Charts of the Day: Global Military Spending Soars!

Brinkmanship geopolitics has prompted a surge in global military spending

The Bloomberg reports:

Global military spending has begun rising in real terms for the first time since the U.S. began its withdrawal of troops from wars in Iraq and Afghanistan, according to the Stockholm International Peace Research Institute.

Defense budgets rose 1 percent to $1.68 trillion in 2015, making up about 2.3 percent of the world’s gross domestic product, Sipri said in a report Tuesday. While the U.S. spent the most at $596 billion, that was down 2.4 percent compared with 2014, while China’s outlay increased 7.4 percent to $215 billion.

Concern about a possible advance by Russia into North Atlantic Treaty Organization territory following the Crimea invasion and hostilities in east Ukraine led to a surge in spending in Eastern Europe, as Chinese ambitions in the South China Sea spurred arms purchases among Southeast Asian states.

Defense budgets have been under pressure since the financial crash, with some of the world’s biggest spenders, including the U.K., France and Germany, scaling back amid austerity programs. Following the November terror attacks in Paris and the expansion of campaigns against Islamic State, those countries plan “small increases” in 2016, Sam Perlo-Freeman, the report’s author, said.

Russia, where slumping oil receipts have weighed on the economy, fell to fourth position in the global rankings, with Saudi Arabia taking third spot. The Mideast country, also hurt by the lower price of crude, would have cut spending too had it not been for the $5.3 billion cost of its military campaign in Yemen.

Russia’s defense budget is set for a slight fall in nominal terms and an 8 percent real decline, Perlo-Freeman said, while Saudi Arabia plans a “large cut,” though with a significant budgetary reserve.

From the economic perspective: how will these spending surges be funded, given that the world economy has been materially slowing down? Will these translate to even more taxes? Or bigger government deficits financed by expansionary debt? Or financed by even more inflationism (ZIRP, NIRP and QEs)? Will the next QE be focused on subsidizing the defense industry? Who will bear the burden or economic-financial-social costs from the du jour military keynesianism? Will it not be the currency holding and tax paying citizenry? And who benefits from the transfer of resources from the currency holders and the tax paying public? Are they not the military industrial complex and the warfare state? Or is war really a racket?

From the geopolitical perspective: will such arms race serve as an effective detente? Or will such fan the flames of belligerency that increases the risk of a full scale world at war?

Military Keynesianism: Keynes Prescribed War to Solve US Unemployment Problem in 1939

For vulgar Keynesians, the essence of economics is all about spending...even if it leads to widespread death and destruction.

In 1939, John Maynard Keynes prescribed war as solution to the Great Depression.

Writes the prolific Carmen Elena Dorobăț at the Mises Blog:

On the eve of World War II, Keynes delivered the following chilling address on the BBC, talking about the "great experiment" of curing unemployment through war expenditure:

Two years later to the day, in a lecture delivered shortly after his arrival in the U.S., Mises described how the great experiment really looked like:

We are witnesses to the most frightful and phenomenal occurrence in human history: the decay of Western civilization. London, one of the centers of this civilization... is almost completely destroyed. The buildings of the Parliament of Westminster are in ruins; the House of Commons holds its assemblies in the catacombs. [...] The theater of war is spreading, and the day seems not distant when peace will have lost its last refuge. It is a moral and material collapse without precedent.

Quote of the Day: Why Global Defense Spending Will Be a Drag on the Global Economy

Australian author, financial analyst and former banker, Satyajit Das at the Marketwatch debunks the (Keynesian) myth of economic prosperity from the war economy (bold mine)

First, there is pressure to increase spending on defense and national security in the U.S., Europe and the U.K. Some economists have argued that this spending could boost economic activity. However, any rise will be artificial and short-lived — money expended on defense could otherwise have been put to more productive use, generating greater wealth. Moreover, defense spending will place additional stress on already fragile public finances in many countries.

Second, dislocations may affect normal trading and financial activities.

For example, between 2010 and 2014, Western investors invested over $300 billion in Russian stocks and bonds. Western sanctions on Russia now make it difficult for a number of heavily indebted companies to refinance existing foreign currency borrowing or raise new capital internationally. Western sanctions on Russia are also costly for European economies, especially Germany. Around 350,000 German jobs directly depend on German-Russian trade, with roughly 8%-10% threatened by sanctions.

Third, rising security concerns and political risk reduce the attractiveness of global supply chains and deter foreign investment. An uncertain geopolitical and global security environment may reinforce the trend to close economies, with capital controls and trade restrictions. For instance, China is moving to domestically source previously imported critical defense and infrastructure components to ensure self-sufficiency.

