Military Keynesians

When it comes to defense, Republicans think government spending boosts the economy.

In September, Mitt Romney launched a series of TV commercials promising to protect and create jobs by preventing the military spending cuts mandated in a bipartisan 2011 deficit reduction agreement. “Here in Virginia,” one ad says, “we’re not better off under President Obama. His defense cuts threaten over 130,000 jobs—lowering home values, putting families at risk.” 

It’s an article of faith among modern Democrats that employment and the overall economy depend on government spending. Although Republicans supposedly reject that premise, they make an exception in the case of military spending.

George Mason University analyst Stephen Fuller gave the Republican argument a boost with an October 2011 study commissioned by the Aerospace Industries Association. Fuller concluded that the scheduled $45 billion cut in military procurement for fiscal year 2013 would reduce GDP by $86 billion that year and eliminate more than 1 million jobs. Virginia and California each would stand to lose more than 100,000 jobs, he estimated.

It is difficult to overstate the impact that Fuller’s predictions had on the defense industry. But his analysis is deeply flawed, a fact that has been conveniently ignored by opportunistic politicians and journalists in search of the next economic scare story. 

The most critical mistake in Fuller’s analysis is his claim that when the government cuts defense spending by $1, the economy will shrink by $1.92—and vice versa when spending increases. The reality is that economists have been debating returns on government spending for years without reaching anything like a consensus. Some studies find large positive multipliers (every dollar in federal spending means more than a dollar of economic growth), but others find negative multipliers (every federal dollar spent hurts the economy). 

The multiplier Fuller uses depends on data taken from historical situations or model assumptions that do not resemble our own. For instance, we are not currently engaged in an all-consuming war effort (as we were during World War II), we are not technically in a recession (as we were two years ago), and our unemployment rates are high, but not as high as they have been during other times. In theory, high unemployment rates make government spending more potent since it allows the use of resources that would otherwise be idle. Basically, the idea is that government spending will be used to hire workers who would otherwise be unemployed. 

More fundamentally, Fuller’s analysis fails to consider the impact that massive, ongoing Pentagon spending has on the economy. In a forthcoming paper to be published in The Review of Austrian Economics, George Mason University economists Chris Coyne and Thomas Duncan argue that the permanent war economy—military spending now consumes roughly 20 percent of our budget, at a cost of over $700 billion including war spending—draws resources into the military sector at the expense of the private economy, even in times of peace. They find that the huge defense budget undermines market processes and decreases our standard of living.

Academic studies corroborate the claim that government spending can reduce private-sector activity. A 2011 National Bureau of Economic Research (NBER) working paper by Lauren Cohen, Joshua Coval, and Christopher Malloy of the Harvard Business School finds that federal spending causes local businesses to scale back their employment, which causes declines in sales rather than growth. In other words, when government spending grows, the private sector shrinks as normal economic activity is crowded out. 

University of California at San Diego economist Valerie Ramey reviews the literature on the impact of government spending in a January 2012 NBER paper. “No matter which identification scheme or which sample period was used,” she reports, “an increase in government spending didn’t lead to an increase in private sector spending. In most cases, it led to significant decreases.” 

That holds true for Pentagon spending. Like any investment of time or money, military spending is subject to decreasing marginal returns. Since national defense is a public good, creating a system for protecting the nation is economically beneficial. Beyond a certain amount, however, increased government spending crowds out private-sector investments of greater value. 

In a 2012 study published by the Cato Institute, Benjamin Zycher of the American Enterprise Institute reminds us that even in the worst-case scenario, in which defense jobs are lost, this reduction does not necessarily represent a net loss to the economy. The newly unemployed person feels pain, of course, but the resources freed up in the process may yield higher returns elsewhere.

Studies that consider the additional tax levies needed tomorrow to pay for today’s spending find that government outlays can have a serious negative impact on the economy, even in the case of defense spending or other legitimate government functions. For instance, the Harvard economists Robert Barro and Charles Redlick found in a 2011 study called “Macroeconomic Effects from Government Purchases and Taxes” that the tax multiplier—the effect that tax increases have on GDP—is slightly negative. If the government raises taxes by $1, they estimate, the economy will shrink by $1.10. When this tax multiplier is combined with the effects of the spending multiplier, the overall effect is even more negative. These findings also imply that if a reduction in defense spending leads to future tax cuts, the economy will benefit. 

