War is the Health of the GDP

The headline of Tyler Cowen's Upshot piece, "The Lack of Major Wars May Be Hurting Economic Growth" is calculated to provoke controversy. Cowen's point, though, isn't that we need a war to boost the economy. As he concludes:

"Living in a largely peaceful world with 2 percent G.D.P. growth has some big advantages that you don't get with 4 percent growth and many more war deaths."

But there is an underlying logic to Cowen's reductio ad absurdum that I'm not sure he grasps completely. The national income accounts were designed with the idea of paying for war in mind. That actually might make sense during a time of war when you're trying to figure out how to pay for it. But it embeds a social accounting protocol that is incompatible with the absence of war. The predictable results are policies such as the Cold War rearmament based on the premise that arms spending will pay for itself by siphoning off revenues from the additional growth that the spending will stimulate. The Latin term for it is inflatio. Time to recycle a piece from three years ago:

Siphoning Off a Part of the Annual Increment of GNP

The lessons drawn from World War II by US policy makers and their advisers stand in stark contrast to those drawn from World War I by Stephen Leacock and prescribed by Keynes during the war. Where Leacock had seen the maintenance of industrial output despite vast withdrawals of manpower from the labor force as a sign of the redundancy of much of that labor force, Leon Keyserling, chairman of the Council of Economic Advisers under President Truman, viewed massive spending on armaments as a tonic to stimulate the expansion of economic activity. Keyserling went even further in his calculation of the economic benefits of the preparations for war. In his view, the increased economic activity could produce a "growth dividend" that could be "siphoned off" to pay for the arms. Rearmament would thus be a free lunch that would not only pay for itself but make a down payment on a bargain dinner. This reasoning underpinned National Security Council memorandum, NSC-68, written in 1950 by State Department analyst Paul Nitze. Keyserling supplied the economic vision underlying NSC-68, which represented a "a serious effort to develop a coherent strategy" in response to two distinct but interrelated problems: first, the obstacles to rebuilding an open system of world trade in which the US could sell its exports and second, containment of the Soviet military and political threat.

"With a high level of economic activity," the report assured, "the United States could soon attain a gross national product of $300 billion per year… Progress in this direction would permit, and might itself be aided by, a build up of the economic and military strength of the United States and the free world." The deficit financing of this military build up and subsequent effect of that spending on economic growth meant, in its author's opinion, that the rearmament could occur, "without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product."

Approved months before the outbreak of the Korean War, NSC-68 recommended a massive rearmament program for the U.S. and Western Europe. "Leon Keyserling was very helpful when we wrote NSC-68," author Nitze admitted in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but President Truman's special counsel, Charles Murphy called upon him to evaluate the document's economic feasibility. It is unclear whether either Murphy or Truman, were aware of Keyserling's dual role as both advocate and judge of the strategy. Never one to underestimate his own importance, Keyserling described his role as "the one who had introduced the fundamental new factor of the dynamics of economic growth. Now, as I say, I started this circa 1947…"

Because of limits to domestic purchasing power imposed by the market, stabilizing the U.S. economy in the post-war period required the expansion of foreign trade. Although the two goals of economic stabilization and Soviet containment were acknowledged as distinct in NSC-68, the document's rhetoric elevated the political-military conflict to top billing. The memorandum's drafters believed that rearmament could solve both problems while also being easier to sell politically. The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. Wartime devastation of productive capacity in Europe left in its wake immense inflationary pressures, as pent-up demand for goods could not be met by the constricted supply. Europe's international payments position was also weakened, giving rise to exchange controls and other barriers to international transactions in an effort to prevent capital flight.