Fourth, actual conflict increases the cost dramatically. There is the direct cost of dealing with the issue. There is also the indirect cost by way of disruptions, restrictions on normal commercial and personal life, and the loss of confidence which impinges on economic activity. Even minor conflicts can disrupt critical resource supplies, such as oil or crucial minerals, and trade routes. It can displace large numbers of people, resulting in large numbers of refugees.

Fifth, even if the conflict is internal to a country or relatively small in scale, the collateral effects are significant. The Syrian civil war illustrates the tremendous humanitarian cost and the economic expense of dealing with the crisis. Germany has estimated the cost of integrating refugees fleeing the conflict may cost up to 900 billion euro over the long-term. The need to reintroduce border patrols within the EU may reduce GDP by 0.8% or around 100 billion euro, in direct costs as well as the effects on trade and tourism.

Combating and controlling failed states, resulting from conflict, such as those in the Middle East, Africa and central Asia, requires commitment of vast resources, by way of manpower and treasure.

Sixth, asymmetric warfare, cyber-attacks or isolated terrorist attacks, are costly to economies. Increased security measures designed to prevent or minimize the effects of such attacks are expensive. The large and rising homeland security costs in the U.S. and elsewhere is a large and unproductive expense.

In addition to the well-known economic problems of low growth, deflation, demographics, slowing productivity, and environmental issues, reversal of the peace dividend now weighs heavily on the prospects for the global economy.

Geopolitical risk theater links: Russian Bomber Flights near US shores, NATO: Russian troops cross Ukraine Border, US $ Costs of ISIS war and more…

Dear email subscribers, the following posts won’t be included in your mailbox today:

-China’s Stock Market Massaging: Hong Kong to Scrap Yuan Conversion Limit

-G20 to institutionalize Bank Bail-Ins?

An update on geopolitical developments:

1 Brinkmanship geopolitics continues as Russia plans long-range bomber flights near U.S. shores CNN.com November 13, 2014

Russia plans to send long-range bombers to patrol the Gulf of Mexico and the Caribbean, the nation's defense minister said, amid escalating tensions with the West over Ukraine.

The patrols, which would also include the western Atlantic and eastern Pacific, would bring the flights close to the United States' territorial waters.

The move is in response to a growing international resentment against Russia, defense minister Sergei Shoigu said Wednesday.

Just ONE mis-encounter is all it takes for an escalation...nuclear exchange?

2 As the US and China firmed up some deals, Chinese hack U.S. weather systems, satellite network November 12, 2014. Will the deal end the mutual hacking?

3 Putin’s mighty escorts: Russian Warships Head to Australia Ahead of G20 Summit Newsweek.com November 12, 2014

4 NATO itching for a fight? : Ukraine crisis: Russian troops crossed border, Nato says BBC.com November 12, 2014

5 More financial and economic burden for US taxpayers for a war that has little or nothing to do with US interests. Nonetheless US politicians, and bureaucracy military industrial complex cheers on more the prospects of monetary largesse, again charged to the taxpayers: $300,000 an Hour: The Cost of Fighting ISIS The Atlantic November 12, 2014

An excerpt

It's been 96 days since the United States launched its first airstrikes against ISIS militants in Iraq; 50 since it expanded that campaign into Syria. And on each one of those days, the U.S. government has spent an average of roughly $8 million, or more than $300,000 an hour, on the operation against the Sunni Muslim extremist group, according to Pentagon officials.

That's a trivial sum compared with the more than $200 million the U.S. pours each day into its 13-year war in Afghanistan (the National Priorities Project, which advocates for budget transparency, estimates that the U.S. has now spent more than $1.5 trillion on its wars in Iraq and Afghanistan, and against ISIS, since 2001). But the bean-counting matters, because the place values and line items offer clues to understanding the military offensive President Obama has committed the country to—and now asked Congress to bless.

5 Can’t beat the foe? Use the ISIS as an excuse to topple Syria’s Assad: Obama now admits Assad MUST go before ISIS can be defeated: President plans to focus on Syria and ousting brutal dictator as he tries to beat back terror group November 13, 2014

6 Will people learn from the history of wars? :Graph of world wars by number of dead and duration of conflict shows how war is very much not behind us Independent.co.uk November 11, 2014

I don’t think so.

