guns versus butter
lnp3 at panix.com
Fri Feb 8 11:54:52 MST 2002
New Yorker Magazine, 2002-02-11
THE FINANCIAL PAGE
GUNS VS. BUTTER
A year ago, a glum Silicon Valley executive, seeing recession on the
horizon, told me, "Only a war can save us now." Well, we got one and, with
it, the supposedly resuscitative burst of government spending he had in mind.
President Bush, in his new budget, has called for the biggest increase in
defense spending in twenty years. If you listen to those who believe, as
Time recently put it, that "war is good for the economy," this infusion of
federal money will enhance not only our national security but our economic
security as well.
It's a comforting thought, and, in the short run, there might be something
to it. Boosting defense spending will put to work some of the people and
machines that have been rendered idle by recession. But this kind of
stimulus spending is like adrenaline: it works best in small, targeted
doses. Bush's proposed defense-budget increases are big and wide-ranging.
If the Pentagon gets everything it's asking for, defense spending will be
forty-five per cent (or a hundred and twenty billion dollars) higher than
it was three years ago. Whatever the strategic merits of the proposed
defense budget, it can't be justified on economic grounds. Over time,
defense spending stunts, rather than stimulates, economic growth.
Consider the much heralded peace dividend of the nineteen-nineties. It
turned out to be even bigger and more consequential than anyone imagined.
With the end of the Cold War, defense spending fell from more than six per
cent of the G.D.P. to around three per cent. This allowed the government to
balance its books, which helped push down long-term interest rates, which,
in turn, made it cheaper for American businesses to invest in new products
and factories. What's more, people who had previously been working on stuff
only the Pentagon could use were suddenly free to invent and develop stuff
civilians might want. The brain trust turned its attention from guns to
butter. Between 1994 and 2000, the percentage of research and development
that was financed by the government fell to its lowest point ever.
Corporate R. & D., meanwhile, accelerated by 8.5 per cent a year.
Productivity rates jumped to levels not seen since the nineteen-sixties,
fuelling the longest economic expansion in America's history.
Does increased defense spending take up resources that would otherwise be
put to more productive use? Yes. There aren't enough smart engineers and
scientists to go around. When the Pentagon ramps up spending, it lures many
of them out of the private sector and diverts laboratories and factories to
military production. During the Reagan era, the percentage of scientists,
engineers, and technical professionals who were working on defense projects
was nearly twice what it was during the Clinton years. The business world
could have used all that talent.
The diversion of resources to military production wouldn't hurt the economy
if the Pentagon were efficient. A company like Intel has to make the most
of every dollar it spends, or risk being surpassed by its competitors. But
the Pentagon doesn't really have competitors. It feels no outside pressure
to be efficient. As Defense Secretary Donald Rumsfeld said in a speech on
September 10th, the Pentagon is "one of the last bastions of central
planning." And we all know how well central planning works.
It's true that in the past defense spending fostered what economists call
"spillovers." (Someone has a great ideaHenry Ford and the moving assembly
lineand that idea spills over into other companies and industries.) In the
eighteen-twenties, for example, government armories became the first
factories in the United States to make products with entirely
interchangeable parts, ushering in the age of modern manufacturing. After
the Second World War, the Defense Department helped develop the integrated
circuit and the jet airliner. The Internet arose out of a Pentagon project
that began in 1969.
In recent decades, though, military spending has created fewer spillovers.
One reason is that American industry, pushed by tougher foreign
competition, now invests and invents more on its own. But another reason is
that the needs of the military are increasingly unconnected to the needs of
everyone else. In the fifties, jet-engine innovations benefitted not only
the strategic bombers and military transports they were designed for but
commercial planes as well. Today, the technology that allows a stealth
bomber to evade enemy radar, or helps a Navy pilot handle an extra g or
two, hasn't done much to improve the lot of civilians en route to LAX. If
anything, innovation tends to spill backward these days, with the military
finding new uses for technologies developed by civilian businesses. As
Rumsfeld himself said in his September 10th speech, "The Department of
Defense was once an engine of technological innovation. Today, the private
sector is leading the way."
Of course, you spend money on defense in order to strengthen the military,
not the economy. Yet as Congress debates the Bush defense budget, which
includes tens of billions of dollars for pork-barrel projects of dubious
military value, it might want to remember what the President said the other
day: "Every budget reflects fundamental choices." If you're spending almost
four hundred billion dollars on defense, you're choosing national security
over economic security, whether you realize it or not. In his State of the
Union address last week, Bush said that he would spend "whatever it costs"
to defend the country. Down the line, that could cost us more than we know.
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