We do not spend on “defense.” We spend on empire building and lining the pockets of the war mongers (see Smedly Butler’s comments, available on the Google). The difference is apparent in our deficit. With our huge stockpile of nucular tipped ICBMs, we need never go to war, defensively, again, if we so chose (nor do we need new weapons systems). But that’s not what we choose. We are learning, and will continue to learn that there is no security in exporting instability.
November 30th, 2009 at 9:18 pm
Historically, you can’t bring a standing army home to a jobless economy, as other empires learned. I guess we’re damned if we do, damned if we don’t.
November 30th, 2009 at 9:31 pm
Some points here:
* William Kristol is a nepotism hire who is always wrong.
* The relative Keynesian effects of different spending have been figured by many economists, and defense spending is always comes out last in stimulatory bang for the buck (pun not intended).
The real economic effect of our military is not Keynesian, but intimidation.
Iraq convinced a number of petro-states not to Euro denominate their oil, for example.
November 30th, 2009 at 9:52 pm
What msaroff said.
Referring to military spending as “Keynesian” is ridiculous and ignorant; government spending is only consistent with the Keynesian model when it attempts to intervene in a liquidity trap — accepting an increase in debt by way of compensating for a collapse in spending by the private sector — all other government spending, deficit or otherwise, is something else and not “Keynesian” by definition.
I confess to growing amazement at how easily Americans are misinformed. Is it simply because corporate media has abrogated (sold) its responsibility to democracy as a 4th Estate of government or is this the real indicator of the failure of our educational system; that we can no longer tell the difference between reality and fantasy?
November 30th, 2009 at 9:54 pm
@ Wally,
Perhaps that’s why we are in two wars. We know job growth has been declining since Reagan…and Clinton was elected because we’d lost our steel worker jobs (I always remember Mario Cuomo’s great speech asking “how can we possible re-train those steelworkers with their big hands hardened by working in the forges and their big fingers to learn to use computers or to retrain as technical workers in the new America?” (I’m paraphrasing)
Clinton got elected because the Japanese Economy was gangbusters and remember how we were all supposed to follow the Japanese Model…which included having workers start their day with Exercise Programs like the Japanese and intensive sessions on “Worker Productivity Training.” Longer work hours were also touted as the Japanese way.
Then “Win 95″ allowed the “Personal Computer” to take off and the Tech Bubble took off and grew and grew…(providing many jobs) …then it burst and the tech jobs went to India. In the background the Textile Jobs in America and the small appliance manufacturing were moving to Mexico and China (while the Tech Bubble was disgusing it all).
But, by building our military we were able to absorb a huge amount of lost jobs for the young…(covering over the loss of jobs disguising the true unemployment.) With Iraq Invasion and Afghanistan we’ve allowed older folks who got jobs in the military when they were young to keep employed as Mercenaries while we continue to recruit the young men and women who have no hope in this economy.
We can’t do this any longer…but how do we bring home so many thousands to a country that has no jobs for them and what about those crazy Military Contractor Mercenaries? Should we further increase “Homeland Security” to give them a job so they don’t “Go Off” on us? Or will they anyway? Mercenaries for hire is not a good thing to have floating loose out there.
What a mess….
November 30th, 2009 at 10:01 pm
@wally: Perfect point. How can we bring them home to no jobs? Unless we expect them to continue the skills they were trained in so well. Then again, beats torches and pitchforks.
Our elites know this.
There is no profit in ending wars. Scale-down with no departure seems to be our history. But that still brings too many home to no jobs.
We’ll see.
Train them, use them, spit them out as social outcasts. Then watch.
November 30th, 2009 at 10:34 pm
> But it is the way we’ve chosen since the Reagan build-up began 30 years ago.
A coincidence that those 30 years also saw the hollowing out of the most productive economy in world history, one that served the middle class as well as elites (though not as well as elites were willing to accept)? I think not.
November 30th, 2009 at 10:43 pm
I confess to growing amazement at how easily Americans are misinformed
I confess to an amazement that people don’t understand how badly Americans have been misinformed by the traditional media for the last thirty years.
November 30th, 2009 at 10:59 pm
There was real fear after WWII ended that there would not be jobs for the returning soldiers. The war ended and the soldiers did come home. There were what? 7 million in the military when the war ended? With a total US population of around 150 million. . . Most of these men were discharged. Today there are roughly 3 million enlisted in the military with a US population of over 300 million . . . . remember that the soldiers of today are enlisted, not drafted, they can simply re-enlist (as many do).
