Europe flutters on the edge of declared recession. Since the ECB has no room to lower rates because of the inflationary pressures from the US dollar, and European governments are close to the top of deficit allowances from the requirements of monetary union, Europe is likely to enter recession. The ECB will be able to lower rates when the actual contraction is visible in lowered oil demand, but not until. This means that the Euro will deteriorate as the US is in a tightening phase.
The basic conflict here is between the American War Economy and the European Peace Economy. Which is not to be confused with militarism versus pacificim, because the only kind of peace economy that will work, is one that has a military instrument capable of being the umbrella under which nations can be built.
The typical story of a post-war recession begins “When the central bank tightens…” Yet the ECB has held rates steady for a very long time, there has been no tightening of monetary policy to combat inflation. Instead, from the perspective of Europe inflation is an exogenous effect – it isn’t anything Europe is doing that is causing inflation. Nor has Europe passed regulations that will amount to tightening, so one can’t argue that there has been de facto tightening of the regulatory leg of the Mundell-Fleming triad of monetary policy, fiscal policy or regulatory policy. One can also not argue that Europe has lifted regulations that would cause inflation.
In short, and this is very obvious to Europeans, the source of their current economic bind is very simple: the US is printing dollars, preventing US consumers from feeling the pinch of their borrow and squander fiscal policies, and easy monetary policies. However, Europe is also aware that the Asian central banks have more or less topped out their ability to soak up dollars, and they can no longer afford to take a bath on US bonds, which are yielding as much as 300 basis points below other completely safe currencies.
Thus free market zealots in the US are calling for Europe to Thatcherize – slash wages and benefits, slash social spending and sell off assets at fire sale prices to waiting billionaires. Europe, which is a great deal closer to Russia, the last nation to try “shock therapy”, realizes just how bad an idea this is. But as yet they do not have any ideas of their own.
In the run up to World War II, it was realized by people like Winston Churchill that the German Economy wasn’t really healthy, instead, Germany was borrowing vast sums of money to run what became called the “German War Economy”. This lead Churchill to argue publically, and others privately, that war with Germany was inevitable, since there was only one use for the capital they were building.
In the run up to, and particularly after, World War II, the United States became a war economy – one which had a large military, and then had to develop the infrastructure to support it. The US government had to create demand for goods which supported the war economy – for example the designs of nuclear power plants from which enriched Uranium could be extracted. The 747 is a military civilian hybrid jet – which means it is not very fuel efficient, but it is very durable. One can’t strap a space shuttle to the back of a jet by accident – it has to be designed to take that kind of stress.
Eisenhower would warn of the “military-industrial complex”, and other Presidents would wrangle with the “iron triangle” in various ways. The defense build up that Carter began, but which Reagan accelerated tremendously, provided a new generation of war economy. It was only budgetary reality which forced the downsizing of the military during Bush’s term – but it was blamed on the Democrats as a, and the parallels to post world war I Germany should be noted “a stab in the back”. The urban legends of mistreatment of Vietnam veterans were used as a rhetorical substratum to blame the Democratic Party for the pain of riffing and base closings.
The essential problem is this: the world is still too unstable, particularly in its resource supplies, to do without a superpower. That superpower will have one big advantage: it will be funding a huge amount of Research and Development, and a big disadvantage: it’s basic economy will be far less efficient than one designed for peace time uses.
For decades this problem was solved by having Europe and Japan form “peace economies” which were tightly linked with the United States. In the wake of decolonization in the 1950’s and 1960’s – Europe found it could do without having to support military infrastructure by, instead, backing the United States dollar. This lead to a small, but noticeable, spread between corporate bonds and US treasuries, which was, in effect, a sienurage tax on Europe to pay for the defense of the Free World. It was not a matter of War economy versus Peace economy – but a matter of spreading out the cost of the war economy over a larger sphere.
The hole in the bottom of a war economy is energy, military equipment is, almost by definition, bigger, heavier, more durable – and therefore more expensive to move – than equivalent civilian only equipment. Since the late 1800’s the quest for energy supplies to feed military machines has increasingly dominated thinking. In the 19th century it was “coaling” and the creation of “coaling stations” around the world. The US entry into the Spanish American war and annexation of Hawaii was, in no small part, about creating coaling stations.
Churchill as First Sea Lord in Britain helped move the British fleet to oil, and then as Colonial Secretary, worked to gain access to oil for that military. The access to oil was central to Hitler’s geopolitical thinking – as well as the reason for the Japanese drive to expansion in the 1930’s. When FDR wanted to finally provoke the Japanese, he embargoed US oil – Pearl Harbor followed soon thereafterward.