7 US has spent so much for warfare, yet a recent encounter with Russian aircraft may have exposed some of  their vulnerabilities: What frightened the USS Donald Cook so much in the Black Sea? Voltairenet.org November 8, 2014

The US destroyer is equipped with the most recent Aegis Combat System. It is an integrated naval weapons systems which can link together the missile defense systems of all vessels embedded within the same network, so as to ensure the detection, tracking and destruction of hundreds of targets at the same time. In addition, the USS Donald Cook is equipped with 4 large radars, whose power is comparable to that of several stations. For protection, it carries more than fifty anti-aircraft missiles of various types.

Meanwhile, the Russian Su-24 that buzzed the USS Donald Cook carried neither bombs nor missiles but only a basket mounted under the fuselage, which, according to the Russian newspaper Rossiyskaya Gazeta , contained a Russian electronic warfare device called Khibiny.

As the Russian jet approached the US vessel, the electronic device disabled all radars, control circuits, systems, information transmission, etc. on board the US destroyer. In other words, the all-powerful Aegis system, now hooked up - or about to be - with the defense systems installed on NATO’s most modern ships was shut down, as turning off the TV set with the remote control.

The Russian Su-24 then simulated a missile attack against the USS Donald Cook, which was left literally deaf and blind. As if carrying out a training exercise, the Russian aircraft - unarmed - repeated the same maneuver 12 times before flying away

Hmmm

Charts of the Day: World Military Spending and Arms Trade

Two related charts of the day

First world defense spending

The Economist speculates that if the current rate of growth persists, China will surpass the US in terms of military budget. 

AMERICA still spends over four times as much on defence as China, the world’s second-biggest military spender. But it has been clear for some time that on current trends China’s defence spending will overtake America’s sooner than most people think. What is less clear is when that date will be reached. It all depends on the underlying assumptions. The 2013 edition of the Military Balance published by the London-based International Institute for Strategic Studies (IISS) shows convergence could come as soon as 2023. That is based on extrapolating the rate of Chinese military spending since 2001—a 15.6% annual growth rate—and assuming that the cuts in the America's defence budget required under sequestration are not modified. The latter is more likely than the former. The latest Chinese defence budget is based on spending increasing by a more modest 10.7% annually. That would mean that China overtakes America in 2032.

However, if China’s headlong economic growth stalls or if more money is needed to serve the health and social needs of rapidly-ageing population, China might slow spending on its military by something like half its current projection. If that happens, the crossover point could be delayed by up to a decade. It is also possible (though at present America’s fiscal travails suggest otherwise), that as China rises, America will feel forced to start spending more if the security guarantees it currently makes to allies such as Japan, South Korea and Taiwan are to retain their credibility into the third decade of the century. Already, China spends more on defence than all of those three together. It is all very well for America to talk about a strategic rebalancing towards Asia, but if the money is not there to buy the ships, the aircraft and all the expensive systems that go with them, it will eventually sound hollow.

The Economist is right to suggest that this trend may not continue as this will likely depend on the state of the China's economy. Of course this will really depend on priorities of the Chinese government.

But what they sorely missed is of the real nature of “strategic rebalancing”, which is not supposed to be about military buildup but about trade.

They forget about Bastiat’s wisdom where “if goods don’t cross borders, armies will”

Second chart global arms trade.

The Reuters notes that China has taken the fifth spot in arms exports with Pakistan being the main recipient.

An arms race serves as dangerous signal for world peace. Such also functions as a thermometer of the desperate state of welfare-warfare governments, who by resorting to inflationism, attempts to divert domestic political economic problems towards geopolitics. And they do this primarily through nationalist overtones.

The sad part is that instead of the remedy of channeling resources into productive uses, an arms race means more economic hardship for society, aside from greater risk of war.

As the illustrious American author Ernest Hemingway rightly admonished,

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists

Unfortunately people hardly ever learn.

War on Terror: Inflation of Security Bureaucracy and Spending

Either terrorism has brought upon government paranoia or terrorism has been a product of foreign policies to justify the expansion security institutions, none the less war on terror has brought one sure thing: inflation in security expenditures.

Writes Tom Engelhardt at the Asia Times, (hat tip Sovereign Man)

Are you, for instance, worried about the safety of America's "secrets"? Then you should breathe a sigh of relief and consider this headline from a recent article on the inside pages of my hometown paper: "Cost to Protect US Secrets Doubles to Over $11 Billion."

A government outfit few of us knew existed, the Information Security Oversight Office or ISOO, just released its "Report on Cost Estimates for Security Classification Activities for Fiscal Year 2011" (no price tag given, however, on producing the report or maintaining ISOO). Unclassified portions, written in classic bureaucratese, offer this precise figure for protecting our secrets, vetting our secrets' protectors (no leakers please), and ensuring the safety of the whole shebang: US$11.37 billion in 2011.

