Learning to chill on the Defense budget

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Simultaneously refusing to extend financial aid to the teetering economic bottom of the U.S. populace, the Senate voted a New Year’s Eve bi-partisan override of President Trump’s veto of the $741 billion defense authorization bill. This bill always sets me off for its size, its over-extended purpose and its embedded corruption, but this year I have decided to take a “chill pill,” and this post is an offer of one to you, the reader, as well.

The mental meditation required here is to recognize that this massive, debt-inducing spending is primarily a federally funded jobs program and a classic Keynesian economic stimulus, even though most of its Republican supporters would vehemently deny that. [1] And that stimulus, especially at this moment, is not all bad. The largest portion of the dollars actually spent by the government goes, either on the first round (e.g., military pay) or the second round (e.g., defense industry workers), to wages, most of which are then initially spent locally by consumers on food, housing, education, and medical care.

With luck, that spending cycles around another time or two before going overseas for imported goods or into the massive pockets of Jeff Bezos and friends. And so, from this bill we get about half-a-trillion dollars of direct Keynesian stimulus, in my estimation, and some decent bounce after that.

Note that this is not my idea of the best place to spend this money. In short, we build a lot of crap, then we blow it up, then we build and buy more expensive crap, then we blow THAT up, in an endless cycle of waste and violence. From a Keynesian economics perspective, it is inefficient. A lot of the cash goes directly to already-rich investors and executives as profit and outsized salaries. The defense industry employs many thousands of middle-class engineers, well-paid factory technicians and support workers who might otherwise be employed these days in “clean energy” or other more beneficial industries. But (time to chill again), these are also Americans who spend money to sustain their own individual local economies.

To summarize, defense spending is primarily an inefficient form of government welfare directed at middle-class Americans, business managers, and investors. Republicans will never admit that, but it is nonetheless true.

Defense theater

One benefit of the chaotic last four years is that the Defense Department budget has been demonstrated NOT to be mostly about protecting the United States from its external enemies. The Republican Party rolled over to Russia without a fight on several significant threats out of fear of their President, who, as Hillary Clinton noted early on, was clearly a puppet of Vladimir Putin. History will bear that out, but every NATO leader knows that fact right now.

As for China, we saw belligerent public-posturing and poorly planned tariffs, which are really taxes on American consumers. But behind the scenes there was a lot of private deal-making by Trump and his grifting cronies, such as Ambassador Terry Branstad’s son, involving special dispensation for favored electronics companies and Chinese trademarks for Ivanka Trump.

While I believe Donald Trump’s bellicose anti-NATO rhetoric was misplaced, the reality is that we do have a lot of soldiers and military equipment all over the world. Everybody knows the incredible imbalance of American war spending and its corrupting influences for friend and foe alike:

If all this spending made us safer, then perhaps it would be worth it. But despite spending more than much of the rest of the world combined on armaments, we have found ourselves less secure in the world in the last four years than in recent history. Significant numbers of Republican legislators have literally tried to overthrow this Presidential election (but not their own down-ballot wins, oddly), advocating the literal scrapping of democracy in fealty to Donald Trump. The biggest threat to American security is, as they say in the slasher movies, from “inside the House.” Republicans who understand demographics have realized that their future electoral prospects do not look good, and so they are willing to throw democracy itself under the bus in order to retain power.

Defense rent-seeking

I have written in the past about rent-seeking, an ill-named and poorly understood economic concept. Rent-seeking is a business focus on obtaining economic gain by persuading the government to provide tariff protection, specific tax benefits, loan subsidies, “privatization,” or grants not available to their competitors. During the past four years, we have seen all these forms of rent-seeking in spades. Do we even have to name them? [2]

In other words, the corporation is not really in the business that it says it is in. Rather, it is in the business of extracting guaranteed cashflows and profits from the government and taxpayers. The product is just part of the shell game, and for many “defense” industries, the point is to build “razor” systems with very disposable and expensive “razor blades” that require regular replenishment, and preferably provide jobs in multiple congressional districts. Defense requirements are not the key; government cash is. The F-22 Raptor stealth fighter program has been one of the best examples of this. Build a very expensive, unreliable weapons system that many in the military did not even want, but one that requires continuing, ongoing maintenance spending in the manufacturing plants scattered strategically around the country where the political power lies.

