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Is War Really Good for the Economy?


While President Bush was speaking to reporters this morning about progress (or the lack thereof) in Iraq, CNBC was flashing an alert that the DJIA was 38 points above its record close.


While President Bush was speaking to reporters this morning about progress (or the lack thereof) in Iraq, CNBC (GE) was flashing an alert that the DJIA was 38 points above its record close.

Is there a correlation?

Scholars have argued over the degree of importance military spending plays in the U.S. economy ever since Eisenhower popularized the term "Military-Industrial Complex" in his 1961 farewell address to the nation.

Alexis Debat, senior fellow for national security and terrorism at the Nixon Center in Washington, D.C., told ABC News (DIS) that "it's an unwritten rule in the U.S. economy that defense companies play an important role in the stock market as anchors of stability."

However, two months ago, a report by economist Dean Baker of the Center for Economic and Policy Research, "The Economic Impact of the Iraq War and Higher Military Spending," showed the increased level of military spending leading to fewer jobs and slower economic growth, using a macroeconomic simulation by economic forecasting company Global Insight.

Among other things, the projections claim that, after an initial demand stimulus, the effects of increased military spending turn negative around the sixth year.

After 10 years of higher defense spending, there would be 464,000 fewer jobs than in a pre-September 11 baseline scenario with lower defense spending.

What we know for sure is that America's long-standing world leadership in many areas is largely due to cooperation between military and civilian industries.

In the past, this generally took the form of something known as "spin-off," in which the results of military R&D were transferred to the civilian sector.

We can thank the military for everything from semiconductors (the market for which was effectively made by the Pentagon's willingness and ability to pay premium prices for them) to MRIs (which use digital signal-processing techniques originally developed to computer-enhance pictures of the Moon for the Apollo program) to cordless tools (which were born from technology developed to help Apollo astronauts drill for moon samples) to the overhead projector (which was developed by the Navy to help teach navigation) to the Internet (which began its life as the Defense Advanced Research Project Agency's "ARPA-Net".)

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But, government-funded advances don't always work as well as market-fueled ones.

Murray Weidenbaum, a professor of economics and the director of the Center for the Study of American Business at Washington University in St. Louis, points out that:

"Government- at least in the United States- is not good at choosing which areas of technology to support and which organizations to do the work. We are much better off when private enterprises risk their own capital in selecting technological activities and then carry through on the successful ventures."

National Bureau of Economic Research Research Associate Frank Lichtenberg found that the net impact on productivity of government R&D spending is lower than the return on privately funded R&D and may even be negative.

We are now seeing the relationship between military and civilian R&D largely reversing itself.

In a recent speech, Northrop Grumman's (NOC) Chairman, CEO, and President, Ronald Sugar, said:

"Following the end of the Cold War, the military and its industrial base contracted significantly. At the same time, the information technology sector boomed with new ideas and products. Of the information revolution's many far-reaching impacts, the most significant impact was that IT became the essential component of our military's new transformation."

Ronald Sugar

This is an example of spin-off in reverse: "spin-on".

Technologies like personal computers, flat-panel displays, image generators, electric motion systems, audio systems, software, and networks are "spun-on" to military applications, dramatically lowering the cost of the overall system. Sugar says that today the use of commercial-off-the-shelf hardware and software is not only encouraged, it is mandated.

By law, all federal agencies having an extramural R&D budget exceeding $1 billion must participate in one of a number of programs in which businesses provide innovative technologies to meet the military's needs, while accelerating the company's products into the marketplace.

One "innovation" that likely won't be of much practical use to either the military or the civilian population?

The so-called "gay bomb."

The "gay bomb" was proposed by the U.S. Air Force's Wright Laboratory in Dayton, Ohio, which requested $7.5 mln to put it into development.

Plans obtained through the Freedom of Information Act by the Sunshine Project, a non-profit anti-biological warfare group, detailed a bomb that would release a chemical aphrodisiac "and by virtue of either breathing or having their skin exposed to this chemical, soldiers would become gay."

Enemy troops would lose interest in fighting as they "became irresistibly attracted to one another."

Take a look at the "gay bomb" files for yourself:

No word as to whether or not researchers at Wright Laboratory planned on affixing "Make Love, Not War" bumper stickers to each unit.

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