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The essay — America the Third World Nation in Just 4 Easy Steps, (Truthout, 10 Nov 2012) — describes how our political addiction to the free-trade ideology of neoliberal economics has helped to de-industrialize America and thereby impoverish much of the American middle class. My 24 Sept essay in Counterpunch describing decline of manufacturing employment gives you a sense of the mind-boggling magnitude of what has happened. While “4 Easy Steps” makes passing references to the increasing dependence of the manufacturing sector on military spending, as well as the financialization of economy (but not the latter’s siamese-twin ‘managerialism’), the authors did not develop these points. Without implying any criticism of their excellent essay, my aim today is to tweak your interest in these omissions, particularly America’s defense dependency.

The late Professor Seymour Melman (Columbia Univ.) wrote a prescient book, Profits Without Production (Knopf, 1983) that explained how the militarization and managerialization of our economy were becoming the central causes of the decline in America’s manufacturing competitiveness. This decline started in the 1970s, but Melman showed how it grew out of seeds planted by the permanent military mobilization of a huge defense industry in the 1950s.

The permanent war economy was born on 30 September 1950. On that day, President Truman officially signed NSC-68, a document that became the blueprint for the containment strategy for waging the Cold War. Central to this strategy was the establishment of a large, permanently mobilized defense manufacturing sector. The authors of NSC-68 justified the permanent mobilization, in part, with an economic rationalization reflecting their contention that the WWII production miracle proved the multiplier effects of Military Keynesianism. They suggested these benefits were likely to repeat themselves. In their words: “the economic effects of the [NSC-68] program might be to increase the gross national product by more than the amount being absorbed for additional military and foreign assistance purposes.”

The post WWII economic boom in the US (note: our competitive performance was aided in part by the lingering effects of the WWII damage to the US’s other major industrial competitors) hid the adverse economic effects of the economic diversion attending to the permanent war economy unleashed by NSC-68. Nevertheless, by early 1961, the accumulating economic and political damage caused by the diversion concerned some insiders: President Eisenhower famously warned the nation about the rise of misplaced power posed by the rise of a large permanent standing arms industry, which he said pointedly was new in our national experience.

The accumulating damage wrought by the permanent war economy started to accelerate in the 1970s, and by 1980, the cancer metastasized: militarization and managerialization began to openly thrive and grow at the expense of the traditional high-wage manufacturing sector, in effect, siphoning off money flows via a combination of government handouts and favorable tax treatment that in effect rewarded both the looting of the tax base and the draining of competitiveness and ingenuity from the civilian manufacturing sector (via the increased defense subsidy, leveraged buyouts, offshoring of jobs, emphasizing short-term focus to pump stock prices, etc.) The combined results of the growing defense dependency, managerialization, and financialization was a decreasing international competitiveness in the manufacturing sector. At the same time, our global competitors were increasing their competitiveness. The net effect can be seen in the US merchandize trade deficit; it went into free fall after 1980.

Those who believe that subsidized defense technologies spill over into the commercial sector to improve international competitiveness might want to consider the obvious fact that the huge increases in the defense spending between 1977 and 1987 and 1998 and 2012 clearly did nothing to ameliorate the free fall.

In America, this political-economic evolution has created a weird political situation where a peculiar political darwinism (taking the form of a corporatist alliance of big business and the federal government) co-exists with the neo-liberal ideology of social darwinism. The former stresses mutual dependency and government subsidies for survival while the latter stresses individuality and survival of the fittest in a Hobbesian Universe. Yet the contradiction between the two modes of belief does not impede the ideologues from promoting both simultaneously, and in so doing, continue the looting and draining operations.

That cognitive dissonance is now poised to grow much worse in the next few months, if as is likely, the threat of a budget sequester induces the government to impose neoliberal austerity economics on the middle class, while government becomes more imbedded with and protects the banksters, the defense contractors, and its other corporatist allies. That is because the only way to practice America’s peculiar mix of social and political darwinism at the same time is to fling what is left of the middle class off the fiscal cliff by defunding social security, medicare, infrastructure modernization, education, etc.