That's up (and get used to the word "up") by 12% from 2010, and double the 2002 figure of $5.8 billion. For those willing to step back into what once seemed like a highly classified past but was clearly an age of innocence, it's more than quadruple the 1995 figure of $2.7 billion.

And let me emphasize that we're only talking about the unclassified part of what it costs for secrets protection in the National Security Complex. The bills from six agencies, monsters in the intelligence world - the Central Intelligence Agency, the Defense Intelligence Agency, the National Security Agency, the National Reconnaissance Office, the National Geospatial-Intelligence Agency, and the Office of the Director of National Intelligence - are classified. The New York Times estimates that the real cost lies in the range of $13 billion, but who knows?

To put things in perspective, the transmission letter from Director John P Fitzpatrick that came with the report makes it utterly clear why your taxpayer dollars, all $13 billion of them, are being spent this way: "Sustaining and increasing investment in classification and security measures is both necessary to maintaining the classification system and fundamental to the principles of transparency, participation, and collaboration." It's all to ensure transparency. George Orwell take that! Pow!

Now let's try the line again, this time with more gusto: That makes no sense!

On the other hand, maybe it helps to think of this as the Complex's version of inflation. Security protection, it turns out, only goes in one direction. And no wonder, since every year there's so much more precious material written by people in an expanding Complex to protect from the prying eyes of spies, terrorists, and, well, you.
The official figure for documents classified by the US government last year is - hold your hats on this one - 92,064,862. And as WikiLeaks managed to release hundreds of thousands of them online a couple of years ago, that's meant a bonanza of even more money for yet more rigorous protection.

You have to feel at least some dollop of pity for protection bureaucrats like Fitzgerald. While back in 1995 the US government classified a mere 5,685,462 documents - in those days, we were practically a secret-less nation - today, of those 92 million sequestered documents, 26,058,678 were given a "top secret" classification. There are today almost five times as many "top secret" documents as total classified documents back then.
Here's another kind of inflation (disguised as deflation): in 1996, the government declassified 196 million pages of documents. In 2011, that figure was 26.7 million. In other words, these days what becomes secret remains ever more inflatedly secret. That's what qualifies as "transparency, participation, and collaboration" inside the Complex and in an administration that came into office proclaiming "sunshine" policies. (All of the above info thanks to another of those ISOO reports.) And keep in mind that the National Security Complex is proud of such figures!

So, today, the "people's" government (your government) produces 92 million documents that no one except the nearly one million people with some kind of security clearance, including hundreds of thousands of private contractors, have access to. Don't think of this as "overclassification," which is a problem. Think of it as a way of life, and one that has ever less to do with you.

Now, honestly, don't you feel that urge welling up? Go ahead. Don't hold back: That makes no sense!

How about another form of security-protection inflation: polygraph tests within the Complex. A recent McClatchy investigation of the National Reconnaissance Office (NRO), which oversees US spy satellites, found that lie-detector tests of employees and others had "spiked" in the last decade and had also grown far more intrusive, "pushing ethical and possibly legal limits." In a program designed to catch spies and terrorists, the NRO's polygraphers were, in fact, being given cash bonuses for "personal confessions" of "intimate details of the private lives of thousands of job applicants and employees ... including drug use ... suicide attempts, depression, and sexual deviancy." The agency, which has 3,000 employees, conducted 8,000 polygraph tests last year.

McClatchy adds: "In 2002, the National Academies, the nonprofit institute that includes the National Academy of Sciences, concluded that the federal government shouldn't use polygraph screening because it was too unreliable. Yet since then, in the Defense Department alone, the number of national-security polygraph tests has increased fivefold, to almost 46,000 annually."

Now, think about those 46,000 lie-detector tests and can't you just sense it creeping up on you? Go ahead. Don't be shy! That makes no sense!

Or talking about security inflation, what about the "explosion of cell phone surveillance" recently reported by the New York Times - a staggering 1.3 million demands in 2011 "for subscriber information ... from law enforcement agencies seeking text messages, caller locations and other information in the course of investigations"?

From the Complex to local police departments, such requests are increasing by 12%-16% annually. One of the companies getting the requests, AT&T, says that the numbers have tripled since 2007. And lest you think that 1.3 million is a mind-blowingly definitive figure, the Times adds that it's only partial, and that the real one is "much higher." In addition, some of those 1.3 million demands, sometimes not accompanied by court orders, are for multiple (or even masses of) customers, and so could be several times higher in terms of individuals surveilled. In other words, while those in the National Security Complex - and following their example, state and local law enforcement - are working hard to make themselves ever more opaque to us, we are meant to be ever more "transparent" to them.
These are only examples of a larger trend. Everywhere you see evidence of such numbers inflation in the Complex. And there's another trend involved as well. Let's call it by its name: paranoia. In the years since the 9/11 attacks, the Complex has made itself, if nothing else, utterly secure, and paranoia has been its closest companion. Thanks to its embrace of a paranoid worldview, it's no longer the sort of place that experiences job cuts, nor is lack of infrastructure investment an issue, nor budget slashing a reality, nor prosecution for illegal acts a possibility.

