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I consider you to be very reasonable and very well informed, and I think you represent majority opinion. But I find that distressing, because many arguments in favor of a slow transition from defense spending I think are not well founded. First of all, we need to think about (1) what is the proper amount of defense spending for the US, considering the potential threats. Only then, should we ask the questions you're asking which, if I understand them, are twofold: (2) is some higher level needed to prop up demand in either the labor, commodity, manufacturing, high tech, or any other markets? and (3) what are the costs of rapid transition and if they are high, how much should we pay for a slower transition. I think when you disaggregate these questions, the idea that we need to keep defense spending higher than say $200 billion (20% of $1 trillion -- and I would go even further down) simply doesn't have much logical support in macro economic theory. So as to the first question, here is one typical estimate of global defense spending, mostly taken from around 2004: World Wide Military Expenditures Country Military expenditures - dollar figure World $1100 billion Rest-of-World $500 billion
United States $623 billion China $65.0 billion Russia $50.0 billion France $45.0 billion United Kingdom $42.8 billion Japan $41.75 billion Germany $35.1 billion Italy $28.2 billion South Korea $21.1 billion India $19.0 billion Saudi Arabia $18.0 billion Australia $16.9 billion Turkey $12.2 billion Brazil $9.9 billion Spain $9.9 billion Canada $9.8 billion Israel $9.4 billion Netherlands $9.4 billion Taiwan $7.9 billion Mexico $6.1 billion Greece $5.9 billion Singapore $5.6 billion Sweden $5.5 billion North Korea $5.0 billion Iran $4.3 billion Pakistan $4.3 billion Belgium $4.0 billion Norway $4.0 billion
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The only countries that could conceivably be deemed short or medium term threats are China, Russia, North Korea and Iran. On the other hand, almost all the other expenditures, by the UK, France, Germany, Japan, etc., can for all intents and purposes be aggregated with ours as NATO and allied defense in case of a real threat to peace or stability.
Even the so-called threats of China and Russia have virtually no regional ambitions outside of a few renegade "provinces" that have little strategic value to the rest of the world. Diplomacy and nice words (which are cheap) could easily ensure that neither is a threat of any kind.
The only definition of "defense" that would justify anything close to our current budget would include our need to seize and control other countries' resources -- such as we are doing in Iraq. This is ironic considering the greatest accomplishment of international political culture of the last few decades was pursuading countries like China to compete over resources using markets; they are the ones signing up long term oil contracts all over the world while we fruitlessly try to seize them by force.
I find it hard to justify a defense budget over $200 billion, but frankly, with alliances it could easily be less than $100 billion.
If you agree with that premise, then the only questions are the second ones: is there some reason to use defense spending to generate demand; and is there some reason that rapid demobilization and transition to civilian economy are too expensive or unachievable in the short term?
As for the latter, before World War II, the answer had always been in this country that near instant demobilization was possible. Why this is suddenly not possible needs an explanation. (My father was in WWII, and the attitude among draftees as soon as Germany and Japan were defeated was, "we ain't stayin in Europe, and we ain't liftin' a rifle no more" and there were demobilization riots in Paris, which speeded up the process.) Near instant demobilization is possible given political will and the willingness to spend the kinds of resources we currently spend on the military. For example, rather than worrying about what jobs soldiers will have, we could just give them vouchers to go to college (like the GI Bill). For those depressed towns and rural areas that depended on military employment, we can create make work programs -- after all, that's pretty much what the military is anyway. It is only an irrational militarized political culture that makes us think it's OK to pay someone to sit in a barracks, but not OK to have them repair roads until the employment market adjusts.
As for industry, it took little time for industry to adjust to civilian purposes in the past. We have the capacity to create a targetted transition of contractors to civilian ends; it's militaristic political culture that makes us think you can't take a contractor making jet fighter "skins" and have them make bullet train "skins" within a few months. We have that capacity.
As for the demand question, there simply is no justification in economic theory that demand has to be maintained through military spending. You mention aluminum. If the military instantly ended its demand for aluminum, then the price for aluminum would fall and other industries would increase their use of it. If not, more aluminum would stay in the ground for future consumption. Either way, there is no reasoned explanation for why it has to be used on military aircraft as opposed to some other use.
With all these questions we always have to remember the guns/butter question: yes these things are expensive, but it's always even more expensive not to do them.
As for the other things you proposed, some I agree with and some not. I agree that speculation is rampant and generally not productive, but it is very difficult to separate good speculation from bad speculation. On Wall Street, speculation is often a means or modality of generating or spreading information, which makes the markets more efficient. Commodity speculation is sometimes, bad, but sometimes it's just a way of putting the cost of holding inventories onto speculators.
I'm often appalled at the degree of blind condemnation of derivates here on DU, but their use is quite opaque to most people. One of the first derivates I came across in my career was a company in the U.S. that needed to buy some mineral (I think it was titanium) from South Africa under a long term supply contract. It could have put money in the bank for a contract purchase price needed two years away -- but even then, it wouldn't know what the market price would be, or the Rand/dollar exchange rate -- so it made more sense to purchase both a Rand purchse option and a titanium put hedge. People don't seem to realize there are really useful and necessary business reasons for what looks like gambling -- options and derivatives. On the other hand, I don't see why the people buying and selling things like Rand options and titanium puts should not be required to be operating companies that need Rands and titanium. So to that extent I agree.
I certainly agree with the need to regulate, although I'm scared of the Bush administration's desire to fold the SEC into some super agency. Shades of Homeland Security! It seems that folding these agencies together magnifies their incompetence rather than generating synergy. I dealt with the SEC for several years under the Clinton administration, and they were highly specialized, highly competent at what they do, and with a very strong sense of professional espirit de corps (again what they actually do is something most "civilians" have no idea of). Folding them into anything else would be a disaster. I am planning to write something about this because in my opinion, it was the Bush era SEC that is more responsible for the current crisis than any other agency. The current crisis is caused by investors not knowing what is in the mortgage backed securities. But that's the SEC's job -- to make sure that the issuer clearly discloses what is in the security in clear language, and if you didn't do so in the past, you couldn't "go effective" with your SEC registration statement, which meant that your prospectus was invalid for use in selling, which meant you absolutely could not sell the security. Working with the Clinton era SEC was like working with a particularly harsh and demanding expository writing professor, who was constantly nitpicking about whether we had disclosed and explained things. If no one knows what's in these securities, it's mostly the SEC's fault.
Another form of re-regulation I would suggest (and this would be extremely unpopular with free market types) is a return to a division between commercial banks and thrifts (including savings and loans). There's a lot of finger pointing about various kinds of deregulation, including misguided finger pointing at the repeal of Glass-Steagal, but you have to go pretty far back for the deregulation that created the mortgage mess.
The real damage was done when Congress eliminated the thrift industry -- local, small scale banks, limited to operating in defined banking districts, that dealt almost exclusively in mortgages and consumer deposits, knew the neighborhoods, and could work out delinquencies with individual homeowner/borrower. Immediately after the repeal of the wall between the thrifts and the commercial banks we had Reagan's and Bush the First's savings and loan crisis, and the destruction of that industry is the underlying cause of the crisis today.
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