Social vs. Military Spending

Social vs. Military Spending: How the Escalating Pentagon Budget Crowds out Public Infrastructure and Aggravates Natural Disasters—the Case of Hurricane Katrina

[This paper was originally presented at the annual conference of the American Society of Business and Behavioral Science, Los Vegas, February 23-25, 2006. It was subsequently published in Review of Social Economy, Vol. 67, No. 2, 2009, pp. 149-173.]

 

ABSTRACT

This paper puts forth (and documents) an argument that, combined with drastic tax cuts for the wealthy, the escalating military spending at the expense of non-military public spending is steadily redistributing national resources in favor of the affluent and undermining the critical national objective of public-capital formation (both physical and human), and that, if not stopped or modified, the resulting trend will stint long term productivity and economic growth, as it erodes both physical and soft/social infrastructure. An equally high opportunity cost of the colossal Pentagon budget in terms of forgone or neglected public works projects (roads, bridges, mass transit, dams, levees, and the like) is vulnerability in the face of natural disasters, as evidenced, for example, by the devastation wrought by Hurricane Katrina.

 

INTRODUCTION

U.S. military spending is now the largest item in the federal budget. Officially, it is the second highest item after Social Security payments. But this is misleading because Social Security is a self-financing trust fund. So, in reality, military spending is the highest budget item. There is no question that, due to its enormous size, military spending has evolved as a crucial part of the U.S. economy. The question is whether the resulting widespread dependence on military spending by many workers and businesses is a positive development that needs to be maintained, or whether it is an unfortunate development that needs to be reversed and rectified.

In the debate over military spending, proponents of a large military spending (sometimes called military Keynesians), see nothing wrong or perverse about the gigantic Pentagon budget. From the fact that large military spending creates so many jobs and benefits so many businesses, they conclude that, therefore, the Pentagon’s appropriation and spending of public money is an effective means of job creation and demand stimulation, and hence of economic growth and prosperity. This view has come to be known as military Keynesianism, after the renowned British economist John Maynard Keynes, who argued that under conditions of inadequate purchasing power the government should spend money in order to jump-start the stagnant economy by stimulating demand. Proponents of this view often cite the experiences of Nazi Germany in the 1930s and the United States in World War II, Korea, and Vietnam as evidence of stimulating or beneficial economic effects of military spending. They also defend military spending on long-term, productivity-enhancing grounds: military spending stimulates investment and technical innovation.

While acknowledging the economic effects of military spending on job creation, demand stimulation, and technological innovations, this study puts forth an argument that such benefits are often not worth their cost in terms of opportunities forgone or sacrificed: drain or curtailment of resources that could (and should) be used for investment in both human capital (such as health and education) and physical capital (such as roads, bridges, mass transit, and schools) that could lead to larger economic gains, especially long-term growth and prosperity. In this view, the unfortunate addiction to the disproportionately large doses of military spending needs to be remedied not only because it produces too many guns and too little butter, but perhaps more importantly, a top heavy military establishment will be unviable in the long run as it tends to undermine the economic base it is supposed to nurture. Perhaps more importantly, to the extent that jobs and livelihoods of many U.S. citizens have become dependent on military spending, it represents a regrettable dependence on a business that is geared to war, death and destruction.

 

THE MAGNITUTE OF THE PENTAGON BUDGET

Even without the costs of the wars in Iraq and Afghanistan, which are fast approaching $600 billion, U.S. military spending is now the largest item in the federal budget. As noted above, officially it is the second highest item after Social Security payments. But Social Security is a self-financing trust fund. So, in reality, military spending is the highest budget item.

The Pentagon budget for the current fiscal year (2007) is about $456 billion. President Bush’s proposed increase of 10% for next year will raise this figure to over half a trillion dollars, that is, $501.6 billion for fiscal year 2008. A proposed supplemental appropriation to pay for the wars in Afghanistan and Iraq “brings proposed military spending for FY 2008 to $647.2 billion, the highest level of military spending since the end of World War II—higher than Vietnam, higher than Korea, higher than the peak of the Reagan buildup” (Hartung 2007).

Using official budget figures, William D. Hartung, Senior Fellow at the World Policy Institute in New York, provides a number of helpful comparisons:

  • Proposed U.S. military spending for FY 2008 is larger than military spending by all of the other nations in the world combined.
  • At $141.7 billion, this year’s proposed spending on the Iraq war is larger than the military budgets of China and Russia combined. Total U.S. military spending for FY2008 is roughly ten times the military budget of the second largest military spending country in the world, China.
  • Proposed U.S. military spending is larger than the combined gross domestic products (GDP) of all 47 countries in sub-Saharan Africa.
  • The FY 2008 military budget proposal is more than 30 times higher than all spending on State Department operations and non-military foreign aid combined.
  • The FY 2008 military budget is over 120 times higher than the roughly $5 billion per year the U.S. government spends on combating global warming.
  • The FY 2008 military spending represents 58 cents out of every dollar spent by the U.S. government on discretionary programs: education, health, housing assistance, international affairs, natural resources and environment, justice, veterans’ benefits, science and space, transportation, training/employment and social services, economic development, and several more items (Ibid.).

 

Although the official military budget already eats up the lion’s share of the public money (crowding out vital domestic needs), it nonetheless grossly understates the true magnitude of military spending. The real national defense budget, according to Robert Higgs of the Independent Institute, is nearly twice as much as the official budget. The reason for this understatement is that the official Department of Defense budget excludes not only the cost of wars in Iraq and Afghanistan, but also a number of other major cost items. These disguised cost items include budgets for the Coast Guard and the Department of Homeland Security; nuclear weapons research and development, testing, and storage (placed in the Energy budget); veterans programs (in the Veteran’s Administration budget); most military retiree payments (in the Treasury budget); foreign military aid in the form of weapons grants for allies (in the State Department budget); interest payments on money borrowed to fund military programs in past years (in the Treasury budget); and a number of other similarly misplaced expense items that tend to undercount the DoD budget (Higgs 2004).

