Today I encountered a discussion, where the participants emphatically maintained that the current US economic woes are to be blamed in part on increased US defense spending during the Iraq and Afghanistan wars. I countered and claimed that they have no relation at all. Of course, these people hate me now (thinking I was merely being difficult for the same of being difficult), but that’s ok. I’m used to it.
To test this hypothesis, I took data on US GDP (adjusted to constant 2005 dollars) and combined them with data on US defense spending (adjusted to constant 2010 dollars). The results can be seen to the left. The red line is defense spending. The blue line is GDP.
As I maintained, there is no obvious relationship between defense spending and economic growth. There are a couple of major blips in GDP growth, namely the collapsing of tech equities in the early 2000’s and the economic meltdown on 2007/8. There are no events in US GDP for drops during Clinton nor sudden increases in defense spending following 9/11.
In fact, as defense spending dropped pre-9/11, you can see the US economy was plugging along just fine. As defense spending went up post 9/11, the US economy maintained the same trajectory, minus the economic bumps.
Now, at first glance, this is a little more convincing. But when you take the events into consideration, it is less so. The two major economic events of the 2000’s, namely the equity bust, and the financial meltdown both resulted in sudden jumps in the unemployment rate. 9/11 and the troop surge did not. In fact, as spending was doing up, unemployment was going down. If we look back into the nineties, we can notice that even though defense spending was declining, unemployment was up, then down again. In short, given the context, there is no real reason to assume that two related.
I am NOT an advocate for war. I am though, an advocate for evidence backed claims. There is little evidence to suggest that increased defense expenditures during the Bush years affected our economy.
We can claim, if we like, that federal revenues might have been greater had the wars not happened. These revenues, it is argued, could have been allocated to education or infrastructure improvements, for example. However, it has to be noted that the wars weren’t funded out of federal revenues. They were funded out of low interest bonds. Thus, as those bonds had not been serviced at the time that this data was collected, there is, again, even less reason to assume that the wars negatively impacted the economy.
Now, we can certainly make arguments over how much defense spending is too much and what the potential long term effects of servicing the war debt will be. I argue, though, that our elected representatives are much more interested in financing the military than, say, welfare programs for the needy. It would take a great leap of faith to assume that, if the military were closed tomorrow, monies targeted for defense would automatically be transferred to providing health care to poor people. I also argue that, long term, the expenditures that came out of the financial crisis will be, in comparison, more difficult to service.
The war cost us politically, but was a bargain economically. To me, that’s a much more frightening state of affairs.
1. A fair assessment of the worst of the IMF for the layman. Some of the details on Malawi, particularly on its food subsidy programs, are a little too general, but a good read. This article was also written back in June. A lot has happened since then.(The Independent)
2. Atheism isn’t all negativity. We do think positively about most things, just without fictional beings. (Times Sunday Review)
3. The NRA’s vision of America is central America. ““A society that is relying on guys with guns to stop violence is a sign of a society where institutions have broken down,” said Rebecca Peters, former director of the International Action Network on Small Arms. “It’s shocking to hear anyone in the United States considering a solution that would make it seem more like Colombia.”” (NYT)
4. Sanctions have led Iranians to brew their own gasoline, and reach deadly levels of air pollution (NYT)
5. Why can’t China and Japan just get along? (NYT)
6. Despite slow global growth, the Americans are coming back strong. you wouldn’t know it listening to our politicians, though (nor from our underemployed underclass). Pacific Investment Management Co.’s new normal, the prediction that global economic growth and investment returns would tumble, is proving half right. Bloomberg
7. Want to fight crime? Address inequality. Militarization won’t solve anything. (Bloomberg)
8. How the world’s third largest economy, Japan, and one of the safest places on earth deals with guns. (Japan Times)
1. Why Republicans won’t admit that supply side economics have failed (Fiscal Times)
2. Africa’s poorest country on the brink (Economist)
3. With 12 months to go until health care reform full kicks in, there is much to do… and to worry about (Economist)
4. 10 fastest growing economies, Mongolia tops the list at a whopping 18% (Economist)
5. No evidence for how much debt is too much for wealthy countries, but much evidence indicating that investors don’t seem worried about getting repaid. Policy makers need to listen to investors, rather than over-reactionary, under-informed Americans (Economist)
6. HIV in China: It is amazing to me how backward Asian countries are in matters of HIV, but in China, things are looking up. (NYT) Also: How you can buy meth and guns over the internet in China but can’t access the New York Times (NYT)
7. Right wing Prime Minister Shinzo Abe, determined to wreck Asian stability, seeks to water down a 1995 apology for Japan’s awful wartime past. Do these old men never learn? (NYT)
8. The history of the assault weapons ban (NYT)
9. The story on the high marginal tax rates of the 1950’s (Bloomberg)
10. Good riddance to the worst Congress in American history, and what an awful Congress is was (Bloomberg)
This puts the U.S. national debt in perspective:
• U.S. tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• Current deficit: $1,650,000,000,000
• National debt: $14,271,000,000,000
• Budget cuts: $38,500,000,000
Now, let’s remove 8 zeros and pretend it’s a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• Additional charges on the credit card: $16,500
• Current credit-card balance: $142,710
• Budget cuts: $385
The trouble is, this doesn’t put the US national debt in perspective at all. In fact, it’s completely uninformed.
