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3.5 The US military economy

The debate on the role and effects of military spending in capitalist economies is an old and still unresolved controversy. Without attempting a review of the theoretical arguments and empirical studies (see MacKenzie 1983: Georgiou 1983: Lindgren 1984), this section investigates the economic effects of the rapid growth of US military expenditure in the 1980s, that reached $1,500 billion between 1981 and 1986.

The contradictory nature of military expenditure is rooted in its double effect. On the one hand it acts as a stimulus to the economy through the increase of public demand, in the Keynesian style, that compensates the problems of underconsumption and stabilizes the cycle of growth (Baran and Sweezy 1968; Kidron 1970; Pivetti 1969a, 1985). On the other hand, military spending subtracts resources to consumption and investment (Melman 1970, 1974; Smith 1977; Dumas 1986). The problem is complicated by the long-term effects of military spending and institutional mechanisms on the structure of the economy, of the society and of the state (see also Krell 1981; Griffin et. al. 1982).

The size of the US military economy, compared to the other countries, is shown in Table 3.2. In 1986 US military expenditure were 6.7 per cent of GDP, against a 5.9 per cent in the UK, 4 per cent in France, 3.1 per cent in West Germany, 2.7 per cent in Italy and about 1 per cent in Japan. Since 1951 the US military budget has been in every year greater than the total profits of all US corporations (Melman 1986b: 4). In 1986 the US Defense Department had 1,100,000 civilian employees, 2,231,000 people were members of the armed forces, while military industries had a total employment of 3,150,000. In all, the US military economy employs almost six and a half million people (ibid.) and one job in twenty depends, directly or indirectly, on military spending The Washington Post, 17 January 1986).

Looking behind the narrow view of official definitions, it has been shown that in the US 'roughly 10% of GNP is directly dedicated to military purposes. One-third of all scientists and technicians work on Department of Defense projects. Nearly half of the non-obligated share of the federal budget is spent by the Defense Department, NASA and the weapons labs' (Tirman 1984: 22). In spite of a limited reduction in 1985 and the constraints set after 1986 by the budget-balancing Gramm-Rudman Act, aiming to phase off the federal deficit by 1991, the US military budget has remained at about $290 billion in fiscal years 1987 and 1988.

Table 3.2: Military expenditures as a percentage of GDP

  1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
North America                    
Canada 2.0 1.9 1.8 1.8 1.9 2.0 2.1 2.2 2.2 2.3
US 6.1 5.9 5.9 6.3 6.6 7.0 7.1 7.0 7.0 6.7
Belgium 3.2 3.3 3.3 3.3 3.5 3.3 3.3 3.1 3.0 (2.9)
Denmark 2.3 2.3 2.3 2.4 2.5 2.5 2.5 2.3 2.2 2.1
France 3.9 4.0 3.9 4.0 4.2 4.1 4.2 4.1 4.1 4.0
West Germany 3.4 3.3 3.3 3.3 3 4 3 4 3 4 3.3 3.2 3.1
Greece 7.0 6.7 6.3 5.7 7.0 6.9 6.3 7.2 7.1 6.6
Italy 2.4 2.4 2.4 2.4 2.5 2.6 2.7 2.7 2.7 2.7
Luxembourg 0.9 0.9 0.9 1 0 1.1 1.0 1.1 1.1 1.1 1.1
Netherlands 3.3 3.1 3.2 3.1 3.2 3.2 3.2 3.2 3.1 3.1
Norway 3.1 3.2 3.1 2.9 2.9 3.0 3.1 2.8 3.1 3.1
Portugal 3.5 3.5 3.5 3.5 3.5 3.4 3.4 3.3 3.1 3.2
Spain 2.8 2.7 2.8 3.1 3.2 3.3 3.3 3.3 3.3 -
Turkey 5.8 5.2 4.3 4.7 4.9 5.2 4.9 4.4 4.5 4.7
UK 4.6 4.4 4.5 4.8 5.0 5.2 5.2 5.4 5.2 5.2
Japan 0.9 0.9 0.9 0.9 0.9 0.9 1.0 - - -

Source: World Armament and Disarmament: Sipri Yearbook 1987, p.173.
Notes: - not available
() uncertain

Between 1981 and 1986 the appropriations of the US military budget have increased at an annual rate of 6.8 per cent in real terms, more than twice the pace agreed in the NATO agreements of 1978. The US military budget has more than doubled, from $143.9 billion in fiscal year 1980 to $286.1 billion in 1986. Over the same period, actual expenditure increased from $134 billion to $265.8 billion, at an annual rate of 5.8 per cent (Center on Budget and Policy Priorities 1986). The share of defence expenditure in the federal budget has increased from 22.7 per cent in 1980 to 27.1 per cent in 1986, and in the projections for 1991 it would reach 32.6 per cent (ibid.).

