Thursday, August 20, 2015

Bernanke: Military Spending is a Positive to the Economy

At a recent event hosted by the Foreign Policy and Economic Studies programs at Brookings, during a panel discussion, former Fed chair Ben Bernanke had this to say about military spending,“[G]enerally speaking, it’s best to keep military preparedness goals separate from the short-run cyclical [economic] considerations.”

Moreover, when it comes to the defense budget cuts made during the recent period of economic recovery.Outside of the drawdown in forces in Iraq and Afghanistan, Bernanke said the cuts in military spending were not motivated by changes in defense needs and “were actually a negative in terms of our economic recovery.”

“There are plenty of examples where military technology has been extremely important for private sector growth,” Bernanke said. “One example I like is laser technology, which began as a military application, but there have since been something like 55,000 patents related to laser technology, and the things that have come out of that include laser surgery, barcodes, DVD players, and a whole range of things.”

“By far the most important [impact of defense on economic growth] in the United States has been the linkage between defense military appropriations and broader technological trends,” but added the caveat that “if the same money had been spent on basic science [research] that would have probably been an even better strategy… but the political system is not good at making long-run investments with uncertain impacts. But overall, military R&D has had positive spillovers in the private sector.”

Bottom line: Bernanke turns out to be a Military Keynesian, aslo.

Robert Higgs has destroyed this thinking. He writes:
The elites who rule this country have a high threshold for embarrassment. They will shamelessly trot out any sorry intellectual apparatus to justify snatching the taxpayers’ money and funneling it to privileged corporate contractors and to the horde of drones on the government’s payroll. However intellectually contemptible military Keynesianism may be, though, it has a proven record of getting the Establishment where it wants to go.

For decades, secretaries of defense helped to justify their gargantuan budget requests by claiming that high levels of military spending would be “good for the economy” and that reduced military spending would cause recession. So common did this argument become that Marxist critics gave it the apt name military Keynesianism. On both the right and the left, people believed that huge military spending propped up an economy that, lacking this support, would collapse into depression. Such thinking played an important part in the political process that directed about $15 trillion (in today’s dollars) into Cold War military spending between 1948 and 1990. Nor did the argument disappear even after the Soviet Union unsportingly left the playing field.

Military Keynesianism has enough surface plausibility that it garnered a substantial following in certain quarters even before Keynes’s General Theory gave it apparent intellectual respectability. In his 1944 book As We Go Marching, John T. Flynn noted as a fact “this devotion of the conservative elements to military might,” and he emphasized that “militarism is the one great glamorous public-works project upon which a variety of elements in the community can be brought into agreement.” He understood, however, that military public-works spending has far graver consequences than ordinary Keynesian pyramid building. “Inevitably, having surrendered to militarism as an economic device, we will do what other countries have done: we will keep alive the fears of our people of the aggressive ambitions of other countries and we will ourselves embark upon imperialistic enterprises of our own.” Flynn deserves high marks as a prophet.

Keynesian economics rests on the presumption that government spending, whether for munitions or other goods, creates an addition to the economy’s aggregate demand and thereby brings into employment labor and other resources that otherwise would remain idle. The economy gets not only the additional production occasioned by the use of these resources, but still more output via a “multiplier effect.” Hence comes the Keynesian claim that even government spending to hire people to dig holes in the ground and fill them up again has beneficial effects: even though the shovelers create nothing of value, the multiplier effect is set in motion as they spend their money income for consumption goods newly produced by others.

Such theorizing never faced squarely the underlying reason for the initial idleness of labor and other resources. If workers want to work but cannot find an employer willing to hire them, it is because they are not willing to work at a wage rate that makes their employment worthwhile for the employer. Unemployment results when the wage rate is too high to “clear the market.” The Keynesians concocted bizarre reasons—downwardly inflexible wage demands, a “liquidity trap”—to explain why the labor market was not clearing during the Great Depression and then continued to accept such reasoning long after the depression had faded into history. But when labor markets have not cleared, either during the 1930s or at other times, the causes can usually be found in government policies—such as the National Industrial Recovery Act of 1933, the National Labor Relations Act of 1935, and the Fair Labor Standards Act of 1938, among many others—that obstruct the labor market’s normal operation.

As for the idea that the private sector wouldn't pursue lasers, when we have private sector companies pursuing everything from driverless cars and private space travel, to robotic hair transplants and female viagra, is Bernanke really serious?

Bernanke did see one downside to the military. Unfortunately, he said, the research suggests that a soldier re-entering the private sector will typically have a lower initial wage than a similar person who never served in the military.

 Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics


  1. Someone should send him a copy of this book:

    1. Yeah. It's hilarious that this PhD economist needs something written for a teenager in order to understand economics. Some people never learn though.

  2. None the tens of millions of young people slaughtered in WWI and WWII would have brought any new good ideas to society. That must be true because an expert, The Ben Bernank, said so.

  3. I'm always annoyed when statists trumpet the war machine, NASA, or other gov't entities as the reason for any technologies existence that benefits us today.

    9 times out of 10 when you dig a little further you always see that the government funding came through AFTER the groundwork was already laid by individual people/companies outside of government funding.

    When you go back and look at claims like the one above, lasers, or the claim that gov't(or Al Gore, ha!) created the internet for example you see many individual actors that were working on the subject matter and made huge breakthroughs prior to gov't ever tossing money their way. Sure, some of these advances occur in state funded universities, but we know that privately run/funded universities are capable of the same.

    Not only are such arguments disingenuous in their suggestion that said technology would have never happened without government funding but even more importantly it completely ignores the unknown opportunity costs of a system that takes huge sums of money from people & corporations that could be used for R&D and would most certainly more directly benefit man if you simply factor the overhead involved with redistributing money and ignore the morality of doing so. (which I don't think anyone should do, but that's a different topic)

  4. Robert Higgs has an excellent video presentation "War is the Master Key of the State" from a recent Mises University presentation that is highly recommended. Shows not only how war impacts State growth on an tax, spending, economic basis, but how personal rights and freedoms are also impacted.