Military spending drains and distorts the civilian economy.
By Thomas E. Woods Jr.
To get a sense of the impact the U.S. military has on the American economy, we must remember the most important lesson in all of economics: to consider not merely the immediate effects of a proposed government intervention on certain groups, but also its long-term effects on society as a whole. That’s what economist Frédéric Bastiat (1801–50) insisted on in his famous essay, “What Is Seen and What Is Not Seen.” It’s not enough to point to a farm program and say that it grants short-run assistance to the farmers. We can see its effects on farmers. But what does it do to everyone else in the long run?
Seymour Melman (1917–2004), a professor of industrial engineering and operations research at Columbia University, focused much of his energy on the economics of the military-oriented state. Melman’s work amounted to an extended analysis of the true costs not only of war but also of the military establishment itself. As he observed,
Industrial productivity, the foundation of every nation’s economic growth, is eroded by the relentlessly predatory effects of the military economy. …Traditional economic competence of every sort is being eroded by the state capitalist directorate that elevates inefficiency into a national purpose, that disables the market system, that destroys the value of the currency, and that diminishes the decision power of all institutions other than its own.
Throughout the Cold War, politicians and intellectuals all over the political spectrum could be heard warning of the catastrophic economic consequences of reductions in military spending. The radical left in particular, as part of its critique of American state capitalism (which it sometimes conflated with pure laissez-faire), lent important support to that position. As Marxists Paul Baran and Paul Sweezy warned: “If military spending were reduced once again to pre-Second World War proportions, the nation’s economy would return to a state of profound depression, characterized by unemployment rates of 15 per cent and up, such as prevailed during the 1930s.”
Yet these politicians and intellectuals were focusing on the direct effects of discontinuing a particular spending stream without considering the indirect effects—all the business ventures, jobs, and wealth that those funds would create when steered away from military use and toward the service of the public as expressed in their voluntary spending patterns. The full cost of the military establishment, as with all other forms of government spending, includes all the consumer goods, services, and technological discoveries that never came into existence because the resources to provide them had been diverted by government.
Not All Growth Is Good
Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends.
Military spending constitutes the classic example of parasitic growth. Melman believed that military spending, up to a point, could be not only legitimate but also economically valuable. But astronomical military budgets, surpassing the combined military spending of the rest of the world, and exceeding many times over the amount of destructive power needed to annihilate every enemy city, were clearly parasitic. Melman used the term “overkill” to describe that portion of the military budget that constituted this kind of excess.
By the 1960s the U.S. government, in its strategic aircraft and missiles alone, was capable of unleashing in explosive power the equivalent of six tons of TNT for every person on Earth. “Now that we have 6 tons of TNT per person in our strategic missiles and aircraft alone,” Melman wondered, “have we become more secure than when we had only 1 ton of TNT per human being on earth?”
The labor, time, and other resources that were used to produce this overkill material were taxed away from the productive population and diverted from the creation of civilian goods.
The scale of the resources siphoned off from the civilian sector becomes more vivid in light of specific examples of military programs, equipment, and personnel. To train a single combat pilot, for instance, costs between $5 million and $7 million. Over a period of two years, the average U.S. motorist uses about as much fuel as does a single F-16 training jet in less than an hour. The Abrams tank uses up 3.8 gallons of fuel in traveling one mile. Between 2 and 11 percent of the world’s use of 14 important minerals, from copper to aluminum to zinc, is consumed by the military, as is about 6 percent of the world’s consumption of petroleum. The Pentagon’s energy use in a single year could power all U.S. mass transit systems for nearly 14 years.
Still other statistics illuminate the scope of the resources consumed by the military. According to the U.S. Department of Defense, during the period from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plants, equipment, and infrastructure (capital stock) at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock.
Then there are the damaging effects on the private sector. Since World War II, between one-third and two-thirds of all technical researchers in the United States have been working for the military at any given time. The result, Melman points out, has been “a short supply of comparable talent to serve civilian industry and civilian activities of every sort.”
