America’s Peace Dividend, by Ann Markusen (ed.)

 

Comments on David Gold's
"Could We Have Done Better? A Retrospective on the
1990s Peace Dividend in the United States"

Cindy Williams

 

Summary of Article

This article poses two questions: How did the United States use the peace dividend that resulted from the post-Cold War downsizing of the armed forces? Could the peace dividend have been put to alternative uses that would ultimately have resulted in a better economic outcome for the country?

Professor Gold defines the peace dividend as the sum of resources no longer claimed by the military and therefore available for non-military purposes. He distinguishes between two views of the peace dividend. The first, relatively narrow view, sees the peace dividend as a source of consumption: the increase in non–military expenditures made possible by the drop in military spending. The second sees it as a source of long-term investment: the overall improvement in living standards that results from alternative uses of military resources.

The article takes issue with the conventional wisdom that the peace dividend was the initiating spark for the economic recovery and boom of the 1990s. As the author indicates, conventional wisdom holds that the reduced military spending of the late 1980s and early 1990s led to reductions in the federal budget deficit. Lower deficits resulted in lower inflation and interest rates. As a result, investment in housing and business–no longer crowded out by the high cost of borrowing–grew.

Gold challenges the conventional argument on two grounds: First, the 1980s' model that predicted the crowding out of investment was based on fundamental assumptions about the non-accelerating inflation rate of unemployment (NAIRU) and the level of resource utilization the economy could sustain. The boom of the late 1990s proved the assumption wrong; in retrospect, it is apparent that the economy was not operating at the maximum level of resource utilization generally presumed in the 1980s. Thus reduced deficits may have played a much smaller part in the economic recovery and boom than is commonly understood. Second, the boom was led by investments in information technology, which had their roots in the 1970s and early 1980s. Thus the main driver of the boom was not deficit reduction fueled by the drop in military spending, but the technology expansion.

In fact, Gold argues, the nation did not spend the whole peace dividend on deficit reduction. During the 1990s, as military spending declined as a share of gross domestic product, non-defense discretionary spending fell very slightly, and entitlement spending increased somewhat. But the same period saw a mild increase in tax rates and a large increase in federal revenues. Thus the deficit reductions of the 1990s can be attributed to the increase in tax collections as well as the decrease in defense spending. In fact, by examining the timing of increases and decreases in federal spending accounts and revenue levels, Gold determines that the nation used about 40 percent of the peace dividend to protect non–defense programs–especially in the areas of science, space, transportation, education and health–that would otherwise have suffered reductions under successive deficit reduction measures.

Thus in answer to his first question, the author finds that the peace dividend was paid partly to reduce the deficit and partly to spare some non–defense public–sector programs from the budget ax. Protecting some of these non-military programs will likely yield benefits in the future and can be viewed as investment rather than consumption. But the choices of programs to protect were haphazard, the result of political compromise rather than a targeted effort to invest for the best long-term economic effect.

In answer to the second question, Gold finds that the nation could have spent the peace dividend more effectively by investing more of it in public–sector programs that have the potential to promote long-term improvement in living standards. Targeted investments in technology, in physical and human capital, and in poverty and inequality reduction would have increased the chance that the peace dividend had a long-lasting impact.

 

Comments

This article represents an important contribution to the understanding of the economic effects of the Cold War and its aftermath. The author offers an insightful alternative view of the value of balancing the budget, the economic results of the peace dividend and the world that might have been. The piece has significant implications for the future as well, since the question of how to spend the federal surplus that economists project as far as the eye can see is by no means settled.

The author’s argument that the nation did not have to balance the budget to achieve the economic recovery and boom of the late 1990s is compelling. The Congressional Budget Office and others who continue to defend the explanatory and predictive powers of the NAIRU acknowledge that the economy is operating well above the level of resource utilization previously thought to be maximal. Given the large size of today’s surpluses, the unanticipated size of federal revenues of the late 1990s, and the dramatic productivity improvements and investments stimulated by information technologies, the role that deficit reduction played in the current economic expansion seems less important than may be commonly believed.

I am somewhat less persuaded by the author’s calculation of the peace dividend’s relative contributions to deficit reduction and to public investment in the 1990s. To my way of thinking, there are too many variables on both sides of the equation to determine which specific factors caused which effects. During the 1990s, defense spending declined, information technologies exploded, welfare programs saw significant changes, commodity prices sank, and medical costs grew at lower rates than expected. At the same time, deficits dropped, the economy boomed and non-military public spending suffered less than anticipated. With all that going on, assigning specific causes to specific outcomes would seem difficult. Since the calculations are cited from previous work by the author and not reiterated in this article, however, I am unable to assess the merits of the argument in detail.

In my opinion, the author’s answer to the second question has the more serious implications for the future. As such, I feel that it deserves a more rigorous treatment than this article provides. Gold suggests four ways that the nation might have invested to put the peace dividend to better use than balancing the budget. All four ways sound plausible and would seem to have high potential payoff. But Gold’s conclusion is likely to be challenged by opponents of non–military public investment on economic as well as political grounds. Economists differ regarding the relative social rate of return to private–sector investment versus government outlays that are financed by deficits. And the value of surpluses may be greater than their effect on today’s economy, if they permit the nation to bolster Social Security and Medicare programs as baby boomers begin retiring in large numbers.

On the political side, opponents of greater public–sector investment will argue that the government’s track record of choosing technology winners (or letting go of the losers) is not good; that private–sector investment built some of the nation’s key physical infrastructure and the public role in infrastructure investment should be limited; that investment in human capital is better left to states and local governments; and that further investment in poverty and inequality reduction means returning to a welfare system that locked generations of Americans in poverty.

The article would benefit greatly from an expansion of the final section that lays out a few specific examples for each of the alternative uses of the peace dividend and then runs through and counters some of the political arguments that will be posed against them. In addition, I feel this section deserves a few paragraphs that explore the economic arguments and evidence regarding the relative long-term economic merits of these public-sector investments compared to private-sector investment or consumption.

 

Summary

This article represents an important contribution to the overall understanding of the aftermath of the Cold War. Its premises and arguments are clear and refreshing. It would benefit from an expansion of the discussion of the alternatives uses to which the peace dividend might have been put–and to which anticipated budget surpluses might still be put in the future. The expanded section would include more specific examples of alternatives as well as the economic and political arguments that lay out a case for their value.

 

America’s Peace Dividend