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The Military: Good Place for Budget Cuts

Posted on by Posted in Budget, Data, Economics, Politics Leave a comment

Republicans have been railing on about the need to reduce spending, they also have been railing about the need to increase military spending. Although in the last post it was discussed how Military spending can stimulate the economy at this current point in time Military spending is not the best option of stimulus for several salient reasons.

Before we discuss the reasons an increase should not be the way to stimulate the economy it’s best to point out that Republican legislators are not really serious about increasing military spending. When you look at the amount they wish to increase spending by, $1.1 billion, you can tell that the spending increase is just rhetoric to get votes during the election year.

For the average American $1.1 billion dollars sounds like a lot of money but just think for a moment whether $1000 sounds like a lot to Bill Gates. In this case, the military consumption expenditures and investment is about $808.3 billion a year, so the Republican increase is a mere 0.14% increase and is unlikely to make much difference.

The reason why actual increases are not wise is that military spending is very high right now and raising spending as a war ends is just silly. Let’s go to a historical comparison we have a chart illustrating per-capita defense expenditures and gross investment in constant 2010 dollars. In other words the data is corrected for population growth and inflation allowing us to directly compare past spending to current. As you can see military spending oscillates with conflicts.

What we can see is that current spending is over one standard deviation, that is higher then the normal range of spending. It is not unusual for military spending to be above the normal level in times of war but to increase it as the war in Afghanistan is drawing down is absurd. Current military spending is a full fledged war level, as the wars draw down one can expect military spending to naturally decrease by as much as 30%. If it stays at current levels the reasons would either be another war or perpetual militarism.

In addition to comparing historical spending, we should also compare spending to potential threats. In this case we can compare the ratio of United States military spending to spending in other counties. The below chart shows two things first in compare the ratio of United States spending to that of the second biggest spender, in 1988 the Soviet Union and as of today China. Since the fall of the Soviet Union in 1991 no country has even come close to equaling the United States in military spending, even if the United States cut spending by 30% to return it to normal peacetime levels we would still be outspending China by about 3.73 times.

The second line compares US spending to that of the next ten countries after China and once again the United State out spends all ten countries and would continue to do so. The United States has the best funded military in the world and would continue to do so even with massive cuts.

Certainly the cuts cannot be immediate given that the War in Afghanistan won’t be over until 2014. Even then cut should be cautious to avoid the adverse affects to the economy. Further as China seems to be increasing their military spending recently it may be wise to our spending at a certain selected ratio of theirs. That said it’s clear that in the coming years there will be an excellent opportunity to decrease unnecessary military expenditure by roughly $240 billion a year, a 6.5% cut in federal government expenditures.

For comparison Republican’s instead are taking $4.3 billion dollar swipes at poor people. If the Republican party were truly serious about cutting excess government spending the military should be one of the first places they look.

Sources:

Data on Federal Government: Current Expenditures, National Defense Consumption Expenditures & Gross Investment, PCE inflation rate, and the US Population were from the Saint Louis Federal Reserve “FRED” data base http://research.stlouisfed.org/fred2/graph/?g=7WU

Comparative Data on Military Spending in Multiple Countries was from the SIPRI Military Expenditure Database 2011, http://milexdata.sipri.org

What Stimulus? How Anti-Stimulus is Prolonging The Recession

Posted on by Posted in Budget, Data, Economics, Politics, Recession 3 Comments

Conservatives were fast jump on the blame wagon claiming that the rise in unemployment was all Obama’s fault and due to the oh so scary stimulus. On the other hand liberals knew that this double dip was a distinct possibility because of the anti-stimulus measures imposed on the government by both the Republican congress and by State governments.

Let’s go over the recent economic history, from the below chart of government spending, stimulus started in the fourth quarter of 2009 and rose peaked in quarter 1 of 2010 and then plunged. Whats more, despite repetitive conservative parroting about the massive amount of spending going on, the actual stimulus was not even enough to compensate for the decreases in State government spending. At the peak of the so call stimulus, the increase in the total annual government consumption expenditures and investment was only 2.57%, just barely above the 2.54% average rate of increase since 1980. In other word’s the Federal government stimulus combined with state anti-stimulus led to net, below average growth in government spending.

