The Hidden Tax of the “Permanent War Economy”

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Faced with the prospect of more spending cuts, the defense industry has been arguing that they would cripple many local economies by ending well-paying jobs in the weapons-building sector. In fact, the Aerospace Industries Association went so far as to commission a study by George Mason University professor Stephen S. Fuller, whose analysis shows that up to 1 million jobs could be lost if sequestration takes place, as now scheduled, on Jan. 2.

But at what cost? There’s a new George Mason paper by Thomas K. Duncan and Christopher J. Coyne, a pair of GMU economists, that focuses on a long-overlooked side effect of military spending. GMU has a highly-regarded economics program (including two Nobel economics laureates) and — located just outside the Washington Beltway that encircles the capital city — an ideal perch from which to study federal policy.

The pair writes:

Once the U.S. embarked upon the path of permanent war, starting with World War II, the result was a permanent war economy. The permanent war economy continuously draws resources into the military sector at the expense of the private economy, even in times of peace. We explore the overlooked costs of this process. The permanent war economy does not just transfer resources from the private economy, but also distorts and undermines the market process which is ultimately responsible for improvements in standards of living.

The pair focuses on the total cost of military spending – including what could be done with funds not spent on the military. They try to show how the military-industrial complex has turned into what some in the Pentagon call a “self-licking ice cream cone” more concerned with self-preservation than national security:

As the military-industrial complex lacks a mechanism for meaningful economic feedback and correction, once the economic activity has been set in motion, there is no true method of correction. This leads to the second implication, which is that the permanent war economy is self-extending.

For those of us who found Paul Samuelson‘s Economics: An Introductory Analysis daunting in college, Duncan and Coyne’s paper is similarly challenging. But it raises important issues that have been ignored by Washington’s putative national-security experts for too long.