Military spending as economic stimulus

Thus far, most of the stimulus proposals are concerned mainly with pumping money into the economy via infrastructure projects, health care, and increased welfare and unemployment benefits.  At the Wall Street Journal, Martin Feldstein suggests that the incoming administration should direct some stimulus money towards the military:

Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That’s why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments.

A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.

The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military’s annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.

Here’s a nice graph I whipped up earlier today:

This graph shows military spending  (not including outlays for the wars in Iraq and Afghanistan) since 2000, extending up to estimated spending for 2009.  Assuming the estimate is accurate, base defense spending will have almost tripled over the course of this decade.  While I hesitate to call all increases in defense spending unnecessary (a good deal of it is personnel spending, and of course spending jumped after 2001 for understandable and appropriate reasons), I don’t think it’s terribly unfair of me to describe the Pentagon as a hotbed of wasteful spending for irrelevant (or ineffective) programs.

The 2008 defense budget, for instance, allocates $8.8 billion to missile defense, $6.1 billion to the F-35 Joint Strike Fighter, $4.6 billion to the F-22, and $3.7 billion to Future Combat Systems.  You’d be hardpressed to describe any of these projects as necessary to furthering long-term strategic goals; the F-22 , for instance, is a Cold War weapon (designed for combat with Soviet air-superiority fighters) ill-suited to current strategic realities (you can’t really fight counter-insurgencies with airpower).  Before moving forward with another increase in military spending, it is probably a better idea to reduce current spending in areas like R&D.  Simply reducing the amount we spend on the aforementioned items more than accounts for the additional (and I agree, needed) procurement spending Feldstein recommends (I would also support closing overseas bases, but that’s another post).

It’s also worth adding that there still isn’t a clear consensus as to how increased military spending effects the economy.  The Center for Economic and Policy Research, for example, released a study last year suggesting that increased military spending has a long-term, detrimental effect on the economy:

– After an initial demand stimulus, the effect of increased military spending turns negative around the sixth year. After 10 years of higher defense spending, there would be 464,000 fewer jobs than in the baseline scenario with lower defense spending.

– Inflation and interest rates are considerably higher. After 5 years, the interest rate on 10-Year Treasury notes is projected to be 0.7 percentage points higher than in the baseline scenario. After 10 years, the gap would rise to 0.9 percentage points.

– Higher interest rates lead to reduced demand in the interest-sensitive sectors of the economy. After 5 years, annual car and truck sales are projected to go down by 192,200 in the high military spending scenario. After 10 years, the drop is projected to be 323,300 and after 20 years annual sales are projected to be down 731,400.

In short, the report concludes that “most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.”