News Could Significantly Upping Defense Spending Help the Economy Recover?

[CRGreathouse]

Keynesian does not work always as it should because government fail to respond within appropriate time sometimes not because it always crowds out the private investment.

That's certainly what a Keynesian would say, yes.

 

[talk2glenn]

Could you provide a source for this?

I'm usually not a fan of doing the research of others; properly defining an elementary economic theory should be the claimants job, not mine. But...

http://agonist.org/stirling_newberry/20081115/how_keynesian_stimulus_works

"This conclusion, that economies can stabilize after a shock at a lower level of production was his reason for calling for "priming the pump" stimulus: spending which would encourage people not to defer purchases, or businesses not to defer investment based on fears about the economy."

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Clearly, we can all see that this proposal is metaphorical, not practical?

I feel the need, right about now, to mention the broken window fallacy.

The broken window fallacy is an argument about efficiency of outcomes, and is used to address the claim that war is economically productive, independent of defense spending.

To be fallacious, the argument assumes the homeowner would have spent his money productively had the window not been broke. Keynes would respond that during a recession, the capital is by definition saved, not spent. Therefore breaking the homeowners window (a metaphor for forcing capital to be put to work) is more productive than the status quo, but certainly less productive than alternatives.

 

[CRGreathouse]

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Emphasis added.

Can you explain?

 

[mugaliens]

Maybe we should have the military take over building of the fence on the Mexican border and equip it with the latest Solar and Wind technologies - coupled with guard towers and soldier barracks, helicopter pads, and Drone facilities.

The Government could discount energy prices and still realize a (GASP!) Return On Investment.

Interesting idea. In the days of old, members of the military were expected to do nearly all the work of repairing and maintaining their equipment, including scraping rust and barnacles, painting, cutting grass, sweeping/cleaning/mopping/polishing... Going through basic or OT schools, that's still done, but these days it's largely contracted out once you hit your operational units. I do not buy into any "savings" involved, as these work details largely used additional time available to servicemembers not spent elsewhere in training or operations.

One of the issues I see with your idea is that of community creep. That's what we call what happens when the military builds a base way out in the middle of nowhere, only to find dozens of businesses and services springing up just outside the gates who provide services from dry-cleaning to eateries to dining room furniture to the servicemembers and their families.

I think drones provide exceptional value, covering vast expanses of terrority at a fraction of the cost of dedicated ground troops, while allowing roaming patrols to conduct the pickups. If there's a large breech at one point, helicopters can deliver a force of troops with more than enough numbers to round them up.

Both the drones and the air assault forces can be housed away from the border, in more hospitable areas, while still being able to conduct patrols and respond as required to keep our borders secure.

 

[Galteeth]

I feel the need, right about now, to mention the broken window fallacy.

This was basically what I was trying to express.

 

[jduster]

Increasing defense spending should only be done for national security reasons, otherwise it becomes a broken window fallacy. Sure, we could spend $400 billion dollars on defense spending that isn't vital to the country, but that money could be spent in much better areas such as medicine and education.

 

[mheslep]

I'm usually not a fan of doing the research of others; properly defining an elementary ...

You mean classical. I think you'll be hard pressed to find a economics text saying Keynes' A General Theory ... is elementary.

... economic theory should be the claimants job, not mine. But...

I didn't ask you per se about a working definition of Keynesian theory or to provide condescension; I asked for a reference in accordance w/ PF guidelines about your statement:

It does not advocate that the government buy useless rocks; it says that the government continues to buy things it already values, just more of them.

Instead, you provided an agenda blog site as a reference and side stepped the question by posting something that says nothing about what the government should buy.

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Clearly, we can all see that this proposal is metaphorical, not practical?

The example is narrow or marginal, not metaphorical. Burying money only to be dug up qualifies as an attempt at demand side stimulus, but would have no other utility.

 

[talk2glenn]

You mean classical. I think you'll be hard pressed to find a economics text saying Keynes' A General Theory ... is elementary.

