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The Pentagon's Budget from Hell
On March 13th, the Pentagon rolled out its proposed budget for Fiscal Year 2024. The results were—or at least should have been—stunning, even by the standards of a department that’s used to getting what it wants when it wants it.
The new Pentagon budget would come in at $842 billion. That’s the highest level requested since World War II, except for the peak moment of the Afghan and Iraq wars, when the United States had nearly 200,000 troops deployed in those two countries.
$1 Trillion for the Pentagon?
It’s important to note that the $842 billion proposed price tag for the Pentagon next year will only be the beginning of what taxpayers will be asked to shell out in the name of “defense.” If you add in nuclear weapons work at the Department of Energy and small amounts of military spending spread across other agencies, you’re already at a total military budget of $886 billion. And if last year is any guide, Congress will add tens of billions of dollars extra to that sum, while yet more billions will go for emergency aid to Ukraine to help it fend off Russia’s brutal invasion. In short, we’re talking about possible total spending of well over $950 billion on war and preparations for more of it—within striking distance, in other words, of the $1 trillion mark that hawkish officials and pundits could only dream about a few short years ago.
The ultimate driver of that enormous spending spree is a seldom-commented-upon strategy of global military overreach, including 750 U.S. military bases scattered on every continent except Antarctica, 170,000 troops stationed overseas, and counterterror operations in at least 85—no, that is not a typo—countries (a count offered by Brown University’s Costs of War Project). Worse yet, the Biden administration only seems to be preparing for more of the same. Its National Defense Strategy, released late last year, manages to find the potential for conflict virtually everywhere on the planet and calls for preparations to win a war with Russia and/or China, fight Iran and North Korea, and continue to wage a global war on terror, which, in recent times, has been redubbed “countering violent extremism.” Think of such a strategic view of the world as the exact opposite of the “diplomacy first” approach touted by President Joe Biden and his team during his early months in office. Worse yet, it’s more likely to serve as a recipe for conflict than a blueprint for peace and security.
In an ideal world, Congress would carefully scrutinize that Pentagon budget request and rein in the department’s overly ambitious, counterproductive plans. But the past two years suggest that, at least in the short term, exactly the opposite approach lies ahead. After all, lawmakers added $25 billion and $45 billion, respectively, to the Pentagon’s budget requests for 2022 and 2023, mostly for special-interest projects based in the states or districts of key members of Congress. And count on it, hawks on Capitol Hill will push for similar increases this year, too.
How the Arms Industry Captures Congress
The $45 billion by which Congress increased the Pentagon’s budget request last year was among the highest levels on record. Add-ons included five extra F-35 jet fighters and a $4.7 billion boost to the shipbuilding budget. Other congressional additions included 10 HH-60W helicopters, four EC-37 aircraft, and 16 additional C-130J aircraft (at a cost of $1.7 billion). There were also provisions that prevented the Pentagon from retiring a wide array of older aircraft and ships—including B-1 bombers, F-22 and F-15 combat aircraft, aerial refueling planes, C-130 and C-40 transport aircraft, E-3 electronic warfare planes, HH-60W helicopters, and the relatively new but disastrous Littoral Combat Ships (LCS), referred to by detractors as “little crappy ships.”
The lobbying effort to prevent the Navy from retiring those problem-plagued ships is a case study of all that’s wrong with the Pentagon budget process as it works its way through Congress. As the New York Times noted in a detailed analysis of the checkered history of the LCS, it was originally imagined as a multi-mission vessel capable of detecting submarines, destroying anti-ship mines, and doing battle with the kinds of small craft used by countries like Iran. Once produced, however, it proved inept at every one of those tasks, while experiencing repeated engine problems that made it hard even to deploy. Add to that the Navy’s view that the LCS would be useless in a potential naval clash with China and it was decided to retire nine of them, even though some had only served four to six years of a potential 25-year lifetime.
Contractors and public officials with a stake in the LCS, however, quickly mobilized to block the Navy from shelving the ships and ultimately saved five of the nine slated for retirement. Major players included a trade association representing companies that had received contracts worth $3 billion to repair and maintain those vessels at a shipyard in Jacksonville, Florida, as well as other sites in the U.S. and overseas.