A superstructure of "security" has been endlessly expanded based largely on the fear that terrorists will do you harm. As it happens, you're no less in danger from avalanches (34 dead in the US since November) or tunneling at the beach (12 dead between 1990 and 2006), not to speak of real perils like job loss, foreclosure, having your college debts follow you to the grave, and so many other things. But it matters little. The promise of safety from terror has worked. It's been a money-maker, a stimulus-program creator, a job generator - for the Complex.

The above only reminds me of the great H.L. Mencken whose prescient warnings seem relevant today…

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

Huge Military Industrial Complex Equals Big Government

The US have been pampering her military institutions...

From Bloomberg,

The two-star general’s new home came with granite countertops, hardwood floors, stainless appliances and high expectations. It was a gift to the U.S. Army from the taxpayers of Huntsville, Alabama.

Major General James Pillsbury and wife Becky moved into the house during November 2003. The 4,200-square-foot (390-square- meter) brick villa was built using city paving funds. It was the first of 10 costing a total of $3.8 million that the city donated to the Army to enhance nearby Redstone Arsenal as the Pentagon prepared to close bases around the country.

“It’s what we affectionately call ‘pass-through pork,’” says James Link, a retired Army three-star general who was commander of the arsenal in the 1990s.

Luxury quarters for generals were just part of a leave- nothing-to-chance strategy led by Joe Ritch, a 61-year-old lawyer. Armed with campaign contributions and lobbying funds, his network of politicians, boosters and defense executives helped Huntsville expand its military presence, win billions of dollars in Pentagon contracts and add thousands of jobs. Per capita defense spending climbed to 13 times the national rate, creating an oasis of prosperity in a lackluster U.S. economy.

Huntsville helps show why it’s difficult to slash defense spending. Congress and the president have told the Pentagon to find $450 billion in cuts over the next 10 years. The Defense Department’s past efforts have fallen short. In 2005, the military promised to save $36 billion by consolidating bases and missed its goal by almost two-thirds, according to a January 2009 Government Accountability Office report….

Fifty years ago, President Dwight D. Eisenhower warned against “the acquisition of unwarranted influence” by “the military-industrial complex” of defense contractors, lawmakers and Pentagon officials. The local advocacy groups represent a new spoke on the wheel that keeps military spending rolling.

US military spending have been the largest in the world and is even larger than the combined spending of rest of the world. (chart from the Economist)

True, there are some areas or sectors that have benefit from such activities. But it is important to note that military spending has not only been non-productive but crowds out resources meant for consumers.

As Professor Thomas Woods aptly writes,

Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends. Military spending constitutes the classic example of parasitic growth.

In other words, politically privileged sectors (or cronies) are again beneficiaries of politically allocated expenditures—all for the sake of the preservation and expansion of power over society—which incidentally resonates with the title of the Bloomberg article quoted above “Big Gov’t Embraced to Keep U.S. Generals Happy”

As the great Murray Rothbard wrote, (bold emphasis mine)

What the State fears above all, of course, is any fundamental threat to its own power and its own existence. The death of a State can come about in two major ways: (a) through conquest by another State, or (b) through revolutionary overthrow by its own subjects, in short, by war or revolution. War and revolution, as the two basic threats, invariably arouse in the State rulers their maximum efforts and maximum propaganda among the people. As stated above, any way must always be used to mobilize the people to come to the State's defense in the belief that they are defending themselves. The fallacy of the idea becomes evident when conscription is wielded against those who refuse to "defend" themselves and are, therefore, forced into joining the State's military band: needless to add, no "defense" is permitted them against this act of "their own" State.

In war, State power is pushed to its ultimate, and, under the slogans of "defense" and "emergency," it can impose a tyranny upon the public such as might be openly resisted in time of peace. War thus provides many benefits to a State, and indeed every modern war has brought to the warring peoples a permanent legacy of increased State burdens upon society.

So some pointers from the above…

Wars have been provoked or incited (directly or discreetly) by politicians to expand political control over society and or to gratify the whims or ideologies of politicians and or to protect the interest of certain powerful groups (Read Anthony Gregory’s excellent review of historian Ralph Raico’s book here)

Wars do not benefit society, but politicians and their private sector allies.

