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Military spending binge is working to keep economies growing

Its been around 9 months since the central banks of the world (bar Japan) started to push up interest rates. And still there are no firms signs that a recession is impending. There are some signs of a growth slowdown but that is not uniform across the globe. The US seems to be continuing to grow. While that suggests that monetary policy is less effective than the mainstream economists claim – which is no surprise to non-mainstream economists who have long understood that fiscal policy is the tool of choice for counter-stabilisation, there are other offsetting factors that are at play here. Governments around the world have seriously ramped up their fiscal outlays over 2022 on military procurements as the perceived threat from Russia and China has been magnified by military generals and their mates in the big US weapons corporations, who have taken the opportunity to get make massive extra profits. The power of the military-industrial complex (MIC) is long-standing and well understood. It explains why all the usual disaster scenarios that accompany increasing fiscal outlays by governments haven’t attracted much criticism. Too many elites benefit from the military binge. But the fiscal expenditure also helps to counteract any spending contraction by households who are negatively impacted by interest rate increases.

On Japan, there was disbelief last week among financial markets over the Bank of Japan’s decision to leave their policy settings unchanged.

Fools rush in!

There is now widespread financial market speculation aiming to profit from a change in the Bank’s policy, which the ‘clever’ financial markets think is inevitable because, after all, mainstream economics says that when inflation is rising interest rates have to rise.

Fools’ logic.

The bullies in the financial markets haven’t seemed to cotton on to the fact that, in fact, they are supplicants. They are not in charge.

They can only gain from short selling strategies which attempt to undermine local financial stability if the central bank allows them to.

I will write more about that on Wednesday.

It is an interesting case study.

But today I want to focus on military expenditure.

While I was working in Japan recently, several missiles were shot over the northern part of the nation from North Korean tests.

There was an emergency called on one day by the Japanese government.

During that period, the Japanese government announced a major strategic shift in policy towards defense.

On December 16, 2022, the Prime Minister announced that they would be increasing defense spending to around ¥43 trillion ($US315 billion) over the next five years as part of its Medium Term Defense Program.

This represents an increase of more than 50 per cent on previous 5-year plans.

In the Fiscal Year 2022 allocation – Defense Programs and Budget of Japan – Overview of FY2022 Budget – the current five-year defense spending plans (2019-2023) amounted to around ¥27.47 trillion – this plan ends in April 2023.

The Japanese government plans to spend around 2 per cent of GDP on defense by 2027, which is the NATO spending goal.

Previously, military spending in Japan has been around 1 per cent on GDP in line with the pacifist constitution that the US imposed on the nation after the Second World War.

The Cabinet released several documents in December 2022 outlining the shift in defense strategy.

In this document – National Security Strategy of Japan – we read:

Japan’s security environment is as severe and complex as it has ever been since the end of World War II. Russia’s aggression against Ukraine has easily breached the very foundation of the rules that shape the international order. The possibility cannot be precluded that a similar serious situation may arise in the future in the Indo-Pacific region, especially in East Asia. Across the globe, historical changes in power balances, particularly in the Indo-Pacific region, are occurring. In addition, in the vicinity of Japan, military buildups, including of nuclear weapons and missiles, are rapidly advancing, coupled with mounting pressures by unilaterally changing the status quo by force.

The document goes on to detail all the threats now perceived (China, North Korea, etc) and the shift in military strategy necessary to deal with these threats.

A further document, released at the same time by the Ministry of Defense – National Defense Strategy – noted that:

As Russia’s aggression against Ukraine attests, the international community, of which Japan is a member, is facing serious challenges, and has plunged into a new crisis. China continues to advance its unilateral changes to the status quo by force and such attempts in the East China Sea and the South China Sea. North Korea escalates its activities as it launches ballistic missiles at an unprecedented high frequency, and pursues further miniaturization of its nuclear weapons. Russia has launched an aggression against Ukraine while its military activities in the Far East have been trending upward. Given the foregoing, in the future one cannot rule out the possibility of serious events taking place in the Indo-Pacific region, particularly in East Asia, that might shake the foundation of the stable post-war international order.

I am not expert in these matters to comment on the strategic issues.

But the shift in Japanese policy, while significant in terms of that nation’s long-standing pacifist position, is being mirrored in fiscal terms around the world.