The key congressional players in saving the ship were Representative John Rutherford (R-FL), whose district includes that Jacksonville shipyard, and Representative Rob Wittman (R-VA), whose district includes a major naval facility at Hampton Roads where maintenance and repair work on the LCS is also done. I’m sure you won’t be surprised to learn that, in 2022, Wittman received hundreds of thousands of dollars in arms-industry campaign contributions, including substantial donations from companies like Lockheed Martin, Raytheon, and General Dynamics with a role in the LCS program. When asked if the lobbying campaign for the LCS influenced his actions, he said bluntly enough, “I can’t tell you it was the predominant factor . . . but I can tell you it was a factor.”
Former Representative Jackie Speier (D-CA), who tried to make the decision to retire the ships stick, had a harsh view of the campaign to save them:
“If the LCS was a car sold in America today, they would be deemed lemons, and the automakers would be sued into oblivion . . . The only winners have been the contractors on which the Navy relies for sustaining these ships.”
Not all members of Congress are wedded to the idea of endlessly increasing Pentagon spending. On the progressive side, Representatives Barbara Lee (D-CA) and Mark Pocan (D-WI) have introduced a bill that would cut $100 billion a year from the department’s budget. That figure aligns with a 2021 Congressional Budget Office report outlining three paths toward Pentagon budget reductions that would leave the U.S. with a significantly more than adequate defense system.
Meanwhile, members of the right-wing Freedom Caucus and their allies have promised to push for a freeze on federal discretionary spending at Fiscal Year 2022 levels. If implemented across the board, that would mean a $75 to $100 billion cut in Pentagon spending. But proponents of the freeze have been unclear about the degree to which such cuts (if any) would affect the Department of Defense.
A number of Republican House members, including Speaker Kevin McCarthy, have indeed said that the Pentagon will be “on the table” in any discussion of future budget cuts, but the only specific items mentioned have involved curbing the Pentagon’s “woke agenda”—that is, defunding things like alternative fuel research—along with initiatives aimed at closing unnecessary military bases or reducing the size of the officer corps. Such moves could indeed save a few billion dollars, while leaving the vast bulk of the Pentagon’s budget intact. No matter where they stand on the political spectrum, proponents of trimming the military budget will have to face a congressional majority of Pentagon boosters and the arms industry’s daunting influence machine.
Greasing the Wheels: Lobbying, Campaign Contributions, and the Job Card
As with the LCS, major arms contractors have routinely greased the wheels of access and influence in Congress with campaign contributions to the tune of $83 million over the past two election cycles. Such donations go mainly to the members with the most power to help the major weapons producers. And the arms industry is fast on the draw. Typically, for instance, those corporations have already expanded their collaboration with the Republicans who, since the 2022 election, now head the House Armed Services Committee and the House Appropriations Committee’s defense subcommittee.
The latest figures from OpenSecrets, an organization that closely tracks campaign and lobbying expenditures, show that new House Armed Services Committee chief Mike Rogers (R-AL) received more than $511,000 from weapons makers in the most recent election cycle, while Ken Calvert (R-CA), the new head of the defense appropriations subcommittee, followed close behind at $445,000. Rogers has been one of the most aggressive members of Congress when it comes to pushing for higher Pentagon spending. He’s a longstanding booster of the Department of Defense and has more than ample incentives to advocate for its agenda, given not just his own beliefs but the presence of major defense contractors like Boeing and Lockheed Martin in his state.
Contractors and members of Congress with arms plants or military bases in their jurisdictions routinely use the jobs argument as a tool of last resort in pushing the funding of relevant facilities and weapons systems. It matters little that the actual economic impact of Pentagon spending has been greatly exaggerated and more efficient sources of job creation could, with the right funding, be developed.
