A friend of mine, a very smart Democrat, thought it ironic to send me a link to a report from CEPR that increased defense spending will drag down the economy.

The Center for Economic and Policy Research released a report today estimating the economic impact of increased U.S. military spending comparable to the spending on the Iraq war. The report, presenting the results of a simulation from the economic forecasting company Global Insight, shows the increased level of military spending leads to fewer jobs and slower economic growth.

My reply to him was, what about an increase in non-military spending? Was there something special about the form of spending? So I thought I would dig into the report itself. Deep inside is a heading titled "How Spending on the Military and the Environment Cost Jobs."

It would be possible to design an ambitious agenda to curb global warming that relied entirely on paying people to act in ways that would lead to fewer emissions of greenhouse gases. This would affect the economy in a way that is very similar to the way that military spending affects the economy. In the case of military spending, we are paying firms and individuals to produce weapons, ammunition, and supplies for the military. This global warming policy would be paying firms and individuals to produce and install cars, appliances, and other items that would lead to a reduction in greenhouse gas emissions.

In both cases, the initial effect on the economy would likely be job gains, since both policies generate more demand for goods and services. However, in both cases, the policy would likely lead to a rise in interest rates and inflation, as higher levels of demand begin to push against the economy�s capacity. The rise in interest rates will lead to less investment, and less demand for cars and houses.

So this is not surprising; it's a classic story of public investment crowding out private investment. The question is what you get back on the public investment, either in the form of a cleaner environment or in terms of national security. Both types of spending should produce benefits as well as costs. They probably don't work identically, but my guess is the Global Insight model they used doesn't differentiate on what kind of government purchases are made. (I've seen some of their models, and I don't recall seeing a differentiation, but my memory may be faulty here as it's been a few years.)

Spending on national security is expensive, but that is neither good nor bad save the alternatives (of national insecurity) make it so.

Labels: economics