Though it is tempting to do so, the economics of the United States Government (or any government) cannot be compared to a private household.
First, a household in this example would owe money to an external credit card company. US debt is actually principally held by domestic entities. As of 2011, 47 percent of the US debt was held by foreign sources, who also happen to be our major trading partners (Japan, China and the UK).
So, according to this analogy, more than $75,000 or this household’s debt would not be to credit card companies, but actually to household members themselves. The remaining $67,000 would be owed to family members (outside the home), local businesses, good friends and neighbors, who depend on the household’s continued support.
This would be akin to a situation where household family members pool money from their own savings to purchase a new family car, and expect that money to be paid back into the pool at some later date at interest. Not many households would do this, making the analogy even more useless.
Second, the interest rates on credit cards are typically between 7 and 36 percent in the United States. The United States Government can currently borrow money for a fraction of a percent, meaning that, with inflation, lenders are paying the US government to hang on to their money. Over time, the US government will pay back less than it originally borrowed. Some people freaking out over the debt don’t seem to notice that the world still seems ready to invest in the US. Despite low returns, lending money to the US is a safe bet. I’m not aware of many households which have credit cards that allow money losing interest rates for very long.
Third, the US government has the luxury of being able to print money. Government debt is held in dollars. If any of you know of a household that has its own legal currency press, let me know.
The US could theoretically, print a boat load of dollars, and pay back the entire debt in a day. Granted, worldwide economic calamity would ensue if done in a day, but it is practically possible in small increments.
Be aware, countries do this. One of the reasons that Spain is hurting so bad in the European economic zone is that, using the Euro, it can no longer devalue its currency (through an injection of newly printed money) to pay down its debt.
I don’t think I have to point out that a household can’t do this.
Fourth, the assets of the US Government are vast. Estimated at approximately $200 trillion dollars, the tangible and intangible assets of the US are nearly 15 times the GDP of the entire country. One of the reasons that people are happy to loan the US money despite low returns is the security of the investment. In a bind, the US can certainly print money (an asset in itself), but can also start selling land, arms, contracts or anything else it possesses.
There’s a reason that the US has an easier time raising money than a cash strapped country like Malawi. Its assets far outstrip its debt. In fact, the national debt, at $11 trillion only a fraction of its total assets.
Face it, if you had $2 million dollars in assets, faced an income shortfall and financial obligations, and somebody came to you and offered to lend you $110,000 at a rate which meant that you would pay back less than what you initially borrowed, you’d be a complete idiot not to take it. Unfortunately, most households don’t have this option.
Finally, the US Government has what most households don’t have: certainty. The US government, though indebted, has the strongest economy on the planet behind it and faces no retirement. We can hem and haw about China, but the truth is that China’s economy is much less certain than that of the US since, lacking a strong domestic economy, it relies too heavily on exports and is insufficiently diversified.
I can’t speak to the relative merits or demerits of the level of debt and debt trajectories, but the truth is that the national debt following the worst economic crisis since the depression should be expected to rise. It still has not reached the levels of debt which followed WWII and we have a much stronger economy now than then.
These ridiculous comparisons of the US economy to a poorly managed household have to go. They are fine for fun political comedy, but too reductive to foster any real discussion.
1. 2012 in Charts, Congressional polarization, health care spending quickens, median incomes decline (NYT)
2. De-worming medication may kill biting bed bugs (NYT)
3. A writer claims that US Universities’ research output is useless by producing an example from Shakespeare (Bloomberg)
4. Stock returns grow in 2012, bond returns are unchanged, but isn’t that what bonds are supposed to do? (Bloomberg)
5. Why we drink champagne on new years (Bloomberg)
6. Gaijin language teachers sustain an 11 month strike and (amazingly) win (Japan Times)
7. Why capitalism is moving away from the market stifling, paternalistic conservatism(NYT)
1. Federal deficits and surpluses are driven by financial markets through rising inequality (NYT)
2. Mali’s first female Mayor appeals to the US for help to abate a worsening situation (NYT)
3. The Central African Republic may soon cease to exist (NYT)
4. The year in charts – emerging market growth flattens (Economist)
5. Business obstructs local high speed networks, and US government refuses to pony up pennies to give every American world class access (Bloomberg)
6. Short history of public sector labor unions (conservative analysis but interesting) (Bloomberg)
7. US becomes major gas exporter (Bloomberg)
8. Who are the exemplary African armies? (Africa Report)
9. Investing lessons of 2012, uncertainty is the new certainty (The Reformed Broker)
10. Extremism on the rise in Zanzibar (Financial Times)
11. Tanzanian reality TV teaches people to farm (Economist)