More Military Spending Could Actually Save the U.S. Money | e21 – Economic Policies for the 21st Century

During the first year of the bubble bursting America was generating a substantial budget surplus and by September 11 2001 the nation was heading into what I expected to be a very, very severe recession as the budget surplus mantra was still the overwhelming song being sung in the corridors of the Capital. Perhaps, cleansing the system then through the cathartic effects of a major bear market and accompanying economic decline would have, in the long run, been the best thing that could have happened to the country. But, it was not to be. 9/11 allowed the Bush government with the blessings of Congress to turn on the spigots which resulted in the largest yearly swing in fiscal policy in the history of the nation.

The true impact was the spread between what was expected and what ended up happening, from an anticipated surplus of over $200 billion the nation produced a defect of over $300 billion, it was not just the nominal number that saved the economy through a massive short burst of stimulus, but the second derivative, the spread which amounted to well over $500 billion that saved the economy from the deep recessionary trajectory it was on. Which, of course was followed up by serious pump priming by the Federal Reserve leading to a substantial drop in short term interest rates and the housing bubble was reignited full throttle.  In the long run, the miss-allocation of the nation’s resources can not be over overestimated and the resultant long depression most of America and world has suffered under since 2008 is the direct result of such policies.

To wish the same today when rates are already as low as they can go without handing money out on the street corners, which, of course, may still be in our future, is about as dumb and shortsighted as anything i have seen ( at least today). But, I suppose this is what we have come to–the economic support for ramping  up the war machinery to save us all from our own economic stupidities will only make the final economic and market revulsion all the more disastrous, more so than it will already be, which is on the path to be horrific to begin with.

moneybombI was in a meeting of the National Economic Council staff in the West Wing of the White House on Sept. 11, 2001, when the planes hit the World Trade Center. Not only did terrorists destroy the twin towers, damage the Pentagon and kill 3,000 people, but they also forced the U.S. to spend additional billions on defense, swelling the deficit.

In 2001, the federal budget had a $128 billion surplus, about 1% of gross domestic product. The National Economic Council could talk about how to use the surplus to benefit the economy, such as putting Social Security on a path to financial solvency, or lowering taxes. But a recession that began in March 2001 was exacerbated by the 9/11 attacks.

Fast forward to 2014, when our nation’s debt is $18 trillion. Social Security and Medicare consume 40 cents of every dollar spent by the federal government, a proportion expected only to increase in the years ahead. Our fiscal situation looks dire now, but it will be worse if another 9/11 comes along and we must increase military spending to defend ourselves.

We are, shortsightedly, reducing military spending that can save lives, but we are not curbing major entitlement programs that are the main driver of our deficit. Nor are we streamlining regulations to encourage economic growth. Instead, we are satisfied with an economy that plods along at 2% GDP growth, and a labor force participation rate that has shrunk to 1978 levels.

In the six months following the attacks, employment fell by 1.3 million. The travel industry was severely affected because people did not feel confident about flying. American Airlines AAL, +1.63%  stock dropped 39% on Sept. 17, the first day trading resumed. United Airlines UAL, +1.77%  saw a 42% decline. Once the first week of trading was over, the Dow Jones Industrial Average had tumbled 14%. The market set records for both largest point losses in a week and in a single trading day, since broken in 2008.

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