It would be a mistake to over-emphasize this point and make it into a vast conspiracy that dominates everything – but it is a very important part of strategic thinking, which has lead to US involvement in parts of the world which we would otherwise not care about. It has also created numerous constituencies in the US which support the War Economy, because their current economic arrangements are based, directly or indirectly, on that war economy. To move the US off of a war economy means finding a means of compensating the losers, even as they are moved to other areas.
In no small measure the Clinton policy was forced down this line: both by instinct, searching for a “peace dividend”, and by political reality. Increasingly the war economy constituencies were the hard core of the opposition to Clinton. This line of cleavage – not between pro-war and anti-war, but between the war economy and the peace economy in the US – became increasingly visible in the division in the electorate. The metropolitan economy is largely involved in importing and exporting, and for it, while the military is important to protect access to materials and trade relations, the war economy itself is largely a burden. This economy has voted increasingly for Democrats, particularly since the early 1990’s when much of the defense research budget was pulled and far less of the metropolitan research and development engine was tied to defense. The early 1990’s recession forced the metro research economy to wean itself from defense oriented research, and while this was painful, it was also, ultimately, liberating.
The exurban areas are, of course, most closely tied to the war economy, and not only the most important beneficiaries, but also the most tied to war economy infrastructure. These areas have increasingly become Republican, particularly as many have realized that they can get the largess from Washington that they need, without having to form common cause with social liberals and other metropolitan constituencies that they dislike. Once the Republicans found out how cheap appalachia was to buy, they went out and bought it. The result shifted Kentucky and Tennessee firmly into the Republican camp, and influenced Pennsylvania, Alabama, Mississippi, Missouri, Virginia, North Carolina and even South Carolina and Georgia. It seems likely to move West Virginia into the Republican camp.
Also interestingly is a shift in politics in the rural and frontier areas – while resource extraction in the form of minerals and oil is part of the war economy, the agricultural sector is increasingly pressured by that same war economy and its demand for standardized food products. High Diesel prices, agribusiness consolidation, higher fertilizer prices and the funnelling of credit into home building and spraw all threaten farming as a way of life. In no small part the Democratic revolt in Montana is driven by this increasing shift of agriculture away from the Republican sphere. If the Democrats can take advantage of it that is…
The European Peace economy has had a no less tumultuous history. The dismantling of the European war economies in the 1950’s caused tremendous dislocation, the attempt to maintain the remains of the British War economy in the 1960’s caused tremendous dislocation. The gradual creation of the European Common Market is not a smooth and continuous process, but one filled with stops and starts, good and bad decisions, political tensions. Governments have fallen over the whether to be pro- or anti- Europe, and the economic troubles in Europe now show how difficult the process has been.
The fundamental difference between a war economy and a peace economy is the question of demand. In a war economy there is both a constant demand for certain goods, from resources to machine parts. This is both a benefit, in that it generates employment, and a problem, in that that demand must be maintained at all times in order to keep both the workforce and the capital in top condition. From the New Deal forward, preserving the industrial base has been a top priority of successive American administrations. A peace economy has no such basic stream of demand, and therefore can and must create a stream for “soft demand”.
A peace economy must also run a much tighter ship financially – since it cannot impose sienurage taxes to pay for military protection. It must run only manageable deficits and be able to reach surplus from time to time. As a result, the European Peace economy, even more than the American war economy, has been aggressive about forcing open developing nations to capital investment.
In the present two effects have become important. One is that the Republican Party has gained almost complete control over the top down apparatus of the War Economy in the US. It is now using this control to reverse many of the changes in society made through the Democratic version of the War Economy. While many on the left loath anything with the word “war” in it, it should be pointed out that it was the war economy’s need for labor which was one of the cutting edges of the creation of civil rights: Truman integrated the military, because he had to. The War economy of the 1950’s needed labor, and it drew African Americans in. The war economy of the 1960’s urbanized large populations out of the need for labor. Many cherished institutions of the left, including labor unions – as opposed the older craft unions – had their bargaining power because war economies cannot afford instability. It was worth paying more to get a steady stream of labor.
The Cold War version of the war economy also acted as protectionism for labor – by putting more or less half the population of the globe out of reach, it meant that labor could demand a higher wage. By making goods which, almost by definition, had to be built locally, it created a large supply of economically nationalist demand. It had to be made in the USA, because in the event of a war, supply disruption would be lethal. The US understood the lesson of the German U-Boat blockade of Britain.
