Nevertheless, during the Cold War several periods of substantial economic expansion in the American economy were based on military spending along the lines of the NSC-68 Memorandum. Called Military Keynesianism, in its fully developed form the policy embodied a large and sustained increase in military spending combined with tax cuts to stimulate consumer spending and investment incentives to promote business expansion.
The first test of Military Keynesianism came with the Korean War, shortly after the appearance of NSC-68. Military expenditures almost tripled, unemployment fell to below 3 percent, and government revenues increased as the economy grew. Price controls kept prices in check, but they probably had little impact, for prices fell after a short period of increase when controls were removed after the war. The experience of the Korean War period seemed to confirm the theory: military spending and the economy as a whole expanded together, growth of the private sector helped check inflation, and public revenues rose to help balance the increased spending.
The second test came indirectly during the Eisenhower administration of the 1950s. Military spending was stabilized at about $40 billion to $50 billion annually. Three recessions followed, and the administration did little to counter the downturns with either fiscal or monetary policies as unemployment rose and utilization of productive capacity fell.
The next application of Military Keynesianism came during the Kennedy and Johnson administrations, although its policies were not linked directly to NSC-68. Rather, it professed a broader set of goals related to the Cold War and the conflict with the USSR. The best statement of the administration's program was made by Eugene V. Rostow, one of Kennedy's inner group of advisers and later Under-Secretary of State for Political Affairs. His book, Planning for Freedom, argued that Keynesian fiscal policy to maintain high levels of economic activity and rapid economic growth, supplemented by a restrictive monetary policy to hold inflation in check, would allow the private sector the freedom needed to meet consumer needs, develop new technologies, and raise living standards for all. The "growth dividend" could then be used to maintain military defenses against the Soviet Union, provide aid to less-developed countries to stimulate their growth and prevent them from falling into the Soviet orbit, and provide additional funds for aid to the disadvantaged within the United States. Keynesian economic policy was to be directed toward both domestic issues and the needs of the Cold War.
Military spending was sharply increased during the Kennedy and Johnson administrations, supplemented by investment tax credits to stimulate investment and income tax cuts to promote consumer spending. Eight years of prosperity and economic growth followed. Escalation of the Vietnam War justified large increases in government spending, and the argument of NSC-68 was once more validated. The private sector expanded.
unemployment fell, and economic growth accelerated as the military sector provided a stimulus to the private sector. Expansion of consumer goods production helped check inflation, so a tight money policy was not needed.
Finally, after three administrations—-Nixon, Ford, and Carter—that refrained from Keynesian policies, the Reagan administration provided a massive dose of Military Keynesianism. Tight money policies, begun under Carter and continued under Reagan, reduced inflation and brought a serious recession in the early 1980s. But huge increases in military spending, together with tax cuts primarily for the wealthy, stimulated the private sector once more, this time with relatively modest price increases. Military Keynesianism, spurred by Cold War rhetoric and ideology, once again produced eight fat years. The distribution of benefits was lopsided, but the gains were there. We should note, however, that the 1980s differed from the 1960s: private investment did not increase significantly, real wages fell, and the federal budget deficit exploded. Inflation was checked chiefly by restrictive monetary policies and by expansion of production in the private sector of the economy triggered by growth in military spending.
The two episodes of Military Keynesianism under Kennedy-Johnson and Reagan were each successful in triggering seven to eight years of vigorous economic expansion. But the results were different in one important respect. In the 1960s the U.S. economy was still in the era of rapid growth that followed the Second World War. All sectors of the economy benefited from the seven years of Kennedy-Johnson Military Keynesianism, except perhaps the urban poverty areas. But by the 1980s the economy was deep into the era of slow growth that began around 1970. The Reagan administration's Military Keynesianism was not a tide that raised all boats. The unemployment rate never fell to the low levels and close to full employment achieved during the Kennedy-Johnson economic expansion, and the slide in weekly earnings that began in the 1970s continued. The sluggish response of the private sector, together with the tax cuts, meant that government revenues did not rise enough to pay for the large increase in government spending. Huge increases in government debt followed.