(Excerpt from Bichler and Nitzan, ‘Cheap Wars’, The Economy of the Occupation. A Socio Economic Bulletin, No. 10, September 2006, pp. 5-7 http://bnarchives.yorku.ca/223/.)
“Theories of Military Keynesianism and the Military-Industrial Complex became popular after the Second World War, and perhaps for a good reason. The prospect of military demobilization, particularly in the United States, seemed alarming. The U.S. elite remembered vividly how soaring military spending had pulled the world out of the Great Depression, and it feared that falling military budgets would reverse this process. If that were to happen, the expectation was that business would tumble, unemployment would soar, and the legitimacy of free-market capitalism would again be called into question.
Seeking to avert this prospect, in 1950 the U.S. National Security Council drafted a top-secret document, NSC-68. The document, which was declassified only in 1977, all but explicitly called on the government to use higher military spending as a way of preventing such an outcome.
NSC-68 marked the birth of Military Keynesianism. In the decades that followed, military expenditures seem to have worked as the document envisaged. The basic process is illustrated in Figure 1. The graph shows the relationship between U.S. economic growth and the country’s military spending. The thin line plots the annual rate of economic growth against the right scale. The thick line shows the level of military spending, expressed as a share of GDP and plotted against the logarithmic left scale. Both series are smoothed as 10-year moving averages to emphasize their long term tendencies.
The data show a co-movement of the two series, particularly since the 1930s. The rise in military spending in preparation for the Second World War coincided with a massive economic boom. Military spending had risen to 43 percent of GDP by 1944 and averaged 20 percent of GDP during the 1940s. This rise was accompanied by soaring economic growth, with annual rates peaking at 18 percent in 1942 and averaging 6 percent during the 1940s (the peak levels of the early 1940s cannot be seen in the chart due to the smoothing of the series).
After the war, military spending began to trend downward, but remained at very high levels for the next couple of decades. The adoption of Military Keynesianism, along with the wars in Korea and Vietnam, helped keep military expenditures at 12 percent of GDP during the 1950s and at 10 percent during the 1960s. Economic growth during this period averaged over 4 percent—lower than in the Second World War, but rapid enough to sustain the buoyancy of American capitalism and the confidence of its capitalists.
Both big business and organized labor supported this set up. The large corporate groups saw military spending as an acceptable and even desirable form of government intervention. At the aggregate level, these expenditures helped counteract the threat of recession at home and offset the loss of civilian markets to European and Japanese competitors—yet without undermining the sanctity of private ownership and free enterprise. At the disaggregate level, many large firms received lucrative contracts from the Pentagon, handouts that even the staunchest free marketers found difficult to refuse.
The large unions endorsed Military Keynesianism for different reasons. They agreed to stay out of domestic politics and international relations, to accept high military expenditures, and to minimize strikes in order to keep the industrial peace. In return, they received job security, high wages and the promise of ever-rising standards of living.
The consensus was aptly summarized in 1971 by President Nixon, who pronounced that ‘we are all Keynesians now.’ But that was the peak. By the early 1970s, the Keynesian Coalition of big business and organized labor started to unravel, Military Keynesianism began to wither and the welfare-warfare state commenced its long decline.”
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