Military expenditure is booming again as the military-industrial complex rubs its hands together before putting them out for further fiscal support.

I recall John Kenneth Galbraith’s book – the New Industrial State (published 1973) – where he wrote in relation to military expenditure:

All business objection to public expenditure automatically exempts expenditures for defence … which are held to serve equivalent goals of international policy. It is these expenditures which account for by far the largest part of the increase in federal expenditure over the past thirty-five years. Accordingly they account for most of the expansion in the role of the federal government in the economy …

… defence expenditures … have a justification that transcends ordinary questions of economic policy or everyday fears of socialism and the state. ….

Those who have thought it suspicious of Keynesian fiscal policy have failed to see how precisely it has identified and supported what is essential for that policy …

In much social comment, including that of numerous economists, there has been a tendency to minimize or ignore the role of military expenditures in the regulation of demand …

The subject of military spending is dismissed by saying that were it not required by higher national policy, then the same effect wcould easily be obtained by shifting the outlays to civilian purposes or return then to private use.

This … is too simple. Income released to or taken from private expenditure will only serve effectively to regulate demand if the public sector is large and the resources released or absorbed are large enough to count. Military expenditures are what now make the public sector large. Without them the federal government would be roughly half its present size. It is most unlikely this would exercise the requisite leverage on the private economy.

(The photo is from my copy which I purchased according to my dating process in 1976 – while an undergraduate).

On July 15, 2004, JKG published an article in the UK Guardian – A cloud over civilisation – on military expenditure pursuing Iraq, he reiterated these themes.

1. “In 2003, close to half the total US government discretionary expenditure was used for military purposes.”

2. “Such expenditure is not the result of detached analysis.”

3. “In an impressive flow of influence and command, the weapons industry accords valued employment, management pay and profit in its political constituency, and indirectly it is a treasured source of political funds.”

4. “… corporate power has shaped the public purpose to its own needs.”

5. “Mass slaughter has become the ultimate civilised achievement.”

And more.

Fast track to now.

The Ukraine situation is providing salivating opportunities for military generals around the world who are witnessing how new technologies such as drones and portable missile systems are being deployed to complement all the rest of the destructive equipment they have induced governments to procure from the Military-Industrial complex, of which the top brass are boosters.

Military expenditure around the world is booming now and the nation that has most to gain from the destruction and suffering in Eastern Europe at present is the United States, given its corporate structure which is dominated by large weapons manufacturers such as Lockheed Martin Corp, Raytheon Technologies, Boeing, Northrop, General Dynamics, L3Harris Technologies, all of which are in the top 10 suppliers who profit from a war economy.

On December 29, 1940, the US President F.D. Roosevelt gave a ‘fireside chat’ radio broadcast – The Great Arsenal of Democracy – where he said that (America):

We must be the great arsenal of democracy.

Democracy was in his view intrinsically linked with weapons and destruction which the US would supply other nations such as Great Britain.

On May 3, 2022, US President Biden was visiting the Lockheed Martin Pike Country Operations in Alabama and said (Source):

Being the arsenal of democracy also means good-paying jobs for American workers in Alabama and the states all across America where defense equipment is manufactured and assembled.

The amount of weapons and military equipment that the US has already sent to Ukraine is staggering to say the least.

But Britain and the European nations are also lining up at the doors of the US manufacturers for weapons

Most European governments have announced major increases in defense spending .

And when (if) Russia ceases to be the bogeyman – China is still in the frame – to justify these increases in military spending.

The publicly-owned Australian Broadcasting Commission (ABC) published an interesting article (January 20, 2023) – As the war rages on and military spending booms, the US arms industry is a big winner in Ukraine.

It notes that without US weapons support the Ukraine would have been overrun by Russia. Whether that is true or good is beside the point here.

We have been focusing on the corporations that have gouged massive profits from the gas situation in Europe (including the Australia gas licence holders) but little attention, until now, has been focused on the military equipment suppliers, predominantly US-based.

These corporations link a range of smaller corporations together in the supply chain of destruction, which is why JKG (above) noted there is little resistance to public spending on their products, unlike the massive cries of impending government insolvency etc that accompany relatively small outlays to help the poor survive another day.

