KC-135 Stratotanker refuels F-15C Eagle

America is wounded by the twin afflictions of militarization and financialization

Marshall Auerback

Marshall Auerback

Marshall is a Research Associate at the Levy Economics Institute of Bard College. He has over 20 years of experience in the investment management business. He was also head of economic research for Madison Street Partners. Follow him on Twitter @Mauerback

The United States faces multiple crises in foreign policy, economics and democracy. The economy has been living on intellectual capital accumulated before the 1980s and has been increasingly afflicted by the twin diseases of militarization and financialization. These trends have combined to destroy its manufacturing base and moved its policies dangerously in a direction that heightens the potential for a renewed Cold War and possible military conflict.
 
In January 1961 when he left office President Eisenhower gave a well-remembered farewell address in which, though he hit the usual buttons of American exceptionalism and greatness, he warned about the “military-industrial complex” in terms that remain valid today:

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

Unfortunately, policy in the United States has largely ignored this prescient warning. The “unwarranted influence” of the military-industrial complex has not only become a reality rather than a potential danger but has indeed endangered the liberty and economic well-being of the United States. It is coupled with the phenomenon of “financialization”, which refers to the increase in size and power of a country’s financial sector relative to its overall economy, along with an upsurge in the economic and political power of those who derive their income from financial investments (that is, the rentier class). Together, these twin evils have played a symbiotic role in contributing to many of the pathologies that now afflict the US economy.

Military spending may at one time have been a genuine job creator when weapons were compatible with converted civilian production lines, but the days of Rosie the Riveter are long gone. The late Professor Seymour Melman’s prescient book, Profits Without Production, illustrated how the growing militarization of our economy was one of the central causes of the decline in America’s manufacturing competitiveness. Melman argued that “the relentlessly predatory effects of the military economy erode industrial productivity, the foundation of every nation’s economic growth.” In the same analysis, he gave statistics showing that “the government [has] invested more capital in its military account than would be required to replace most of the human-made machines and structures in the country.” In other words, increased military spending also engendered huge opportunity costs to improve the civilian sphere of life (given the extent to which fiscal resources have been increasingly deployed in favour of the military rather than the civilian economy). More fundamentally, military spending destroyed the core competence in manufacturing that Melman saw as the basis of economic life.

Most weapons projects now require relatively little touch labor. Instead, a disproportionate share is siphoned into high-cost R&D (from which the civilian economy benefits little), exorbitant management expenditures, high overhead, and out-and-out padding, including money that flows back into political campaigns. A dollar appropriated for highway construction, health care, or education will likely create more jobs than a dollar for Pentagon weapons procurement. A University of Massachusetts study claims that several alternative projects would produce anywhere from 35 percent to 138 percent more jobs than spending the same amount on the U.S. Department of Defense (DOD).

During the 2000s, DOD budgets, including funds spent on the war, doubled in our nation’s longest sustained post-World War II defense increase. Yet during the same decade, jobs were created at the slowest rate since the Hoover administration. If defense helped the economy, it is not evident.

Coincident with this was the growth of financialization, especially with the growth of securitization and derivative markets, and the belief that risk was better spread around in the system and allocated toward entities that could bear it best. In reality, the contrary is true: the economic system has been characterized by highly leveraged funds seeking maximum returns in an environment that systematically under-prices risk.

Taken in aggregate, these two insidious trends – militarization and financialization – have insidiously combined to destroy the accumulated manufacturing know-how and intellectual capital that was long the source of American economic prosperity. In the case of the former, contact with the Pentagon often signals death for a civilian company because of the incentives inherent in its “cost-plus” contracts, along with the geographic disbursement of what’s left of domestic American manufacturing facilities to as many parts of the country as possible (much of the civilian manufacturing having already been outsourced to other parts of the world). The goal here is to maximize congressional political support for increasingly expensive military boondoggles – what longtime defense analysts Franklin “Chuck” Spinney and Pierre Sprey term “political engineering.” Cost-plus and political engineering together bias corporate practices toward inflating costs and therefore foster waste and diminish safety. By contrast, in a traditional civilian manufacturing model, profit margins are best secured by reducing costs as much as possible in order to maximize the bottom line.

In the case of the latter, there is financialization which points to the rising role of finance in the economy, increasing leverage and the layering of debt on top of debt. It means a greater share of GDP going to the financial system, going to interest rather than profit, and largely diverting resources away from a goods-producing economy, to one that generates persistent asset bubbles and growing financial instability.

Among the biggest beneficiaries of the current American economic system are not entrepreneurs or innovators, but parasites who owe their wealth to rigged markets or government subsidies, especially from the DOD. The “parasite load” in the U.S. economy includes many in the financial industry who expect that the federal government will socialize their losses but let them keep their profits – profits taxed at low rates, or hidden from taxation altogether.

The company that best manifests the destructiveness of these twin pathologies – militarization and financialization – is Boeing. Before the recent fiascos associated with the ill-fated launch of the company’s new “Max 8 737”, Boeing was a company that had historically been very successful in the highly competitive civil aviation market since the 747 jumbo jet (“the Queen of the skies”) first dominated some 50 years ago. The 21st century has been less kind to the company, however, as its failures have been increasingly exacerbated by its growing, and increasingly toxic, ties to the U.S. defense industry.
 

KC-135 Stratotanker refuels F-15C Eagle
U.S. Air Force photo/Tech. Sgt. Angelique Perez. Photo @ Wikimedia Commons.