What have been the effects of such large military expenditure? First, we will consider the short-term effects on demand, then those on supply and finally the long-term consequences for the US economy.

Such large public spending, combined with tax cuts, has increased the federal deficit and has been financed by borrowing; this has emphasized the expansionary effect on the US domestic economy, in the classical Keynesian policy tradition. A simulation on a computer model of the US economy has shown that 'tax and expenditure policies instituted by the Federal government after 1981 played an important role in bringing about economic recovery' (Bluestone and Havens 1986: 1), even if at the price of growing social inequalities. The result is that 'half of all the job growth since 1981 can be attributed to the direct or indirect effect of these fiscal policy initiatives' (ibid.: 12). The 1980s offers a new example of growth through the established mechanism of 'military Keynesianism'.

However, military spending is not the most efficient mechanism to achieve growth. In a parallel simulation, assuming the transfer of $35 billion from the defence budget to human and physical infrastructures, the result is $5 billion dollars in additional GNP, 250,000 new jobs, with a reduction of the federal deficit and of social and regional inequalities (ibid.: 1).

Military 'booms' tend also to be short-lived. With the slowdown of military spending in the late 1980s, analysts from Data Resources estimate that possibly a quarter of the 676,000 new defence jobs added in the past years may soon disappear (Clayton 1987). For industries such as aerospace, computer equipment, data-processing and consulting, the 14 per cent growth rate of military contacts of past years will be cut to 2-3 per cent (ibid.).

In the expansion of the US military budget up to 1986, the fastest growth has been that of 'investment' (weapons research and acquisition, bases and infrastructures), that increased from 36 per cent of the US budget in 1980 to 47 per cent in 1986 (Markusen 1986: 498). These 'investments' have been concentrated in high-technology sectors: tanks, ordnance, missiles, shipbuilding, aircraft and engines rapidly increased their military production between 1982 and 1987, at paces ranging from 33 per cent to 64 per cent. In 1987 the share of military production of these industries ranged between 44 per cent and 95 per cent of their total production (ibid.: 500). However, the fastest growth of military production took place in the computer industry with a 141 per cent increase between 1982 and 1987. Here 'the Reagan military buildup will reverse a 20-year trend in which commercial demand consistently outpaced military output growth in the electronics and computing industries' (ibid.: 501).

While US manufacturing output stagnated in 1985, military and space productions increased by 11 per cent (ibid.: 502); while all categories of manufacturing showed trade deficits, the net exports of military goods tripled between 1980 and 1984 (ibid.: 495).

With production, profits have also risen. In 1984 the ten largest contractors of the Defense Department had an average rate of return after taxes of 35 per cent, almost three times the 12.8 per cent of the average of manufacturing industry (Rubin and Frisvold 1985: 7). The US General Accounting Office reported that 'defense contractors were 35 % more profitable than commercial manufacturers during 1970-79 and 120% more profitable during 1980-83' (quoted in Clayton 1987). The political power of military industry has increased in a parallel way. The political contributions of the twenty largest military suppliers doubled in the period between the two presidential elections, reaching $3.6 billion in 1984. As an example, Rockwell International in the same period multiplied its political contributions by four and its military contracts by eight (Rubin and Frisvold 1985: 7).

These results have been considered as evidence of the success of US policy by the apologists of the Reagan administration. David Losman, professor of economics at the National Defense University, argued that

if defense spending is more capital-intensive, this furthers America's retooling and reindustrialization. And if such spending initially goes to higher income, high saving groups - well, aren't we trying to stimulate savings? If such expenditures bid up scientists' and technicians' wages, won't this encourage entry into these highly productive, crucial fields?

(Losman 1982).

Many economists, from Murray Weidenbaum to Charles Schultze, focused their questions on the short-term consequences, in limited industrial sectors, fearing bottlenecks in production, shortages of skilled personnel and inflationary effects (Tirman 1984: 4, 20). In 1983 a study of the Congressional Budget Office dismissed the fears of inflationary effects, but concluded that 'a defense build up financed by large federal deficits that continue after the economy recovers could damage economic performance in the long run' (quoted in Tirman 1984: 2). These worries about the long-term effects of military spending are shared by Lester Thurow, who has considered the US military build up as an example of 'how to wreck the economy' (Thurow 1981).