Much has been written on the economic distortions created by the financialization of the economy, but aside from Melman’s pioneering work, little has been written on economic distortions created by the increasing dependency of the manufacturing sector on military spending — which is really a huge government subsidy — and the rise of managerialism, financialization’s deadly siamese twin. Both sets of distortions exist side by side with, but in sharp contrast to, the ideological neoliberal fantasies of a free market.

The attached graphic provides a hint — but only a hint — of how the hidden distortions that have been insensibly creeping into the economy: the graphic illustrates how rates of growth in the industrial shipments of military durable goods increased at a much faster rate than shipments of nonmilitary durable goods since 2000.

This difference in growth rates reflects the accumulating effects of the huge increases in the defense budget that began in 1998. These differences have worked to increase the disproportionate large share of the de-industrializing manufacturing economy that has been soaked up by the defense industry over time. For example, defense spending (base budget + war costs) in 2011-12 amounted to about 4.4% of the GDP. About one-quarter of this spending was applied to the salaries of military and civil servants. That implies the other three-quarters or about 3.3 percent of GDP was spent on defense goods and services in the private sector. Yet this 3.3 percent of GDP spent on defense goods and services soaked up 11 to 12 percent of America’s total capital goods shipments over the last two years.

There are other indicators of the economic distortion caused by the defense dependency: For example, fifty-five percent of the federal R&D budget is now allocated to defense-related activities. In the early to mid 1990s, nationwide employment of scientists and engineers in the defense sector soaked up about 30 percent of the total scientific and engineering talent (public and private sectors). Given the rapid growth in the defense budget and the decline in the manufacturing share of GDP since then, the ratio is likely to be even higher today. Unfortunately, there is little current academic research aimed at understanding the size and meaning of these hugely important preemptions of resources, production capabilities, and human skills.

Indeed, most contemporary economists, like the authors of NSC-68, still think of military spending in Keynesian terms as being a general economic stimulus and job creator. But Military Keynesianism, if it ever worked, is certainly not working in the 21st Century.

To wit: the largest sustained increases in the defense budget since the end of WWII began in 1998, but this spending binge was accompanied by (1) a sluggish recovery from the March-November 2001 recession to the onset of the Great Recession that began in late 2008 and its even more sluggish recovery; (2) an acceleration in the rate of decline of employment in the manufacturing sector after 1998 (see Figure 2 here); and (3) the unprecedented plummeting of the merchandise trade balance (discussed earlier). There is also academic research suggesting defense spending is one of the least effective way to create jobs via the ‘Keynesian multipliers’ flowing out of government expenditures (see this Univ. Mass study, for example).

Nevertheless, lest you think the NSC-68’s faith in Military Keynesianism is forgotten ancient history, President Bush was still spouting its soothing nostrums as recently as February 2008, when he told NBC’s Ann Curry, “I think actually, the spending on the war might help with jobs. … because we’re buying equipment, and people are working. I think this economy is down because we built too many houses.”

Defense companies now make up a very substantial part of America’s much diminished industrial base — and these giant defense companies are hooked on the narcotic of defense spending.

That is to say, defense manufacturers cannot survive without the defense subsidy. Since the end of the Viet Nam War, many have tried to convert some of their efforts to competitive production of non-defense goods, and most have failed. One of the most spectacular flops being Grumman’s attempted diversification into hi-tech flexible buses for New York City’s Metropolitan Transportation Authority. The buses had to be withdrawn from service after only three years, because they broke down repeatedly. As Melman explained in the early 1980s, defense companies simply do not have the marketing, managing, engineering, and manufacturing skills to compete successfully in global commercial markets; and when their business practices spill over into the private sector, they often hurt competitiveness and productivity.*

By 1990, even the industrial leaders in the Military-Industrial-Congressional Complex (MICC) fully understood Melman’s point. No less an authority than William Anders, CEO of General Dynamics publicly admitted to the truth of Melman’s argument in 1991, when he explained the reasons for the high failure rate in excursions into competitive commercial markets. Anders said (pg. 13),

“This isn’t surprising. Defense industry management teams generally have little commercial experience and market savvy. Most have been ‘cost plus’ and ‘mil spec’ trained. In short, most don’t bring a competitive advantage to non-defense businesses. Frankly, sword makers don’t make good and affordable plowshares.”