Looking at different types of military spending than Fuller, the work of Mark A. Hooker and Michael M. Knetter, the current president and CEO of the University of Wisconsin Foundation, shows that some defense cuts may even have no negative impact on the economy, even in the short run. In a 1999 study published by NBER, Hooker and Knetter looked at the 25 percent reduction in real defense spending during the 1990s, particularly the economic consequences of closing 57 military bases, which resulted in job losses ranging from 150 to more than 16,000. Comparing employment in counties where bases closed to employment in counties where they remained open the authors found that “in most cases, job losses didn’t spill over from the base to other sectors in the economy as is typically assumed in impact analyses.” Instead, “jobs were created in particular when [a] base’s resources could be deployed in alternative uses.” 

The employment reductions in the affected counties were limited to the jobs at the bases. But these direct losses didn’t mean a net reduction in employment, since in most cases the closures resulted in transfers or reallocations of military personnel out of the region. 

As we head into the budget battles of 2013, it’s important to remember that the GOP’s military Keynesianism is no more academically sound than the broader version preferred by Democrats. Until both sides repudiate faith-based economics, we will be stuck with excessive government spending. 

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  • Pound. Head. On. Desk.||

    Frisk!

  • ||

    It seems the Repugs make a lot of exceptions to their principles. On all of them really. The ones that dont ( Palin, West) get drummed out.

    I just cant figure out why they lost..... *scratches head*

  • Pound. Head. On. Desk.||

    It seems the Repugs make a lot of exceptions to their principles. On all of them really. The ones that dont ( Palin, West) get drummed out.
    I just cant figure out why they lost..... *scratches head*

    When given a choice between Pepsi and knock-off Pepsi, which do people choose?
    When Republican decide to be their own brand again, they have a chance. Until then, even when they win, they lose.

  • ||

    Until then, even when they win, they we lose.

    FIFY

  • Robert||

    This one's just an example of how politics gets "locked in". It started with the Cold War. All that "war" time without actual all-out warfare, the kind where you actually try to kill as many people as necessary to make the other side surrender, which would've taken nuclear weapons once they became available to both sides. What position could you take at that time to be anti-Communist? Be for buying lots of guns, because eventually they'd be used to shoot Commies. The positions then got locked in whereby the "right" wanted more guns, the "left", fewer, irrespective of any actual shooting. It became a habit that didn't end with the Cold War, because, remember, there wasn't all-out war to associate gunliness with. Republican Keynesianism is just ain insincere rationaliz'n for that policy, just as practically all supposedly Keynesian practice has been.

  • Virginian||

    It is difficult to overstate the impact that Fuller’s predictions had on the defense industry. But his analysis is deeply flawed, a fact that has been conveniently ignored by opportunistic politicians and journalists in search of the next economic scare story.

    _______________

    I don't see him as making the argument that you ascribe to him. He's not making the Keynesian argument that government spending creates more jobs total, he's simply trying to quantify just how many jobs would be lost if the "defense" cuts were to go through.

    It's also not his fault that GDP is a deeply flawed measurement. He is simply stating that he thinks the impact of the cuts will be an 86 billion dollar loss in GDP and a million fewer jobs. Of course we here know GDP is a poor way to measure actual wealth, and that these jobs are as dependent on federal profligacy as any Underwater Basket Weaver employed by the National Endowment for the Arts. Honestly, at least half all of the jobs north of Fredericksburg and south of the Potomac are net drains on the economy. But they boost the phony GDP measurement. So obviously they can't be dispensed with. Also, a job is a job, in the mind of most of the public. Even though we know that a convenience store clerk making 25,000 a year is a healthy contributor to the actual production of wealth, while a defense contractor pulling down 150,000 a year is just a parasite in a nice suit.

  • lightning||

    I agree, and your comment illustrates a basic problem we now have. Given the way GDP is calculated government spending is a direct driver of either growth or contraction. To an extent, the keynesians are correct that if you cut spending GDP will contract. Rational people know that the contraction is necessary to the future fiscal health of the nation, but there is no way ANY politician is going to admit this and they will fight it happening. Why? They are making money hand over fist, some want to become overlords, and the others simply want to get while the getting is good. Others - all of the above.

  • sarcasmic||

    GDP is meaningless because it doesn't count the opportunity cost of government's removing money from the economy before it spends it.

  • Restoras||

    Check out the big brain on sarcasmic!

  • sarcasmic||

    What language do they speak on 'What'?