The ABC article suggests there is now a free-for-all where thet “many safeguards to protect against waste and price gouging” have gone out the window as the weapon pigs get their snouts deeper into an even deeper public spending trough.

So on top of the already massive military spending handouts going to these companies, the Ukraine situation has gone beyond the expectations of these companies and will lock in a higher level of public defense spending for years to come.

And this is an industry full of corporations that:

… continue to arm repressive regimes like Saudi Arabia, Egypt, the Philippines and Algeria that have horrific human rights records and have engaged in destabilising activities …

So there are several strands to this discussion – corporate greed; corporate political power; corporate human rights violations – and more.

But I am focusing (without downplaying the importance of a focus on those previous strands) here on the fiscal impact.

As JKG noted above, progressives are somewhat stuck when they criticise the MIC and the amount of funding it receives from national governments.

Progressives like to think that the MIC expenditure can be simply replaced by spending on hospitals, schools, public transport and the like.

However, as JKG noted, if you reduce the MIC outlays down significantly, there is a huge spending hole that would be hard to fill without expanding the size of the public sector considerably.

I would support that sort of shift.

But, all of that sort of ‘progressive’ expenditure is the type that leads to manic criticism from those with political power, unlike the military outlays which are ‘exempt’ from such criticism.

So the question that progressives have to answer is how can they create the political conditions whereby the public sector expands significantly in its as corporate profits shrink.

And as Biden said in his speech at Lockheed last May, the MIC creates jobs, often in poorer states.

Conclusion

So the problem is not just to attack the MIC but also to articulate how the benefits of the MIC expenditure that flow to local communities in the form of work and incomes can be easily replaced.

That is not an easy challenge, which is why the MIC has prospered for decades despite its nefarious and destructive nature.

PS: I am migrating away from Twitter to Mastodon. I will write a little primer soon on how you can all do the same. I want as many people who follow me on Twitter (currently 20.5 thousand odd) to make the transition too. I will provide instructions tomorrow on how to do that.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.

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    This Post Has 14 Comments
    1. Using resources to devise and build new ways to kill more people has to be among the absolute worst waste of resources possible. But I am somewhat surprised that you would say that the United States benefits from exporting any kind of manufacture. Given the MMT stance that exports are always a real cost to the exporter. I mean Bill- we already kill enough of our own people with guns as it is- it isn’t like we need any more of them here.

      I completely agree with what you have written here. Just confused as to how the USA, as a whole, benefits economically by exporting real, if awful, goods. Or rather, how that squares with your other discussions about trade.

    2. Weapon sales are plainly a loss of resources but the MIC and their shareholders/political donors financially benefit from a flow-through of public funds directly from the treasury for inflated priced arms. The armaments supplied to order from the US government then being on-sold to (mostly) approved foreigners to use (sales of so-called “kinetic” armaments – love those wonderful Yank euphemisms like “collateral damage” and “rendition” – have to be replaced as they’re a single use item). The Ukraine conflict has become a “wonderful” real-world arms fair sales demonstration for the MIC.

      Selling arms to oil suppliers has them financing their purchases through selling oil priced in US$ (an economy only functions via an energy input and he who controls oil in the current carbon energy market controls economies) of which the US has no need, being the monopoly issuer of that currency but it looks good in the accounts. Sales to others can make them indebted to the US and leave them open to having their resources owned and controlled by US interests with the help of the World Bank & IMF. Just watch what price Ukraine is paying and will pay for armaments supplied by the MIC. Et voila, another vassal state added to the neofeudal empire.

      Imagine what might be possible if spending for jobs to counter and reverse global warming was seen as sacrosanct as defence spending. What could be higher national policy than that? Sign me up for expanding the public sector and reducing the power and influence of private wealth.

      Look forward to reading on Wednesday about the widow maker trades making bets against the ability of the BOJ to set interest rates.