The threat of wars signifies as propaganda bogeymen meant to justify the existence and the expenditures of the military industrial complex.

Military expenditures have been a drain to the economy as resources are diverted to non-productive or non-market (consumer) uses.

Military expenditures partly account for as implicit buying of the military’s support to sustain politicians’ control over society and to eliminate the risk of a military orchestrated upheaval.

And like the welfare state the warfare state essentially represents crony capitalism or State Corporatism.

Bottom line: The warfare state is largely incompatible with economic, political and civil freedom.

The Twilight Age of the Aircraft Carriers

Even the course of conventional-traditional warfare will be adapting to the ever changing realities. Vastly technology-enhanced anti-ship ballistic missile will render aircraft carriers obsolete

Writes Eric Margolis,

Batteries of DF-21D’s based safely inland may keep the US Navy far off China’s coasts, isolate Taiwan, and threaten US bases in Japan, Okinawa and Guam. In fact, the mere existence of the DF-21D’s and their deployment in sizeable numbers may be enough to keep US carriers at least 2,000 km from China’s coasts, thus beyond the useful range of the carrier’s strike aircraft…

But anti-ship missiles are lethal to carriers. Layered anti-ship missile defense can stop small number of attacking missiles. But if enough high-speed missiles are fired, and from different directions, at least one or two will permeate carrier and escort defenses.

Just one missile, filled with explosives and fuel, hitting a carrier will cause massive damage and fires that will put the great capitol ship out of action. I have joined numerous naval warfare simulations: in almost every case, some anti-ship missiles fired by enemy aircraft and subs inevitably leaked through layered defenses and hit the carriers. Each carrier and its escorts costs over $25 billion (not including its aircraft). They simply cannot be risked against relatively inexpensive Chinese missiles.

Officially, the US Navy denies claims its beloved carriers are increasingly vulnerable. The Navy’s brass is dominated by former naval aviators, just as the pre-war US Navy was run by battleship admirals. There is huge institutional bias against abandoning big attack carriers, just as there is bitter Navy and Air Force opposition to abandoning manned fighter aircraft and relying on drones.

Which makes all the more amazing an article in the May 2011 issue of the US Naval Institute Proceedings (for which I’ve written) by two Pentagon strategists urging an immediate end to building aircraft carriers, “Proceedings” is the voice of the US naval establishment.

For this heresy to be printed is a bombshell. But a needed one. It’s time the US Navy face facts and plan for the obsolescence of its attack carriers. There will still be a role for smaller carriers carrying drones and helicopters, but in wartime, the days of the mighty flattop that won the epic WWII victories at Midway and the Marianas are over.

Aircraft carriers signify as artifacts of the industrial age warfare. The information age (Third Wave) will radically change even the methods of engagement of military conflicts.

Spratlys Dispute: Why AFP’s Plan to Build Up Military Signifies War on the Filipinos

Governments always look for an excuse to expand power. And General Douglas MacArthur was right, government always try to keep “us in a continuous stampede of patriotic fervor -with the cry of grave national emergency” by conjuring “terrible evil at home, or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it”

The geopolitical tensions over Spratlys Island have prompted the Philippine government to shop for arms, according to yesterday’s news.

From the Philippine Daily Inquirer,

Amid increasing concern over renewed tensions in the South China Sea, the Philippine Embassy here is shopping for excess defense equipment from the United States under Washington’s Foreign Military Sales (FMS) program.

Jose L. Cuisia Jr., the Philippine ambassador to the US, said he has asked the Department of National Defense and Armed Forces back home to provide him with a wish list of military equipment they will need to shore up the country’s defense capability.

He said he expected the defense department to “prioritize” its modernization goals, but was careful not to explicitly link the purchase of US excess defense articles to the Philippine military’s job of securing the territorial sovereignty of the country in the face of China’s alleged intrusions into the areas of the disputed Spratlys group claimed by the Philippines

The idea that the Philippines can resolve the current dispute with China over an ‘arms race’ or by brinkmanship is not only unfeasible and anachronistic but outright ridiculous.

Unfeasible because in almost every aspect, the Armed Forces of the Philippines cannot measure up to China’s People Liberation Army in terms of numbers and in technology.

In addition, China is by far wealthier (in terms of GDP per capital) than the Philippines and thus can afford to spend more for her military services. [Google Public Domain]

Chart from Tradingeconomics.com

Considering that China has unveiled its newest stealth warplane and aircraft carrier, it would seem that no amount of nonsensical ‘arms race’ will prevent a ‘determined’ China from encroaching on Spratlys.