Thus the Democratic War Economy’s liberalizing effects should not be tossed aside lightly. One inherent paradox in the progressive movement is a simultaneous demand for a Peace Economy in the US – and demands for returns to the kinds of protection of stability of labor supply which the War Economy generated. Consider, for example, the US jet travel system. It is not an accident that it has a strong degree of Unionization even today: because the jet travel system in the US is, to no small extent, related to the war economy and its needs to move goods, troops and other personnel and supplies, as well as finding civilian employment for former military pilots. That that unionization is being torn apart is a sign that the circle of benefits of the War Economy is contracting.
The shift from liberal to obliberal democracy in the US – where the war economy is attempting to become self-perpetuating even in the absence of a threat equivalent to Soviet Communism – has effects on Europe as well. The problem with the European Peace Economy is that it isn’t. It isn’t a peace economy in a self-sustaining way, but, instead, a peace economy which sells to a war economy. Europe makes capital goods and certain classes of consumer goods that the US does not make because it is busy being engaged in a War Economy. The European economy, despite almost 30 years of being weaned away from internal military demand, still is related to the US war economy.
However the rise of obliberalism in the US changes that: the US government is raising the sienurage tax on the Europeans, because it cannot effectively tax its resource suppliers any longer. Through the 1950’s and 1960’s the people who paid the most, in terms of lost freedom and development, for the US war economy were the oil states around the world, which had regimes that sold oil to the United States far more cheaply than a real market price would demand. With the oil shock, the tax on the populace of these nations stopped going to the US – and started going to their own elites. But it was still paid.
The obliberal state, unable to tax its upstream, is now taxing its downstream – Japan and Europe are both being squeezed by the willingness of the developing economies – particularly China – to be better subsidiaries to the American War Economy. This taxation is being paid willingly because the mechanizing economies of Asia are getting the same benefits from the American War Economy that workers in the US and Europe used to get: constant, and rising, growth and demand. China’s “soft landing” is going to be 8% growth in real GDP. That’s a slow down for them. The tiger economy zone is projected to grow by 5%.
That neither Japan nor Europe have managed a true Peace Economy, and that the highly managed Chinese economy is very successful shows how misguided and intellectually dishonest libertarianesque blather about free markets is. China is a protectionist, mercantile, top down thoroughly unfree market economy. It is booming. Japan is in theory capitalist. It is starving. The ideological divides between “socialism” and “capitalism” are pure nonsense and are no more relevant to the present world situation than theories about whether the number of angels that can dance on the head of a pin is finite or infinite. They simply do no matter. There is no such thing as a free market War Economy – War Economies are, by definition, top down, and they are, therefore, not capitalist either. They may well have a set of owners of capital who are beneficiaries, and are therefore adamant about not pay the pareto balancing taxation – but this has been true since the days when wars were fought on horseback. War Economies are also price insentive, which divorces them from the market mechanisms signals of about resource allocation. A war economy must have whatever it must have, and will take it if need be.
What does matter is the control of the crucial forms of scarcity and the trading relationships built on them. Presently the United States, by being the designated economic loser, has the ability to consume far more than it produces. However, this is only because it is the designated loser: the Asian economies aren’t helping the US by buying dollars, they are throwing an anvil to their competitors here in the US. Despite dramatic devaluation of the US dollar, American exports have not signficantly recovered above what would be expected from the ending of the financial crisis and world slow down of 1997-2003. What has happened instead is simply that goods that used to be orderd from abroad are now made here. The Republican Party has returned to its roots as the party of high protective tariffs, this time enacted by monetary policy.
What this means for the left cannot be put in blunter terms: to turn back the obliberal movement in America, and to take power and govern, there must be a coherent governing idea.
The problem in the American left, both Democrat and Green, is that there is, at present, an ideological cleavage. Much of the rhetoric of the left looks backwards to economic circumstances which are the result of the war economy. This cleavage, between war economy demands for job stability and labor stability, and peace economy demands for liberalization and nationalization of health care – are in basic conflict. The US cannot both have a war economy degree of stability for workers, and a peace economy degree of benefits. Europe is going through this right now: it must liberalize its economic structures, simply because the demand stream from the US War economy is being cut off.
