Friday, February 11, 2011

Military Spending as Stimulus

Jeremiah asked after class the other day if military spending is related to prosperity.

The evidence on this is mixed, but definitely overrated.

I think the first thing to recognize is that if it was that easy to be prosperous, then everyone would do it. Of course, everyone does have some military spending, but in relative terms it’s declined just about everywhere over the years, decades and centuries.†

A second thing to consider is that if it was that easy, the U.S. economy would have gone through the roof in the last decade. Also, if military spending is a big deal, a decline in it would be associated with the most recent recession. It isn’t.

A third thing to consider is that the list of places that we associate with militarism leading to prosperity are ones where the private sector wasn’t doing much to begin with: so there was a big open role to step into. A good example here is Nazi Germany.

A fourth factor is if military spending is big enough to have much influence. If we take Keynesian theory at face value, what counts is purchases of goods and services – and weaponry is a good example. But most military budgets are actually compensation … which are tantamount to a transfer program and would net out of Keynesian arguments.

Lastly, most of the people selling arms are already selling everything else. The list of the world’s largest arms exporters reads like a list of real GDP. The ones that should be troubling because their export rank is higher than their GDP rank would be Russia, Spain, Israel, the Netherlands, Sweden, Switzerland, and Ukraine. That’s not great, but not exactly a rogues gallery either. The ones that then seem to be less warlike are China, India, Brazil, the UK, Mexico … probably not the list you expected. Maybe we should worry about the buyers rather than the sellers: neighbors India and Pakistan, neighbors Singapore and Malaysia, neighbors Greece and Turkey, and so on.

I think there are 3 reasons for the confusion of military activity and prosperity.

1) The U.S. is the biggest economy, has the biggest military, and is the biggest exporter of arms. But, correlation is not causation. Also, we have a volunteer military, which has much higher compensation relative to soldiers in other countries.

2) A lot of people attribute the end of the Great Depression to World War II. I’m OK with this one, but there have been a lot of people chipping away at this argument over the last decade or so.

3) There’s some wishful thinking too – it’s easy to forget about the military spending that did not lead to prosperity. In the Soviet Union, the high rate of military spending growth didn’t translate into comparable real GDP growth, while in postwar Japan, lower military spending growth rates were swamped by private sector growth.

† I put this at the bottom because it requires a more detailed argument. It is possible to find sites detailing increasing international military expenditures. There’s one at the top of this page at Global Issues. But … look closely … it does precisely what I recommend that you don’t do: plot growing data without taking logs (it is in real dollars though, which is great). It shows spending going up by about 60% over 11 years, at what looks like a steady rate. That’s roughly 4% per year. Is that a lot? Compared to what? It would be a lot in a developed country. But, a good chunk of the world isn’t developed, and is growing a lot faster than that. China has grown about 200% over that period, Now consider the fact that the chart is approximately of constant slope in this period. That won’t happen with compounding unless the rate is declining each year – which I’m quite sure is not the takeaway they’d like you to absorb. A last thought is that given the huge size of the U.S. defense budget – both because of scale and the expense of arming in the U.S., that most of this runup is actually the wars in Iraq and Afghanistan. Look again … most of the upswing is from 2001 onward.

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