    3. Dear Jerry Brown (at 23/01/2023 2:29 pm)

      I think you are missing the point. The military expenditure contributes to domestic demand, which generates local output and employment and incomes. The resources deployed in the production other than labour are clearly then exported (blown up!) but the income effects remain, which was the point of the blog post.

      best wishes
      bill

    4. Military spending happens when a war is on the making.
      And a war is on the making.
      Just watch who is pushing for a peace agreement in Ukraine – nobody!
      Once again, it will be a clash of empires, just like WWI and WWII.
      And europe is at the center of the “game”, again.
      Napoleon and hitler tried to take over Russia – I wonder who will lead the next invasion?
      Biden will not do it, that’s for sure.
      Some crackpot will do it.
      Anyway, 30 million dead in WWII will be shadowed by what is coming.

    5. Galbraith’s logic is flawed. There’s no change in the overall size of the public sector when resources are shifted from the MIC to other priorities (education, healthcare, infrastructure). The work and income that flow to local communities from the MIC is very easy to replace with jobs and income from hospitals, schools, public transportation and other public goods. Note: I’m not arguing here for or against such a shift. Just pointing out that such a shift has no effect on the overall size of the public sector since the increase in the size of social spending is precisely offset by the decrease in size of MIC spending.

    6. Dear John Bruch (at 2023/01/24 at 3:47 am)

      I am sorry to say that I don’t think you fully understood JKG’s point.

      Yes, you are correct, it is possible to replace the MIC expenditure with spending on other priorities. That is clear.

      But the point is that the MIC expenditure is largely on activity outside the public sector which boosts the non-government sector.

      The ‘other priorities’ tend to be public sector activities (or should be).

      That means that to avoid reducing aggregate demand, the size of government would have to increase.

      And the ‘other priorities’ are not seen politically in the same way defense expenditure is seen by the elites etc.

      So his point was that to make that transition would require a massive shift in political power and perception among the public in favour of larger government.

      Sure, the government can simply transfer MIC dollars to private health care with no change in the size of government. But that would just transfer the profit gouging and lobbying etc to a different private sector set of firms and interests.

      best wishes
      bill

    7. A very interesting subject and very topical.

      In Australia, too, we are witnessing the same hysterical calls to buy all sorts of over-hyped military hardware: from the cursed AUKUS nuclear subs to the infantry fighting vehicles, passing through the super-duper rockets and maybe even the new American strategic bomber. The latest is the return of the Blackhawks: the Howard regime ditched the Blackhawk fleet because the Blackhawks were obsolete, they wanted the Taipans, that were supposed to be a Wunderwaffe, bespoke to Aussie conditions; now Albanese wants to ditch the actually crappy Taipans for the much better … Blackhawks!

      All that is received by the commentariat — deeply worried as they are with the “eye-watering” debt — without blinking an eye. And then the sales-reps, sorry, Washington-based, MIC-funded independent experts of the Australian Strategic Policy Institute explain that Australia is not spending money like “drunken sailors” (in Tony Abbott’s favorite expression) with those weapons, because they are an “investment” …

      The icing on the cake is that those purchases generate much less economic activity in Australia than they do in the US: these are to a large extent imports.

      The immoral Morrison clique harassed and bullied over one hundred thousand poor devils to the point that some may have taken their own lives with the Robodebt scam. Their goal was to extort a little over a billion dollars from them. If we actually go there, a single new bomber will cost more than that.

    8. Dear Bill,

      Agree 100% about the shift in political power that would be required to shift resources from the MIC to other priorities.

      But much of the defense budget (40%+ here in America) is for salaries of *public sector* workers (soldiers, sailors, airmen, Marines, Department of Defense civilians (many!), Veterans Administration civilians (especially in the VA hospital system), etc.) All of these folks are already employees of the federal government. So a very large chunk of defense spending is *already* in the public sector!

      You’re right that a shift in spending to private construction companies, private healthcare, and private universities would open the government to profit gouging and lobbying. But the federal government already has HUGE contracts with all these entities (Obamacare, Medicare, Medicaid, the interstate highway system, all sorts of educational grant programs, etc.) So the feds are used to handling pricing and lobbying.

      In fairness, the shift would have been bigger in JKG’s day because the federal government was not as deeply involved in all aspects of the economy as it is today. Today, the shift is “merely” a political issue.

      Best wishes,

      John

    9. @Jerry Brown….

      “I completely agree with what you have written here. Just confused as to how the USA, as a whole, benefits economically by exporting real, if awful, goods.”