Government jobs, whose funding source—taxation—is unavailable to private firms, have been able to offer substantially higher salaries than those in the private sector. By the 1960s major companies were already complaining of being unable to meet their hiring targets for new researchers.
Meanwhile, firms servicing Pentagon needs have grown almost indifferent to cost. They operate outside the market framework and the price system: the prices of the goods they produce are not determined by the voluntary buying and selling by property owners that comprise the market, but through a negotiation process with the Pentagon in isolation from market exchange.
Beginning in the 1960s, the Department of Defense required the military-oriented firms with which it did business to engage in “historical costing,” a method by which past prices are employed in order to estimate future costs. Superficially plausible, this approach builds into the procurement process a bias in favor of ever-higher prices since it does not scrutinize these past prices or the firm’s previously incurred costs, or make provision for the possibility that work done in the future might be carried out at a lower cost than related work done in the past.
This is not nit-picking: advancing technology has often made it possible to carry out important tasks at ever-lower costs, yet rising costs are a built-in assumption of the historical-cost method. Moreover, if some piece of military equipment—a helicopter, plane, or tank, for example—winds up costing much more than initial estimates indicated, that inflated price then becomes the baseline for the cost estimates for new projects belonging to the same genus. The Pentagon, in turn, uses the resulting cost hikes to justify higher budget proposals submitted to Congress.
Cost-minimizing incentives that exist for civilian firms are often absent with the military-industry firm. The largest contracts are negotiated with a single supplier, and cost is not the major factor in the Pentagon’s reckoning. More important is the Pentagon’s confidence that the firm can deliver the product, interact with the military community, and adapt to ongoing and sometimes frequent changes to the initial design.
Even if the resulting military hardware exceeds the negotiated price by three or four times, the Pentagon will generally find a way to come up with the money. Melman also found administrative overhead ratios in the defense industry to be double those for civilian firms, where such a crushing burden simply could not be absorbed. He concluded:
From the personal accounts of ‘refugees’ from military-industry firms, from former Pentagon staffers, from informants still engaged in military-industrial work, from the Pentagon’s publications, and from data disclosed in Congressional hearings, I have found consistent evidence pointing to the inference that the primary, internal, economic dynamics of military industry are cost- and subsidy-maximization.
These incentives also supply little reason to exert the intellectual and physical effort necessary not only to control costs but also to make complex systems simpler and more user-friendly, as truly competitive firms and industries must try to do when catering to the public. “In one major enterprise,” Melman reported, “the product-development staffs engaged in contests for designing the most complex, Rube Goldberg-types of devices. Why bother putting brakes on such professional games as long as they can be labeled ‘research,’ charged to ‘cost growth’ and billed to the Pentagon?”
The efforts of Boeing Vertol, Rohr, and Grumman to enter the field of mass transit are revealing. In each case, their products were simply too complex and unreliable. Boeing Vertol’s trolley cars, introduced on Boston’s Green Line in the 1970s, broke down regularly and were largely replaced by cars built by Japan’s Kinki Sharyo. Rohr Industries’ subway cars, introduced in San Francisco’s Bay Area Rapid Transit (BART) system and in the nation’s capital, were enormously costly and for years suffered from chronic malfunctions. Grumman buses in New York City were so unreliable that the city ended up suing the company.
War Machine Tools
The American machine-tool industry can tell a sorry tale of its own. Once highly competitive and committed to cost-containment and innovation, the machine-tool industry suffered a sustained decline in the decades following World War II. During the wartime period, from 1939 to 1947, machine-tool prices increased by only 39 percent at a time when the average hourly earnings of American industrial workers rose by 95 percent. Since machine tools increase an economy’s productivity, making it possible to produce a greater quantity of output with a smaller input, the industry’s conscientious cost-cutting had a disproportionately positive effect on the American industrial system as a whole.
But between 1971 and 1978, machine-tool prices rose 85 percent while U.S. industrial workers’ average hourly earnings increased only 72 percent. The corresponding figures in Japan were 51 percent and 177 percent, respectively.
