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Arms production leads to unemployment, higher interest, low productivity

Mel Watkins — August 1984

If it were true that more arms spending created more jobs, then it would follow that any move towards disarmament, and thus towards spending less on arms, would destroy jobs. That would mean that advocating disarmament today would risk creating more unemployment, at a time when unemployment in Canada is already intolerably high. This would create a real conundrum for the peace movement, which needs to involve more ordinary working people who either have jobs but are worried about losing them or don’t have jobs but are seeking employment.

But if it were true that arms spending is really “spending on waste” when there are many unfilled human needs, and that it is sapping the economy and eroding its productivity, then disarmament will create jobs and will be of benefit to the economy in the shortrun as well as the long-run. In that event, the peace movement is in the happy position of being able to assert that decreased armament expenditures will both increase everyone’s chance of survival and everyone’s chance of having a job.

Which of these scenarios is the correct one? It so happens that the weight of the evidence shows that arms spending destroys jobs. Therefore, conversely, disarmament would create jobs.

But a skeptic says: “How can that be? Look at the present situation here in North America. The economic recovery is proceeding in the United States, which is benefitting from a strong dollar, low inflation and falling unemployment.” (Our skeptic is clever enough to say nothing about interest rates – on which more below). Our devil’s advocate continues: “Though even the business press doesn’t like to admit it, is it not true that the military spending of the Reagan Administration is, more than anything else, powering the present American economic recovery? In contrast, is it not also a fact that the Canadian economic recovery is much weaker than the American, and might that not be because we are not increasing our spending on armaments in the same madcap and profligate way as the Americans? “

Perhaps here in Canada, then, we should be following the American example and spending more (much more) on arms, the better to speed our way to prosperity. Indeed we are, in our modest Canadian way, currently increasing our spending on arms at the same time as we are imposing severe restraints on other public spending, while influential voices (such as the 150 Chief Executive Officers who make up the Business Council on National Issues) precisely advocate a quantum leap in arms spending, expecting I,m sure,; that this will help the economy.

It’s true that the American economy is booming, for the moment. Let us concede that this i,s largely because of arms spending. But we must recognize that there are no less that three reasons why that prosperity is illusory, and to such a degree that it shows, all factors considered, that arms spending is hurtful rather than helpful to the economy.

In the first place, arms spending creates jobs only in the sense that any kind of spending – like digging postholes and filling them in – necessarily creates jobs. The relevant question is: How many jobs are created by spending, for example, a billion dollars on arms, compared to the number of jobs that would be created by spending that billion dollars in some other way? It is possible to look at statistics and to give a fairly precise answer to that question. That answer is that almost any way that goverments choose to spend (or, for that matter, consumers choose to spend) creates more jobs than does arms spending.

Arms spending, in fact, is about the most inefficient way imaginable to create jobs. This is true in the United States where the bias. of the arms industry towards disproportionately employing wellpaidscientists and engineers means fewer jobs per billion dollars, while unemployment is concentrated among the not-so-well-paid. It is further true in Canada because arms spending is what economists call “capital-intensive” — meaning that it uses a lot of machines for every person it employs – and Canada tends to import many of its machines rather than employing Canadians to produce them.

Nor do goverments have to spend on arms because there is nothing else for them to spend on. Quite the contrary. The Reagan administration is actuaJIy cutting back on a variety of social services, such as the school lunch program. (Ketchup was recently reclassified as a vegetable, and real vegetables eliminated in the name of economy.)

Of course, I am not naive, and I am not denying the reality of a military-industrial complex which tells us that more military spending will save us and more of anyother-kind of public spending will subvert free enterprise, and which has the power to give effect to its absurd views. But “it is important to understand that the issue here is not some law of economics, but power and its perversions:

The second way in which arms spending damages the economy and destroys jobs is via its effects on productivity. Read Seymour Melman’s excellent new book, Profits Without Production. Imagine, says Melman, that every dollar spent on arms was instead spent on productive capital in the civilian goods sector (that is, that we stop what he calls “the looting of the means of production”), productivity would surely rise. Or imagine, again according to Melman, that we replace the present inefficient cost-maximizing behaviour of firms (who produce arms under cost-plus contracts) with the cost-minimizing behaviour that is presumed to characterize efficient firms concerned with enhancing productivity.

Read also Ruth Leger Sivard’s annual publication World Military and Social Expenditures, where she argues cogently that the more a country has spent on arms since World War II the less productive its economy has been. Read Mary Kaldor’s book The Baroque Arsenal on the way in which esoteric and gargantuan arms systems (such as the MX missile) are dysfunctional in both military and economic terms. Or catch a re-run of The Deer Hunter and contrast the archaic Pennsylvania steel mills at the beginning of that movie with the sophisticated technology of the American war machine in Vietnam. And recaJl who lost that war and how the American economy has continued to wane.

