Special Report

How to Save the Global Economy: Cut Defense Spending

Breaking out of the current frustratingly slow growth in the developed world requires a blend of short-term stimulus and longer-term restraint. Unfortunately, in Europe and the United States, we have been following these policies in reverse -- constraining public-sector spending in the near term while doing nothing effective to prevent deficits in the future.

In the United States, cuts in public-sector spending have caused the loss of 550,000 public-sector jobs -- think teachers, police, and firefighters -- since January 2009, adding to the raw unemployment numbers and removing the multiplier effect that takes place when employees spend their paychecks. The result: Despite gaining private-sector jobs every month for the past 21 months as of November, we have been badly hurt by reduced public-sector spending, which has cut jobs and economic growth.

Yet my Republican colleagues have insisted on retaining all of George W. Bush's tax cuts, thus all but guaranteeing that future revenues will continue to fall far short of what is necessary to reduce U.S. debt and create the conditions for a strong recovery.

One major change that can reverse this: a substantial reduction in America's military spending. In the current fiscal year, the United States is spending upwards of $650 billion on its military, including the costs of the wars in Iraq and Afghanistan. This is far more than it spends on Medicare and, more importantly, considerably in excess of what is required for America's legitimate national security needs.

The United States should and will be the strongest country in the world. But it can achieve that status for significantly less than it is now spending. An early withdrawal of U.S. troops from Afghanistan over the next six months would save hundreds of billions of dollars. In addition, we could reach savings of more than $100 billion annually by adopting strategic concepts appropriate to the current world situation, rather than continuing to rack up bills fighting threats that no longer exist. We could also save tens of billions of dollars a year by curtailing our commitment to the defense of Western Europe -- which was perfectly sensible when President Harry Truman made it but is wholly inexplicable now that Europeans are wealthy, strong, and threatened by no one -- as well as by reducing our military presence in Japan and forgoing the new proposal for stationing U.S. Marines in Australia. We do not need to maintain the fighting capacity we had during the height of the Cold War to engage the Soviet Union in an all-out conflict. Terrorists are terrible people who should be confronted, but they are not a thermonuclear-armed Soviet empire. Fighting them, though in many ways more complicated, should be less expensive.

Reducing excessive military spending -- my proposal cuts approximately $900 billion in the next 10 years -- would allow us to provide the short-term economic stimulus needed to continue the progress we are making in breaking out of the recession. Ironically, many of my conservative colleagues have opposed the idea of reducing our military budget on grounds that I refer to as "weaponized Keynesianism." They claim that government spending doesn't create jobs -- unless it is for the military. Many opponents of cuts in military spending now argue against them not in terms of national defense, but on the grounds that they would cause job losses. In fact, economists tell us, reductions in military spending will have far less negative impact on jobs than comparable reductions in medical care or infrastructure.

If America's extensive worldwide military engagements were proving effective at bringing stability to troubled countries, I would feel conflicted in noting that these impose a terrible drain on our economy and interfere with what we need to do to resume economic growth. But in fact, such interventions rarely work. Heavily armed young Americans are an excellent fighting force, but a U.S. military presence is rarely the best way to resolve long-standing ethnic, religious, or other social tensions.

If we commit to reducing military spending to a rate of approximately $430 billion a year over the next decade, with suitable inflation adjustments, it would do a great deal to reassure people that we had our deficit problem under control, that the long-term drain this puts on our economy would be diminished, and that we could then afford the near-term economic stimulus we need to help accelerate our currently sluggish growth.

Defense Secretary Leon Panetta recently said further cuts would "hollow out" the U.S. military. This is a surprising complaint from someone who cited the post-Cold War period as one of those times when we "hollowed out" our military -- he was, after all, President Bill Clinton's budget director when the United States reduced military spending in the way he now decries. But Panetta is unfair to his younger self. The reductions in the military budget begun after the collapse of the Soviet Union by President George H.W. Bush and continued by Clinton -- along with other spending constraints and tax increases on the wealthy -- resulted in balanced budgets in the late 1990s. No one I have spoken to has ever presented any convincing evidence that there was any damage to U.S. national security because of it.

Returning to the sensible defense policies of George H.W. Bush and Bill Clinton would in no way damage America's security. It would help us get the United States' job engine going again and revive economic growth around the world. Let's bring the troops home.

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Special Report

How to Save the Global Economy: Get Better Data

The 2008 crash was more than the start of a recession; it represented the end of what economists James Stock and Mark Watson labeled the "Great Moderation," a two-decade period of low business cycle volatility, moderate inflation, moderate unemployment, and steady industrial production. The Great Moderation lulled businesses into reducing their reserves and led some economists to speculate that perhaps we had moved beyond business cycles entirely. As Nobel laureate Robert Lucas proclaimed at the 2003 American Economic Association meeting, the "central problem of depression prevention has been solved, for all practical purposes."