Meanwhile, widespread conservative and protectionist political sentiment in the U.S. blocked a wholesale expansion of a Marshall Plan-type arrangement of foreign aid and easy credit. The Marshall Plan itself had been a brilliant success in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term continuation of the effort. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism. Instead, it produced politically marketable palliatives to several immediate and pressing problems. The document evaded the hard issues of the inherent weaknesses of liberal capitalism and the difficulty of establishing an open world economy. Instead, it opportunistically projected Western economic frailties onto Soviet military strength. That rhetoric, in Fred Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bugbear unnecessary. While it may have made sense as an expedient, it was flawed in that it created an enduring institutional bias in favour of ongoing militarization of U.S. foreign policy. According to Block, "Rearmament became official policy largely because of the absence of coherent alternatives." But the strategy's success in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argued that the implementation of NSC-68 established or reinforced three institutional structures – NATO, the military-industrial complex and political McCarthyism – that subsequently made it difficult for US policy makers to stray from the logic of militarization.

If the politics of NSC-68 were dubious, the theoretical status of its economic rationale was even more so. During World War II, as mentioned in a previous chapter, John Maynard Keynes had written to T.S. Eliot describing the full-employment policy by means of investment as first aid. It was, he explained, only one application of an intellectual theorem that also included wise consumption and working less. Keyserling's growth economics, however, abandoned any pretence to theory in favor of boosterism of growth, growth and more growth fueled by wasteful consumption and wasteful investment. Economic stimulus through rearmament strategy is best understood as a response to the political difficulties inherent in adopting a genuine full-employment policy, as they had been analyzed by Michal Kalecki in a 1942 Cambridge lecture published the following year as "Political Aspects of Full Employment."

Kalecki had argued that the economic feasibility of maintaining full employment through a policy of government spending was widely accepted by economists, with the exception of "'economic experts' closely connected with banking and industry." As long as there remained unused capacity of labor, production facilities and raw materials, government spending financed by borrowing could proceed without triggering inflation. The reasons for political opposition to a full employment policy, however, are three-fold. First, industrialists dislike government interference in the area of employment because it blunts the political threat – used to indirectly dictate government policy – of warning that one or another policy opposed by business will "undermine business confidence." Second, the scope for government investment is initially narrow – restricted to such facilities as schools, roads and hospitals – but continued pursuit of the policy of government spending would create pressure to expand government involvement into industries like transportation and public utilities that are currently the preserve of private investment. Subsidizing mass consumption is even more strongly scorned because it violates the fundamental moral principle, "that 'you shall earn your bread in sweat' – unless you happen to have private means." The long-term maintenance of full employment is most politically objectionable because it would lead to social and political changes in which the threat of dismissal from employment would cease to be an effective disciplinary measure. Thus, although a full employment strategy could increase profits, its undermining of factory discipline and political stability make it unpalatable to bankers and industrialists.

An exception to this rule of big business opposition to full employment occurs under fascism, where, "the state machinery is under the direct control of a partnership of big business with fascism" and "dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditures on armaments." Although this second aspect suggests parallels with NSC-68, there are fundamental differences between fascism and the economic rationale behind the Truman administration's Cold War rearmament strategy. As Kalecki pointed out, "in a democracy, one does not know what the next government will be like. Under fascism there is no next government." This clearly was not the case with NSC-68. Although the memorandum itself remained classified until 1975, its implementation following the outbreak of the Korean War revealed a policy logic that was clear enough to critics of the Truman administration.

Opposition to the rearmament as economic stimulus policy was readily forthcoming during the 1952 presidential election campaign. On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that a political campaign fund established for him was improper. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech, however, was published the next day in the Washington Post.

Eisenhower's speech was a sustained polemic expressly directed at the Truman administration policies conceived by Keyserling. Although Ike didn't name the economic policy's architect in the speech, he did the next best thing. He cited with regret the resignation of the Edwin G. Nourse, whom Keyserling succeeded as Chairman of the Council of Economic Advisors. To anyone familiar with Keyserling's conceptual role with regard to the economics of NSC-68, several passages in Ike's speech stand out as virtual indictments.

"The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... The point and purpose of this policy I have already indicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less..."

Furthermore Eisenhower identified the mainspring of that inflationary policy as the production of armaments:

"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."

In contrast to the scorned Truman administration policy, Eisenhower cited Thomas Jefferson's praise of governmental frugality: "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy."