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Tuesday, December 30, 2008

"Disagreeing With Martin Feldstein On Defense Spending"

Stan Collender rebuts Martin Feldstein's call to use increased defense spending as a stimulus measure:

Disagreeing With Martin Feldstein On Defense Spending, by Stan Collender [Creative Commons]: As I said about a month ago, its not always smart to disagree publicly with an economic icon, especially when he's Martin Feldstein. Nevertheless, a Feldstein article published on Christmas Eve in the Wall Street Journal is so wrong that it and he deserve to be called out.

The title of the article -- "Defense Spending Would Be A Great Stimulus" -- says it all. It's Feldstein's contention that additional military spending should be part of whatever economic stimulus package Congress and the Obama administration adopt in a few weeks.

Here are my objections almost paragraph by paragraph.

First, Feldstein opens his article with this: "The Department of Defense is preparing budget cuts in response to the decline in national income." All my sources tell me this is absolutely false; the Pentagon is now planning to increase spending by a healthy amount, but it won't be the 13+ percent that several months ago it was insisting was needed. A 5 or 6 percent increase is now considered likely and, with little or no concern about inflation this year, that will be a substantial increase in DOD buying power.

Feldstein starts the third paragraph by saying "A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays." But Pentagon spending increases, especially the number of people in uniform, are almost never temporary. In most cases, DOD and its supporters on Capital Hill generally look at what was spent the previous year as sacrosanct and consider anyone who tries to reduce it anti-military, or worse.

Putting a permanent increase in military spending in place now will only mean that there will be additional pressure to raise taxes or cut other spending several years from now when inflation and the deficit return as issues.

Feldstein then repeats the same mistake in the fourth paragraph when he insists that after a "short-term surge" in outlays in 2009 and 2010, the spending increase should then be "tailing off sharply in 2011." He should know better. Personnel costs go up rather than down in future years and military procurement projects typically take many years to complete with comparatively little spending in the first year or two. In other words, major procurement projects would be about the worst type of stimulus spending.

That makes Feldstein's recommendation towards the end of the piece that the stimulus include additional "fighter planes and transport aircraft" and ships a bit ridiculous.

Feldstein tries to justify he recommendation by saying that problem with the delayed and multi-year spending of major procurements can be partially dealt with by the Pentagon buying of materials and components in advance and then "holding them in inventory" until they are needed. He then admits that this would be "wasteful" and, therefore, in effect also admits that this would violate one of his own stated principles (see below) for stimulus spending.

The fifth paragraph, where Feldstein says the government should increase the number of people in uniform by 15 percent, also makes no sense. Yes, it would provide jobs for (if we believe his number) 30,000 people. But not only would they be locked into those positions for years, the overall increase in the number of people in uniform that supposedly would be done temporarily would likely be very hard to reduce in the future.

Later in the article, Feldstein justifies the additional personnel spending by saying that it would be an excellent way to provide job training for these men and women when they reenter the private sector. But on a per person basis, that may be the most costly form of job training the federal government provides.

It's also at direct variance with something Feldstein talks about in the sixth paragraph -- the absolute need by those designing the stimulus package "to avoid wasteful spending." He says that one way to avoid waste "is to do things during the spending surge that must eventually be done anyway." But if the military threat to the U.S. doesn't require a 15 percent increase in personnel, doesn't that mean that the additional people in uniform aren't needed? If so, wouldn't adding them be "wasteful" according to Feldstein's own definition? And if the Pentagon thinks these people are needed, why doesn't it just propose that and justify the increase in spending that would result on that basis?

Finally, something that's not in the Feldstein piece: dollar for dollar, military spending doesn't provide as much an economic return as domestic spending. Building an extra tank or missile that then sits idle because it's not needed provides a one-time boost to the economy. But building a road, bridge, tunnel, sewer, or information superhighway that is needed continues to provide benefits as people, goods, and information travel faster, less expensively, and far more productively than would have otherwise been the case.

That means that starting with the headline, Feldstein was seriously mistaken.

    Posted by on Tuesday, December 30, 2008 at 12:15 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (76)


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