One of President Obama’s chief advisors recently made headlines with the claim that unemployment benefits stimulate the economy. This is a repetition of the administration’s Keynesian mantra we have heard for three years. The theory is that because unemployment benefits go to those with immediate needs the money will get spent immediately, stimulating the economy.
There are many ways to stimulate the economy, each with different impacts. Some have immediate impacts but little staying power, such as unemployment benefits. Others are less impactful immediately but provide long-lasting benefits, for example infrastructure projects. The multiplier effects of different forms of stimulus also are different. Investments in plants and equipment have a high multiplier because the money cascades down to lower tier producers, component manufacturers and the purchase of basic commodities.
So, if unemployment benefits are good for the economy what about defense spending? As I have written here in the past, FDR understood the stimulative effects of defense spending. During the Great Depression he spent to modernize military facilities and acquire major platforms such as destroyers and aircraft carriers. The effects of these investments lasted for years and had consequences far beyond the immediate goal of reviving the U.S. economy. The Battle of Midway was won with the products of such investments.
Frankly, it makes no sense to be touting the stimulative effects of unemployment benefits while cutting defense spending. Any positive effects of the former are likely to be neutralized by reductions in the latter. The current proposed cuts in defense spending mean a reduction of 100,000 Army and Marine Corps personnel with a likely reduction in their wages. Cuts in weapons programs will require layoffs of lots of relatively highly skilled, well-paid workers, many of whom are members of unions. Yes, these laid off workers will be stimulated with unemployment benefits but that still means less money in their pockets and, thus, less stimulation to the economy.
In fact, it is more likely that the overall effects of this push and pull economic policy will be decidedly negative. The reason for this is the high multiplier effect of defense spending. Every major military activity, whether production of a new weapons system, sustainment of an existing one or support for the troops, is imbedded in a web of economic activities and support an array of businesses. These include not only major defense contractors such as Lockheed Martin, General Dynamics and Raytheon, but a host of middle tier and even mom-and-pop businesses. Money spent at the top ripples through the economy. Most of it is spent not on unique defense items but on products and services that have commercial markets too.
Exports of high-end defense products are one of the few remaining areas where the U.S. still achieves a positive balance in international trade. Cuts in major weapons systems often cause the price of those items to go up. Not only does this make it more difficult for the U.S. military to buy them but it reduces their competitiveness in the global defense marketplace. This is a double negative effect.
Then there are the contributions of defense-funded research and development efforts to the rest of the economy. We have all heard the stories of satellites, radar, computers and the Internet. A modern example is unmanned vehicles, particularly aerial systems. We know the role that unmanned aerial systems such as Predator, Scan Eagle and Shadow have played in Iraq and Afghanistan. The FAA estimates that by 2020 there could be as many as 30,000 of these vehicles operating inside the United States. Think of the jobs in manufacturing, maintenance and operations that this will create.
In addition, the administration’s plan to cut defense spending is likely to impact disproportionately minority and disadvantaged businesses, precisely those already hardest hit by the recession. The reason for this is because through its contracting practices the Department of Defense has been extremely successful at encouraging the participation of minorities. According to a major study produced by the Center for Security Policy (CSP), there are some 284,000 minority, Black, Hispanic, Asian-Pacific, Native American, veteran, service-disabled, women and small businesses receiving defense funds. According to the CSP analyses, these businesses stand to lose around $9 billion in revenue for fiscal 2013 alone and close to $100 billion over the course of the next decade. Most of these businesses will have to lay off employees and some, possibly many, will be forced to close their doors.
Defense spending supports hundreds of thousands of high quality jobs, is a major stimulant to the economy, creates export opportunities and sustains tens of thousands of minority and small businesses. But let’s cut defense while spending billions on unemployment benefits.
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