The economist Tyler Cowen wrote a piece in the New York Times’s Week In Review section entitled “The Lack of Major Wars May be Hurting Economic Growth.” He raises a serious point that requires two questions to be answered. First, does modern capitalism rely on military and other “wasteful” expenditures to grow? Second, is growth of 4 percent per year necessary for the American economy to succeed?
Cowen makes a fairly convincing argument that preparing for war has led to increased growth since the end of the Great Depression.
It may seem repugnant to find a positive side to war in this regard, but a look at American history suggests we cannot dismiss the idea so easily. Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.
Neoclassical economics would have us believe that the invisible hand of the market in creating a balance of supply and demand will naturally create the kind of growth that makes capitalism the only possible economic system. Thus as we are reminded constantly by Republican economic orthodoxy, government intervention in the economy can only destroy this perfect balance and gum up the works.
But Cowen, who authored The Great Stagnation and who is a conservative economist, is arguing that since 1940 it has been government spending on military technology that made the difference in the post war average of 4 percent growth and our current relatively stagnant 2 percent growth. Although Cowen can point to the wonders of the Internet delivered by the Cold War, he admits that the wasteful cost of war (in blood and treasure) is not worth the growth.
And then there is another source of waste that we need to look at. In 1950, total U.S. ad spending was $5.7 Billion. Last year it was $171 Billion. Why do I say waste? Because that box of Tide you just purchased had far more embedded costs in advertising and packaging than it did in ingredients (which were basically similar to the ingredients of all the competitive detergents).
Then there is a third source of waste for which we are paying dearly: Wall Street speculation.
Note how the role of Wall Street has grown since 1950. The vast proportion of this revenue is trading profits. This is not money going to finance productive growth of the economy, but rather the speculative profits of the trading desks of big banks. It is this speculative activity that caused the crash of 1929 and the Great Recession of 2008. Though the role of Wall Street fell dramatically in 1930, you will note that the Great Recession of 2008 was merely a hiccup in Wall Street Profits, mostly because men like John Paulson made billions betting the housing market would crash. And now, as Michael Lewis has reminded us, High Frequency Trading makes it possible for the Hedge Fund guys to let the computers do all the speculation, often trading in and out of a single stock four times a day.
So perhaps the invisible hand of the free market doesn’t really work without the government spending billions a year on missiles and bombers and the corporations spending billions a year to get you to buy stuff you don’t need. Perhaps Paul Ryan and Ted Cruz are just plain wrong in their belief in the growth fairy of Ayn Rand. But maybe we should look at it another way. Perhaps we don’t need to grow 4 percent a year. Given certain limits on our natural resources, perhaps a Steady State Economy might be a better idea. Cowen acknowledges this possibility.
We can prefer higher rates of economic growth and progress, even while recognizing that recent G.D.P. figures do not adequately measure all of the gains we have been enjoying. In addition to more peace, we also have a cleaner environment (along most but not all dimensions), more leisure time and a higher degree of social tolerance for minorities and formerly persecuted groups. Our more peaceful and — yes — more slacker-oriented world is in fact better than our economic measures acknowledge.
This of course brings me back to the point I made a couple of weeks ago from Moscow.
The mistake of the old wise men was that they thought man would gladly trade consumption for leisure—that living a modest life, rich in the aesthetics of writing songs or painting our masterpiece—would be a worthy trade.
It could be that we could create a sustainable society at lower growth levels. That there is not a single politician willing to acknowledge this possibility is depressing.
Jonathan Taplin is a Professor and the Director of the Annenberg Innovation Lab at the University of Southern California.
“Do we need 4% growth”? I would argue we do not. It needs to be kept firmly in mind that a large part of the economicgrowth that has occurred since the industrial Revolution has been intrinsically linked to population growth. A population growing at 2%/year needs 2% GDP growth just to stay even. A stable population does not. Moreover, a growing population, dominated by a younger demographic has consistently rising demand. A stable, aging population does not. This is what we have seen in Japan and most of Europe and is what we are seeing now in the US (and to a large extent in China too). Is 2 % GDP growth in a stable, older population a bad thing? I would say that in fact it may be a good thing, particularly for poor planet Earth. Attempting to kick the engine up to 4% may not only be unfeasible, but may be undesirable if we hope to address climate change and other environmental problems.
As for Cowen, he leans conservative, but he is not dogmatic. I enjoy reading him, not just on economics, but on food as well,
$171B for advertising is only 1% of US GDP, although it does drive inequality in the form of ridiculous Silicon Valley buyouts like $17B for WhatsApp.
Computer technology got some help from military spending, but far less than rocketry, jets, or fission power. Those are also far less profitable and useful. Also, the path of fission tech was distorted by the needs of submarines, and forced down the blind alley of light-water enriched reactors. We would have far better reactors, and probably aircraft and rockets, if they had grown in an incremental instead of force-fed manner.
I’m no economist, but I’d quibble with a few secondary points in this column. The author characterizes advertising as “waste” because it doesn’t translate into more Corn Flakes in the consumer’s breakfast bowl. However, advertising informs consumers (in a slanted way) about the marketplace. It also funds independent, non-charity-based journalism - including newspapers and TPM. Surely that has important, beneficial consequences for the rest of the economy.
Similarly, I think it’s simplistic to say all speculative costs on Wall Street are waste. Irresponsible and nauseating as the behavior of many in that sector has been, it surely facilitates capital flows that are essential to growth in a modern, developed economy. Seems to me that the real trick is to create a political and regulatory regime that will moderate Wall Street’s worst impulses.
We need government spending to spur economic growth. We don’t need spending on war to spur growth, at least from an economic standpoint. Government spending building universities and fixing and expanding transportation and energy infrastructure or spending it on a space program that pushes technology past its existing limits (i.e. doing something other than piddling around in LEO refining incremental improvements in technology we developed in the 1960s) would spur it far better than military spending.
The problem is that war ends up being the only kind of government spending that’s politically feasible because it’s the only thing that can generate political support from people who don’t believe in Keynesianism.
There is, and always has been, a broad and powerful coalition of people who reject Keynesian economics. Elites who think their excellent grasp of microeconomics makes them qualified to opine about macro issues (and whose opinions just happen to turn out to be that letting them keep all the money they make is the best thing for the economy); economists who are ideologically invested in generating alternative models of reality where Keynesian economics don’t work; and, of course, ordinary people who can’t get their heads around the fact that their experience running a household doesn’t have anything to do with running a national economy but jealously resent anyone they perceive as benefiting more from government spending than they do. The only thing that seems capable of getting those people to support the kind of spending it takes to get rapid growth is nationalism and fear.
That’s the real problem. It’s a problem that’s existed for decades and that has resisted every effort to bring people to a more enlightened understanding of their self-interest. I don’t know how to fix it, but that’s the problem.
Will kicking up the economy back to 4% growth alleviate the massive inequality we see now? Or will the one percenters just gobble up the excess via the political system they’ve rigged? Perhaps if we remove the massive, massive corruption, now endemic to our political and economic system, it would be enough even at 2%?