One of the weirder things to happen over the past few years has been to see defense policy circles basically just recapitulate the errors made by in-retrospect-naïve development economists decades ago. That’s what came to mind when I read Reihan Salam’s post on Pakistan where he observes that though there’s a compelling case for humanitarian assistance in an emergency, it seems doubtful that there are good prospects for improving Pakistan’s economy over the long term through aid:

Planting crops, building infrastructure, restoring the agricultural and economic base: though I can certainly see how the U.S. and other affluent countries can be helpful in these domains at the margin, it’s fair to ask whether Pakistan’s government is willing to take the difficult steps it needs to take to provide a basis for long-term growth. Here are a few steps that come to mind: (1) a serious, long-term commitment to women’s literacy; (2) religious freedom for the Ahmadiyyas and various oppressed Muslim sects, Hindus, Christians, and other minorities; (3) aggressive land reform that would break the back of feudalism in rural areas; and (4) a sharp reduction in military expenditures directed at countering the supposed threat from India.

Until these steps are taken, one can plausibly argue that aid flows to Pakistan will essentially subsidize the country’s corrupt, militaristic elite. Money, after all, is fungible. It is the Pakistani elite that decided to invest in nuclear weapons rather than the rural poor, not the much-despised United States. But the U.S. has helped keep the Pakistani government afloat despite abominably bad human capital policies by transferring billions in military assistance.

But rather than target this critique at a hypothetical plan for Pakistan, why not focus on the actual plans unfolding across the border in Afghanistan? As I understand it, our policy there puts economic development at the core of our strategy. But if the US government knew how to produce development in foreign countries just because we want to see it happen, the world would be a very different place. The fact of the matter, however, is that promoting development is really hard. We know a fair amount about how to do humanitarian assistance. And we’re learning more and more about how to be helpful in supporting governments that want to do the right thing. But we don’t know much about how to promote sustainable development in the teeth of Afghanistan’s corrupt elites.

And I think we need to worry much more about the possibility that even though we’re nominally committed to improving governance, in practice we’re basically feeding the parasites whose malgovernance is stifling the Afghan people’s aspirations. My colleague Caroline Wadhams has repeatedly raised the point, for example, that Afghanistan’s budget is completely unsustainable absent massive, continued government-to-government financial transfers. That means that we’re creating an Afghan state whose real clients are in Washington rather than Afghanistan; a state whose officials would risk a massive financial hit if the war were to end.

The combination of sky-high unemployment and policymakers’ apparently determination to persistently undershoot inflation targets means that the only way for the economy to adjust is via a cycle of difficult nominal wage cuts. Steven Greenhouse’s article on workers at a Mott’s plan resisting demands for such reductions helps illustrate the difficulties of the process:

“It’s disgusting, honestly, that they want to take things away from the people who made them profitable,” said Ms. Muoio (pronounced MOY-oh), a $19-an-hour machine operator who has worked at the plant 15 years.

The company that owns Mott’s, the beverage conglomerate Dr Pepper Snapple Group, counters that the Mott’s workers are overpaid compared with other production workers in the Rochester area, where blue-collar unemployment is high after years of layoffs at employers like Xerox and Kodak.

Chris Barnes, a company spokesman, said Dr Pepper Snapple was seeking a $1.50-an-hour wage cut, a pension freeze and other concessions to bring the plant’s costs in line with “local and industry standards.”

The company, which has 50 brands including 7Up and Hawaiian Punch, reported net income of $555 million in 2009, compared with a loss of $312 million the previous year. Its 2009 sales were $5.5 billion, down 3 percent.

The problem here is that both sides are right. Thanks to economic developments unrelated to the juice industry, there is high unemployment in the United States of America and especially high unemployment in the Rochester area where major employers Kodak and Xerox have been hurt by technological shifts. The result is that exactly as Dr Pepper Snapple says, the full employment wage for the area has gone down and thus in some sense wages at the plant “should” decline. Conversely, as the union observes Dr Pepper Snapple is a profitable firm even under current conditions and operating the plant at the current wage level is a profitable undertaking. There’s a lot of economic surplus to be had in operating this plant, it’s currently divided between the workers and the owners, and the workers quite reasonably don’t feel like giving it all to the owners for no reason. So now we’re in a classic bargaining standoff where there are a whole range of outcomes that would be better for both sides than a continued strike but precisely for that reason neither side wants to give in.

Appropriate monetary policy would, by getting the price level up, help ameliorate the difficulties involved in these wage adjustment issues. What’s more, it would do so while avoiding the debt-deflation problem that would arise if the entire economy tried to Mott-ify and start paying everyone less simultaneously.

I haven’t written much about the Sharon Angle Follies, but this exchange is quite interesting:

Q. Did Keynesian economics, the stimulus spending, work in the Depression of the ’30s?

A. No. And I think history has really proven that to be true. Most economists agree that the thing that really worked, which is a sad commentary, is the war.

And she’s right. Stimulus spending during the 1930s had little positive impact on the economy since there was in fact very little stimulus spending during the 1930s. Expansionary monetary policy moves made a great deal of difference in FDR’s first term, but then contractionary fiscal and monetary measures undertaken in 1937 prompted a new recession. Shortly thereafter, World War II revived the economy. But as Steve Benen says “The war was a shot in the economy’s arm because of all the spending.” The war is a textbook example of how deficit spending by the government can boost the economy by mobilizing real resources for some public purpose.

Now obviously it would be morally wrong to revive the economy over the next two years via a deficit-financed effort to destroy Germany and Japan. But the point is that if we use deficit spending to target and mobilize idle resources, the economy will grow. What’s more, if we target those resources and mobilize them to do something useful we’ll reap substantial benefits.