But this isn’t to say that China will do so.

I say anachronism too because military engagement has not been the du jour foreign policy for China.

Had she assimilated an imperialist path, Taiwan, which China claims as part of her territorial sovereignty, would have been invaded. And so with the Japanese held Senkaku Islands, which China has claims too along with the Spratlys. A similar political friction arose in Senkaku Island in 2010 following a collision between Japan’s Patrol boats and a Chinese trawler.

Yet China’s geopolitical strategy has been to expand trade and investments around the world.

Derek Scissors of Forbes magazine writes,

China's hefty investments in sub-Saharan Africa have received deserved attention, but its investment in Latin America has been overblown by some. One reason is a common event in bilateral commercial transactions--grand announcements that never come to fruition. In mid-April Venezuela proclaimed a $20 billion oil-for-loans deal with China, but Caracas' track record in this area encourages skepticism. China has little investment in the Arab world, which is perhaps surprising in light of its focus on energy, but it has sizable engineering and construction contracts there. Australia, at $30 billion, is the single biggest draw for Chinese investment. The U.S. is second at $21 billion, Iran third at $11 billion.

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

So the more appropriate action to resolve any territorial dispute should be to actively increase trade with China.

As Frederic Bastiat once said,

When goods don't cross borders, armies will

Greater trade will likely ensure an amicable or diplomatic settlement because both China and the Philippines would like to see a continuity of this mutually beneficial relationship.

And this goes back to the reason why the call for more military spending represents a war against the citizenry.

As the great Ludwig von Mises wrote,

The adequate method of providing the funds the government needs for war is, of course, taxation. Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can do the job for a limited time. But it is the most expensive method of financing a war; it is socially disruptive and should be avoided.

More military spending means higher taxes and risks of higher inflation. It also means redistribution of wealth from the ‘productive’ private sector to government appointed intermediaries and suppliers or non-productive capital consuming activities.

Doing so leads to lower economic growth, higher unemployment, lower investments, higher risk premium and a lower standard of living. Also this amplifies the risks of corruption.

In addition a military build-up could also extrapolate to using newly acquired weapons against the citizenry to suppress political dissent or for repression or to expand in the engagement of military conflict with local subversives.

So instead of seeking diplomatic solutions, the likely path is to have more turmoil which heightens political instability which should further weaken the economy. It's another lesson we never seem to learn.

$1.1 Trillion Spent On Arms Is $1.1 Trillion of Wasted Resources

$1.1 trillion was spent by nations for defense.

According to the Economist, (bold highlights mine)

THE ten biggest defence budgets for 2010 add up to a total of more than $1.1 trillion, according to the latest Military Balance report from the International Institute for Strategic Studies (IISS), a think-tank. The defence budget of America alone, at $693 billion, accounts for more than 60% of the total. But when defence spending is compared to the overall size of each country's economy, Saudi Arabia tops the list. It spends over 10% of GDP on defence, more than double the proportion spent by America. China ranks second in the world's biggest defence budgets (spending some $76 billion) and also boasts the largest armed forces. Only America, India, Russia and North Korea (not shown) have more than 1m military personnel. Defence budgets have grown since 2005, but the balance of military power may be shifting. Western countries, many of which are engaged in Afghanistan, now face budget constrains and cuts, whilst emerging economies, such as Brazil and China, have increased military spending in line with economic growth.

That’s $1.1 trillion of resources wasted on whimsical government actions designed to promote self interests of the politicians.

Then US President Dwight Eisenhower’s “Chance for Peace” Speech poignantly reverberates on this dilemma. (pointer Robert Higgs) [all bold highlights mine]

The worst to be feared and the best to be expected can be simply stated.

The worst is atomic war.

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Bottom line: Politicians use the threat of war to expand control over us. Yet unknown to many, most of these military expenditures represents nothing more than a waste of valuable resources.

How Militarization Diminishes Economic Competitiveness

Some industries in the US have become significantly less competitive, NOT because of globalization or China or the Chinese yuan or the immanent bubble policies but because of the enormous influence of her gargantuan militarized economy.

From Armscontrol.org

From Google Public data

A militarized economy has not only distorted pricing and resource distribution but also negatively affected the political economic structure of industries that depended on it.

A good example is the machine tool industries.

The following is an excerpt of the enlightening and excellent discourse by Thomas E. Woods Jr. on this. (published at the American Conservative) [bold highlights mine]

Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends.