These problems can be accounted for in part by the American machine-tool industry’s relationship with the Defense Department. Once the Pentagon became the American machine-tool industry’s largest customer, the industry felt far less pressure to hold prices down than it had in the past. That decreased pressure undoubtedly contributed to the negligible investment by the machine-tool industry in modern production techniques of a kind used routinely in Europe. No longer under traditional market pressure to innovate and lower costs, the machine-tool industry saw a considerable drop in productivity.
In the short run, the American machine-tool industry’s woes affected U.S. productivity at large. Firms were now much more likely to maintain their existing stock of machines rather than to purchase additional equipment or upgrade what they already possessed. By 1968, nearly two-thirds of all metalworking machinery in American factories was at least ten years old. The aging stock of production equipment contributed to a decline in manufacturing productivity growth after 1965.
Why Americans couldn’t have switched to lower-cost imported machine tools as soon as prices began to rise involves the reluctance of machinery buyers to change their suppliers. Not only do they prefer to deal with established firms with good reputations, but they also want to avoid unnecessary and costly downtime, so they patronize suppliers who can perform repairs and supply spare parts on short notice. In the long run, American firms did indeed begin to shift into imported machine tools, and by 1967 the United States for the first time imported more machine tools than it exported.
The military-induced distortion of the American machine-tool industry, and the industry’s correspondingly decreased global competitiveness, is not confined to the perverse incentives created by the Pentagon’s cost-maximization approach to procurement. Another factor is at work as well: the more an industry caters to the Pentagon, the less it makes production decisions with the civilian economy in mind. Thus in the late 1950s the Air Force teamed up with the machine-tool industry to produce numerical-control machine-tool technology, a technique for the programmable automation of machine tools that yields fast, efficient, and accurate results. The resulting technology was so costly that private metalworking firms could not even consider using it. The machine-tool firms involved in this research thereby placed themselves in a situation in which their only real customer was the aerospace industry.
Some 20 years later, only 2 percent of all American machine tools belonged to the numerical-control line. It was Western European and Japanese firms, which operated without these incentives, that finally managed to produce numerical-control machine tools at affordable prices for smaller businesses.
The distortion of business decisions and strategy that contributed to the decreasing competitiveness of the machine-tool industry is at work in thousands of American firms in rough proportion to their reliance on Pentagon contracts.
How Much Is Enough?
We sometimes hear it said that the military budget is too low. As of this printing the Pentagon absorbs the equivalent of 3.3 percent of GDP; some say this figure should be increased to at least 4 percent. That figure sounds moderate and reasonable, especially since it has reached more than twice that level at various times in the past. But the problem with determining the adequacy of the military budget by measuring it as a share of GDP is that the two figures have no logical connection to each other. One would think, instead, that a reasonable metric for determining the military budget would involve some calculation of what expenditures were necessary to defend the United States from potential aggressors. Whatever that figure turns out to be, its ratio to GDP is of no relevance at all.
A better way to measure the U.S. government’s military spending would be to compare it to that of other countries. As of this writing, the U.S. government’s military expenditures equals the sum of what all the other countries in the world spend. Economist Robert Higgs wonders: “Why can’t the Department of Defense today defend the country for a smaller annual amount than it needed to defend the country during the Cold War, when we faced an enemy with large, modern armed forces and thousands of accurate, nuclear-armed intercontinental ballistic missiles?”
In fact, a great many military experts have begun to conclude that the enormously expensive and complicated equipment and programs that the Pentagon has been calling for would be of limited help even in fighting the Second Generation Warfare with which the American military seems most comfortable, and a positive detriment to waging the kind of Fourth Generation Warfare of which the war on terror consists. William Lind, a key theorist of Fourth Generation Warfare, says the U.S. Navy in the 21st century is “still structured to fight the Imperial Japanese Navy.” As Lind puts it, the Navy’s aircraft-carrier battle groups “have cruised on mindlessly for more than half a century, waiting for those Japanese carriers to turn up. They are still cruising today, into, if not beyond, irrelevance.”