After adding these camouflaged and misplaced expenses to the official Department of Defense budget, Higgs concludes: “I propose that in considering future defense budgetary costs, a well-founded rule of thumb is to take the Pentagon’s (always well publicized) basic budget total and double it. You may overstate the truth, but if so, you’ll not do so by much” (Ibid.).

The fact that the Pentagon appropriates and controls more than one-third of the entire federal budget has allowed it to forge the largest constituency and/or dependents nationwide. Tens of thousands of businesses, millions of jobs, and thousands of cities and communities have become dependent on military spending. While a handful of major contractors take the lion’s share of military spending, millions more have become dependent on it as the source of their livelihood. As the late Senator William Fulbright observed some 35 years ago, “millions of Americans whose only interest is in making a decent living have acquired a vested interest in an economy geared to war. Those benefits, once obtained, are not easily parted with. Every new weapons system or military installation soon acquires a constituency” (Congressional Record; as cited by Lens 1970: 45-46).

It is not surprising then that not many people are willing to oppose the continuing rise in the Pentagon budget—even if they might philosophically be opposed to militarism and large military spending. Because of the widespread presence of military installations and production sites nationwide, few politicians can afford not to support a continued rise in military spending lest that should hurt their communities or constituencies economically. As Howard Swint, Democratic candidate for Congress in West Virginia put it, “The all-powerful cycle of military appropriations, driven by congressional district-specific military pork as rewarded with campaign contributions, prevents any meaningful effort towards demilitarization” (2004). Trade unions seeking to preserve their members’ jobs often find themselves supporting military contracts, even though they may not be in principle in favor of large military spending.

 

WEAK/DUBIOUS ARGUMENTS AGAINST MILITARY SPENDING: MILITARY BUILDUP “CROWDS OUT” NON-MILITARY PRIVATE SECTOR INVESTMENT

“Crowding out” is essentially a conservative, neoclassical/neoliberal economic theory that is often invoked in economic policy debates to buttress arguments against social spending. Although the theory was originally developed by anti-interventionist, conservative economists and politicians in their campaign against public sector spending in general, it has been adopted in recent years and decades by many of their liberal counterparts to argue against large military expenditures.

The theory makes two closely linked claims. The first claim, which is sometimes called the “theory of resource diversion,” maintains that public-sector expenditures, military or otherwise, lead to an equal and offsetting decrease in private investment. That is, because there is a direct competition for economic resources (financial, labor, production capacity, etc.) between the public and private sectors, any spending by the public sector is tantamount to an equal amount of lost investment by the private sector.

But this argument assumes that the Pentagon and the non-military private investors always compete over a fixed or finite pool of financial resources. This claim implicitly assumes that non-military investors are always short of funds for investment, that they constantly compete with the Pentagon for the same dollars in financial markets, and that, therefore, every dollar borrowed and spent by the Pentagon is a dollar lost in capital markets for non-military investors. Yet, many corporations and businesses often have plenty of internal financial resources as a result of their retained earnings, or undistributed profits; and what they often seek is not so much capital or credit as it is profitable outlets for investing their abundant cash (see, for example, Mandel 1975).

In terms of macroeconomic categories, the “crowding out” argument implicitly assumes that the overall/national private sector investment (I) and public sector spending (G) are strictly limited by the overall/national amounts of savings (S) and tax dollars (T); that is, (I + G) = (S + T). It follows from this assumption that, given total national savings (S + T), if G is increased, I must be decreased accordingly, and vice versa. In this way, a direct trade-off is established between I and G because the combined source of their funding (S + T) is implicitly assumed to be given as a fixed and inflexible amount.

But (I + G) = (S + T) is a financing or income-expenditure equilibrium condition (meaning that, ideally, one should not go beyond one’s means); it is rarely an actual or real-world state of affairs. In the real world, and in the short- to medium-term, funding sources of I and G are much more flexible than S, T, or (S + T). The credit system, the money supply and, hence, the sources of funding for both I and G are quite flexible in advanced market economies. For example, during periods of expanding business cycles and optimistic economic scenarios investors would not be constrained by the existing pool of national savings, or by the financial resources of the banking system, because during such periods of optimism financial institutions’ ability and willingness to extend credit becomes quite flexible—almost unlimited. As one officer of the New York Federal Reserve Bank has put it, “In the real world, banks extend credit . . . and look for reserves later. In one way or another, the Federal Reserve will accommodate them” (Heilbroner/Galbraith 1990:383).

The claim that the Pentagon and the non-military private sector always chase a fixed or finite amount of dollars in financial markets may be true during cycles of economic growth and expansion, when businesses tend to expand capacity, but not so during cycles of economic decline or contraction. During periods of economic slowdown or recessionary cycles, many businesses simply opt for retrenchment and downsizing, whether they have cash or not. It is usually during such periods of depressed economic conditions and high unemployment that efforts to increase military spending have been most successful, since under such circumstances military expenditures are viewed as stimulus shots in the arm of the depressed economy. Drastic increases in military spending in the early 1950s, the early 1980s, and the early 2000s all came about on the heels of the respective recessionary cycles of those times. Obviously, the large military expenditures under such economic conditions do not push or “crowd” out non-military industrialists from capital or credit markets. On the contrary, such expenditures might spur them into action by providing both new purchasing power in the market and opportunities for profitable investment outlets (Cypher 2002; Wolf 2005; Atesoglu 2004).

