Hudson: Traditionally war spending has driven deficits

Michael Hudson and William Hartung make the argument that military spending was exempted from cuts in the debt ceiling deal because it had strong backers who protected it. They also reveal that the US debt ceiling was put into place to keep Woodrow Wilson from overspending during World War I as military conflicts have traditionally been the real budget busters for governments.

War was certainly the budget buster for the United Kingdom as the UK left the gold standard to inflate and deficit spend for World War I. When the British went back onto the gold standard, they came back at too high an exchange rate and were able to get the US to inflate on their behalf to ease the deflationary pressure the peg had on the British economy. Eventually, America’s loose monetary policy ended in Depression. (See my post 1925 which excerpts from Murray Rothbard’s History of Money and Banking.)

Afterwards, World War II left the British economy in tatters with a mountain of government debt that was eroded through a combination of currency depreciation and inflation.

The analogue here that Hudson and Hartung are presenting is that America’s permanent war footing and large Military-Industrial Complex are the real deficit busters, something that leaders in Congress like Ron Paul and Dennis Kucinich are actively working against. We’ll see if military spending gets a free ride in the second half of the debt ceiling deal.

Video below

  1. David Lazarus says

    If the US did three things its deficit would decrease dramatically. First is reverse the Bush tax cuts, this would bring in money from the rich. Second, end the wars. This would cut the expense. Next make some cuts to military spending, nothing drastic but maybe just a modification of the procurement process, though in a way that corporations share the risks. This would not reduce military efficiency unless deliberately designed to do so. Finally have a jobs program for infrastructure. That will end the crisis in the US. Unfortunately I do not see any of these happening so the US will probably face a downgrading and repeat the experience of Japan with twenty years of stagnation.

  2. Leverage says

    Add a couple of extra steeps and fix the crisis:
    1) Tax cuts (payrolls) for low/middle class and introduce progressive taxes ala 30-60 era.
    2) Introduce a Job Guarantee program.
    3) Increase spending in key sectors to reduce energy consumption (efficiency and production) and energy imports.

    Call me a keynesian but with this I can finnish this depression and set the bases for long term solid growth (or at least an stable economy, because I don’t care so much about growth really).

    There would have to be done more things in the long run like a change in the international monetary system to finish chronic balance of trade deficits (or surplus), or a change in the financial system structure that can support low levels of growth and leverage without collapse. But that could be done with everyone being employed and real wealth production.

    1. David Lazarus says

      You could roll the jobs guarantee and the energy efficiency program into one. Solve two problems with one program. I do think ending reserve currency status will allow the US to lower its trade deficit which will allow the fiscal deficit to fall.

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