The Department of Defense is the only federal agency not subject to audit. The seriousness of problems with the Department’s books has been acknowledged for decades. In the 1990s the Defense Department actually secured from Congress a special exemption from the general audit requirement that exists for other federal agencies. So it is not that the Department has failed an audit—meaning accountants tracked its expenditures and found its money misspent. With the Department of Defense, accountants cannot track the money in the first place.
It is not uncommon for the Pentagon not to know whether contractors have been paid twice, or not at all. It does not even know how many contractors it has. Meanwhile, so-called fiscal conservatives, who know nothing of this, continue to think the problem is excessively low military budgets. This, no doubt, is just the way the establishment likes it: exploit the people’s patriotism in order to keep the gravy train rolling.
To tabulate the full amount of government expenditure on defense, it is not enough to glance at the budget for the Department of Defense. That number was $518.3 billion in 2009 and excludes hundreds of billions of dollars in additional defense-related expenditure. Higgs suggests that the real defense budget is closer to $1 trillion.
Winslow Wheeler reaches a comparable figure. To the $518.3 billion, he adds the military-related activities assigned to the Department of Energy ($17.1 billion), the security component of the State Department budget ($38.4 billion), the Department of Veterans Affairs ($91.3 billion), non-Department of Defense military retirement ($28.3 billion), miscellaneous defense activities spread around various agencies ($5.7 billion), and the share of the interest payments on the national debt attributable to military expenditure ($54.5 billion). When we add the roughly $155 billion for the wars in Iraq and Afghanistan to Wheeler’s tabulation, we arrive at a grand total of $948.7 billion for 2009.
And we’re worried about trivialities like “earmarks,” which comprise such a small portion of spending that they barely amount to a rounding error in the federal budget?
Meanwhile, $250 billion is spent every year maintaining a global military presence that includes 865 facilities in more than 40 countries, and 190,000 troops stationed in 46 countries and territories. It is not “liberal” to find something wrong with this. Most liberals, in fact, find nothing wrong with it. Who was the last Democratic presidential candidate to call for a reduced military presence abroad?
President Obama is being portrayed in some circles as a radical who wants to gut the U.S. military. This is misleading. Obama is a center-left variant of the bipartisan foreign-policy consensus whose basic premises are shared by John McCain, Hillary Clinton, Madeleine Albright, Newt Gingrich, and the Washington Post. He has no intention of withdrawing American troops from where they are stationed around the world, and in fact he is increasing military spending to levels beyond those of Ronald Reagan. Between 2010 and 2013 Obama plans to spend $2.47 trillion on the Pentagon. Were he to be re-elected, he intends to spend another $2.58 trillion. The combined total of $5.05 trillion is a whopping $840 billion in inflation-adjusted dollars more than was spent by the Gipper himself.
Out with the phony conservatives, the Tea Party movement says. We want the real thing. But the real thing, far from endorsing global military intervention, recoils from it. The conservative cannot endorse a policy that is at once utopian, destructive, impoverishing, counterproductive, propaganda-driven, contrary to republican values, and sure to increase the power of government, especially the executive branch.
The conservative temperament shuns utopian schemes, and seeks instead those finite but noble virtues we associate with hearth and home. These are the things the conservative is supposed to delight in and defend. Nathaniel Hawthorne once observed that a state was about as large an area as the human heart could be expected to love, and G.K. Chesterton reminded us that the genuine patriot boasts not of how large his country is, but of how small it is. As Patrick Henry said, “Those nations who have gone in search of grandeur, power and splendor, have always fallen a sacrifice and been the victims of their own folly. While they acquired those visionary blessings, they lost their freedom.”
Thomas E. Woods Jr. is a senior fellow at the Ludwig von Mises Institute and the author of Nullification: How to Resist Federal Tyranny in the 21st Century. This essay is adapted from Rollback: Repealing the Government Before Fiscal Collapse. Reprinted by arrangement with Regnery Publishing. Copyright © 2011 Regnery Publishing.