The argument that military spending diverts investment resources away from the non-military private sector is dubious on yet another ground: it assumes that increases in the Pentagon appropriations are financed by increases in taxes on corporate profits and/or high incomes (i.e., by taxing the financial resources for investment, or the so-called investable funds). Yet, this is not necessarily the case. In fact, raises in U.S. military spending since the early 1980s have been accompanied by decreases, increases, in taxes on corporate profits and higher earnings. The U.S. ruling class has thus made it certain that increases in the Pentagon budget would not divert investable resources away from the non-military private sector. Those increases in the Pentagon budget have been financed, instead, by cuts in non-military public spending, by borrowing from the Social Security Trust Fund, and by plunging the nation into debt and deficit. Indeed, during the last three decades or so, large Pentagon appropriations have been used as a device to strengthen, not weaken, the private sector. As Richard Du Boff aptly points out: “For antigovernment conservatives, military expenditures have acted as a regulatory mechanism, expanding government support for private enterprises and limiting the expansion of the federal government for virtually all non-military purposes” (Du Boff 1989: 10).

The second major argument of the “crowding out” theory, in addition to “resource diversion” argument, is that the resources diverted from non-military private-sector production to military production do not generate as many positive or stimulating economic effects (in terms of employment, economic growth, and technological or productivity enhancement) as would non-military or civilian production. Robert W. DeGrasse, an exponent of this view and the author of Military Expansion: Economic Decline, writes, for example, “Since soldiers and arms producers do not create goods and services that can be consumed by others,” military spending can be “viewed as an impediment to economic progress” (1983: 55). Lloyd J. Dumas, another proponent of this view, likewise writes:

 

Churches are constructed and bibles are printed not to provide material well being, but to help fulfill the human need for spiritual guidance. . . . By the same token, battle tanks and missiles do not themselves add to the material standard of living . . . they do not directly contribute to the central purpose of the economy and so do not have any economic value. It is logical, then, to classify activities that result in goods or services that do not have economic value as economically non-contributive” (2005: 4).

 

A detailed analysis of the theoretical weaknesses of these and similar “crowding-out” arguments is beyond our discussion here. Suffice it to say that such weaknesses stem primarily from conceptions of what constitutes productive labor or activities and what constitutes unproductive ones. Arguments that military production is “economically non-contributive,” or unproductive, tend to view productive activities in a moral and ahistorical sense; that is, in terms of their general social and economic usefulness. Yet, from a capitalistic point of view—or, more precisely, from the viewpoint of capital—any labor or activity that generate surplus value and/or profits is also productive, regardless of what it produces or how its products are used. What defines productive labor under capitalism is exchange value, not use value, to borrow Karl Marx’s felicitous words.

On empirical grounds, too, the hypothesis that economic effects of Pentagon-financed investment are smaller than those of non-military investment has never been conclusively supported by evidence. Research results of econometric studies of the relationship between military spending and economic performance, including both cross-country comparisons and time-series comparisons within the same country, are at best mixed: there are as many studies that tend to reject this hypothesis as those that tend to support it. For example while DeGrasse (1983), Smith and Smith (1983), and Ward and Davis (1992) found negative links between military spending and economic performance, Atesoglu (2002), Nordhaus (2002), and Fordham (1998) found positive links. There are yet other researchers who have found no or negligible links between military spending and economic performance (Gold 2005, Payne and Ross 1992, and Kinsella 1990).

A major part of these mixed results seems to be due to the researchers’ choice of the time period, or economic cycle, for their studies. For instance, researchers who focus on the long cycle of economic slowdown of the late 1960s through the early 1980s in the United States tend to attribute the sluggish economic performance of those years to the large U.S. military spending: “Our analysis indicates that America’s higher share of gross domestic product (GDP) spent on the military has contributed to the decline in manufacturing competence.” By the same token, from the fact that the economies of Germany and Japan, two countries with very small military spending at the time, performed quite strongly during that period, these researchers conclude that there must be a negative correlation between military spending and economic growth, technological progress and productivity enhancement: “Nations with higher military burdens tend to have lower levels of investment and lower productivity growth” (DeGrasse 1983, p. 10).

On the other hand, researchers who have focused on the economic performance of these major industrialized countries in the 1980s and 1990s have come to the opposite conclusion because during those decades the U.S. and U.K., the two countries with large military expenditures, enjoyed stronger economic performance than did Germany and Japan, the two countries with smaller military expenditures. (Nordhaus 2002; Wolf 2005; Atesoglu 2004).

A major claim of the “crowding out” theory is that, for equal amounts of spending, military production does not create as many jobs as civilian production: “. . . military spending does create employment, but it actually generates fewer jobs for the buck than equivalent civilian expenditures” (Bell, et al. 2004). This argument tends to stand the test of evidence better than other hypotheses of the “crowding out” theory. For example, a 2002 Congressional Budget Office report found that every $10 billion spent on weapons generates 40,000 fewer jobs than $10 billion spent on civilian programs (Gold 2002). The main reason that military production creates fewer jobs than the equivalent civilian investment is that military production tends to use relatively more capital or equipment and less labor than most other industries—although not all other industries.

A study conducted in the early 1980s by the Employment Research Associates showed that military production created roughly 28,000 jobs per billion dollars of investment. The study also indicated that while (for the same billion dollars) most civilian industries such as public works projects and education services created more jobs, there were also a number of civilian industries such as oil refining and car manufacturing that created fewer jobs. Overall, the 28,000 arms production jobs were only “slightly less than the 30,000 jobs created by the median industry in the Bureau of Labor Statistics’ input-output model” (DeGrasse 1983: 30 and 41).

The claim that military production creates “fewer jobs for the buck than the equivalent” non-military production is, of course, relevant only to the part of the Pentagon budget that is spent on its purchases for procurement purposes, the portion that is spent by its contractors for arms production. The argument is irrelevant to the part of the Pentagon budget that goes directly to pay its personnel because government employment created by military spending is comparable to other types of federal employment. Money for civil service workers creates approximately the same number of jobs whether it is spent by the Defense Department or by other departments.