How can the negative effects of military spending on economic performances be shown? Melman suggests considering military expenditure as a capital fund, resources that are used neither for consumption, nor for investment. Summing US military expenditures between 1948 and 1987 at constant 1982 prices, the result is $7,620 billion. In 1982 the value of all fixed reproducible tangible wealth of the US was $7,292 billion. US military expenditure since 1948 'comprise a quantity of capital resources sufficient to rebuild the United States' (Melman 1986b: 6).

Only in the US, among advanced capitalist countries such large resources are devoted to military purposes. The ratio between annual military expenditure and gross fixed capital formation, net of residential constructions, in 1979 was 33 per cent in the US, 20 per cent in West Germany and 3.7 per cent in Japan (Melman 1986a: 64).

Besides this subtraction of resources, the growth of the military sector has a more subtle effect on the operation of US industry. Melman argued that the concentration of resources in the military economy has undermined the cost-minimization criteria of business operation and has spread in military contractors the practice of cost-plus pricing (Melman 1970, 1983). In this way profits are maximized not by reducing but by expanding costs. This mechanisms, combined with the dynamics of military technology (see section 4.3), has eroded the productive capacity of a growing number of US firms. The frequent examples of waste, inefficiencies and astronomical costs for ordinary products, such as the bolts that the Pentagon paid $2,043 each for (serf and Beard 1986) are not the result of occasional malpractice or individual corruption, rather they are the result of the very logic of military production. The impact on the rest of the economy is inevitable; Melman has shown that 'the special effects of military economy are an integral part of, and major contributors to, the transformations under way in American management, technology and productivity' (Melman 1983: xiii); this in turn results 'in the looting of the productive capital of the system on behalf of short-term money-making and military-political power' (ibid.: xiv).

With 37,000 firms that are prime contractors of the Defense Department, the high-technology industries that increasingly rely on military contracts and the major US technological programmes concentrated in military research, such as the Strategic Defence Initiative (see section 4.9), the military influence over the US economy has continued to increase. Ann Markusen argued that 'in the United States military spending acts as a de facto industrial policy, and... the poor performance of the economy results from the distortions brought about by this reliance on military-led investment and innovation' (Markusen 1986: 496). Documenting the shift toward military production by the large US corporations, Mike Davis noted that 'for the old "Fordist" industrial core of the American economy - that is for the complex of mass production industries and their suppliers now threatened by import competition - the Pentagon has been the chief instrument of restructuring' (Davis 1985: 55). In the same way, Jeff Faux stressed that in the US 'no person or institution is responsible for increasing the competitiveness of US industry. But we do have industrial policy. Its manager, by default, is the Pentagon, and its implicit goal is to concentrate America's technological future in weaponry' (Faux 1986: 196).

The 'industrial policy' of the Defense Department, however, did not result in greater efficiency, neither in military production, nor in the rest of the economy. A report of the House Armed Services Panel in 1980 listed a number of serious problems, imbalances and inefficiencies of the US military industrial base, including a lack of flexibility in production, increasing lead times, shortages of skilled manpower, increasing dependence on foreign suppliers for raw materials and key components, lack of adequate capital investments. The report stressed that 'productivity growth rates for the manufacturing sectors of the US economy are the lowest among all free industrialized nations; the productivity growth rate of the defense sector is lower than the overall manufacturing sector' (quoted in DeGrasse 1984: 143).

The expansion of the US military economy in the 1980s has certainly stimulated, in the short term, demand and growth, but did little to address the fundamental problems of the US economic decline. According to Ann Markusen, 'the fact that the economy has failed to grow at estimated rates suggests the inefficacy of military spending as an industrial policy' (Markusen 1986: 503). On the other hand, the long-term tranformations underway can indeed change the shape of the US economy: 'if the present build up continues, it will transform America's huge, diversified economy into one heavily specialized in high tech, arms, business services and resources' (ibid.: 512).

This is the direction of the economic changes experienced by the US in the 1980s, with deep transformations in the structure of the economy, the institutions of the state and the composition of society. The growth of the military sector in a declining economy is now a major contradiction for the US; as Mary Kaldor has noted, 'it has diverted resources in such a way as to constrain and distort accumulation and so accentuates the underlying causes of the crisis' (Kaldor 1982b: 283). The state structures, with the growing power of the military, now 'fetter the development both of capitalist accumulation and of alternative visions for society' (ibid.: 267).

This contradiction has become deeper in the 1980s, as the US government has expanded its military system, in a strategy to escape economic decline and the loss of international leadership.