At the national level, direct employment in the weapons sector has dropped dramatically in the past four decades, from 3.2 million Americans in the mid-1980s to one million today, according to figures compiled by the National Defense Industrial Association, the arms industry’s largest trade group. And those one million jobs in the defense sector represent just six-tenths of one percent of the U.S. civilian labor force of more than 160 million people. In short, weapons spending is a distinct niche sector in the larger economy rather than an essential driver of overall economic activity.
Arms-related employment will certainly rise as Pentagon budgets do and as ongoing expenditures aimed at arming Ukraine continue to do so as well. Still, total employment in the defense sector will remain at modest levels relative to those during the Cold War, even though the current military budget is far higher than spending in the peak years of that era.
Reductions in defense-related employment are masked by the tendency of major contractors like Lockheed Martin to exaggerate the number of jobs associated with their most significant weapons-making programs. For example, Lockheed Martin claims that the F-35 program creates 298,000 jobs in 48 states, though the real figure is closer to half that number (based on average annual expenditures on the program and estimates by the Costs of War Project that military spending creates about 11,200 jobs per billion dollars spent).
It’s true, however, that the jobs that do exist generate considerable political clout because they tend to be in the states and districts of the members of Congress with the most sway over spending on weapons research, development, and production. Addressing that problem would require a new investment strategy aimed at easing the transition of defense-dependent communities and workers to other jobs (as outlined in Miriam Pemberton’s new book Six Stops on the National Security Tour: Rethinking Warfare Economies).
Unfortunately, the major contractors are ever better positioned to shape future debates on Pentagon spending and strategy. For example, a newly formed congressional commission charged with evaluating the Pentagon’s National Defense Strategy mostly consists of experts and ex-government officials with close ties to those weapons makers. They are either executives, consultants, board members, or staffers at think tanks with substantial industry funding.
And sadly, this should shock no one. The last time Congress created a commission on strategy, its membership was also heavily slanted towards individuals with defense-industry ties and it recommended a 3% to 5% annual increase in Pentagon spending, adjusted for inflation, for years to come. That was well more than what the department was then projected to spend. The figure that the commission recommended immediately became a rallying cry for Pentagon boosters like Mike Rogers and former ranking member of the Senate Armed Services Committee James Inhofe (R-OK) in their efforts to push spending even higher. Inhofe typically treated that document as gospel, at one point waving a copy of it at a congressional hearing on the Pentagon budget.
“An Alert and Knowledgeable Citizenry”
The power and influence of the arms industry are daunting obstacles to a change in national priorities. But there is historical precedent for a different approach. After all, given enough public pressure, Pentagon spending did drop in the wake of the Vietnam War, again at the end of the Cold War, and even during the deficit reduction debates of the early 2010s. It could happen again.
[Adapted from a longer article at TomDispatch. Reprinted with permission of the author.]
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Does Cost Cutting Undermine Economic Growth?
Keynesian economists claim that cutting costs in a business slowdown is counterproductive. As usual, the Keynesians have it backward.
Original Article: "Does Cost Cutting Undermine Economic Growth?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
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Elizabeth Warren’s Contradictory Demands for Easy Money and Strict Financial Regulation
As the financial ripples following the recent collapse of Silicon Valley Bank (SVB) continue to run through the financial sector, a predictable voice has weighed in on the affair, and, as always, giving bad advice. Elizabeth Warren, never one to skip a chance to publicly gnaw on a financial carcass, writes in the New York Times that the entire problem is lack of government regulation. Of course.
The US senator from Massachusetts has spent most of her Washington career calling for both easy money and a financial sector that will “serve the little guy” and be the paragon of fiscal responsibility at the same time. Her demands are mutually exclusive, but that doesn’t stop her from trying to be the voice of financial reason from the left. She writes in the Times:
No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules.
In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.
Since none of the changes to Dodd-Frank in 2018 would have prevented the collapse of SVB, Warren is attempting to apply a general concern (easing of some bank regulations) to a specific event. But by claiming that financial crises are the result of lax regulation, Warren overlooks the real reason that we had the 2008 meltdown and that the financial system is also in near crisis today: easy money from the Federal Reserve System.