In brief, the theory that military spending crowds out non-military private-sector investment and/or production and, therefore, impedes economic performance is a weak theory. At best, it is inconclusive and unconvincing; at worst, it is overwhelmed by counter arguments and evidence that military spending is more likely to be stimulating, not impeding, an advanced market economy.

But while the claim that military spending crowds out non-military private sector investment is dubious, there is no question that it crowds out non-military public sector spending, that is, spending on public capital formation, both human and physical capital—thereby posing serious dangers to the long-terms prospects or ideals of socio-economic growth and development. This issue will be examined next.

 

MILITARY SPENDING CROWDS OUT PUBLIC, NOT PRIVATE, SECTOR SPENDING: A REGULATORY MECHANISM TO REVERSE THE NEW DEAL AND REDISTRIBUTE NATIONAL RESOURCES IN FAVOR OF THE WEALTHY

It follows from the above discussion that what gets pushed out, or forgone, by military spending is often not private-sector investment spending but non-military public spending. This includes both physical capital, or physical infrastructure (such as roads, bridges, mass transit, schools, drinking water, wastewater, dams, solid waste, hazardous waste, navigable waterways and energy) and human capital, or soft/social infrastructure, such as health and education. In other words, it is often the proverbial butter that gets melted away when a disproportionately large share of public money is allocated to the production of guns.

Official macroeconomic figures show that, over the past five decades, government spending (at the federal, state and local levels) as a percentage of GNP (gross national product) has remained fairly steady—at about 20 percent. Given this nearly constant share of the public sector of GNP, it is not surprising that increases in military spending have almost always been accompanied or followed by compensating decreases in non-military public spending. This is, of course, not fortuitous because instead of financing through progressive taxation such additions to military spending have been increasingly accompanied by tax cuts on the wealthy—which have then forced cuts on non-military public spending in order to close the budget gaps that are thus created. For example, in the early 1980s, as President Reagan drastically increased military spending, he also just as drastically lowered tax rates on higher incomes. The resulting large budget deficits were then paid for by more than a decade of steady cuts on non-military spending. Likewise, the administration of President George W. Bush has been pursuing a similarly sinister fiscal policy of cutting social spending while increasing military spending and granting the wealthy huge tax breaks.

The trade-off between military and civilian components of public spending was also confirmed by the fact that when, for example, by virtue of FDR’s New Deal reforms and LBJ’s metaphorical War on Poverty, the share of non-military government spending rose significantly the share of military spending declined accordingly. From the mid-1950s to mid-1970s, the share of non-military government spending of GNP rose from 9.2 to 14.3 percent, an increase of 5.1 percent. During that time period, the share of military spending of GNP declined from 10.1 to 5.8 percent, a decline of 4.3 percent. That trend was reversed when President Reagan took office in 1980 (Du Boff 1989: 6).

As Reagan embarked on his “rearming of America,” as he put it, and successfully put into effect his notorious supply-side tax cuts for the wealthy, he also cut non-military public spending to make up for the resulting budget shortfalls. From 1978 through 1983, real military spending climbed more than 28 percent, from $161 billion to $207 billion. During that period, real federal grants to state and local governments—a major source for investment in public works projects—dropped 25 percent, from $109 billion to $82 billion. From 1983 through 1988, military spending jumped another 27 percent in real terms, while federal grants to state and local governments “were practically unchanged. Thus, in the late 1980s only 13 percent of state and local government spending was going to public capital formation compared with an average of 30 percent in the 1950s and 1960s” (Du Boff 1989: 8).

Although President Reagan’s military spending hikes and his supply-side tax cuts helped turn the stagnant economy of the 1970s into the expanding cycle of the 1980s, by the same token it also helped create an imbalance in the opposite direction: insufficient investment in, hence insufficient formation of, physical public capital such as highways, bridges, mass transit, waste water facilities, hazardous waste sites, and the like. The resulting imbalance, or gap, between the expanding economy and the shrinking investment in public works/capital “produced a crunch, in the form of an expanding private economy generating greater demands for public services that cannot be supplied by a public sector becoming relatively smaller. Its manifestation is the dilapidated state of the public infrastructure—streets and highways, bridges, mass transit and railways” (Du Boff 1989: 7).

In March 2001, the American Society of Civil Engineers (ASCE) issued a “Report Card for America’s Infrastructure,” grading 12 infrastructure categories at a disappointing D+ overall, and estimating the need for a $1.3 trillion investment to bring conditions to acceptable levels. In September 2003, ASCE released a Progress Report that examined trends and assessed the progress and decline of the nation’s infrastructure. The Progress Report, prepared by a panel of 20 eminent civil engineers with expertise in a range of practice specialties, examined 12 major categories of infrastructure: roads, bridges, mass transit, aviation, schools, drinking water, wastewater, dams, solid waste, hazardous waste, navigable waterways and energy. The report concluded: “The condition of our nation’s roads, bridges, drinking water systems and other public works have shown little improvement since they were graded an overall D+ in 2001, with some areas sliding toward failing grade.” Thomas L. Jackson, ASCE President, pointed out: “Time is working against our nation’s infrastructure. . . . Since we graded the infrastructure in 2001, our roads are more congested than ever, the number of unsafe and hazardous dams has increased, and our schools are unable to accommodate the mandated reductions in class size” (http://www.asce.org/reportcard/index.cfm?reaction=news&page=5).

Commenting on this ominous trend of the nation’s infrastructure, Seymour Melman, emeritus professor of industrial engineering at Columbia University, wrote, “All this is an important indicator of the opportunity cost, of what has been forgone, as a consequence of the Permanent War Economy” (Melman 2003).