Classical? Really? You do realize that Keynes is considered the father of the anti-classical movement in economics? One might as well call Einstein a classical physicist. Under classical economic theory, the market was expected to be self-correcting towards long run equilibrium, through cyclical volatility.

The Depression demonstrated practically - and Keynes theoretically - that while this was technically true, the new equilibrium level could be below the pre-recession output level, due to the permanent removal of production capacity from the market in response to the decline in consumption and investment. Keynes took it one step further - he argued that the market may be prevented from naturally reaching any equilibrium, lower or otherwise, by price inflexibility (for example, worker unwillingness to take additional pay cuts, or consumer unwillingness to purchase rather than save at any price due to their individual long-run concerns). This flies in the face of the basic assumptions of classical economic perspective - the so-called invisible hand.

I meant elementary in that it is taught in ECN 101.

I didn't ask you per se about a working definition of Keynesian theory or to provide condescension; I asked for a reference in accordance w/ PF guidelines about your statement:

My statement was an accurate, working definition of Keynesian stimulus. It is not reasonable to misrepresent Keynes and then claim that by attacking this straw man you've said anything useful about one of the central tenets of modern economic theory.

Instead, you provided an agenda blog site as a reference and side stepped the question by posting something that says nothing about what the government should buy.

Agenda driven? I'll admit I linked to the first Google link I followed which provided a simple, non-technical explanation of the theory. Regardless, this strikes me as attacking the messenger - you have any technical complaints with the content, other than the fact that it disagrees with your own (erroneous) interpretations?

The example is narrow or marginal, not metaphorical. Burying money only to be dug up qualifies as an attempt at demand side stimulus, but would have no other utility.

I feel silly having this discussion. This is the risk academics take when they use metaphor and simple hypothetical narrative to impart complex ideas. Keynes was not seriously suggesting that the government bury money as a form of fiscal stimulus. He was making a point. That point is, "demand creates its own supply" - the best way to insure a constant level of production in an economy is to maintain consistency of demand. By injecting additional currency into the market during periods of increased savings (recessions), the market will naturally organize labor to the productive pursuit of receiving that currency for services rendered (ala, digging it up).

Practically, Keynes argued for infrastructure spending and (to lesser effect but still desirable) interest rate spending as the mechanisms most likely to produce an efficient, desirable effect (specifically, that the government should build roads and bridges and buy down the interest rate through intervention in the loanable funds markets).

There are reasonable arguments against Keynesian theory (specifically, the Austrian and American economic schools take issue with some of his claims, particularly price inelasticity), but to suggest that he would advocate that the government get into the business of quarying useless rocks and then force people to buy them (a collectivist economic approach, clearly) is not reasonable.

 

[mheslep]

My statement was an accurate, working definition of Keynesian stimulus.

Says who? Support it with a reliable reference.

It is not reasonable to misrepresent Keynes and then claim that by attacking this straw man

What are you talking about? I've proposed nothing, thus no strawman.

https://www.physicsforums.com/showthread.php?t=414380

 

[mugaliens]

Practically, Keynes argued for infrastructure spending and (to lesser effect but still desirable) interest rate spending as the mechanisms most likely to produce an efficient, desirable effect (specifically, that the government should build roads and bridges and buy down the interest rate through intervention in the loanable funds markets).

And until a couple of yeas ago, this was, more or less, the approach we took.

There are reasonable arguments against Keynesian theory (specifically, the Austrian and American economic schools take issue with some of his claims, particularly price inelasticity), but to suggest that he would advocate that the government get into the business of quarying useless rocks and then force people to buy them (a collectivist economic approach, clearly) is not reasonable.

You're right. Infrastructure spending only works, and I mean only, as a means of improving the economy, when the projects upon which the funds are spent have a direct, or nearly direct, and significant and positive impact on one or more key aspects of the economy. Good transportation is one of those aspects, or rather, the effect it would have on our economy if it weren't good, is one of those aspects.