3.6 The US international economic strategies

Parallel to the broad agreement on the problems of the US economic decline, there is a consensus on the importance of an active government policy to reverse it. More precisely, the stated aim of much of the policy discussion is the return of the US to the leadership position that has been lost with the growth of Western Europe and Japan.

In reviewing the current US debate, let us start, once again, from the Data Resources study on US manufacturing industry, that raised the question of the consequences of US decline:

by the early 1980s, the signs had become unmistakable that other nations were surpassing some of our manufacturing industries and that America's traditional role in the world economy was much diminished. Japan has proved to be the principal challenger to our leadership, but other nations, in Europe and in Asia, are rapidly closing the gap between their economic performance and our own. The implications of the decline in leadership of US manufacturing industry are not yet fully clear or understood. Can the United States continue to play the role of guardian of the Western world, with its heavy political, economic and military burdens, with a weakening manufacturing economy?

(Eckstein et al. 1984:2).

The conventional answers to this question have been summarized in 'pessimistic' and 'optimistic' views by John Yochelson, the neo-conservative head of the Center for Strategic and International Studies at Georgetown University. The former view sees US policy as the centre of the international economic policy; they assume that the US has the power and responsibility to manage the world economy and its recovery. As current US policies do not go in this direction, they fear an inward shift of US policy in both economic and political issues (Yochelson 1985b: 16). The 'optimistic' view, on the contrary, is that the US 'can exert leadership in managing the world economy by example and through negotiations without any radical shift in current policy' (ibid: 17).

In the restructuring of international economic power, the neo-conservatives emphasize the effect of the shift of US economic interests from the Atlantic to the Pacific. Yochelson argued that 'US resurgence has confirmed the end of an era in which the United States and Europe were the dominant forces shaping the global economic order, If current trends continue, US policies and perspectives on the world economy will be increasingly influenced by a US-East Asian dynamic' (ibid: 23).

Such views have led to an international political and economic strategy that has been outlined by Irving Kristol, a major neo-conservative thinker, in a 1979 article:

The 1980s will see a disintegrating international order in which economic growth is going to be extraordinarily difficult to achieve... What will be relevant is an American foreign policy in which power, and the readiness to use it boldly, will play a far more central role than has ever before been the case in our history... Our economic growth will henceforth be as dependent on our foreign policy as on our economic policy... Today it is military rearmament that is the first priority, as well as political.

(Quoted in Gordon 1986a: 106)

Such a strategy has been consistently followed by the Reagan administration in the 1980s. It marked a radical departure in international economic relations and it has been criticized by officials of previous US governments. Jeffrey Garten, an adviser of Nixon and a State Department official with Ford and Carter, wrote that this policy not only ignored the decline of America's competitiveness, but 'as a strategy for the 1980s, it could only be called gunboat economic diplomacy and it was singularly inadequate to deal with the intensifying interaction among national economies' (Garter 1985: 538).

However, a 'gunboat economic policy' is exactly what the neo-conservatives wanted, and Yochelson admitted that 'US economic diplomacy has grown increasingly assertive' and that 'the outlook is for further US assertiveness' (Yochelson 1985b: 17). Facing a declining economy, the US government strategy in the 1980s has attempted to restore its leadership with growing assertiveness and more power, combining economic, political and military means.

The 'neo-liberal' and the Democratic alternative differed only in some of the means, the aim - restoring US world leadership - being the same. David Obey, Democratic chairman of the Joint Economic Committee of the US Congress has summarized this view arguing that

we will need to meet the challenge of competition in an increasingly integrated world economy, or become a second-class economic power with a declining standard of living. We will need to meet the challenge of increasing the growth rate of the world economy or face a crisis of insufficient demand, increasing protectionism and unpayable debt. We must meet the challenge of increasing our own rate of productivity growth, improving the quality of our workforce and raising the incomes of our workers.

(Obey 1986)

The problem of productivity returns at the core of the policy problem of the US. According to Lester Thurow, if US productivity continues to fall behind that of advanced countries, 'America will surely withdraw from the world economy and its position of economic leadership' (Thurow 1985a: 341), opening a dangerous phase of fragmentation of the world economy, with the diffusion of protectionist barriers, resulting in a system without any 'leader' or 'regulator'. The political consequences are obvious: 'the US likes to think of itself as the leader of the free world... If the leader of the free world declares an economic war on its military and political allies, then it should not find it a surprise if it no longer has military and political allies' (ibid.: 105).