      While weapons and other military goods certainly constitute an expenditure of real resources, unless you’re going to turn them on yourself they are only useful when they are exported and used elsewhere. In this case, the gain for the economy that produces them is in the enhanced domestic economic activity arising from the mass production of weapons, even though the real resources (weapons) themselves are exported and deployed elsewhere.

    10. In the UK we now have a much reduced army in manpower terms compared to say 30 years ago, but still a large arms industry (I think arms is a better description than defence). According to the USA Dept of Commerce website https://www.trade.gov/country-commercial-guides/united-kingdom-aerospace-and-defense# ‘In 2021, the UK defense industry turnover totaled approximately $33 billion, $15 billion of which was exported’. Difficult to say how much of the stuff produced is military intended since as it says, ‘the UK aerospace and defense industries are inextricably intertwined’ with more than 3000 aerospace companies. Drones, primarily for civil purposes, but as we know, incredibly useful militarily, are a massive expansion area. Leftwinghillbillyprospector is correct that even the $15 billion exported results from/produces plenty of domestic economic activity and jobs. Sure it would be better for us to fill the hundreds of vacant posts in the NHS in place of some of this activity, but the jobs aren’t in the same location and that’s a shift from private to public, as most of the aerospace industry isn’t publicly subsidised. Also, while exports are a cost of things produced for someone else, I think we probably need to give foreigners some actual stuff rather than just £ for our imports. Import substitution would be an alternative. At present anyway, that is unlikely as contrary to Paulo Rodrigues’ ‘war is on the making’, war, not limited to small area conflict, has been very much the actuality in Europe for the last year. Paulo you should know that Napoleon’s and Hitler’s invasions of Russia were for very different reasons, with neither comparable to the present invasion of Ukraine by Russia.

    11. I wrote, eventually as promised, a short piece for CND on the economics of nuclear (weapons and power). It wasn’t very good and no one commented. This post is part of something much bigger which probably needs expansion IMO.
      I’m a BAE Systems pensioner. Oh, and I’ve written a short piece on pensions as well. Another topic which needs expansion.

    12. Thank you, Bill and Lefty, for your replies. I understand the points made in the post about exports increasing aggregate demand which can lead to increased economic activity and income in the exporting country. And agree with it.

      But exports ‘as a benefit to the economy’ is something Bill and Warren Mosler have actually argued against in the past, saying that exports are a drain of real resources and that therefore they don’t actually benefit the exporting country. And I was trying to point out that seeming contradiction from what is said in this article here. But in fairness, Bill has also said we should take a nuanced view regarding trade and exports. And I’m fine with that.

      It bothers me greatly that the things designed to kill people would be among the most highly valued exports of my country. That the US government has funded the research and development and production of these terrible but highly sophisticated things-weapons that everyone hopes would never be used- makes me wonder what would be possible if that funding was employed towards technologies we would actually want to use. What a waste of resources.

    13. Hi Bill, thanks for the blog post.

      I know this is besides the point of the post, which was in part to draw attention to the important impact MIC expenditure currently has on economic activity and employment in certain places.

      However I must take exception to the way you cover Russia’s invasion of Ukraine.

      First of all, referring to it simply as the “Ukraine situation” is a clear whitewash of what’s actually happening and gives the inaccurate idea that there’s no actor clearly at fault here. We all know this was an unprovoked war of choice by Russia, who is seeking to subjugate through brutal force a soverign democratic nation.

      Secondly, you suggest that Russia is being used by Western Givernments and the MIC as a “bogeyman”. I guarantee you that for the 43 million Ukrainians, and the millions more citizens of other eastern European nations, Russia is much more than a bogeyman – it is a very real tangible threat to their way of life.

      And finally, this sentence is probably the most egregious: “It notes that without US weapons support the Ukraine would have been overrun by Russia. Whether that is true or good is beside the point here.” Anyone that’s paid attention to this war would know it’s indisputable that, inspite of Ukraine’s fierce resistance to Russia’s agression, without US support, Ukraine would no longer exist as a soverign nation. And as for whether this is good or not, I don’t think that even deserves debate.

      I really appreciate your MMT insights Bill, and the effort and care you put into to ensuring these insights are sound and defensible. I only ask they you please take the same approach to the other topics you cover.

      Kind regards,
      Stefan

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