By the first quarter of 2011 the effect of spending cuts to stimulus has dried up and State governments were slashing spending more. Then, despite the warnings of experts on the subject, the newly elected tea party Republicans heroically decided to pursue an anti-stimulus pro-austerity policy, further slashing spending.

Now look at the other line, the change in employment, as you can see the paltry stimulus was able to quite slowly reverse the negative trend in employment growth and bring it into the low positive numbers. But the growth was fragile and after a year anti-stimulus we are back to where the experts warned us we would be, last month employment actually started shrinking again.

Now for comparison, lets look at a real stimulus by an evil socialist liberal … ummm … Ronald Reagan, well not so liberal but then again the post-tea party Republican party has swerved far far right of the gipper into the magical land of Reagan-never-increased-spending because that’s not how the far right version of history goes.

According to the far right version of history, Reagan got us out of the early 80′s recession with good old conservative small government, yet in reality government consumption and investment increased at well above the average rate during Reagan’s term. Although he certainly did make cuts to social programs, any cuts he made were dwarfed by his massive increases in spending, especially military spending. In his 1983 budget his spending increases were about 53 times larger then his cuts leading some conservatives to accuse Reagan of run away spending.

Although one may certainly disagree with what programs Reagan was increasing, Reagan’s spending certainly counted as a massive stimulus package far out pacing Obama’s. Because of it’s size, it was able to not only pull employment out of the slump, but keep it out.

Clearly the lesson of history is that stimulus does work at getting an economy out of a slump and austerity will simply prolong your recession. Although what is required is more stimulus now, it is highly unlikely that any will be passed. However it’s even sadder when you realize that Obama and stimulus will get blamed for the result of unsound anti-stimulus policies.

Obama Spending Still Low

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Much is being made of Obama’s very political and somewhat exaggerated spending claim. Some complaining that he didn’t include spending that was passed before his term but enacted during it and the more legitimate complaint from the Washington Post that ”as almost $150 billion of the bailout was paid back during Obama’s watch, the analysis counted them as government spending cuts”. But let’s take a closer look, let’s count every single Federal Government Expenditure since 2009 to be Obama’s Spending, even if the actual allocation was passed before Obama took office. The Expenditures grew at a 3.05% annual growth rate which although higher then Obama’s .4% claim, is still lower then every president except Clinton since Eisenhower. To put that in perspective it would mean that over the last 30 years Republican Presidents have increased government spending more then Democrats.

Brief Comments

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Shorter Commentary on News Headlines

The big news over the weekend was of course the massacre in Houla, Syria which left 108 people dead. Russia continues to impede progress by refusing to take a united stance against the Assad regime. An important vantage on the situation comes from the Women Under Siege project which has been documenting the use of violence against women.

Economist Paul Krugman discusses “Big Fiscal Phonies” and how despite Republican claims that they are opposed to the deficit, Republican budget proposals would increase the deficit.

The Alphaville on the Financial Times and the Economist give two different perspectives on China. The Financial Times indicates that China is on the verge of a housing bubble bursting . On the other hand the Economist argues, “China’s economy will not crash. Like the high-wheeled penny-farthing, which rolled serenely over bumps in the road, it is good at absorbing the jolts in the path of any developing country.” Truthfully I find the Financial Times evidence more convincing then that of the economist. The important question be must ask is if China has a crash what will be the effect of this behemoths fall on the world economy and that of the United States:

The first round in the Egyptian elections are over and everyone is waiting with anticipation to see what direction Egypt will take. It’s sad that Egypt’s elections could not be conducted as peacefully as one might have hoped.

And last but certainly not least I wish to think all of Americas Veterans who have risked their lives to make the world a better place, they are truly heroes.