To avoid such disastrous economic and political consequences, the US should, in the neo-liberal recipe, concentrate the efforts in reconstructing the domestic economy, with an active industrial and trade policy, increasing efficiency and productivity, with some reduction of the military burden. The argument here is that 'to do nothing is to lose not only economic leadership, but political and military leadership too, for no nation can build or maintain world leadership with a rotting economy' (ibid.: 60).

The viability of such a neo-liberal strategy has still to be demonstrated. It requires the US to outperform Western Europe and Japan on the economic ground, while maintaining, with reduced resources and more limited policy options, the same world political and military role. It is doubtful that the US will be able to perform any one of these tasks, let alone all at the same time. In fact, the main strength of the neo-conservative strategy of the 1980s has been the linking of economic and political-military issues, using the latter to affect the outcome of economic processes. As Yochelson noted, 'the Reagan administration has insisted more strenuously than its predecessors that Western commercial interests be subordinate to strategic considerations' (Yochelson 1985b: 23).

More and more, in the 1980s, the problems of the international economy have been seen in a 'national security' perspective, leading to restrictions on trade and technology transfer (see section 4.8) and to the growth of military production and research, with new major programmes such as the Strategic Defence Initiative (see section 4.9).

In this mix of strategic and economic considerations, the aim is not only political superiority over the Soviet Union and the Eastern bloc, but, increasingly, the economic and technological superiority over the other capitalist countries of Western Europe and Japan. In the 1980s some success has been scored by the US strategy in this direction. As Riccardo Parboni noted, 'the militarization of American capitalism represents the last hope for its ruling groups to recover world industrial leadership' and to bring the reluctant European partners back in the US orbit' (Parboni 1986: 15).

While the dominant debate in the US has been between the neo-conservative and neo-liberal perspectives, on the best means to achieve the same aims of restoring US economic and political leadership, a few have challenged the common objective of both strategies: 'staying on top' of the world economy. David Gordon has suggested a 'front yard' strategy for putting in order the domestic economy, with new co-operative international relations. He argued that

we should not seek and do not need to be number one. Strategies that pursue international primacy not only are economically unreliable but also pose a political threat to democracy at home and peace abroad. We should begin instead to work toward greater independence from the world economy, seeking self-sufficiency... in order to provide wider domestic room for political maneuver.

(Gordon 1986a: 100)

Such a strategy aims to shape the US economy on the domestic needs, with a productivity growth based on high wages and full employment. In this perspective, a renegotiation of the agreements on international trade would open the way to a co-operative management of the world economy, overcoming the crisis and the instability brought by the US attempts to restore its leadership. Such a course would bring greater growth, stability and welfare - not to mention democracy and detÚnte - to the world and to the US itself. Nevertheless, restoring the American leadership continues to be the keyword of the American debate, and is likely to be also the political refrain of both candidates in the 1988 US presidential elections. This time, some of the most extreme views on the use of US military and political power are being dropped, but the neo-conservative and neo-liberal perspectives still dominate the US political scene.

They not only share the aim of restoring US leadership, but they also increasingly emphasize the possibility of achieving this goal through a renewed technological lead. The new promise of an America that 'stays on top' is coming now from the development of new technologies. Here the erosion of US leadership has been slower and the memory of the times of the undisputed US leadership are stronger. This also appeals to the popularity of 'technical fixes' for political and social problems that is so recurrent in the experience of the US.

It is not surprising, therefore, that a massive effort for the development and application of new technologies is the common recommendation of all the analyses discussed in this section. The report of Data Resources recommended that the US 'should take strong actions to preserve its lead in the high technology industries' (Eckstein et al. 1984: 5). More expenditure on research and development, more innovation and more high technology are the common requests of neo-conservatives and neo-liberals alike, with possible debate only on the share of R&D to be left to the military. In fact, the prospect of a 'technological fix' to the problem of the US decline can hardly be resisted by a country that on the development of modern industrial technology has built its international power. It also helps to avoid confronting the serious problems of economic and social adjustment that are emerging with the US economic and political decline, beginning with the fall in the standard of living of large sectors of American society and the need to rebuild a large part of the social infrastructure.

For all these reasons, the US technological strategies have been a crucial component of American policy in the 1980s and are likely to be increasingly so in the future. They have played a major role in the current restructuring of the world economy and in the strategy to restore US leadership. At the same time, however, the development of new technologies offers the possibility for the emergence of new powers and new models of innovation and development, that may be led by Europe or Japan. The next chapter investigates these issues, and the technological strategies of the more advanced industrial countries.

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