Military spending constitutes the classic example of parasitic growth. Melman believed that military spending, up to a point, could be not only legitimate but also economically valuable. But astronomical military budgets, surpassing the combined military spending of the rest of the world, and exceeding many times over the amount of destructive power needed to annihilate every enemy city, were clearly parasitic...

The American machine-tool industry can tell a sorry tale of its own. Once highly competitive and committed to cost-containment and innovation, the machine-tool industry suffered a sustained decline in the decades following World War II. During the wartime period, from 1939 to 1947, machine-tool prices increased by only 39 percent at a time when the average hourly earnings of American industrial workers rose by 95 percent. Since machine tools increase an economy’s productivity, making it possible to produce a greater quantity of output with a smaller input, the industry’s conscientious cost-cutting had a disproportionately positive effect on the American industrial system as a whole.

But between 1971 and 1978, machine-tool prices rose 85 percent while U.S. industrial workers’ average hourly earnings increased only 72 percent. The corresponding figures in Japan were 51 percent and 177 percent, respectively.

These problems can be accounted for in part by the American machine-tool industry’s relationship with the Defense Department. Once the Pentagon became the American machine-tool industry’s largest customer, the industry felt far less pressure to hold prices down than it had in the past. That decreased pressure undoubtedly contributed to the negligible investment by the machine-tool industry in modern production techniques of a kind used routinely in Europe. No longer under traditional market pressure to innovate and lower costs, the machine-tool industry saw a considerable drop in productivity.

In the short run, the American machine-tool industry’s woes affected U.S. productivity at large. Firms were now much more likely to maintain their existing stock of machines rather than to purchase additional equipment or upgrade what they already possessed. By 1968, nearly two-thirds of all metalworking machinery in American factories was at least ten years old. The aging stock of production equipment contributed to a decline in manufacturing productivity growth after 1965.

Why Americans couldn’t have switched to lower-cost imported machine tools as soon as prices began to rise involves the reluctance of machinery buyers to change their suppliers. Not only do they prefer to deal with established firms with good reputations, but they also want to avoid unnecessary and costly downtime, so they patronize suppliers who can perform repairs and supply spare parts on short notice. In the long run, American firms did indeed begin to shift into imported machine tools, and by 1967 the United States for the first time imported more machine tools than it exported.

The military-induced distortion of the American machine-tool industry, and the industry’s correspondingly decreased global competitiveness, is not confined to the perverse incentives created by the Pentagon’s cost-maximization approach to procurement. Another factor is at work as well: the more an industry caters to the Pentagon, the less it makes production decisions with the civilian economy in mind. Thus in the late 1950s the Air Force teamed up with the machine-tool industry to produce numerical-control machine-tool technology, a technique for the programmable automation of machine tools that yields fast, efficient, and accurate results. The resulting technology was so costly that private metalworking firms could not even consider using it. The machine-tool firms involved in this research thereby placed themselves in a situation in which their only real customer was the aerospace industry.

Some 20 years later, only 2 percent of all American machine tools belonged to the numerical-control line. It was Western European and Japanese firms, which operated without these incentives, that finally managed to produce numerical-control machine tools at affordable prices for smaller businesses.

The distortion of business decisions and strategy that contributed to the decreasing competitiveness of the machine-tool industry is at work in thousands of American firms in rough proportion to their reliance on Pentagon contracts.

Read the rest here.

There are other unintended consequences from the military economic-corporatist framework, such as corruption.

This seems very relevant today in Philippine politics, where an ongoing expose over a supposed payola has triggered a former top military officer to suicide.

According to Carlos Conde of the Asia Times Online [emphasis added]

To be sure, corruption in the military is nothing new. In fact, the slush fund had existed even before the time of Reyes, as Rabusa himself admitted. A questionable practice in the armed forces called "conversion" - funds or budgets allotted for a specific purpose being used on something else, thus making it vulnerable to manipulation and kickbacks - has for years practically been the norm.

The practice allows commanding officers to bypass the military's slow-moving bureaucracy and deal directly with the suppliers of urgently needed equipment and weaponry, according to a military official familiar with the practice. Military officials, in turn, often ask for the cash equivalent of the equipment and then allow the supplier to process the papers and deal with the bureaucracy. The supplier often pads the cost of the equipment and gets approval from the comptroller, who will only sign if a kickback is assured, according to the official.

At the end of the day, a nation’s lack of competitiveness has almost always been a result of the many forms or faces of government interventionism, and this includes the military aspects—whether it is the US, the Philippines or elsewhere.

Yet the public or the mainstream only goes for oversimplified and superficial explanations rather than examining the roots of the issues.

With public ignorance of the structural issues, hence the vicious cycle.