Business apologists for the military-industrial complex like to tell us about alleged spinoffs into the civilian goods sector from the military. Always much exaggerated, these are becoming fewer and farther between in the era of baroque weaponry. Instead, there appears to be a radical disjuncture in the American economy. On the one hand, we are asked to contemplate technologicaJly mind-boggling laser wars in space. On the qther hand, there is the mundane problem that the United States has trouble producing a car competitive with Japan, specialty steel competitive with Canada, etc. It is possible, apparently, to be too clever by half.

In the ’80s, we have seen a third and potent mechanism by which arms spending imposes its costs on the economy. Big increases in arms spending, of the Reagan variety, have meant escalating government deficits. The borrowing which is necessary to fund these deficits competes with the private sector’s demand for credit, and pushes up interest rates. This then inhibits private spending in general and productive investment in particular. This threatens to choke off the American recovery itself at some future date – though probably too late to prevent Reagan’s re-election. The unreal and ridiculous interest rates – two to three times higher than they ought to be – are already wreaking havoc in the Canadian economy. Here, if any reader is still in doubt, is the dear and present evidence of how arms spending hurts us economically.

Our skeptic, though clearly pushed to the wall, might try one last ploy, though it t90 will turn out to be of no avail. “Mustn’t the American arms expenditures,” we’re asked, “help Canada because Canadian firms are allowed to bid on Pentagon contracts?” Canadian companies are, indeed, so ‘favoured under the tenns of the 1958 Defence Production Sharing Agreement (DPSA). However, that same agreement also has a 1963 rider that requires Canada to maintain a rough balance of trade in arms with the United States. So, if we export more – for example, the guidance system for the cruise missile – we import more, and there is no net benefit to the Canadian economy and no net increase in jobs.

Even worse, if we trace aJI the effects through the economy, (allowing for the remission of profits by foreign-owned Canadian arms manufacturers, and for the machinery imported to produce arms for export) we find that there is a net loss to the Canadian economy, and a net decrease in the number of jobs. For economic reasons alone, we ought to cancel the DPSA and prohibit exports rather than encouraging, or even subsidizing them, as we presently do. And even if we stopped exporting and continued importing — which would maximize the adverse effects on our economy -Gordon Rosenbluth (an economist at the University of British Columbia) estimates that our Gross National Product would only fall by one-third of one percent.

What impact would it have on public support for Canadian arms spending if people could be convinced by the arguments being made here that arms expenditures create economic costs instead of benefits? After all, perhaps Canadians want to maintain (or even increase) military spending, for reasons of national security? Not true. A recent paper by J. M. Treddinick, an economist at the Royal Military College, shows that the Canadian government leans heavily on allegations of economic benefit in order to justify arms spending. To refute the economic arguments is, therefore, to strike at the essence of the rhetoric of justification.

It has been said that disarmament is simply the armament process in reverse. Since arms spending is bad for the economy, disarmament would be good for economy. (Kaldor has gone so far as to argue that the economic damage from armaments is so great as to constitute in itself a case for unilateral disarmament!) But workers are entitled to wonder if it would all happen that smoothly, and to insist that the process of conversion (from arms oroduction to civilian goods production) contain some real guarantees for them.

A good deal of thought has already been given to this matter in the United States and Britain. For example, companies wishing to receive arms contracts could be mandated to submit detailed proposals of how they would use their plant and work force to produce civilian goods after the arms contract expires; joint committees of management and workers could be established on an ongoing process to do such planning. Workers who were phased out from arms production and who had difficulty getting another job could be offered income guarantees and access to retraining and relocation programs (funded from a tax on the profits of the arms companies). And so on. We need to begin to lobby now to have such institutional protections put in place here in Canada.

We are in an economic crisis in the ’80s, the likes of which we have not seen since the ’30s. That crisis was ended by the massive arms spending of World War II (raising the question as to why, if governments could create prosperity with massive spending, they had chosen not to spend much money on peaceful and productive activities.) If we try to resolve the present economic crisis in the same way, which is what Reagan is doing, we risk World War III and the end of the world. The moral is that we must resist the siren calls of the merchants of death and insist that the best solution to the economic crisis, both morally and economically, is to spend not on arms, but on fulfilling a vast array of real human needs and aspirations.

Mel Watkins is a professor of economics at the University of Toronto. He also a member of Science for Peace.