Military Spending Double Whammy: Increasing Unemployment and Reducing GDP

I have written extensively on the fact that unemployment will continue rising in America for some time, which will make a real, sustainable recovery very difficult.

The heads of two Federal Reserve banks are now saying the same thing:

Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.

But instead of doing anything to encourage a sustainable recovery in employment - such as rebuilding America's manufacturing base, or breaking up the too big to fails so that the smaller banks have a chance to grow and lend more to individuals and small businesses (see this and this) - the government has simply thrown money at the banks.

Moreover, as PhD economist Dean Baker pointed out yesterday, America's massive military spending on unnecessary and unpopular wars actually lowers GDP and increases unemployment:

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low...

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

Comments

[Dave Wrixon:]

Yes, and I bet that makes no allowance for lost exports from citizens of other countries that won't buy American goods because they are sick of American Imperialism. America not only needs to find ways of making defense savings, it needs to aggressively work on the problem of reducing the loathing of other nations. Frankly, you have to ask, in view of the fact that most of the collateral damage was directed against the US Financial Industry, whether the World would actually have been a better place if 9/11 had not happened. I know the loss of thousands of lives is tragic whoever those lives may be, but the US financial system murders people around the globe every day of the week. Hundreds of thousands of lives have been lost during the same period due to US military intervention, most of which seems to be more related to obtaining cheap oil than the high fluting ideals that have been used to justify all the carnage.

Nov 11 01:58 PM

[Tony Petroski:]

The U.S. Defense needs and spending should be predicated on the current and potential threats, not based on whether the writer "Washington" thinks it's a job killer.

By the same token, the actions taken by military leaders including the Commander in Chief should be predicated on military effectiveness, not as a massive social experiment promoting America-hating officers who shoot up their own bases.

Nov 11 02:54 PM

[ArizonaGlen:]

"But instead of doing anything to encourage a sustainable recovery in employment - such as rebuilding America's manufacturing base,"

Your article seems to follow a similar philosophy to Peter Schiff which I am more or less in agreement with, although neither you nor Mr. Schiff seem to ever say exactly how we are supposed to rebuild America's manufacturing base without both (a) lowering both wage and benefits for American workers and (b) tackling China's currency manipulation without imposing some kind of trade sanctions. I am increasingly coming to the conclusion that there is no solution that results both in a stable economy and an increased standard of living. There is simply not enough capital and resources to sustain full employment at the standard of living we are used to while in a global economy.

Nov 11 04:08 PM

[chris coonan:]

I am glad Obama is weighing options for the current war. I am not sure we have accomplished much for America being in Iraq and Afganastan. The soldiers who are there have my support, but I wish they were home.

Nov 12 03:57 AM

[Scott Sacknoff:]

OK, I'm probably biased in the other direction but the analysis seems to be more politically-driven than based on economics. What is apears to fail to recognize is a> all the jobs that would be eliminated by a smaller economy; b> all the training and skills that military service provides workers that are entering the workforce; c> the technology generated by the defense sector that makes its way into the economy (where would our economy be without commercial applications that emerged from defense technology -- ie. the internet, composite materials, and information technology, to name but three); and exports (which is one of the few sectors of the U.S. economy that is a net positive to the U.S. economy). Citing construction and manufacturing as sectors that lose out was the clincher. The Department of Defense spends billions on construction annually and defense manufacturing employs millions, so how do they lose out? If anything, in an economic climate such as today, the sector is a stable buyer and does not have to deal with economic issues faced by commercial entities such as whether the bank will provide loans for a project to continue. As said, I see this "economic analysis" as one trying to validate a political agenda not one that I see based on facts. Remember the Mark Twain quote, "there lies, damn lies, and statistics."

Nov 12 12:47 PM

[Gregman2:]

Excellent points, and well said--basically, the top leadership has failed in its vital mission to restructuure our manufacturing base, thanks to a lack of will (and a refusal to adopt an industrial policy).

Nov 12 11:42 PM