Proponents of laissez-faire economics—interchangeably called neoclassical, neoliberal, or supply-side economists—tend to view government spending on public capital as a burden on the economy. Instead of viewing public sector spending on infrastructure as a long-term investment that will help sustain and promote economic vitality, they view it as an overhead. In other words, they seem to lose sight of the indirect, long-term returns to the tax dollars invested in the public capital stock by focusing on the current, short-term balance sheets. Yet, evidence shows that neglect of public capital formation can undermine long-term health of an economy in terms of productivity enhancement and sustained growth.

For example, a 1987 study by the Chicago Federal Reserve Bank concluded that “the rates of return are now higher on public than on private investment.” The study pointed out that there had been a drastic decline in public capital formation since the 1960s (an ominous trend that continues to this day): “public investment was as high as 2.3 of GNP in 1965-69, but by 1980-84 it had fallen to a mere 0.4 percent.” The study argued that the decline in public capital formation paralleled a decline in the rate of profit on private investment. The reason for this correlation is that as the public investment on infrastructure is cut, private investors find that their costs are higher for transportation, water, and so on. Thus a deficiency of public investment hurts the private sector: “If public capital formation were to return to its 1953-1969 average of 2.1 percent of GNP, private profitability would rise by over 2 percentage points. The total national capital stock would be higher, and the economy would be more productive” (Heilbroner/Galbraith 1990: 299-300).

Continued increase in military spending at the expense of non-military public spending has undermined more than physical infrastructure. Perhaps more importantly, it has also undercut public investment in soft/social infrastructure such as health care, education, nutrition, housing, and the like—investment that would help improve quality of life, human creativity and labor productivity, thereby also helping to bring about long-term socioeconomic vitality. Investment in human capital—anything that improves human capacity and/or labor force productivity, such as education and health care—is a major source of social health and economic vitality over time.

Sadly, however, public investment in such vitally important areas has been gradually curtailed during the past quarter century or so in favor of steadily rising military spending. Evidence of this regrettable trend is overwhelming. To cite merely a few examples: “The war priorities have depleted medical and education staffs. U.S. medical planning now includes programs to recruit large numbers of nurses from India.” And again: “Shortages of housing have caused a swelling of the homeless population in every major city. State and city governments across the country have become trained to bend to the needs of the military—giving automatic approvals to its spending without limit. The same officials cannot find money for affordable housing” (Melman 2003).

The New York Times columnist Bob Herbert reported on 6 February 2003 that, at the time, some 5.5 million young Americans, age 16 to 24, were undereducated, disconnected from society’s mainstream, jobless, restless, unhappy, frustrated, angry and sad. Commenting on this report, Professor Seymour Melman of Columbia University wrote: “This population, 5.5 million and growing, is the product of America’s national politics that has stripped away as too costly the very things that might rescue this abandoned generation and train it for productive work. But that sort of thing is now treated as too costly. So this abandoned generation is now left to perform as fodder for well-budgeted police SWAT teams” (Ibid.)

Ever since the Great Depression (and the concomitant social pressure from below) forced the New Deal reforms on the U.S. ruling elite, opponents of social spending were on the lookout to undermine those and other reforms that were put into effect in the 1950s and 1960s as part of what came to be known as the “war on poverty.” That opportunity arrived when President Reagan arrived in the White House. As the opponents of social spending began to put into effect their supply-side economic policies through the Reagan administration, it soon became clear that their strategy to roll back the New Deal and other poverty-reducing reforms was not very far from cynical: drastic tax cuts for the wealthy along with drastic hikes in military spending. As this combination created big budget deficits, it forced cuts in non-military public spending as a way to fill the budget gaps that were thereby created. David Stockman, President Reagan’s budget director and one of the main architects of his supply-side tax cuts, implicitly confirmed this cynical policy of simultaneously raising military spending and cutting taxes on the wealthy in order to force cuts in non-military government spending: “Cutting defense had never been my real ideological agenda. My aim had always been to force down the size of the domestic welfare state to the point where it could be adequately funded with the revenues after the tax cut” (Du Boff 1989: 10).

With minor exceptions, the trend that was thus set in motion in the early 1980s—sustained increases in military spending financed primarily by sustained cuts in non-military public spending—continues to this day. The resulting steady decline in social spending has had dire consequences: increased economic insecurity for many, further deepening of class divisions, and a considerable slowdown or reversal of the so-called upward social mobility that appeared so promising in the immediate few decades after World War II.

Opponents of social spending tend to justify these policies in terms of market mechanism: that all they want is to keep “government hands off the people’s pocket” and to let the “invisible hand of the market mechanism” regulate the economy. Yet, their twin policy of tax breaks for the wealthy and lion’s share of public money for military industries seems more akin to an iron fist that is designed to redistribute national resources in favor of the wealthy than the invisible hand of market mechanism. Aptly calling this strategy a “regulatory mechanism,” Richard Du Boff of Bryn Mawr College, writes:

 

For over four decades now, the “iron triangle”—Congress, the Pentagon, and the prime arms contractors—has kept the double-edged sword of military spending well honed. One edge bolsters aggregate demand and corporate profits in the economy; the other keeps resources away from a potentially vigorous and attractive civilian government sector. For antigovernment conservatives, military expenditures have acted as a regulatory mechanism, expanding government support for private enterprises and limiting the expansion of the federal government for virtually all non-military purposes (Ibid.).

 

An ominous—though logical—consequence of the use of the Pentagon appropriations as a redistributing mechanism of national resources in favor of the wealthy has been further exacerbation of economic inequality. Calling this insidious mechanism of resource allocation in favor of the affluent “redistributive militarism,” James Cypher of California State University at Fresno wrote:

 

Redistributive militarism functioned to transfer income from those in the bottom 80 percent of income distribution to those within the top 20 percent through: (1) an expansion in military procurement of unprecedented proportions; (2) increasingly lax procurement practices, which permitted both higher profit margins and a greater volume of business for arms contractors; (3) a substantive increase in the relationship between arms buildups and federal deficits (Cypher 1991: 609-610).

