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Paul Krugman and Military Keynesianism

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The Princeton economist Paul Krugman recently appeared on CNN’s GPS hosted by Fareed Zakaria and offered up this pearl of economic wisdom:

It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal. If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space-alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.

Krugman doesn’t bother to explain how spending more to fight imaginary space invaders would provide the jump-start the economy supposedly needs, when a decade of massive deficit spending by the federal government has failed to do the trick.

So why is he now proposing a buildup for an interplanetary war?

Krugman is a disciple of the British economist John Maynard Keynes. According to Keynesians, the United States was pulled out of the Great Depression by World War II. They believe wartime production increased aggregate demand and released the economy’s “animal spirits,” thus restoring the nation to prosperity.

The problem with that analysis is that America’s legendary “wartime prosperity” was a statistical illusion.

Sure, unemployment was finally licked, but that “victory” was achieved only by conscripting 10 million men into the armed forces and shipping them overseas, where they found “full employment” on battlefields in North Africa, Europe, and Asia. On the home front there was plenty of work in the munitions factories, but American consumers were forced to cope with rationing and severe shortages as military procurement dominated the economy. Economic historian Robert Higgs explains:

Many aspects of economic well-being deteriorated during the war. Military preemption of public transportation interfered with intercity travel by civilians, and rationing of tires and gasoline made commuting to work very difficult for many workers. More workers had to work at night. The rate of industrial accidents increased substantially as novices replaced experienced workers and labor turnover increased. The government forbade nearly all nonmilitary construction, and housing became extremely scarce and badly maintained in many places, especially where war production had been expanded the most. Price controls and rationing meant that consumers had to spend much time standing in lines or searching for sellers willing to sell goods at the controlled prices. The quality of many goods deteriorated, as sellers forbidden to raise prices adjusted to increased demands by selling lower quality goods at the controlled prices.

The U.S. economy didn’t really recover until 1946, when the immediate postwar period witnessed the dismantling of the command economy in favor of a much more liberalized market economy. Peace brought demobilization, deregulation, and, perhaps most important, a 75 percent reduction in government spending. That was a genuine peace dividend and it set the stage for America’s legendary postwar economic boom.

Despite the country’s postwar prosperity, policymakers remained haunted by the Great Depression. They looked back on the apparent success of wartime production in ending unemployment and concluded that a state of permanent war was now necessary. Thus a policy of “military Keynesianism” was implemented and more or less codified by the U.S. government in its NSC-68, which stated in the section, “Possible Courses of Action,

One of most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living.

Large military expenditures became a regular feature of the U.S. economy as American policymakers, all of whom were either dedicated Cold Warriors or Keynesians, came to believe a massive military establishment was necessary to hold back the Red Menace and guarantee full employment.

By the 1960s it was apparent that military Keynesianism’s “dual mandate” was too much for the U.S. economy to bear. Civilian production was gradually being marginalized as the nation’s manufacturing sector became increasingly dominated by the Pentagon. Historian Thomas E. Woods has pointed out that during the 1950s and 1960s, between one‑third and two‑thirds of America’s research and development talent was diverted into military production. American industry, deprived of the services of the country’s “best and brightest,” began to be outpaced by foreign competitors. Moreover, the costs of America’s “guns and butter” Cold War project required fiscal and monetary policies that led to the destruction of what remained of the gold standard and converted the United States into a debtor nation addicted to cheap money and easy credit.

Krugman’s proposal for a space-alien invasion-prevention make-work stimulus project is really nothing more than continuation of America’s Cold War economic policy. That Krugman wants to substitute little green men from outer space for communists is meaningless. That he proposes a doubling down on an economic system that is now in a death spiral reveals just how clueless he is when it comes to the current economic crisis.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.