Is War Good For The Economy?

As George Bush asks Congress to pass a three trillion dollar budget today, heavy with military spending for Iraq, it's time to undo a damaging cliché. Military spending harms modern economies, it does not help them.

In the 1950s, the rise of the "military- industrial complex" provided Keynesian stimulus at a time when wages were still low if on an accelerating path of growth. It was in fact called military Keynesianism, and created needed demand in an underspent economy.

But that was then. By 1967, war spending in Vietnam without commensurate tax increases was setting the stage for later inflation.

The relevant lesson began with Ronald Reagan, however. In Jimmy Carter's last year of office, the defense budget equaled 4.5 percent of the nation's total income or GDP. In Ronald Reagan's last year, it was 5.5 percent.

Over the Reagan presidency, discounted for the ups and downs of the business cycle, the economy grew slower than in the 1970s (after inflation), and productivity significantly slower. Wages grew slowly as well and became highly unequal. And capital investment remained disappointingly low as a proportion of GDP.

In the last year of Bill Clinton's administration, defense spending fell to 3.0 percent of GDP. But productivity grew rapidly, capital spending returned to former high levels, and wages grew for all income levels. Less defense spending seemed to benefit the economy.

Under Bush, defense spending is way up again, of course. In fact, it was military Keynesianism more than tax cuts that created the economic growth of the first half of the 2000s.

But the economy is not working again. Productivity is now faltering, capital spending has been disappointing, and most stunning, wages have almost not risen at all. Now, we are sliding into recession.

Is there a relationship? It will take some contemporary research to find out more. But it looks like there is a negative relationship.

A lot of defense spending leaks to imports. The goods produced do not add material benefit to Americans; they tragically blow up in the desert. And these days, though some good jobs are created, on balance, defense spending may create profits for those at the top more than wages for those in the middle and at the bottom. Not least because waste and corruption in military spending are so high.