Since this is obviously a point of contention in the current fiscal cliff craziness. Barney Frank wrote this article earlier this year which I'm obviously sympathetic to. I particularly enjoy this line: In a book on modern warfare I'm currently reading, the author (Jim Dunnigan, for you wargame nerds out there) makes the claim that cutting defense spending may or may not have short term negative effects on the economy, but is good for the economy in the medium to long term. He argues that defense spending doesn't really produce things of economic value, that the high-tech nature of most defense work creates a "brain drain" that could be a significant opportunity cost for civilian business, and that most job losses from cutbacks are easily replaced. However, he doesn't cite anything, so I have no idea where he's getting the data. I quite like his line of reasoning, but was hoping someone here might have some more substantial support to throw at it.
I was under the impression that the basic "inefficiency" of defence economics was uncontentious - at least among informed observers, even informed conservatives.
Well, given that a simple Google search brings up a lot of opinion pieces that argue otherwise, either that's not the case, or there are MANY uninformed observers out there. Honestly, it's probably the latter.
It's a short vs. long term thing. In the short term you'd expect major defense spending cuts to reduce GDP (Keynesian multipliers and all that). In the long term probably some of the effects you're describing come into play.
Employment: In general, outside of unusual circumstances, the federal reserve determines the unemployment and growth rate, regardless of the level of government spending or the taxes required to fund it. Since we're still flirting with the rare situation of a Keynesian liquidity trap where the Federal Reserve is having a hard time doing what it wants, at the moment defense spending cuts (along with all other government spending cuts or tax increases) could create shocks that the Fed can't offset, resulting in higher unemployment, lower labor force participation, and less output. Productivity: The Pentagon is a government program that outlays for current operations (shooting people, looking menacing) in labor and capital purchases, researches future projects that will make those activities more effective, and pays a retirement program to former employees. The unique value is basically two things: 1. Keeping people from invading, keeping the world stable, and protecting the sealanes for commerce. The line between this and "beat up developing countries so US corporations can make money" is fuzzy. 2. Historically military spending is a surprisingly productive source of basic scientific research. No one with half a brain can argue with a straight face that spending cuts will hurt #1, so it's really just #2. #2 could of course be done more effectively outside of the Pentagon if it didn't have the "must kill people" as the project goal. People are just far more willing to pay for research to murder foreigners for some reason.
Yeah, I think some spending, that has historically come under defence spending, has had large economic multiplier impacts (see, computing, nuclear power, the internet, all kinds of maths) but there is no intrinsic reason unique to defence oriented research why it has to be this way. Other than, of course the political reason that fear is a good stick to use on people to make them support paying huge taxes in furtherance of technological change of which they are otherwise leery. See the space race and the current abject failure to move space technology forward post USSR collapse.
You'd expect short term impact GIVEN THAT THE CENTRAL BANK IS NOT DOING ITS JOB. This is an important caveat that needs to be repeated every time fiscal multipliers are discussed, because a properly run central bank (RBA, Riksbank, etc) will automatically ease in response to fiscal tightening. There's a recent study that shows tax vs spending differentials are entirely dependent on central bank reaction function and that IMF study showing increased mults in the crisis era where central banks (contra available evidence) consider themselves unable to respond. If the central bank IS properly offsetting things, then the impact is microeconomic in nature; some sectors shrink, others grow, pie size remains constant. Long term impact, well, that's all supply side and depends on what the institutional response to a decline in defense spending happens to be. If the shittiest suppliers get the axe, we'd expect higher long run growth. If the suppliers with the least influential connections get the axe, the impact is more ambiguous. Long run supply side is too dependent on 'local' phenomena for us to generate accurate expectations from a broad overview perspective. Then there's the question of which sector benefits from a decline in defense supplier hiring. Lobbying? Space? Aeronautics? Automotives? Some of these industries are closely linked to defense spending, so a growth bump from a decline in dollars per experience year costs for their labor might only offset their revenue loss (net nil growth change). Or it could be in a partially unrelated industry like, uh. Honestly I can't think of a single sector where the DOD is 't a huge buyer.
I thought about inserting the central bank caveat, and decided against it. Ultimately I agree that if the central bank was fully committed to offsetting the short-term effects of fiscal austerity, there's a pretty compelling theoretical case to be made that the short-term macroeconomic impact would be minimal. They're not, nor have they ever been, nor is there any indication that they ever will be, so as much as I'm a fan of the Sumner / market monetarist school of thought, it's just a theoretical curiosity at the moment. Certainly when prognosticating the impact of policies that are somewhat likely to happen it's not very useful.
In fact they are, and were big on doing almost exactly that prior to 2k7. Hence the Greenspan put. You can check the FRED data yourself to see him doing it to attack slumps. I have no earthly idea why Bernanke was less interested in offsetting than Greenspan being as he wrote the damn book on non interest rate offsetting monetary policy. And that's ignoring the Sept 'commitment' to that no tightening til 5% unemp/3% inf (not enough and not right, but something). (i wish they'd pre-emptively ease, but apparently that's not something the fed wants to do).
The best part here is the blatant contradiction that military spending costs jobs, yet fiscal austerity everywhere else creates jobs. Really, what's going on is more straight forward -- greedy people like things that make them more money. Rich and otherwise conservative corn farmer? Sure government corn subsidies are great! Unsurprisingly those involved in what amounts to military industry payola are all for military spending. Not got a finger in the till? Taxes and government spending are bad!