These links began in the late 1990s when the DOD helped to engineer a merger of Boeing and McDonnell Douglas, the latter an important supplier of combat aircraft to the United States. Far from being the “largest, strongest, broadest, most admired aerospace corporation in the world,” as promised at the time of the merger by John McDonnell, chairman of McDonnell Douglas, the corrupting practices of the Pentagon soon began to infect the newly combined entity. In particular, the 787’s outsourcing strategy turned out to be a fiasco, which even then-Boeing CEO Jim Albaugh was forced to concede in a Seattle Times report.

But the Seattle Times also exposed that the rot took hold well before the 787 debacle, citing an internal Boeing Report, written in 2001 by Dr. L.J. Hart-Smith, a mere five years after the merger was consummated. Hart-Smith described the disastrous economic effects of excessive outsourcing that began to afflict Boeing almost immediately, especially as its ties to the military expanded. These problems are elaborated here:

“The so-called spin-offs offs from Defense spending can transmit the corrupting effects of the politically motivated, cost-plus economics of the Military – Industrial – Congressional Complex (MICC) into the larger economy[.] The MICC not only subsidizes wasteful cost growth in the Pentagon, its activities infect the overall economy by soaking up scarce investment and human capital; corrupting the practices of science and engineering; distorting research content on a huge scale; while providing incentives for inefficient production and management practices […], not to mention the politicizing of industrial management.”

As Boeing’s ties to the military increased, so too did its shoddy corporate practices. The 787 Dreamliner is still plagued with production problems, and there is little sign that Boeing has rectified them. The company has failed to reintegrate basic manufacturing and R&D to correct the original problems highlighted by Shih and Pisano (quite the contrary, as the company is increasingly shifting production to China in order to safeguard its market share there). Just last year, the New York Times reported that “the [Charleston, South Carolina-based] factory, which makes the 787 Dreamliner, has been plagued by shoddy production and weak oversight that have threatened to compromise safety.” A former quality manager, John Barnett, a whistleblower who worked at Boeing for nearly three decades, damningly suggested: “I haven’t seen a plane out of Charleston yet that I’d put my name on saying it’s safe and airworthy.” Recall that Boeing originally moved some of its operations to the “right to work” state of South Carolina to undermine the strength of its unionized workforce in the state of Washington, which has had an adverse effect on the overall quality of its products.

Boeing’s new CEO, David Calhoun, is unlikely to resolve these problems. Nor are the multifold support packages that came from Congress in the wake of Covid-19. Having spent 26 years at General Electric, stripping aviation talent out and replacing real engineering with financial engineering, Calhoun eventually became a director at Boeing in 2009. In 2014, he joined the Blackstone Group, a private equity firm that, as Matt Stoller points out, “is a vector for financializing corporations” as well as being a company well-versed in creative accounting shenanigans that enable corporate entities like Boeing to mask their extensive cash flow problems. During his tenure as a Boeing board member, Calhoun has been a party to a series of decisions whereby financial machinations of the company’s managerial class have taken precedence over safety culture. Despite many years of affiliation to the aviation industry, then, Calhoun himself is merely another financial “Master of the Universe,” representative of a caste that specializes in outsourcing and stripping out talent, all the while championing practices such as dressing up the balance sheet in a manner that is legal, but has distorted the underlying profits position of the company.

Boeing will not go bust, but likely will remain a de facto appendage of the Pentagon, as its civilian division either withers away or is dressed up by the current board and then sold off to overseas interests (perhaps even China itself, which is trying to build up its own civilian aviation industry), as will many other companies increasingly drawn into the military’s extensive web of support, both politically and financially. We are beginning to see this in the areas of semiconductors, where national security considerations in the semiconductor industry have again revived in the wake of the Trump administration’s growing dispute with Chinese 5G telecommunications equipment maker Huawei. As in other parts of the world, the U.S. government is working to limit the Chinese telecoms equipment manufacturer’s international access to global markets. The Commerce Department has now mandated that all semiconductor chip manufacturers using U.S. equipment, IP, or design software will require a license before shipping to Huawei. This decision has forced the world’s biggest chipmaker –Taiwan Semiconductor Manufacturing Company (TSMC) – to stop taking fresh orders from Huawei, as it uses U.S. equipment in its own manufacturing processes. Taiwan could well become a hot spot for future conflict.

If nothing else, these trends are driving the U.S. back toward a Cold War style of competition that is increasingly emerging as a new global fault-line. In the words of authors David McCormick, Charles E. Luftig, and James M. Cunningham: “The economy has become the primary arena for great power competition given the integration of global markets, the emergence of transformational technologies and the pervasiveness of cyberspace.” Hence, national security concerns will increasingly drive trade and foreign policy decisions, which in turn will create pressures toward conflict. Eisenhower’s horrifying prophecy looks more prescient than ever. America is approaching a state of economic irrelevance. An increasingly militarized economy is impairing its optimal efficiency by creating growth impediments, and its increasing financialization means that the country is unable to deliver sustained growth that is widely shared. The days when other countries looked to the U.S. as a successful model of vibrant economic prosperity and liberal democracy may well be over. It is more like a wounded tiger. And as we all know, a wounded tiger is an animal at its most dangerous.

 

Marshall Auerback

 

Received: 16.10.20, Ready: 13.11.20; Editors: Anthony Pahnke, Alexander F. Brown.

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