An alternative

Here is a thought: Let’s stop being “rent seekers” and pretend to be “classic capitalists” with a twist. If we took a big hunk of that three-quarters of a trillion dollars annually (which we have already established is “welfare”) and dumped it instead at the very bottom of the socioeconomic segments of the economy, and in the form of very direct aid to poorer families, what would happen?

Well, these families might save some of this money, investing it in the capital markets of the United States. But clearly the overwhelming bulk of this money would go into the very-local free-market economy. Entrepreneurial grocers might even go back into the “food deserts” to sell to these now-less-desperate consumers to give them options beyond dollar stores. Coupled with living wage legislation (and note that increased wages at the bottom end also get mostly spent locally), employment in local businesses in economically depressed neighborhoods would likely increase. [3]

Given a few extra dollars, many families freely choose to improve their living conditions. The capitalist demand for better housing, if not impeded by government (which it so often is) could well improve housing stocks in the major cities and surrounding communities. Targeted aid supporting local spending in poor rural communities could draw back those who have left for the higher wages of the cities, and truly capitalist businesses would follow them back home to serve their needs. We have learned during the coronavirus pandemic that many jobs can be just as easily staffed from deep rural Iowa as from Des Moines using new internet tools.

More universal, locally sourced medical care in rural communities would not only have great benefits to the health of poor Americans but would also provide many skilled jobs. including new job opportunities for those residents. Poor families who are not scraping for every dollar are also quick to invest in education for their children, again mostly locally if the right training programs are made available.

The locality of the spending is crucial. The velocity of money is the number of times that the same dollar moves from one person or business to another in a given period of time. Basically, every time you spend your money locally, you are “creating new money,” often in the form of a paycheck for a local employee. If that person also spends locally, even more “new money” is created in your neighborhood, and that is good.

Note that the government gets some of its own money back with every round of local spending in the form of sales, payroll, and property taxes. This is how even the poorest communities can become largely self-sustainable if the velocity of the money is strong enough. The last round of massive tax cuts to the wealthy failed to provide the promised-by-Republicans increases in governmental revenue. But real cash spent locally a few times over will inevitably find its way back into government coffers, and Jeff Bezos will still get more than his share of those dollars. Ordinary folks cannot escape sales and payroll taxes like rich folks can, as many taxes start hitting on the first dollar spent and the first dollar earned.

I have gone into this new year with a great degree of hope. If I can get past an incompetent governor and get my coronavirus vaccine soon, then I, and millions more like me, can re-enter the local economy. And, as you have seen, I am even relatively “chill” regarding that three-quarters of a trillion of war spending that could have changed so many lives and alleviated so much poverty and brought so much healthcare to the vulnerable and…


Notes:

  1. Keynesian economics (named after economist John Maynard Keynes (1883–1946) sees the most effective macroeconomic control as directly juicing or moderating consumer and business demand. The common alternative is monetary theory, which seeks to exert control by regulating the money supply to support economic activity and to moderate inflation. These latter tasks are usually seen as the most important job of the Federal Reserve, but Congress does the heavy lifting for a Keynesian strategy.
  2. The modern use of the term “rent-seeking” comes from economist Anne Krueger, writing in 1974. The term itself goes back to 18th-century capitalist icon Adam Smith, who used the term “rent” to refer to gaining control of land or other natural resources, deriving wealth from means other than manufacturing or service profits. Krueger demonstrated that accumulated government wealth is often an even-more fruitful “natural resource” to be tapped by creative entrepreneurs.
  3. The “Big Mac Index” demonstrates that competitive businesses still provide the basics at competitive prices in world cities where they must pay their employees a living wage, and where they get healthcare to boot. Minimum wage naysayers should have more faith in capitalism.

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