  • ||

    More precisely, GDP is meaningless because it counts government spending as productive activity, exactly equal to private industry producing something consumers actually want, regardless of whether the government spending is on something marginally useful (roads, bridges, etc.), something entirely wasteful (bureaucrats watching pr0n on government computers), or something downright counterproductive (wrecking used cars that are still driveable in Cash for Clunkers).

  • Steve G||

    rawrr, a little GMU civil war, nice!

  • Mike M.||

    The upcoming "fiscal cliff" has proven once and for all that there's no such thing in the world as a real Keynesian. Lefties like Chony Krugnuts exposed themselves by arguing that Obama shouldn't do any deal and should just let everyone's taxes go up in the middle of an ongoing global depression.

  • sarcasmic||

    This goes back to the patron saint of conservatism, Ronald Reagan.

    Isn't he credited for getting the economy back on track by borrowing huge sums of money to buy things that go "boom"?

  • Virginian||

    I think it's usually his tax cuts that get the credit for that.

  • Restoras||

    And the greater simplification of said tax cuts.

  • ||

    In all fairness, there was at least some justification for it at the time. And, importantly, after the Soviet Union collapsed and the Cold War ended, we scaled down military spending to match the global security environment. Quite unlike today.

  • Harvard||

    You think quite unlike today eh? Keep in mind that "diplomacy" is most often conducted at the point of a gun. Consider this; China's new deep water aircraft carrier, an enormous catamaran half again bigger, nearly twice faster than any of ours (they intend to build 6), China's new stealth fighter bomber (naval version already in the test stage). China has already destroyed two surveillence satellites (their own) with a laser (one from the ground, the other from space. China owns our ass in the international debt game and is the chief oil producer in the largest deep water petro fields off Cuba, Brazil and Venezuela
    You can advocate huge defense cuts. It will help to provide the populace with the Chink version of Rosetta Stone.

  • Harvard||

    Go to club.china.com for pictures of the catamaran carrier. Very impressive.

  • waaminn||

    Some times dude you just gotta rol with it lol

    www.Goin-Anon.tk

  • Heroic Mulatto||

    DON'T TALK SHIT ABOUT BICYCLE INFANTRY!

  • C. S. P. Schofield||

    The history of defense spending in my lifetime has been that Republicans spend on defense, and then use the military they equipped to exert their will across the globe. Democrats cut on defense and then use the military they deprived of equipment to exert their will across the globe.

    Of the two styles, I like the Republicans' slightly better.

    The problem, historically, is that you can either waste money on defense, of save money on defense in which case sooner or later somebody else will lay waste to the country.

  • jili5||

    I didn't know Democrats ever actually cut the military just like Republicans never actually cut entitlement spending. Both parties claim the other one is cutting something if they simply don't increase spending as much as the other one wants.

  • C. S. P. Schofield||

    It is my impression that, whether of not overall spending has ever dropped (and I think it has) the Democrats are very fond of cutting both bases (not in their districts) and weapons programs … and then they while about having to buy more spare parts for the weapons the programs they cut were slated to replace.

    My real point, however, is that Republicans plan to use the military and spend money on that basis. Democrats claim to be against using the military, plan spending cuts on that basis, and are AT LEAST as quick to yell for the Big Green Machine as the supposedly "War Mongering" Republicans.

    The Democrats, by the way, got us into WWI, WWII, and Korea, certainly made Vietnam worse, and can arguably be blamed for the most costly war in our History (do I really have to say it was the Civil War?. But it is the Republicans who are war mongers. Right.

  • ||

    The Democrats, by the way, got us into WWI, WWII, and Korea, certainly made Vietnam worse

    Wait...In what universe is Vietnam not the Democrats doing?

  • ||

    Truth. 1 Democrat got us there, another Democrat escalated, and, ironically enough, a Republican closed up the shop.

  • jili5||

    It's always expected that Republicans keep spatting Keynesian nonsense while contradicting themselves claiming they're for the free market, after all it allows them to dole out military contracts and keep bribing foreign dictators. But I thought George Mason educated their students and faculty a little better than this. They are one of the few (very few) schools that teach sound economics.

  • joey89924||

    Fredericksburg and south of the Potomac are net drains on the economy.
    BAT54S

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  • nikea||

    University of California at San Diego economist Valerie Ramey reviews the literature on the impact of government spending in a January 2012 NBER paper. “No matter which identification scheme or which sample period was used,” she reports, “an increase in government spending didn’t lead to http://www.cheapbeatsbydreonau.com/ an increase in private sector spending. In most cases, it led to significant decreases.”

  • attractions guide||

    I like watching TV

  • zhonga||

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  • cinsel chat||

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