Traffic jams, for example, including those caused by repairing both sides of the road simultaneously, don't make for efficient deliveries. What costs the transportation companies winds up costing the consumers. But we can't afford to create an infrastructure so expansive that it eliminates all traffic jams. That's a luxury, not a utility.

There appears to have arisen this idea that spending is a means of solving our economic issues. That idea is fundamentally flawed, and leads to the temptation and action of increasing spending not because the target is worthwhile, but simply because of the flawed premise itself.

This has the potential for huge wastes on non-essential programs, void of return on both those programs as well as the economy. The only solution is to ditch the flawed premise, and stop spending as a means of improving the economy. That's a pipe dream.

Instead, if any spending is done, it should be based on both the project's inherent worth and value, but within budget - always within budget. And that includes making serious payments on the principle behind the interest!

 

[nismaratwork]

Am I painfully naive in believing that a bi-coastal system for high-speed maglev rail would be beneficial in breaking some measure of dependency on airlines in those areas, improve traffic, and some small amount of local pollution? Elevated rail of this type allowing for an east-coast line from Florida to NYC/Boston would seem wise, as would a west-coast line. Given the failure of Amtrack, I get the hesitancy, but that tech was never going to compete with air-traffic.

 

[mugaliens]

Am I painfully naive in believing that a bi-coastal system for high-speed maglev rail would be beneficial in breaking some measure of dependency on airlines in those areas, improve traffic, and some small amount of local pollution? Elevated rail of this type allowing for an east-coast line from Florida to NYC/Boston would seem wise, as would a west-coast line. Given the failure of Amtrack, I get the hesitancy, but that tech was never going to compete with air-traffic.

I agree with you 100% in that if it ever were to prove economically beneficial, it would have long ago. Just too much territory for rail to have won out over air transportation. In Japan, rail rules. Here in the US, air rules.

 

[talk2glenn]

Am I painfully naive in believing that a bi-coastal system for high-speed maglev rail would be beneficial in breaking some measure of dependency on airlines in those areas, improve traffic, and some small amount of local pollution? Elevated rail of this type allowing for an east-coast line from Florida to NYC/Boston would seem wise, as would a west-coast line. Given the failure of Amtrack, I get the hesitancy, but that tech was never going to compete with air-traffic.

One should always be deeply skeptical of these sorts of stimulus programs as being "more efficient" than "conventional" (ie, expanding existing, proven infrastructure) spending.

Critically, the question you should be asking is why massive government intervention in the form of federal stimulus funds is required in the first place. If it were the case that rail traffic were practical, it would have developed naturally. There were no political obstacles inherent to rail traffic relative to aircraft that would have given the latter a non-market advantage over the former.

Any stimulus funds spent on these sorts of unsustainable non-starters, like high speed rail, is likely to be wasteful relative to alternatives (like improving highway infrastructure, commercial rail, or airports). There is no room for competitive passenger rail in the US; air traffic coverage is too competitive and too systemic.

Government likes to use crisis periods to sneak through massive federal interventions of favored industry that would never have been tolerated during normal budgeting, on the basis of stimulus. However, this kind of political maneuvering was a big point of failure with the initial ARRA package: money was tagged to non-starter projects like high speed rail, and ultimately was either not spent or spent with no tangible short-term effect (indeed, most of the grants for high-speed rail projects were spread thinly around the county on potential projects, most of which will never break ground, and the soonest of which is supposed to be open in 2015 - 6 years after the bill was passed).

It's always better in cases like this to stick to the old axiom, "keep it simple stupid". If somebody is trying to sneak some provisions into emergency spending bills, it's probably because taking the time to analyze the productive potential of the proposal would reveal it to be pretty much useless.

 

[mheslep]

One should always be deeply skeptical of these sorts of stimulus programs as being "more efficient" than "conventional" (ie, expanding existing, proven infrastructure) spending.
.

Do you mean to say that spending on infrastructure is proven to be stimulative? If so, to what source or data are you referring?