That, in a nutshell, is why Grumman could not make reliable and affordable buses. That is why the private sector made the internet affordable, reliable, and easy to use, not the DoD which invented it. For interested reader, the essay Why Boeing is Imploding provides a stunning example of how the defense-related engineering and production practices (in this case, political engineering or the practice spreading subcontracts around to build political support for a program) have spilled over to infect Boeing’s civilian production practices.

One thing Anders did not mention is that the defense industry is very skilled in lobbying the federal government to increase the public subsidy for making its increasingly unaffordable weapons. Nor did he mention that you buy what you subsidize. In a ‘cost-plus,’ ‘mil-spec’ed,’ single-buyer economy, you subsidize cost growth, so you ‘buy’ costs — the cost overruns in the hugely expensive F-35 Joint Strike Fighter being an outstanding current example (here is just one example in the F-35’s ever growing shop of horrors).

Anders made his amazing admission in the 1991 keynote address to the twelfth annual conference sponsored by Defense Week, then a very influential newsletter in the MICC. His intent was to explain why, at the end of the Cold War, General Dynamics had chosen not to diversify its business into the non-defense sector — i.e., why GD was not interested in converting swords into plowshares. Instead, Anders proposed to undertake a takeover strategy to increase its market share in a (temporarily, as it turned out) shrinking defense market.

Anders was not alone in thinking along these lines. In fact, his speech was a precursor to the industry-wide, government-subsidized “Pac-Man” consolidation strategy. This strategy was promoted by President Bill Clinton’s then deputy secretary of defense, William Perry, at a 1993 meeting with the defense titans, a meeting dubbed the “Last Supper.” Perry’s strategy led to a rash of industry-wide mergers beginning in the mid-1990s.

Significantly, when the defense budget began to grow rapidly after 1998, there has been no undoing of the consolidations, even though rising defense budgets eventually grew to levels exceeding the highest budgets of the Cold War, even after removing the effects of inflation.

Today, the defense industry is dominated by three giant all-purpose weapons manufacturers—two of which now have their headquarters in the Washington, DC, area, and the third (Boeing) with a major government relations office in the DC area as well—to more closely supervise their most important corporate activity: the lobbying efforts that influence the money flow out of the Pentagon, Congress, and the White House.

Together with the banksters, these immensely powerful companies, their smaller brethren, and the huge supporting cast of gucci-shoed K Street lobbyists, pro-defense think tanks, and the defense trade press are poised to pounce on President Obama and Congress to protect their fiscal honey pot, while the rest of country is heaved over the fiscal cliff.

If you want to learn more about the important but little examined subject of the economic distortions caused by the defense dependency, and by extension, learn more about why America is becoming a third world nation, the best introduction is still Melman’s** elegantly argued eleven-page prologue to Profits Without Production, aptly titled “How the Yankees Lost Their Know-how.”

If that essay does not peak your interest in this hugely important subject, nothing will. Unfortunately, you will have to go a used bookseller to find it.

Franklin “Chuck” Spinney is a former military analyst for the Pentagon and a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He be reached at chuck_spinney@mac.com

* At this point, I should note that Melman believed it was possible to convert defense manufacturers to civilian production on a large scale, but such a massive conversion program would require large scale government sponsored industrial planning. This kind of planning is a highly toxic subject to believers in free-market capitalism. So, it should not be surprising that military conversion — i.e. turning swords into plowshares — is not only an exceedingly complex but also a highly controversial subject. The possibility or impossibility of conversion is not at issue in this essay. My focus is on the short term response of any grand bargain to dodge the effects of the looming budget sequester: namely how in the next few months the defense dependency may induce the politicians, who have been captured by it, to fling the middle class off the fiscal cliff (i.e., by cutting back expenditures for Social Security, Medicare, Medicade, infrastructure modernization, education, etc.)

** Caveat emptor: Melman was my friend and I made some minuscule contributions to the research in this book.