However, failure to understand this shift will be lethal for the left, which ever party it backs. This is because the Republicans have sought, and are getting, complete control over the top down war economy. This means that the direct beneficiaries of that war economy are now lost to the Democratic party as supporters, and the indirect supporters are moving to the right. The reason why the Republicans have made such in roads into Minnesota, Wisconsin, Michigan and Pennsylvania is because, for the present, resource extraction and raw manufacturing are benefiting from the Republican War Economy. Steel is up in price, SUVs are very profitable for Detroit, mining is doing well. Fiddling with the edges of social conservatism does nothing about any of this. Social conservatism follows the attachment to the Republican War Economy, not precedes it. People get hostile and xenophobic when they need enemies because their jobs depend on having enemies.
Since this highly reved version of the War Economy is unstable – war economies at high speed must go to war to lower their input costs of labor and resources – these effects are offset by the growing number of people who are being held out of the benefits of the War Economy. The young, in particular, are getting hammeredby it. This means that the future is against the War Economy, since it must economically slag the prospects of its input sources of labor. Right now Europe and Japan are on the menu. American labor, and not just low scale wage labor, but intellectual labor, is also on the menu. As the war economy consumes its own demand base, it runs a larger and larger debt.
In short, while the temptation of returning to a liberal War Economy is almost overwhelming – after all, almost everyone in elected office grew up in the War Economy, was elected promising to protect the War Economy, and to make sure that its benefits were distributed widely, and is used to the mechanisms of the War Economy – and that is both in the US and Europe, across the political spectrum – it is also a mistake of global proportions.
This is because the threat to global stability comes not from a concentration of armed might, but from the growth of assymetrical threats and economic nationalism. The War Economy is going to, in fact, encourage economic nationalism – simply because other nations will want to offset the protectionism that a War Economy generates with protectionism of their own. Argentina, Iran, Russia, Venezuela and China are at the cutting edge of the shift to economic nationalism by those countries which can either supply their own energy, or have labor competitive advantage enough to flout the free trade rules of the WTO.
The solution to this problem is nation building. Nation building on a scale that has not been seen since the end of World War II. It is nation building, and nation building alone, that can supply the enormous void in demand that would be left by the end of the war economy. It is nation building alone that can defuse the assymetrical threats, and it is nation building, and only nation building, which will provide the market incentives to develop peace economics.
The series of Wars that was the 20th century is over. Either we can set ourselves on the course for another series of resource wars, as various nations move from economic nationalism, to war economy – since the war economy is the ultimately end of economic nationalism – or we can set ourselves on the difficult course of weaning ourselves from the heroine of the war economy.
This is not to say that there is no role for the military in this process. On the contrary, military discipline, military virtues, and military sense of self-denial for a larger cause are, in fact, going to play an essential role in any nation building system.
It is only by ending the threat of failed states, and the global plague of dictatorial or oligarchic states that the economy can be shifted away from one where the military is a cost that the general economy carries, to one where it is part of the expansion of prosperity. For all of the talk from the neo-conservative movmeent about how it is committed to creating Democracy around the world, the reality is quite different. For a stark example of this, look at the ceremonies that took place to announce the new Iraqi government. Well scripted, with flags and polished furniture, it seems that all is in order. But look again, note how all the men on that stage are fat. Now look at whatever video from the Iraqi street you can find – you will see no fat Iraqis. What has happened is the installation of soft, fat, and out of touch leaders who have lived well through the times of trouble in Iraq, and their maintenance by US power. This might work in Iraq – and the present price of oil an economy doesn’t have to be that efficienty – but it will work virtually nowhere else.
It may seem ironic, but, in fact, it is the case: nation building requires the instilling of discipline and order, and the means for doing this must include a strong set of military institutions. Military institutions which are “professional, competent, loyal and patriotic”. The military itself must be weaned from the War Economy, which warps its outlook towards weapons systems, and towards creating webs of industrial supply chain. The military itself would do well to be lifted from the burden of the war economy. Canada and Britain have thriving martial traditions, without having a War Economy.
But the military of nation building is very different from the military of the Cold War or of the obliberal state. Instead it is a military that can stablize an area, end civil violence, and form an umbrella for rapid redevelopment of an afflicted area. This process was seen in outline in Bosnia and Kosovo – with numerous problems and with a long list of caveats about the points of failure in those missions, which the participants themselves have been willing to point out. Not least was the amount of force needed to produce stabilization itself: the military does not have the tools to stabilize, the military instrument is still too blunt.
However it is the complete failure of this process to date in Iraq that has been the hallmark of the post-invasion period. Now with oil as expensive as it is, Iraq’s new government is going to have numerous chances. More over all it needs to do is assert control over a small section of the country that produces oil and manages its export. If Iraq can produce oil at 2 million barrels a day consistently, that is almost 100 million dollars a day of free cash flow. In a nation the size of Iraq, that is a huge amount of money.