The crash silenced all triumphalism. The Great Moderation is now a fading memory, but the shape of the new economic order remains in doubt. A depression seems unlikely, and a return to robust global growth unlikelier still, though one can find advocates for positions everywhere along the continuum from collapse to boom.

Uncertainty is the signature of this moment, and it hints at the shape of the new normal. We have entered the "Great Turbulence," a period of high amplitudes, rapid oscillations, and scarce equilibrium. Short-cycle events will punctuate the landscape, events like May 2010's "flash crash," when the Dow Jones industrial average plunged -- and rebounded -- nearly 1,000 points within a few minutes. Once upon a time, it took months or years to recover from a crash; now, both plunge and rebound can unfold in nanoseconds.

The Great Moderation was no accident; it was the consequence of the financial institution-building that began at Bretton Woods in 1944. Determined to avoid the devastating economic shocks of the interwar period, a generation of leaders designed a framework of strong institutions, including the International Monetary Fund and World Bank, that could intervene when market forces alone could not maintain equilibrium. It was not without controversy, but the system seemed to work, damping unpredictable economic swings. The result: the Great Moderation, a period of sunny economic weather punctuated by only the occasional storm.

Beneath the calm, though, the growing complexity of the global economy meant that over time, the magnitude and frequency of institutional interventions increased. John Maynard Keynes, the British economist whose ideas shaped the postwar economic order, himself never imagined that the powerful tools created in the Bretton Woods system would be used as frequently as they were, and by the early 1970s, more than a few economists began to wonder whether these measures were treating the symptoms of a problem and not its root cause. Perhaps the global economy was not an equilibrium system at all.

The technological revolution that began with the microprocessor accelerated this shift even as the Great Moderation was beginning. The digital technologies that hastened the fall of the Berlin Wall were also eating away at the power of the institutions in the Bretton Woods system. (Coincidentally, Tim Berners-Lee finished the original design of the World Wide Web within months of the wall's fall.)

The diffusion of the web and consequent dot-com revolution accelerated the velocity and volume of the global economic system to the point where the Bretton Woods institutions could not keep up. In a world awash in high-speed trading and hot money, traditional institutional interventions are woefully inadequate as dampening mechanisms. Just look at Europe today.

It is tempting to conclude that giving more resources to the likes of the IMF can cure the current crisis, but the problem is larger than one of underresourced institutions unable to enact otherwise effective policy. The last century's economic architecture was built on the notion of the economy as an equilibrium system, but amid today's economic storms the global economy is revealing itself to be something quite different, a dynamic system in which equilibrium is an illusion. Given this reality, our institutions are as obsolete as the defenses of the Maginot Line -- their policy guns are pointed in the wrong direction.

A new Bretton Woods is in our future, a moment when chastened global leaders will commit to building a new institutional order. But it will take another, larger economic crisis before the collective will to do so is found. In the meantime, we must immediately undertake another equally important task: We need to create a global economic observatory, an entity capable of collecting and digesting the data needed to truly understand the global economy in all its shifting complexity.

In theory, the IMF and World Bank already perform this task. In fact, what they collect is too narrow, too slow to get published, and their data-collection activities are subordinate to their policymaking and implementation missions. Imagine instead an institution with the analytic resources of Wall Street players, the reach of Google, and the openness of Wikipedia. Such an observatory would leverage the capacities of cyberspace to become a global (and cost-effective) clearinghouse for economic information. Its scope would extend far beyond the data collected by established entities today, for example probing deep into the world's illicit economies and exploring the market implications of rapidly spreading social media. And unlike those institutions, it would serve a purely informational role with no policy responsibilities.

Above all, this economic observatory would be open and independent, inviting the participation of crowds and encouraging the broadest possible research access to its data in the service of rethinking our global economic architecture. Funding is less of a hurdle than one might think. Such an observatory could be operated on a fraction of the 342 million-euro annual budget of the Organization for Economic Cooperation and Development. Moreover, its smaller budget would provide the flexibility required to preserve both the appearance and actuality of independence. It might even be possible to crowdsource the bulk of its budget over the Internet.

The global economy has reached such complexity and scale that it qualifies as a tectonic force alongside those of nature. If anything, we know more about weather systems and the like than we know about the global econosphere, and our weather forecasting is unquestionably better than our economic forecasting. It is time to embark on a systematic process of gathering the economic ground truth required to truly understand the global economy in all its shifting complexity. Then maybe next time we'll see it coming.

Thomas Lohnes/AFP/Getty Images