 

[nismaratwork]

Thanks for the responses... I have a lot to think about.

 

[talk2glenn]

Do you mean to say that spending on infrastructure is proven to be stimulative? If so, to what source or data are you referring?

Well, sure, any spending is "stimulative"; the question is always one of alternatives. Would $10 spent on new high speed rail have been more effective if it were spent on a new runways or highways? Probably. And indeed, to the extent that the money is not spent, it is not stimulative.

You're asking for proof, but I don't think it can be provided in the manner you want. There is no experimental test for economics; it is a science of models and predictions. Try setting up a market in a laboratory - it's just not practical. Further, aggregate outcomes cannot be attributed to individual policies; modern economies are terribly complex and there is strict interconnectivity. I cannot point to unemployment rates over a term and tell you which individual policy change was responsible for the change in employment.

That said, the simplest of economic models tells us that more demand, with supply held constant, will have the desirable effect of raising prices (stopping deflation) and increasing output. You really contest that?

[URL]http://upload.wikimedia.org/wikipedia/commons/7/7a/Supply-and-demand.svg[/URL]

 

[mheslep]

Well, sure, any spending is "stimulative"

No, not necessarily. The spending can be, and visibly has been in this attempt, simply saved instead. And, the money spent by the government is taken or borrowed from someone else in the private sector in the attempt to stimulate.

That said, the simplest of economic models tells us that more demand, with supply held constant, will have the desirable effect of raising prices (stopping deflation) and increasing output. You really contest that?

S/D curves are a strawman distraction at this point. The issue is not what happens when D1 moves to D2; the issue is how , or what is required to move D1 to D2.

 

[mugaliens]

No, not necessarily. The spending can be, and visibly has been in this attempt, simply saved instead.

I'd argue that unless spending is on clear, solid, and useful projects, it's wasted, or worse, abused/stolen, taken from taxpayers and used to line the pockets of those who figured out how to siphon off the funds into their own pockets.

S/D curves are a strawman distraction at this point. The issue is not what happens when D1 moves to D2; the issue is how , or what is required to move D1 to D2.

I'd again argue that whenever funds move from one segment to another, they are lost, in part, at the very least, and in some cases in close to in whole, by the same or similar friction spoken of by Carl von Clausewitz.

People think funds can be transparently shifted from one segment of society to another with impunity or without loss, but this is a myth. When you donate to charity, said charity always has an overhead. For the absolutely best of them, it's less than 20%. For the worst, it's above 100%, which means they're caving in on themselves, unable to find or fix the corruption and leaks within their organizations.

When it comes to governments shifting funds, on average, about half the funds are simply lost to those who've figured out ways of siphoning off their "fair share." It's a crude and largely unaccepted reality of governmental life, but it is a reality nonetheless, a reality which sparked the creation of and funding for the OMB, to help counter these losses.

The only way to prevent thse sorts of parasitic losses are to simply leave these funds in the hands of those who generated them in the first place i.e. the taxpayers.

 

[vertices]

Well, sure, any spending is "stimulative"; the question is always one of alternatives. Would $10 spent on new high speed rail have been more effective if it were spent on a new runways or highways? Probably. And indeed, to the extent that the money is not spent, it is not stimulative.

Any stimulus package should address glaringly obvious long term problems eg. trade deficits and crumbling infrastructure. In particular, investment in infrastructure has a very high long-term multiplier and such investments will increase the standard of living for future generations.

Now, global warming is also a long term problem that must be addressed - it makes a lot more sense to invest in projects like high speed rail.

 

[loseyourname]

I'd think commuter rail projects are a better investment than inter-regional rail. First, the competition with automotive commuting is more clearly in favor of rail. It's faster and clears the roads to make highway transportation and shipping more cost-effective. It also doesn't cost as much as building rail lines from New York to DC.

But if we really want the federal government spending money on infrastructure, a particularly worrisome trend is the amount of deferred maintenance local governments have been running up. It's a non-transparent form of deficit spending that people don't think of as debt, and it occurs off-balance sheet, but maintenance can't be deferred indefinitely and future maintenance costs more than present maintenance. These future costs are economically identical to interest, but nobody recognizes or talks about them because they're not aware of it.

