Sunday, January 11, 2009

Bad fiscal stimulus

Greg Mankiw has posted a lot about the possibilities behind a fiscal stimulus to jump start the American economy. My favorite points out a danger in fiscal stimulus spending on things that have no public value.

I was surprised then to see him quite on an article from the Wall Street Journal arguing that increasing defense spending would be a great fiscal stimulus program. In this paper, I argue that defense spending is the biggest waste in our government.

I am always surprised to find that people think spending on tanks and military personnel is somehow useful. Security is useful, and if buying more tanks gets us there efficiently, then its a good idea. The problem is, there are other ways to get to security (think international cooperation) without buying things that contribute nothing to our lives.

Of course, the spending multiplier means that even tanks can have a positive effect on our economy, but they have no welfare enhancing or long-run value to us. There are though lots of government spending items that leave long-term, lasting usefulness for us. Infrastructure spending on dams, bridges and public and private transportation during the great depression was very helpful for our long-run growth. A tank will never be.

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