- LOS ANGELES -- What do the
war in Iraq and the economic recovery in the United States have in common?
More than one might expect, to judge from the last couple of rounds of
US growth figures.
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- The war has been a large part of the justification for
the Bush administration to run ever-widening budget deficits, and those
deficits, predicated largely on military spending, have in turn pumped
money into the economy and provided the stimulus that low interest rates
and tax cuts, on their own, could never achieve.
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- The result, according to economists, is a variant on
Keynesianism that has particular appeal for Republicans. Instead of growing
the government in general - pumping resources into public works, health
care and education, say, which would have an immediate knock-on effect
on sorely needed job creation - the policy focuses on those areas that
represent obvious conservative and business-friendly constituencies. Which
is to say, the military and, even more specifically, the military contractors
that tend to be big contributors to Republican Party funds.
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- "It may be very inefficient and obviously not fair,
but it is nevertheless causing almost 5 per cent more money to be pumped
into the economy than is being taken out in tax revenues," observed
Robert Pollin, professor of economics at the University of Massachusetts
at Amherst. "At the same time, it fits into the broader ideological
goals of the administration because they can paint it as part of a national
emergency, the fight against terrorism, the fight against Saddam Hussein,
and so on."
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- During the second quarter of 2003, when the war in Iraq
was in full swing, some 60 per cent of the 3.3 per cent GDP growth rate
was attributable to military spending. Expenditure on manpower and weaponry
was relatively flat, according to Professor Pollin's analysis, while the
lion's share of the stimulus came from the multi-billion dollar contracts
handed out to Halliburton, Bechtel and other private contractors.
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- A smaller proportion of the roaring 8.2 per cent growth
recorded for the third quarter was directly attributable to the military,
but Professor Pollin and others argue that it is still the military that
is driving the deficit, and the deficit - budgeted at about $500 billion
(£270bn) for next year - that is driving the recovery.
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- Just last month, the Pentagon awarded a $4 billion contract
to California company Northrop Grumman to work on the Star Wars missile
defence programme. It is the sort of figure that can regenerate the economy
of an entire region. California - the state where US economic booms have
a tendency to begin and end - is also a beneficiary of the boom in security-related
spending, since much modern security paraphernalia depends on Silicon Valley
computer technology.
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- The Bush administration itself prefers to attribute the
recovery to its tax cuts, targeted disproportionately towards the richest
Americans. Many non-administration economists, however, say this is nonsense,
and that the tax cuts are far more political than they are stimulative.
A more significant role has been played by buoyant household spending,
helped by low mortgage interest rates which have inspired many homeowners
to borrow against the rising value of their properties. But there are signs
that interest rates are now on their way back up and that the refinancing
fad has ended.
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- "The administration is conducting a highly irresponsible
fiscal policy, and there is no legitimate economist on the face of the
earth who doesn't say the tax cuts are just loony," said Kent Sims,
a San Francisco economic consultant and public policy expert. "The
chosen weapon for dragging the economy off the floor - now that an election
is coming - is the deficit. Military expenditure is usually the least effective
of short-run ways of spending money, because it doesn't build infrastructure
that give you returns over time. But it does create a short-term lift."
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- Military-fuelled growth, or military Keynesianism as
it is now known in academic circles, was first theorised by the Polish
economist Michal Kalecki in 1943. Kalecki argued that capitalists and their
political champions tended to bridle against classic Keynesianism; achieving
full employment through public spending made them nervous because it risked
over-empowering the working class and the unions.
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- The military was a much more desirable investment from
their point of view, although justifying such a diversion of public funds
required a certain degree of political repression, best achieved through
appeals to patriotism and fear-mongering about an enemy threat - and, inexorably,
an actual war.
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- At the time, Kalecki's best example of military Keynesianism
was Nazi Germany. But the concept does not just operate under fascist dictatorships.
Indeed, it has been taken up with enthusiasm by the neo-liberal right wing
in the United States.
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- Ronald Reagan famously resorted to deficit spending,
using talk of the Evil Empire and communist threats from Central America
as his excuse to ratchet up the military budget. In 1984, the deficit rose
to a whopping 6.2 per cent of GDP. Consequently, the economy grew by more
than 7 per cent that year, and he was re-elected by a landslide.
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- The corollary of the Reagan military boom was a sharp
cutback in social spending, something that was not reversed under Bill
Clinton and is now back on the agenda with George Bush. State and local
budgets are all in crisis because of the recession of the past two years.
The fact that the White House is not using federal dollars to help them
finance schools, hospitals and police forces hurts all the more because
these things have now been underfunded for a generation.
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- The Bush deficit has not yet reached Reaganesque proportions
(it stands at roughly 4.5 per cent of GDP). But Professor Pollin, for one,
predicts that the resulting debt burden could rapidly rise to the levels
seen in the 1980s, with interest repayments eating up as much as 18-19
per cent of the overall federal budget.
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- Professor Pollin does not share the Clinton administration
view that deficits are always bad. In classic Keynesian fashion, he believes
they are necessary and desirable to pull countries out of recession. But
he, like the generation of economists who criticised Reagan's policies,
thinks the priorities are wrong - as well as overtly bellicose - and will
have repercussions for years or even decades to come.
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- "The long-term effects of military Keynesianism
are obviously negative on public infrastructure, health, education and
so on, and there are limits on how long you can keep it up," he said.
"What we borrow we will eventually have to pay back, with interest."
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- © 2003 Independent Digital (UK) Ltd
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- http://news.independent.co.uk/business/news_analysis/story.jsp?story=478434
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