Not sure I understand the comparisons of Rome and the US today. I see some of the very same people chastising other posters on comparing our current stock rally with markets as far back as the depression, making claims that we are following in the same path as Rome.
November 30th, 2009 at 11:23 pm
“Military Keynesianism” that *works* in the sense of a high multiplier-keeping jobs here-boosting monetary velocity etc., is really nothing more than a high tech version of digging holes and filling them up. It IS important what you spend the money on, not so much because it is *needed*, but because of the TYPE of jobs that it creates. The space program in the 1960s is a good example. The trick is to keep the money here and to circulate it rapidly through employment of a large scope of manufacturing skills-high end design engineering down through button pushers on a shop floor. The big mistake with neo-liberal and neo-conservative “globalism” is the idea that you can farm out the lower skills stuff and everybody does better. FAIL.
November 30th, 2009 at 11:25 pm
Posters here obviously see the 800 pound gorilla in the room. Smedley Butler, Dwight Eisenhower spoke to our problem decades ago. Fiscal conservatism comes to an abrupt halt on the doorstep of the defense budget, and as of today neither party has the will to rein it in.
November 30th, 2009 at 11:35 pm
RW @ 9:52
The media haven’t been the “fourth estate” since the ’70s. And given the magnitude of wealth and talent that has been devoted to obscuring the difference between reality and fantasy for the last century, the educational system cannot bear too large a part of the blame.
November 30th, 2009 at 11:46 pm
Barry,
I had attributed to you heretofore more depth than you exhibit here. The military is a necessary evil. The less of it you need the less the burden weighing on economic prosperity.
And you actually buy Keynesian stimulus crap?
December 1st, 2009 at 12:13 am
“Not sure I understand the comparisons of Rome and the US today.”
The crux of the comparison, I believe, is military overreach and mountains of debt, and it is valid IMHO.
Slightly OT but has Krugman gone off the deep end with his arguments that the exploding nat’l debt isn’t a problem, relative to the size of our economy? I suppose that he’s entitled to make that argument, but I’m not buying and god help us if he’s wrong…
December 1st, 2009 at 12:21 am
algernon,
I have been guilty of this before (and hopefully Mr. Ritholtz realizes this), but Barry did NOT write this blog post..it was written by Marion Maneker. I know, its in small print waaaaaaaaay at the top, but Barry hasn’t commented at all on this matter, other than to post it.
Perhaps in the future “other authors” names will be in a different font, different color for the font, etc to make them distinguishable from what Barry posts? Just about once a day you see a post where someone says what you did “Barry, you believe this stuff”? when in fact it wasn’t written at all by him but merely posted it as “another voice”.
December 1st, 2009 at 12:29 am
Ferguson comes to us out of the Tory tradition of Montagu Norman. Unlike Norman, thank God, Ferguson has no control over anything of real value. One has little to fear from him unless one is close enough to get a direct blast of his puffery.
December 1st, 2009 at 12:56 am
I normally enjoy Niall’s work, but there are quite a few glaring holes in several of his arguments. We’re not France in the 1930’s because we’re not pegged to precious metals. We’re not the Ottoman Empire or Argentina, because we have a debt denominated in US dollars. He conveniently forgets that we can literally print money out of thin air if need be.
Secondly, what’s with his 19th-century mentality rant on a declining empire? Who thinks America needs or wants to be the world’s standing army? Would it be a bad thing to dismantle the military-industrial complex?
December 1st, 2009 at 1:21 am
1. At the end of WWII, we had about 16 million men in uniform. Over 400K were KIA.
2. A big chunk of WWII wartime spending was the Manhattan Project, which in the WWII era dollars, cost about $2 billion and employed over 130,000 people across the US. This is an example of military Keynesianism writ large – a whole new industry, with prolonged domestic employment, was created out of the Manhattan Project.
This was enabled by yet another Keynesian project, the huge hydropower dam projects of the 1930’s and FDR’s economic meddling in building electrical supply completely out of proportion to demand in the 30’s.
At one point during WWII, the Manhattan Project consumed over 20% of all electrical power generated in the US at that time. So you see, one Keynesian project begat another: if we hadn’t had the large hydropower capacity from the TVA, Grand Coulee, et al, there would have been no Manhattan Project during WWII.
Whenever I hear another one of these idiot policy wonks start yammering about a “Manhattan Project” approach to the economy, or for “alternative energy,” I cringe. These fools don’t have a clue what they’re talking about.
3. Reducing our military spending would be a good thing. But there are ways to reduce it which don’t sacrifice our interests. For example, we could bring home the troops from Germany, Japan and S. Korea. All we’re doing is subsidizing these other economies, and it is high time we stopped. We then should pull out of the UK as well. We’re subsidizing their economy too. Let these countries then decide what they need to spend for their defense when they don’t have Uncle Sugar to fall back upon.
What do to with all the troops we bring home? Well, we should devote some of them to controlling the rapidly escalating drug war on our southern border. The rest, we merely keep on bases in formed units on our soil. The money they are paid then works its way out into our domestic economy, rather than into the economies of the nations in which they were previously stationed. Seems rather obvious to all but economists.
December 1st, 2009 at 1:41 am
@ TakBak04
> Clinton got elected because the Japanese Economy was gangbusters
Rubbish. The Japanese economy was in the doldrums in the early 90’s.
December 1st, 2009 at 1:47 am
The last two presidents ran on non-interventionist, quasi-isolationist platforms, and well…. you know how that went. W started a poorly run fracas in the deserts of Iraq, and Barry O is about to send 35.000 more over the defend the caves of Afghanistan, for the right war.
While I do believe both these men are chicken-hawks to the Nth degree, and can’t possibly imagine personal sacrifices of war – that alone doesn’t explain the continued escalation of American military presence around the globe.
From my view that dates back many decades, and requires a mature analysis of the structural design of how wars are waged in the US. That is….. they are financed. The citizens of the US of A unknowingly or knowingly are financing these wars through inflation, debt, and higher taxes for unborn generations.
And, like all things financed, expect more… until the credit card is maxed out.
As for the stimulative effects of military Keynesianism….. you’re gonnna have to pay a highly paid think-tank to get the answer you want.
Or you could use your head, look at the current body of work and say…… hmmmm… maybe we are not really getting our moneys worth borrowing from China, to buy oil from the Saudis, to build Hummers to get blown to bits 9,000 miles away.
But we will have some pretty sweet war toys laying around.
Thats my rant.
December 1st, 2009 at 5:50 am
Secret Weapon? To whom? (it’s whom)
IF we all could only see what ‘the connected’ in Defense, Roads and Bridges Construction live like splashing around all over the world in the lap of luxury, on a daily basis, then people who don’t work in these industries might finally wake up and realize……er……uhh…….nah…..forget it.
December 1st, 2009 at 8:10 am
“But it is the way we’ve chosen since the Reagan build-up began 30 years ago. Like the massive overhaul in our entitlement programs that will be forced by the deficit spending on financial system bailout, the loss of military Keynesianism will cause great disruption within the American economy.”
~~~~~~~~~~~~~~~~~~~~
Can’t this disruption be managed? Of course it can, but we have to be willing to visualize what can be accomplished. As a society, we Americans aren’t there yet.
May military Keynesiansim RIP someday so we can invest in our kids’ and grandkids’ future instead, like education, clean energy, and affordable health care.
December 1st, 2009 at 8:39 am
wally posts “Historically, you can’t bring a standing army home to a jobless economy” .. good point …
dsawy points out infrastructure spending on butter projects for the returing troops …. then the thread goes protecting book flow …. I signed in to point out – this current regular military is loaded with Guardsmen (temps) who are MIA from their home jobs and families … that if tonight, the POTUS said come home – would be a problem because the jobs have been filled …. gotta add before submit / the temps are trained and fitted for black swan events (imo) .. but there could be a pov out there / they signed up for the gravy money weekend warrior video game* / and we the cap’ist network need to extract their benefit for the $s spent
Tears For Fears – Change
http://www.youtube.com/watch?v=GcbVjLXaGzM
time to pick another ‘Ism
coda * – the creme of our land (imo) willing/needing to work two jobs to provide – HIRED back home in job 1 because of talent – Volunteered in job 2 for adventure, money and duty
December 1st, 2009 at 9:35 am
Isn’t commercial and industrial non– competitivity in the arms industry costing more than the human factor?
I’m not sure the active personel count would change in the event of a pull-out in Iraq and Afghanistan, the reserves are reserves, not actual jobs.
The impact of spending less in defense would surely be felt by those lining up their pockets for a change, the Pentagon budget is ridiculously high.
December 1st, 2009 at 9:54 am
I’m with dsawy…bring ‘em home from Korea, Japan, Germany, Great Britian, Iraq, and Afghanistan too. A few strategically stationed aircraft carriers should do to keep Al Qaeda in check.
December 1st, 2009 at 10:24 am
william… or just let the CIA, FBI, NSA, etc, worry about Al Qaeda. Terrorism is an intelligence, law enforcement, and foreign policy issue. You can’t defeat an idea with guns… quite the opposite in fact. I always drew a comparison between our current path of military action against terrorism with attempting to defeat a puddle of water by punching it. It’ll just spread the water around. We need to change the conditions to promote evaporation of the idea. “Drain the swamp” as George Galloway put it.
What we are doing is exacerbating the problem, but then cynical ole me sees that as intentional to further justify the “defense” spending and allow for more war profiteering. “Disaster capitalism” as Naomi Klein put it. Cataclysmic events are no longer looked at as times to come together and do the right thing, but as profit opportunities were the margins are highest.
December 1st, 2009 at 12:42 pm
Gee, for a guy who already knows when he’s going to die (spooky), Ferguson has it all bass-ackwards. Empires decline because they over-reach, militarily. This creates crushnig debt and a largely non-productive economy.
December 1st, 2009 at 12:43 pm
This is a recipe for disaster (moving stimulus money through the DOD because they’re “efficient”) Military spending is inflationary. It does not produce consumer goods. It moves money into the economy, withdraws resources (steel, brass, and other commodities) from the private sector, and provides no new goods for this. The result is inflation.
BTW we already spend more per year on our military then the rest of the world COMBINED. Do we really need to increase that?
December 1st, 2009 at 12:45 pm
“The military is our secret Keynesian weapon. William Kristol was the first to say that if we needed to spend stimulus money, it should be most quickly and efficiently spent through the Pentagon.”
Yet another example of why Kristol is consistently wrong.
.
“Many have argued that this is a very inefficient way to achieve those economic goals.”
Because it IS a VERY inefficient way to create jobs.
.
“But it is the way we’ve chosen since the Reagan build-up began 30 years ago.”
No, that’s why job creation during the Reagan administration was of such poor quality.
According to IRS data, there were no NET new jobs created during Reagan’s two terms that paid more than $20,000. Hence the reference at the time to “McJobs”.
Oh, and Ferguson is a alarmist.
December 1st, 2009 at 1:01 pm
When Kristol starts talking Keynes – you know you’re in for BS. Of course when Kristol talks . . .
December 1st, 2009 at 4:23 pm
The father of modern conservatism, Edmund Burke, warned about the overreach of imperial empires. It’s a lesson that pseudo-conservatives have not learned, and neither have the so-called American liberals.
December 1st, 2009 at 7:17 pm
Airbus SAS will be interested in the acknowledgement that the US Military subsidises Boeing?
December 1st, 2009 at 8:42 pm
Unfortunately, less and less of our military spending benefits U.S. contractors. Therefore, the amount of Keynesian stimulus effect it has is less than it used to be, and it was never the best way to stimulate the economy. Comparisons to military spending during WWII are misleading. Things have changed. Computers and other military hardware are manufactured overseas, and Haliburton isn’t an American company. They don’t pay taxes because they moved their HQ to the Bahamas and then Dubai.
December 2nd, 2009 at 2:49 am
With US military spending at anbout $ 1 trillion (!!!. Not some $ 650 billion !!) the US can reduce its spending significantly.
How utterly, totally and completely insane US military spending has become can be illustrated by the nuclear weapons. The US still has over 9,000 nuclear warheads in all sorts and sizes. If the US wants to, it can turn the entire world into one giant radioactive hellhole. But in spite of all that nuclear firepower the US commisioned in march 2007 the development and construction of a new generation of hydrogen bombs. This is a very good example of military keynesianism.
The entire system of military spending crowds out the private sector. Companies working solely for the military can’t compete with private firms.
December 3rd, 2009 at 12:50 pm
builders & sponges/yinyang
don’t tear yourself up there TakBak04
take it from me – toss them shoes
the fractured wheel supporting the wagon has to collapse
then folks will rally together to get it going again
right now industries/factions/tribes are fighting for the scraps
that’s just how it is
that’s nature