 

Escalation of war and military spending under President George W. Bush has been a boon for Pentagon contractors. This is clearly reflected (among other indicators) in the continuing rise of the value of their shares in the stock market: “Shares of U.S. defense companies, which have nearly trebled since the beginning of the occupation of Iraq, show no signs of slowing down. . . . The feeling that makers of ships, planes and weapons are just getting into their stride has driven shares of leading Pentagon contractors Lockheed Martin Corp., Northrop Grumman Corp., and General Dynamics Corp. to all-time highs” (Rigby 2006).

But while the Pentagon contractors and other beneficiaries of war dividends are showered with public money, low- and middle-income Americans are squeezed out of economic or subsistence resources in order to make up for the resulting budgetary shortfalls. For example, as the official Pentagon budget for 2008 fiscal year is projected to rise by more than 10 percent, or nearly $50 billion, “a total of 141 government programs will be eliminated or sharply reduced” to pay for the increase. These would include cuts in housing assistance for low-income seniors by 25 percent, home heating/energy assistance to low-income people by 18 percent, funding for community development grants by 12.7 percent, and grants for education and employment training by 8 percent (Shakir et al. 2007).

Combined with redistributive militarism and generous tax cuts for the wealthy, these cuts have further exacerbated the ominously growing income inequality that started under President Reagan. Ever since Reagan arrived in the White House in 1980, opponents of non-military public spending have been using an insidious strategy to cut social spending, to reverse the New Deal and other social safety net programs, and to redistribute national/public resources in favor of the wealthy. That cynical strategy consists of a combination of drastic increases in military spending coupled with equally drastic tax cuts for the wealthy. As this combination creates large budget deficits, it then forces cuts in non-military public spending (along with borrowing) to fill the gaps thus created.

For example, at the same time that President Bush is planning to raise military spending by $50 billion for the next fiscal year, he is also proposing to make his affluent-targeted tax cuts permanent at a cost of $1.6 trillion over 10 years, or an average yearly cut of $160 billion. Simultaneously, “funding for domestic discretionary programs would be cut a total of $114 billion” in order to pay for these handouts to the rich. The targeted discretionary programs to be cut include over 140 programs that provide support for the basic needs of low- and middle-income families such as elementary and secondary education, job training, environmental protection, veterans’ health care, medical research, Meals on Wheels, child care and HeadStart, low-income home energy assistance, and many more (Greenstein 2007).

According to the Urban Institute–Brookings Institution Tax Policy Center, “if the President’s tax cuts are made permanent, households in the top 1 percent of the population (currently those with incomes over $400,000) will receive tax cuts averaging $67,000 a year by 2012. . . . The tax cuts for those with incomes of over $1 million a year would average $162,000 a year by 2012” (Ibid.).

Interestingly (though not surprisingly), changes in income inequality have mirrored changes in government spending priorities, as reflected in the fiscal policies of different administrations. Thus, when the share of non-military public spending rose relative to that of military spending from the mid 1950 to the mid 1970s, and the taxation system or policy remained relatively more progressive compared to what it is today, income inequality declined accordingly.

But as President Reagan reversed that fiscal policy by raising the share of military spending relative to non-military public spending and cutting taxes for the wealthy, income inequality also rose considerably. As Reagan’s twin policies of drastic increases in military spending and equally sweeping tax cuts for the rich were somewhat tempered in the 1990s, growth in income inequality slowed down accordingly. In the 2000s, however, the ominous trends that were left off by President Reagan have been picked up by President George W. Bush: increasing military spending, decreasing taxes for the rich, and (thereby) exacerbating income inequality (see Figure 1).

 

Figure 1: Income Inequality in the U.S. (Gini Index), 1913-2004

Source: Doug Henwood, Left Business Observer, No. 114 (December 2006), p. 1

 

Leaving small, short-term fluctuations aside, Figure 1 shows two major peaks and a trough of the long-term picture of income inequality in the United States. The first peak was reached during the turbulent years of the Great Depression (1929–1933). But it soon began to decline with the implementation of the New Deal reforms in the mid 1930s. The ensuing decline continued almost unabated until 1968, at which time we note the lowest level of inequality.

After 1968, the improving trend in inequality changed course. But the reversal was not very perceptible until the early 1980s, after which time it began to accelerate—by virtue (or vice) of Reaganomics. Although the deterioration that was thus set in motion by the rise of neoliberalism and supply-side economics somewhat slowed down in the 1990s, it has once again gathered steam under President George W. Bush, and is fast approaching the peak of the Great Depression.

It is worth noting that even at its lowest level of 1968, income inequality was still quite lopsided: the richest 20 percent of households made as much as ten times more than the poorest 20 percent. But, as Doug Henwood of the Left Business Observer points out, “that looks almost Swedish next to today’s ratio of fifteen times” (2006).

The following are some specific statistics of how redistributive militarism and supply-side fiscal policies have exacerbated income inequality since the late 1970s and early 1980s—making after-tax income gaps wider than pre-tax ones. According to recently released data by the Congressional Budget Office (CBO), since 1979 income gains among high-income households have dwarfed those of middle- and low-income households. Specifically:

  • The average after-tax income of the top one percent of the population nearly tripled, rising from $314,000 to nearly $868,000—for a total increase of $554,000, or 176 percent.  (Figures are adjusted by CBO for inflation.)
  • By contrast, the average after-tax income of the middle fifth of the population rose a relatively modest 21 percent, or $8,500, reaching $48,400 in 2004.
  • The average after-tax income of the poorest fifth of the population rose just 6 percent, or $800, during this period, reaching $14,700 in 2004 (Congressional Budget Office 2006, Figure 2 below).