But most nations are not sitting on an ocean of oil. And the expense of rebuilding Iraq compared to the final profits to the outside world are so ruinously bad, that this is a victory that looks financially like defeat. The model provided by Iraq is simply not scalable to most other nations, because most other nations cannot be disrupted to the degree of an oil state – where most of the value can’t be bombed because it is below the ground. Thus the model provided by Iraq is an invasion that is too expensive, an occupation that fails to stabilize, a development period that has failed to put basic utilities on line, and an open ended committment that is a massive drain on manpower and logistics.
This effect is seen in every component of military supply chain. M-1 tanks, while the best battlefield superiority tank every built, are taking high attrition against guerillas in urban areas. Helicopter parts are wearing out quickly – a military helicopter in Iraq is a giant vacuum cleaner in a land of sand. The warnings of a number of generals, and military analysts – including this one – were firmly repeated by one of the earliest and highest profile opponents of the Iraq invasion: General Wesley Clark in his testimony before the Armed Service Committee. The picture that General clark so forcefully outlined is that the attrition on key parts, personnel and logistical pinch points is reaching crisis proportions in the US military. His warnings are not speculative: attrition in helicopters, and crashes attributable to maintenance problems are growing.
Thus the military itself must be transformed from a machine designed to meet a large army on the battlefield, to one that can provide stabilization. It must shift its priorities away from high performance, if sexy, air superiority forces – and towards sustainability of operations. A problem which has as many technical challenges as hte ability to super-cruise a jet fighter. The military must shift its training and logistical systems to a form which will allow the secure movement of goods by ground through many kinds of terrain: the insurgency has targetted trucking with great effect in Iraq, a tactic that is sure to be repeated over and over again in the coming decades.
This process – of going to a Peace Economy, without losing the essential edge and fuction of the ability, not merely to engage in peacekeeping, but in peacemaking – is one that is the challenge before the left, simply because the right has neither a conception of how to do it, nor the will to do it. The collapse of the long standing agreement between those who run the American War Economy – and the Peace Economies of other nations that lived under the protection of that War Economy – indicates that the current world economic structure is unstable. Either real wages must collapse so that the War Economy can feed itself, or there must be a dramatic readjustment in the means by which developed nations maintain their security and economic stability, one which generates, rather than consumes, resources.
The only road to doing this is for the developed nations to aggressively drive down their own resource and energy costs – the GDP of a developed nation must be much more “energy dense” than present. As importantly, the developed world must shift the nature of its miltiary instrument from one of battlefield conflict between nations, and towards creating an interior zone of stability within which economic development can occur. It must be able to not merely defend borders, but hold territory, and do so sustainabily for long periods of time with smaller committments of manpower. The military can only do this if there is a civilian leadership committed to making this transition.
The old system of America having a War Economy, which other developed nations paid for, and had, in return, Peace Economies, is breaking down. The United States, no longer able to extract surplus value from the states that supply it resources, is now engaged in taxing through sienurage the other developed states. The end point of this process is a dramatic drop in real wages in those states, as they race to the bottom with China as a labor provider. China, needing resources, is destined to become a war economy when it can do so, because only this will generate enough demand and social stability to hold their large population together and employed.
This process is destined to dramatically raise materials prices, and produce a large movement towards economic nationalism, first in resource states, as is already happening in Venezuela, Argentia, Russia and Iran, and then in other nations as they progressively face outside pressure on wages and currency flow. Unless halted, it will mean an end to free trade, and the establishment of nationalist states of a quasi-dicatorial form of either the right or the left around the world.
The left faces a challenge in that many of the traditional mechanisms of the left – including labor stability – are creatures of the War Economy, even socialist and green parties support these artifacts of the previous liberal War Economy. Since the war economy has now been completely coopted by the right wing and the Republican Party, these mechanisms are increasingly useless, and the people tied to them are going to continue to move to the right. Instead the left must seek a Peace Economy solution.
That Peace Economy must rest on nation building, since it is only through the ending of assymetrical threats and failed states that the developed world can continue to prosper. The War Economy model of nation building, as seen from Iraq, is an abject failure at producing stability and development at any reasonable cost – only a nation sitting on as much resource wealth as Iraq could have this model implemented.
To engage in this transition then, require a military instrument that is capable of nation building – not the dissolving, but the transforming of the military. A transition, because it will focus on martial values will, in fact, liberate the military from the corrupting role of being the industrial policy for the American economy. This military instrument must be able to control space, sustainably, for long periods, rather than being designed for rapid invasion.
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