To put it mildly, Elizabeth Warren lives in an economic netherworld in which easy money equals responsible monetary management. Banks give near-unlimited credit to people with zero or poor credit histories to buy homes or cars, the Fed stays in permanent money-pumping mode, lending is directed by the political system, and all the while banks are regulated by a green-eyeshade regime that makes Ebenezer Scrooge look like Wilkins Micawber. Perhaps a typical progressive Massachusetts voter might be able to logically tie these things together, but for people grounded in causal realism, her comments make no sense.
Peter Schiff noted in his famous speech at the Mises Institute in 2009 that a financial system should be regulated by profits and losses. However, that kind of system cannot have government bailouts, easy money triggered by central banks, or political favoritism, as government interference will overpower natural market regulation because the political system will declare winners and losers.
The system that Warren and others like Paul Krugman demand is something close to the regulated banking cartel that was in place from the New Deal to about 1980. Writes Krugman:
The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.
He adds: “Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.”
Far from being a time of “spectacular economic progress,” the late 1970s was a period of stagflation. Inflation rates hit double digits and unemployment was not far behind. During the so-called golden era of which Krugman writes, Regulation Q, which was created by the Federal Reserve Board in 1933, restricted interest rates on time deposits. This and other regulations greatly restricted bank lending to ensure that only the best customers received loans. This regime bumped along with no major bank failures or major problems until the late 1970s.
When the Carter administration sought to loosen lending rules and abolish Regulation Q, it wasn’t out of ideology but rather because American banks were facing a disintermediation crisis. For that matter, even President Ronald Reagan’s so-called signature financial deregulation measure, the 1982 Garn-St. Germain Act, was much more the initiative of Ferdinand St. Germain, the Democratic chairman of the House Banking Committee, than anything from the White House.
All of this contradicts the standard narrative we hear regularly from Krugman and progressives like Warren, but the history of financial and economic deregulation over the past forty-five years has had very little to do with ideology and more to do with trying to mitigate the growing problems caused by the regulatory regimes themselves, something I pointed out in a reevaluation of the Carter presidency.
With the appointment of Alan Greenspan as chairman of the Federal Reserve in 1987, the Fed launched an easy-money regime that has lasted nearly forty years, and (contra Warren) easy money means consequences. By pushing interest rates to near zero, the Fed has eliminated the attractiveness of interest-bearing securities as investments, driving banks and other financial institutions to other financial instruments. One of the reasons that so many investment banks have been holding mortgage-backed securities is because these instruments have had better returns than instruments paying interest.
This brings us to the great contradiction: progressives like Warren have demanded that the Fed suppress interest rates, all the while denouncing the hard fact that artificially low interest rates drive investors—including banks—to embrace riskier lending and outside investment.
Neither has Warren limited her contradictory demands to banking and finance. She loudly advocates for rent controls—all the while decrying housing shortages (which rent controls would make even worse)—and, for good measure, demands government-enforced price controls for the rest of the economy. She also is a leading voice for student loan forgiveness, conveniently overlooking the fact that such “forgiveness” measures only transfer responsibility from borrowers to other taxpayers and hardly fits her ideal of regulated lending.
Second, Silicon Valley and the financial industry tied to it have been cash cows for Democratic Party candidates for the past several election cycles. Even leaving out Samuel Bankman-Fried and the millions laundered mostly to Democrats through the now-collapsed FTX exchange, no regulator tied to a Democratic regime is going to do anything to shut off the political money spigot that has given the party a huge edge the past two elections.
The symbiotic relationship between Washington and the tech industry is simply not conducive to the kind of financial oversight Warren demands, something she almost surely understands. That the feds are bailing out everyone associated with SVB, even above the $250,000 limit for federal deposit insurance, probably is as much a political payoff as it is a measure to keep the markets from being further frightened.
Warren, the New York Times, and the assortment of progressive pundits are spinning this crisis—and nearly every other financial one—as a regulatory problem that can be solved by all-knowing financial clairvoyance. But none of them are calling for an end to the real problem: the easy-money regime that is rotting out the economy and especially the financial sector from the inside out.
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The Last Lie Government Will Ever Tell
Western governments seem to relish a clash with Russia, despite the specter of nuclear war. If so, it will be a conflict built on government lies.
