The Buzz

Why the Welfare State is Good for National Defense

Should Social Security and Medicare be cut, to provide more money to the Pentagon?  The idea that entitlements like Social Security and Medicare should be slashed, in order to free more resources for the Pentagon and other national security agencies, is sometimes found on the center-right.  Entitlements for the middle class and defense spending are the two biggest components of the federal budget, and it might seem logical that cutting the former could free resources for the latter.  But those who hold this view fail to understand the economics and politics of modern industrial society.

We are still living in the industrial era, even though only a shrinking minority of workers worldwide still works in factories, thanks to automation.  Since the industrial revolution began, no country has been able to be a great power without having its own major domestic manufacturing base.  And since the early twentieth century, every great power has had, not merely a means-tested safety net for the destitute (which is often termed “welfare” in the US), but also expensive welfare-state policies for middle-income citizens, to provide for their income security in old age and illness.  Most welfare state spending, like Social Security and Medicare in the U.S., goes to the middle classes, not the poor.  When this welfare spending on the middle class is added to other government spending, it boosts the typical government share of modern developed nations to more than 40 percent of GDP.

It is no coincidence that all modern great powers have large welfare states of some kind.  Nor is it a coincidence that welfare state policies were promoted by Bismarck in the nineteenth century and by Churchill and the Roosevelts in the twentieth.  The modern welfare state, in its various national varieties, promotes national security in three ways.  The middle-class welfare state promotes national manufacturing by lowering domestic labor costs and boosting domestic consumption, and it secures public support for defense spending.

If the modern welfare state were abolished, and every worker had to pre-fund personal savings accounts for all of these purposes, either middle- income citizens would have to accept greatly reduced living standards during their working years, or employers would have to pay far higher wages to enable their workers to save more to enjoy a middle-class retirement.  The socialization of part or all of the costs of unemployment, retirement, and health care for middle-income workers reduces labor costs for all employers, including those in the manufacturing sector.

In addition to lowering labor costs, the middle-class welfare state helps the national manufacturing base by enlarging the domestic mass market.  The welfare state does so by maintaining a level of consumption on the part of the retired, the disabled and the temporarily unemployed that is much higher than would be the case in its absence.  

Manufacturing industries, including defense manufacturing, tend to be characterized by increasing returns to scale—that is, the longer the production run, the lower the cost of each additional unit.  The bigger the consumer base within the nation’s borders, the more efficient the national industry can be.

While government can provide a single consumer with deep pockets for specialized military manufacturing, the most successful great powers of the modern era like the U.S. have had large dual-use manufacturing sectors made efficient by mass production for civilian use as well as for defense (national automobile and aerospace industries, for example).  In wartime, a flourishing civilian industrial base can be converted for defense production.  Furthermore, product and process innovations can flow back and forth by means of military-to-civilian “spin-offs” and civilian-to-military “spin-ons.”

Mass civilian industrial production requires a mass market of middle-class consumers with adequate personal purchasing power.  That is why the transnational firms that dominate many global industries tend to be based in the three most populous middle-class nations—the U.S., Japan and Germany.  Contrary to popular mythology about globalization, the most successful transnational manufacturing firms tend to have 40-50 percent of their consumers in their home countries, which provide spring-boards for foreign expansion, chiefly into neighboring countries in the same region.

The modern welfare state supports mass industrial production by supporting domestic mass consumption, in part by minimum wages imposed by government or negotiated by employers with unions, and in part by means of the redistribution of purchasing power from the rich minority to the majority through welfare state programs.  In every modern welfare state, horizontal redistribution of income within the middle class, from working age citizens to retired, unemployed, or disabled citizens, is complemented by a degree of vertical redistribution from the rich to the middle class and the poor.   If there were no redistributive element to the welfare state at all, if middle-class workers took out only what they put in, then domestic mass consumption would suffer, and with it national manufacturing capacity, to the detriment of national military power.