Instead of investing in building new dams and highways and rail lines, it would probably be better to transfer funds directly to cities and counties that are letting their own roads go to waste with the stipulation that they need to use this money to follow their planned maintenance schedules. It's the difference between getting regular oil changes and simply waiting for your engine to fail and then buying a new car.

 

[nismaratwork]

I'd think commuter rail projects are a better investment than inter-regional rail. First, the competition with automotive commuting is more clearly in favor of rail. It's faster and clears the roads to make highway transportation and shipping more cost-effective. It also doesn't cost as much as building rail lines from New York to DC.

But if we really want the federal government spending money on infrastructure, a particularly worrisome trend is the amount of deferred maintenance local governments have been running up. It's a non-transparent form of deficit spending that people don't think of as debt, and it occurs off-balance sheet, but maintenance can't be deferred indefinitely and future maintenance costs more than present maintenance. These future costs are economically identical to interest, but nobody recognizes or talks about them because they're not aware of it.

Instead of investing in building new dams and highways and rail lines, it would probably be better to transfer funds directly to cities and counties that are letting their own roads go to waste with the stipulation that they need to use this money to follow their planned maintenance schedules. It's the difference between getting regular oil changes and simply waiting for your engine to fail and then buying a new car.

Hmmm... can't deny that point... maybe it's unwise to build new infrastructure requiring maintenance, when the current infrastructure is so very neglected. Thanks for the perspective.

 

[mheslep]

I'd think commuter rail projects are a better investment than inter-regional rail. First, the competition with automotive commuting is more clearly in favor of rail. It's faster and clears the roads to make highway transportation and shipping more cost-effective.

I agree.

 

[mheslep]

[...]But if we really want the federal government spending money on infrastructure, a particularly worrisome trend is the amount of deferred maintenance local governments have been running up. It's a non-transparent form of deficit spending that people don't think of as debt, and it occurs off-balance sheet, but maintenance can't be deferred indefinitely and future maintenance costs more than present maintenance. These future costs are economically identical to interest, but nobody recognizes or talks about them because they're not aware of it.

Instead of investing in building new dams and highways and rail lines, it would probably be better to transfer funds directly to cities and counties that are letting their own roads go to waste with the stipulation that they need to use this money to follow their planned maintenance schedules. It's the difference between getting regular oil changes and simply waiting for your engine to fail and then buying a new car.

How does one avoid moral hazard w/ federal funding of state problems? Some states do a fairly good job in regard to infrastructure maintenance (I'd count mine in that regard). Others are a near criminal disaster. NY has not built a new power plant or major transmission line in decades. Washington, DC allowed its sewer system and snow removal systems to nearly collapse under the criminal stewardship of Mayor Barry who looted the funds for political patronage and personal reasons. If the federal government eliminates the consequence of this neglect, it i) encourages more of the same, ii) is an enabler of the theft via taxes from those that act prudently.

 

[brainstorm]

Hmmm... can't deny that point... maybe it's unwise to build new infrastructure requiring maintenance, when the current infrastructure is so very neglected. Thanks for the perspective.

If the infrastructure and economic culture that has already been created was sustainable, it wouldn't be behind schedule for maintenance in the first place. The challenge is to maintain and renovate aging infrastructure in ways that increase its sustainability and the sustainability of the economy in general at the same time. If that requires reducing capacity to a fraction of the current rails or lanes while promoting business- and industrial practices that reduce the traffic on those lines, that is what they should be doing. You can't fix unsustainability by pumping resources into maintaining what led to the unsustainability in the first place.

The first step however, imo, is to identify what levels of mobility and consumption are sustainable per capita, and then to work at designing infrastructure and urban planning around that.