Original Article: "The Last Lie Government Will Ever Tell"
This Audio Mises Wire is generously sponsored by Christopher Condon.
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Understanding the Difference between Praxeology and Psychology
It has been proposed that praxeology has potential not only as the foundation for growing the Austrian school of economics but other sciences as well. The utility of Austrian economics is immense, and similar achievements in other domains would be welcome.
However, it seems like a difficult task, as demonstrated by a recent effort to expand praxeology to psychology. The present article discusses the scope and power of praxeology and the conditions of psychological science.
In his book Human Action, Ludwig von Mises describes praxeology as the general theory of human action. At the most fundamental level, he distinguishes praxeology theory from history. History, in his account, is rather the collection and interpretation of data. Another way to make the distinction is to separate claims as either valid a priori (theory) or contingent on facts (history). The focus in our case is the use of theory—the use of praxeology—to study human action.
What is the distinguishing attribute that makes praxeology so useful? It is the recognition of the action axiom as the proper starting point of economical reasoning. The action axiom states that men act purposefully. This, I believe, is the core of Misesian praxeology.
There are other attributes of praxeology, such as methodological individualism and logical deduction. But without the action axiom, individualism and logic are merely that. They are not praxeology, the power of which is contingent and limited by the action axiom. Austrian economics has expanded our knowledge of economics widely within that framework, and I personally view Hans-Hermann Hoppe’s work on praxeology-based epistemology as immeasurably illuminating.
A psychology of human action that applies Misesian praxeology will have to show first, that it remains within the bounds of logical reasoning from the action axiom, and second, expands our knowledge about human psychology. A claim like “Human action is motivated by a struggle in the social-status hierarchy” is not logically deducible from the action axiom and thus not a praxeological claim. It does not expand our knowledge of human psychology either.
Now, it seems obvious that this claim is true to some degree, but we cannot say exactly how this struggle for social hierarchy influences our behavior. Any such specific theories or conclusions are dependent on facts derived from empirical observation above and beyond theoretical fundamentals.
In Human Action, Mises writes:
The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology. The theme of psychology is the internal events that result or can result in a definite action. The theme of praxeology is action as such.
Mises distinguished praxeology from psychology, and I believe that was judicious. Further, psychology might be a uniquely ill-suited domain for the kind of armchair reasoning that works so well in other lines of inquiry. Behaviorists have recommended parents not to soothe their crying babies because it will reinforce crying for attention. From behavioral theory alone, this might seem to be reasonable. But psychology is about everything, including evolved developmental dynamics that are not evident a priori. Now, one might say that in this case it must be obvious that you can’t leave your child crying like the behaviorists recommended. I agree, and I also think it points to the danger of proving too much with theory, and that theory is at its very best when limited to its core capability and function.
Very little is evident a priori in psychology, and it’s a domain suited for skepticism and scientific rigor. This is especially the case when we involve physiological events or evolutionary history. We should involve such aspects but as testable hypotheses. Even though it might seem self-evident that certain aspects of our nature influence mind and behavior, the specifics of this influence are not logically derivable like individual preferences are from the action axiom. Psychological science is broad and ranges from the humanities to the natural sciences. Although the choice of method will depend on the research question at hand, the necessity of empirical methods is rarely escaped. Just as the fundamental epistemology necessitates sound a priori theory, the advancement of applied models necessitates falsifiability of hypotheses and proper tests to demonstrate validity a posteriori. Merely the realization that scientific psychology tries to expose the developmental processes of such phenomena as self-deception and virtue signaling should prompt skepticism toward the fallibility of one’s preconceptions. If anything passes as a foundational axiom in psychology, it is that perception does not equate to a correct interpretation of what’s factual.
It’s not surprising that the robustness of praxeology begets eagerness to utilize the method to tackle important intellectual problems. It becomes even less surprising when one considers the confused pseudoquantifications in social sciences, as well as the politicization and general decadence of academic social science. Still, good theory should be the proper foundation of good empirical methods, not a substitute.