 

 

Figure 2: Changes in Average real After-Tax Income: 1979-2004

 

 

Legislation enacted since 2001 has provided taxpayers with about $1 trillion in tax cuts over the past six years. These large tax reductions have made the distribution of after-tax income more unequal by further concentrating income at the top of the income range. According to the Urban Institute–Brookings Institution Tax Policy Center, as a result of the tax cuts enacted since 2001:

  • In 2006, households in the bottom fifth of the income spectrum received tax cuts (averaging $20) that raised their after-tax incomes by an average of 0.3 percent.
  • Households in the middle fifth of the income spectrum received tax cuts (averaging $740) that raised their after-tax incomes an average of 2.5 percent.
  • The top one percent of households received tax cuts in 2006 (averaging $44,200) that increased their after-tax income by an average of 5.4 percent.
  • Households with incomes exceeding $1 million received an average tax cut of $118,000 in 2006, which represented an increase of 6.0 percent in their after-tax income (Tax Policy Center 2006).

 

POLICY DISASTERS COMPOUND NATURAL DISASTERS: THE CASE OF HURRICANE KATRINA

The fact that neglect of public infrastructure can inflict heavy socio-economic tolls, especially on the economically-vulnerable social strata, was tragically demonstrated by the destruction wrought by Hurricane Katrina. In light of the steady cuts of the infrastructural funding for the city of New Orleans, especially of the funds that would maintain and/or reinforce the city’s levee system, catastrophic consequences of a hurricane of the magnitude of Katrina were both predictable and, indeed, predicted. Engineering and meteorological experts had frequently warned of impending disasters such as Katrina. Government policy makers in charge of maintaining public infrastructure, however, remained indifferent to those warnings. They seem to have had other priorities and/or responsibilities: cutting funds from public infrastructure and social spending and giving them away (in the form of tax cuts) to the wealthy supporters who had paid for their elections. It is not surprising, then, that many observers and experts have argued that Katrina was as much a policy disaster as it was a natural disaster.

It is important to point out here that not all the policy or government failures in the face of the Katrina disaster can be painted as the exclusive product of the Bush administration. Undoubtedly, the administration played a major role in compounding the destructive effects of the disaster; but, as pointed earlier, the roots of government irresponsibility and the origins of the policies of neglecting public infrastructure descend far back into the past, into President Reagan’s supply-side economics. The core of supply-side economics has been to whittle down social safely net programs, to reverse the New Deal and other anti-poverty programs, and to redistribute national resources in favor of the wealthy. As noted earlier, simultaneous escalation of the Pentagon budget and drastic tax cuts for the wealthy has been used as a cynical strategy in pursuit of this objective: as this combination creates big gaps in the federal budget, social spending is then slashed to close such gaps.

Soon after the disaster hit New Orleans, George Lakoff of AlterNet wrote, “The cause was political through and through—a matter of values and principles. . . . Eliminating as much as possible of the role of government accounts for the demotion of FEMA from cabinet rank, . . . for the budget cuts in levee repair, for placing more responsibility on state and local government than they could handle. . . . This is a failure of moral and political philosophy—a deadly failure” (2005).

As noted above, in light of the steady curtailment of the non-military public spending since the advent of the Reagan administration, and the resulting erosion of public infrastructure, engineering and meteorological experts had over the years issued a number of warnings regarding the vulnerability and the likely collapse of the New Orleans levee system. But expert advices to head off the calamity by proactive and/or preventive measures were ignored. For example, in 1998, after a close call with Hurricane Georges, a sophisticated computer study by Louisiana State University warned of the “virtual destruction” of the city by a category four storm approaching from the southwest. Indeed, ever since the nasty experience of Hurricane Betsy in September 1965 (a category three storm that inundated many eastern parts of Orleans Parish that were drowned by Katrina), the vulnerability of the city to hurricanes has been intensively studied and widely publicized.

The New Orleans project manager for the Army Corps of Engineers, Alfred Naomi, had warned for years of the need to shore up the levees, but corporate representatives in the White House and the Congress kept cutting back on the funding. The most recent cutback was a $71.2 million reduction for the New Orleans district in fiscal year 2006. “I’ve never seen this level of reduction,” Naomi told the New Orleans City Business paper on June 6. His district had “identified $35 million in projects to build and improve levees, floodwalls, and pumping stations,” the paper said. But with the cuts, “Naomi said it’s enough to pay salaries but little else.”

Naomi wasn’t the only one who warned of this disaster. In 2001, the Federal Emergency Management Agency (FEMA) “ranked the potential damage to New Orleans as among the three likeliest, most catastrophic disasters facing the country,” wrote Eric Berger in a prescient article in the Houston Chronicle on December 1, 2001, entitled “Keeping Its Head Above Water: New Orleans Faces Doomsday Scenario.” In that piece, Berger warned: “The city’s less-than-adequate evacuation routes would strand 250,000 people or more, and probably kill one of ten left behind as the city drowned under twenty feet of water. Thousands of refugees could land in Houston” (as quoted in Rothschild 2005).

Around the same time period, the magazine Scientific American published an account of the flood danger (“Drowning New Orleans”, October 2001) which, like the award-winning 2002 series (“The Big One”) in the local newspaper, the Times-Picayune, was chillingly accurate in its warnings.

In June 2003, Civil Engineering Magazine ran a long story by Greg Brouwer entitled “The Creeping Storm.” It noted that the levees “were designed to withstand only forces associated with a fast-moving” Category 3 hurricane. “If a lingering Category 3 storm—or a stronger storm, say, Category 4 or 5—were to hit the city, much of New Orleans could find itself under more than twenty feet of water.” One oceanographer at Louisiana State University, Joseph Suhayda, modeled such storms and shared his findings with “emergency preparedness officials throughout Louisiana,” the article noted. “The American Red Cross estimates that between 25,000 and 100,000 people would die” if the hurricane floods breached the levees and overwhelmed the city’s power plants and took out its drainage system (Rothschild 2005).