 

[loseyourname]

How does one avoid moral hazard w/ federal funding of state problems? Some states do a fairly good job in regard to infrastructure maintenance (I'd count mine in that regard). Others are a near criminal disaster. NY has not built a new power plant or major transmission line in decades. Washington, DC allowed its sewer system and snow removal systems to nearly collapse under the criminal stewardship of Mayor Barry who looted the funds for political patronage and personal reasons. If the federal government eliminates the consequence of this neglect, it i) encourages more of the same, ii) is an enabler of the theft via taxes from those that act prudently.

I agree with that generally. I just think it makes sense to do it during a recession, when tax receipts naturally drop but required maintenance expenses do not. Don't do it all the time for states that allow their infrastructure to rot even when the economy is booming. It's like credit card provisions that allow people to not make payments when they get laid off. That doesn't create a moral hazard where they now have an incentive to get laid off. It just keeps their lives from being disrupted in the event that macroeconomic events beyond their control cause it to happen. Creating a system where they can defer payments any time they're short on cash for any reason would create that moral hazard. Same thing with the states. You don't want to subsidize bad budgeting and management practices, but you can step in and help when circumstances outside of state control cause their tax receipts to drastically drop. I think every state but North Dakota had a projected deficit this year, and they're not all run that poorly. Many of them never had shortfalls prior to this year.

 

[brainstorm]

Creating a system where they can defer payments any time they're short on cash for any reason would create that moral hazard. Same thing with the states. You don't want to subsidize bad budgeting and management practices, but you can step in and help when circumstances outside of state control cause their tax receipts to drastically drop. I think every state but North Dakota had a projected deficit this year, and they're not all run that poorly. Many of them never had shortfalls prior to this year.

The problem isn't so much one of moral hazard, imo, but fairness. For the last decade or so, there have been strong public outcries not to protect people from the free market. Many social security and welfare support programs have been cut or eliminated. The question is if the government is torturing poor people, why shouldn't they torture other people by leaving their roads broken until they fix them themselves? If the free market is supposed to be a fair disciplinarian with its invisible hand, then shouldn't everyone be subject to its full discipline, not just the poor?

Either that or you could convince middle-class people that they should support all levels of welfare support because they get them, but what are the chances that will work?

 

[mheslep]

...You don't want to subsidize bad budgeting and management practices, but you can step in and help when circumstances outside of state control cause their tax receipts to drastically drop. I think every state but North Dakota had a projected deficit this year, and they're not all run that poorly. Many of them never had shortfalls prior to this year.

Sure, I don't think running the odd deficit is necessarily indication of poor management. However, not having any slack in the state finances, through failure to create rainy day funds and the like would be poor management to my mind.

 

[nismaratwork]

If the infrastructure and economic culture that has already been created was sustainable, it wouldn't be behind schedule for maintenance in the first place. The challenge is to maintain and renovate aging infrastructure in ways that increase its sustainability and the sustainability of the economy in general at the same time. If that requires reducing capacity to a fraction of the current rails or lanes while promoting business- and industrial practices that reduce the traffic on those lines, that is what they should be doing. You can't fix unsustainability by pumping resources into maintaining what led to the unsustainability in the first place.

The first step however, imo, is to identify what levels of mobility and consumption are sustainable per capita, and then to work at designing infrastructure and urban planning around that.

Those are good points, but in practice can you imagine such reasonable steps being taken with serious money floating around congress, when it would be very much a state-by-state issue?

 

[brainstorm]

Those are good points, but in practice can you imagine such reasonable steps being taken with serious money floating around congress, when it would be very much a state-by-state issue?

Sure, but the whole problem is that there is an endless pragmatism of spending without any hope that anything reasonable will emerge. So, imo, as long as this attitude prevails the result will be economic degeneration and war. That sucks, imo.

 

[nismaratwork]

Sure, but the whole problem is that there is an endless pragmatism of spending without any hope that anything reasonable will emerge. So, imo, as long as this attitude prevails the result will be economic degeneration and war. That sucks, imo.

Yeah, that definitely sucks, no argument there.