Over the years, much has been written about the “Military Industrial Complex” that is composed of defense contractors and politicians who are believed to steer public policy and create wars for the express purpose of perpetuating their base of power. This narrative has been picked-up by left-leaning activists and conspiracy theorists who point to this alleged unholy alliance as the fundamental cause of our nation’s economic difficulties. This persistent drumbeat against defense spending merits a closer examination of the underlying economic facts.
The single largest component of Gross Domestic Product is consumption spending. This bucket represents both the disbursement of privately earned funds and government transfer payments that are spent by recipients of entitlement programs. A long-term analysis of US consumption spending as a percentage of GDP shows a highly interesting pattern. In the three years following the stock market crash of 1929, consumption as a percentage of GDP increased significantly as private investment crashed in response to the stock market crash. Subsequent to this, monetary contraction by the Federal Reserve initiated a deflationary spiral that suppressed consumption, and was followed-up by rationing during World War II that limited consumption expenditures further.
*Source: Bureau of Economic Analysis (BEA)
Analysis of net private investments shows the suppressive effects of the 1929 stock market crash and World War II. After WWII, investment spending stabilized between 15% and 20% of GDP, save for the occasional recession that was frequently followed by a rapid rebound. However, the recession of 2009 is plunging private investment as a percentage of GDP down to a level not seen since the great depression. This phenomenon is driven by the massive over-inventory of homes built during the real estate bubble, a ‘crowding out’ effect of excessive government expansion, and aggregated uncertainty over the future economic policies likely to unfold in the US.
*Source: Bureau of Economic Analysis (BEA)
When the total amount of government spending (including transfer payments) is expressed as a percentage of GDP, next to the total defense spending, it bursts the “Military Industrial Complex” myth once and for all. During World War II, government spending was driven almost exclusively by defense expenditures as many of the ancillary programs were postponed in lieu of the war effort. During the height of the cold war in 1950, defense spending reached a postwar peak at 15% of GDP, but has been on a downward trend ever sense, settling at approximately 5% of GDP in 2009. (Note that the 5% of GDP for defense in 2009 includes the prosecution of two simultaneous wars in Iraq and Afghanistan)
*Source: Bureau of Economic Analysis (BEA)
During the time in which defense spending has been contracting as a percentage of GDP, it is impossible to ignore the extent to which non-defense government spending has expanded. This perpetual increase in transfer payments from entitlement programs and interest on the debt that has compounded from perpetual deficits driven by this binge of entitlement spending has created a new paradigm. The “Military Industrial Complex” has been effectively dead for nearly 40 years, and was replaced with a “Government Entitlement Complex” that is continuing to grow and expand.
*Source: Bureau of Economic Analysis (BEA)
Analysis of total transfer payments and interest payments as a percentage of GDP paints an undeniable picture of the extent to which this pervasive phenomenon has come to dominate American life. In total, 18% of US GDP is driven by either entitlement payments or owed by the government as interest on debt from past entitlement spending. The importance of this Government-Entitlement-Complex™ is that it controls so much money and hold so much political influence that it dwarfs the supposed “Military Industrial Complex” in size, scope, and impact. The staggering amount of money controlled by the Government-Entitlement-Complex™ makes it the single most dominant force in American electoral politics. As more people become dependent on the government for their livelihood either from subsidies or subsistence, the more resistance there will be against reforms that are necessary to develop a healthy economy. As individual investors, we do not have the power to reverse this destructive trend, but we do have the capacity to structure our income and investments in such a way that the likely actions of a Government-Entitlement-Complex™ will help us become wealthy instead of sending us into destitute poverty. (Top image: Flickr | Kheel Center, Cornell University)
Action Item: Pro-actively structure your business and investment activities so that you are protected from the Government-Entitlement Complex™. Automate business activities so that you can reduce the number of payroll employees and lower your exposure to new taxes and regulations. Shift your investments toward areas of fundamental need so that you can become the provider of basic necessities (such as shelter) for the emerging dependent underclass.
The Jason Hartman Team