On October 11, 2004, The Philadelphia Inquirer ran a story by Paul Nussbaum entitled “Direct Hurricane Hit Could Drown City of New Orleans, Experts Say.” It warned that “more than 25,000 people could die, emergency officials predict. That would make it the deadliest disaster in U.S. history.” The story quoted Terry C. Tuller, city director of emergency preparedness: “It’s only a matter of time. The thing that keeps me awake at night is the 100,000 people who couldn’t leave.”

But policy makers in the White House and the Congress were not moved by these ominous predictions; the warnings did not deter them from further cutting non-military public spending in order to pay for the escalating military spending and for the additional tax cuts for the wealthy. “The Bush administration’s response to these frightening forecasts was to rebuff Louisiana’s urgent requests for more flood protection: the crucial Coast 2050 Project to revive protective wetlands, the culmination of a decade of research and negotiation, was shelved and levee appropriations, including the completion of defenses around Lake Pontchartrain, were repeatedly slashed” (Davis 2005).

More than precious dollars were diverted to Iraq. In addition, much of the Louisiana and Mississippi National Guard personnel were also tied to the war: “Some 6,000 National Guard personnel in Louisiana and Mississippi who would be available to help deal with the aftermath of Hurricane Katrina are in Iraq,” Pete Yost of AP reported on August 29. “The war has forced the Guard into becoming an operational force, far from its historic role as a strategic reserve primarily available to governors for disasters and other duties in their home states” (Ibid.).

Not only did the Bush administration and its corporate allies in the Congress not finance urgent requests for the repair of the deteriorating public infrastructure, but at times the administration even punished dedicated civil servants who insisted on the necessity of such repairs. For example, Mike Parker, the former head of the Army Corps of Engineers, “was forced to resign in 2002 over budget disagreements with the White House.” Parker drew media attention (and the White House’s ire) in 2002 by telling the Senate Budget Committee that a White House proposal to cut just over $2 billion from the Corps’ $6 billion budget request would have a “negative impact” on the national interest. After Parker’s Capitol Hill appearance, Mitch Daniels (former director of the Office of Management and Budget, which sets the administration’s annual budget goals), wrote an angry memo to President Bush, writing that Parker’s testimony “reads badly . . . on the printed page,” and that “Parker. . . [was] distancing [himself] actively from the administration.” Parker “was forced to resign shortly thereafter” (Vest/Root 2005).

The amount of investment that could reinforce the New Orleans levee system and save the city from death and destruction pales by the magnitude of the loss in terms of lives and property. For example, Alfred Naomi, The New Orleans project manager for the Army Corps of Engineers, who had drawn up plans for protecting New Orleans from a Category 5 storm, pointed out soon after Katrina hit: “It would take $2.5 billion to build a Category 5 protection system, and [now] we’re talking about tens of billions in losses, all that lost productivity, and so many lost lives and injuries and personal trauma you’ll never get over” (Ibid.).

Some disasters cannot be prevented from occurring. But, with proper defenses, they can be contained and, therefore, prevented from destroying lives and property. Katrina was not; it was not “because of a laissez-faire government that failed to bother to take warnings seriously,” and because of a skewed government fiscal policy “that is stingy when it comes to spending on public goods but lavish on armaments and war” (Rothschild 2005). More fundamentally, because, driven by powerful special interests, the government has ever since the advent of Reaganomics in the 1980 been steadily diverting non-military public spending to military spending and tax cuts for the wealthy, thereby bringing about a steady erosion of the infrastructural defense systems against natural disasters.

The fundamental moral of Katrina disaster is unmistakable: contrary to the dogma of neoliberalism, governments bear vital responsibilities. These include provision of essential services and critical public goods that individuals and the private sector would not provide. They also include the building of a robust public infrastructure that is necessary for a vibrant economy and a civilized society. These responsibilities sometimes mean setting standards and instituting regulations in order to protect citizens against both natural disasters and failures of a market economy (such as making buildings earthquake proof, or having basic housing codes, or requiring factories and cars to limit pollution). Perhaps most importantly, government responsibilities include investment in vital public capital formation, both physical capital (such as roads, bridges, dams, levees, and public transit) and soft, social, or human capital (such as health and education). Myopic supply-side calculations, prompted by powerful special interests, tend to view these expenditures as redundant overheads that need to be curtailed as much as possible. Sensible, judicious or responsible governments, however, would view such expenditures as vital investments in the long-term economic vitality and social prosperity that would more than offset the short-term costs of those investments.

 

CONCLUSION

The brief discussion along with the evidence presented by this study regarding the socio-economic consequences of military spending show that the “crowding out” economic theory (arguing that military spending crowds out non-military private-sector resources: capital, skilled labor, productive or production capacity, and the like) is misplaced. What gets crowded out by the escalating military spending is often not private-sector investment spending but non-military public spending. This includes both physical capital, or physical infrastructure (such as roads, bridges, mass transit, schools, and the like), and human capital, or soft/social infrastructure, such as health and education.

The steady reallocation of public resources away from non-military to military spending—sometimes called “redistributive militarism—has had a number of ominous consequences. For one thing, it has led to a redistribution of resources from the bottom to the top of income and/or wealth spectrum, thereby further worsening income inequality. For another, it has compromised the all-important national objective of public capital formation. This tends to not only undermine long-term productivity and stint socioeconomic growth and development, but also weaken national or social defenses against natural disasters, as evidenced, for example, by the 2005 destruction of the city of New Orleans by Hurricane Katrina.

 

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