How long can America maintain a war economy?

The major challenge for the United States is the perennial trade-off between guns and butter.

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SOURCEForeign Policy in Focus

Originally published in Hankyoreh.

The U.S. economy is in reasonably good shape, according to conventional measurements. The official unemployment rate is below 4 percent, and the productivity of U.S. workers is surging. In the last quarter, economic growth was nearly 5 percent, and Inflation has been leveling off. Americans are buying things, throwing parties, and going on vacations.

Last year, economists were predicting a recession. It hasn’t happened, not yet at least. In part, that’s because the United States, like many other countries, is still enjoying a rebound from the worst of the COVID pandemic. Led by India, China, and Indonesia, the global economy is on pace to grow about 3 percent this year, which also provides America with a tailwind.

The major challenge for the United States is the perennial trade-off between guns and butter. Right now, the Biden administration has turned this dilemma of “either-or” into “both-and” by increasing spending on the Pentagon and on priming the pump of the domestic economy. So, now the question is: how long can this increase in spending on both military and non-military sectors of the economy continue?

Since the withdrawal of troops from Afghanistan in 2021, the United States is currently not involved directly in any major wars. It still conducts air strikes in Syria and maintains a contingent of a couple thousand troops in Iraq. About 170,000 U.S. soldiers are active on hundreds of overseas bases, with the largest concentrations in Germany, Japan, and South Korea. But the era of significant “boots on the ground” in active conflicts is, at least temporarily, over.

Yet, paradoxically, U.S. military spending is at an all-time high. From 2017 to 2023, the Pentagon’s base budget increased by over 50 percent. For 2024, overall U.S. military spending—which includes the allotment for the Pentagon, the budget for nuclear weapons at the Department of Energy, and a few other items—will be $886 billion. With supplemental requests, like the current one for Ukraine and Israel, the total will approach $1 trillion, the highest military spending since World War II.

Only 15 governments in the world have larger overall budgets than what is currently allocated to the U.S. military. That, in itself, is a staggering statistic.

At the same time, the Biden administration has been pushing through very large expenditures on the domestic economy. In 2021, in its first major win, the administration won passage of a $1.9 trillion stimulus package to respond to the COVID pandemic. It followed up the same year with a $1 trillion infrastructure bill. The next year, the Inflation Reduction Act provided several hundred billion dollars in climate-related funding. The administration also set aside over $50 billion for investments in the semiconductor industry.

That’s a lot of government spending on the “butter” side. Given the lamentable state of U.S. infrastructure, the economic inequities that are baked into the system, and the overwhelming need to construct a modern, sustainable economy, investments on the domestic side are critically needed. Of course, some of that spending is offset by revenue generation through additional taxes and other measures.

But along with all the military spending, the administration’s investments into the domestic economy has contributed to the U.S. budget deficit effectively doubling from 2022 to 2023. The overall debt, which is the accumulated total of deficits over the years, now stands at around $33 trillion. That’s the value of the economies of China, Japan, Germany, India, and the UK combined.

The percentage of debt to GDP for the United States is around 123 percent. Other countries, especially Japan, are in worse situations. Governments in the Global South that face that kind of ratio are usually considered in a debt crisis. The United States gets a pass because the dollar is the global currency. The federal government can either raise taxes, issue more bonds, or print more money or to cover the gap between revenues and expenditures.

Still, at a certain point, the United States will have to choose between its addiction to military spending and the economic demands of its population.

Although the United States is not directly engaged in an active conflict, it is sending a lot of support to Ukraine in its battle against Russian occupation forces. Total military assistance is close to $50 billion. The Pentagon has sent over so much military hardware that it has depleted its own stocks. That’s one reason the United States has persuaded South Korea to send over military assistance on top of the nonlethal support that Seoul is providing.

It’s also why the Biden administration has proposed a $105 billion supplemental bill, of which $61 billion is slotted for Ukraine. A huge portion of that $61 billion–$44 billion—would actually go to the Pentagon to replenish its stocks for the eventual resupply of the Ukrainian army.

The supplemental also includes money for Israel, for Taiwan, and for further militarizing the border between Mexico and the United States.

Although the military assistance for Ukraine dominates the headlines as well as the battles in Congress, the bulk of U.S. spending actually goes to big-ticket items—ships, planes, space weapons—that have little to do with the war between Moscow and Kyiv.

Indeed, the United States has engaged in a multi-year reorientation of military policy toward Asia. Some part of that reorientation has been to counter North Korea. But aside from its nuclear weapons, which are very difficult to defend against, the Pentagon isn’t really worried about Pyongyang. Although North Korea has a large army, it is largely ineffectual, which explains why Pyongyang has invested so heavily in acquiring a nuclear deterrent.

The Pentagon’s real concern is China, particularly its interest in absorbing Taiwan and extending its control over the South China Sea. China has the only military in the world that comes close to matching the Pentagon’s might. Increasing its military spending by about 7 percent annually over the last few years, China has been incrementally closing the gap.

The United States and China face a challenge. Will they continue to spend heavily on their militaries and risk not only war but bankruptcy, political instability, and economic stagnation at home?

This is no small issue. To deal effectively with the threat of climate change, China and the United States must not only cooperate but also free up funds to help the rest of the world make an equitable transition away from fossil fuels. So, yes, it is theoretically possible for the United States and China to continue to invest heavily into both guns and butter even while avoiding war and economic collapse.

But the planet can’t afford that strategy.

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