One common complaint heard about the current recovery is that the rate of growth has been particularly slow. In the past I’ve noted that omitting defense spending from GDP, the shortfall is not so large. Given past correlations, I believe we may soon see a pickup in defense spending which will boost GDP growth relative to what it otherwise would have been.
This is not because defense expenditures systematically rise during recessions.
Figure 1: Defense consumption and defense spending in bn. Ch.2009$ (blue, log scale). NBER defined recession dates shaded gray. Source: BEA 2017Q2 2nd release.
Notice that in several cases defense expenditures fall, in others it rises. Hence, defense spending does not always rise in a manner consistent with counter-cyclical fiscal policy.
Rather, defense spending has tended to rise during the last two periods of Republican presidential administrations. Defense spending in 2017Q2 has risen 0.3% relative to 2016Q4, but it is too early to tell if this means anything given fluctuations in spending.
Figure 2: Defense consumption and defense spending in bn. Ch.2009$ (blue, log scale). Light blue periods denote Democratic presidential administrations, light red denote Republican. Source: BEA 2017Q2 2nd release.
One has to go back to the 1960s to see a rapid rise in defense spending during a Democratic presidential administration (associated with the Vietnam war). Defense spending also rose somewhat during the Carter Administration, although it noticeably accelerated during the Reagan Administration (this is shown by the steepening of the slope in 1981Q1, since the series is plotted on a log scale).
We need to be careful what is meant by “defense expenditures.” Defense expenditures that show up in BEA data are fed by the Defense Finance and Accounting System (DFAS), which basically tracks Treasury expenditures/disbursements. In other words, we can think of it as outgoing cash payments to vendors, soldiers and civilian employees. OTOH, defense spending found in OMB budget tables captures defense authorizations. Monies that are authorized in one year are frequently carried over. If you look at defense contract data, this reflects when an authorization is “obligated” and put on contract. Operations and Maintenance (O&M) authorizations must be obligated in the year of authorization, and as a practical matter Treasury disbursements occur in the same fiscal year for O&M dollars. But if you look at the OMB tables you will see that there are five categories or “colors” of money, and each has a different lifespan. For example, procurement appropriations for ships and aircraft have up to five years to be awarded on contract and another five years for disbursement….remember, BEA data captures disbursements. For example, ship and aircraft authorizations for FY2017 have until 30 Sep 2021 to go on contract, with Treasury disbursements allowed until 30 Sep FY2026. The same with military construction. Research and development dollars have a different lifespan, as do military pay (1 year) and procurement appropriations for ground combat systems (3 years to contract award + 5 years to disbursement). Normally Treasury disbursements occur when the vendor delivers. So why does any of this matter? Because economic stimulus does not come with Treasury disbursements…remember, the disbursements happen after the economic activity has occurred. DoD is paying for completed work, not new work. And economic stimulus really doesn’t come from defense authorizations because contractors don’t know when the contracts will be let and don’t always know that they will get the contracts. Economic stimulus happens around the time of contract award, which is not well captured in the usual macroeconomic data. It’s only when contract award is imminent that contractors begin ordering supplies, hiring workers, negotiating loans, etc.
That was a useful explanation of the difference between what OMB reports v. what is in the BEA national income accounts. Thanks!
BTW – Peaktrader reminds me of Lindsey Graham in the Senator’s defense of his Repeal and Replace proposal. If we do not cut Medicaid – the whole nation is going bankrupt. Sad.
Pgl, reminds me of Nancy Pelosi, who believes more tax and spending will solve all the problems government created.
Budget deficits down to “only” $500 billion a year is so sad for pgl.
Check the facts on the Federal debt as a share of GDP:
https://fred.stlouisfed.org/series/GFDEGDQ188S
It has declined over the past year. And no – I never said spending will solve all problems. It certainly will not solve the problem of all those Presidential tweets!
Sad? In today’s dollars, that $207.8 Billion Reagan deficit in 1983 would be over $500 Billion now.
Likewise, the $221.1 borrowed in 1986 would be almost $500 Billion today.
But I have to remember: PT math says the near tripling of the national debt under Reagan was not nearly as bad as the near doubling under Obama, which was also much worse than the 105% increase under Bush II.
Yes indeed. So darn sad, but likely a proud moment for those studying facts and figures from DeVos Tech.
Noneconomist, what’s sad is I explained differences before and you chose to cling to your simple minded narrative.
Reagan achieved a strong economic expansion and military. Taxes were later raised to slow the expansion and a peace dividend was achieved after winning the Cold War. Moreover, Reagan didn’t get the spending cuts promised by the Tip O’Neill House.
Under Obama, there was little to show for the massive borrowing.
“Taxes were later raised to slow the expansion”
taxes were raised to cover the increased deficit spending, which was not paid for by the resulting growth.
Well, PT, it was Reagan himself who called a near trillion dollar debt “almost unimaginable”. No record of his characterization of the nearly $3Trillion debt he left. But thanks for pointing out MY simplemindness.
The time to raise taxes is when a strong expansion is underway.
Especially when the expansion was created by deficit spending. too bad st reagan failed to pay for his tax cuts.
More for the simpleminded, especially those who thrilled at Reagan’s first inaugural address when he said:
“For decades, we have piled deficit upon deficit, mortgaging our future and our children’s for the temporary convenience of the present….You and I by borrowing can live beyond our means but only for a limited period of time. Why then should we think that collectively, as a nation we are not troubled by that same limitation. We must act today in order to preserve tomorrow, And let there be no misunderstanding—we are going to act beginning today .
It is my intention to curb the size and influence of the Federal establishment. It is time…to get government back WITHIN ITS MEANS, and to lighten our punitive tax burden. These will be our first priorities…there will be no compromise.”
Apparently, PT, it was only the real simpleminded who really believe he did.
2slugs is mainly correct with this: “Economic stimulus happens around the time of contract award, which is not well captured in the usual macroeconomic data. It’s only when contract award is imminent that contractors begin ordering supplies, hiring workers, negotiating loans, etc.”, but there is some stimulus by companies deciding to bid on those contracts. Which due to the glacial buying of most Fed agencies, may well be much earlier than around contract award.
Nice exposition, Slugs. Thank you.
More deficit spending may boost GDP in the short run. Trillion dollar annual budget deficits are down to half a trillion. Defense spending as a percent of federal spending has declined from about 60% between the Korean and Vietnam wars to 20% today.
Interest payments on the national debt is expected to double as a percent of GDP in 10 years, and the last of the Baby-Boomers will reach 65 in 2029. Entitlement spending, including health care and education spending, continues on a costly track. Politicians need to deal with the projections rather than kicking the can down the road.
The Democrats are rigid, unified, political, and moved further to the left, while the Republicans are more fragmented or diversified and moved to the center. I think, independents, or people who don’t identify themselves as Republicans or Democrats, but looking for practical solutions, will become even more important determining elections.
The the data disagrees with you on the left/right directional movement of the 2 parties: http://rpubs.com/ianrmcdonald/293069
What are the criteria on moving left/right?
Your own graph shows, in the House, Democrats have the lowest standard deviation in over 50 years, while Republicans have the highest in over 50 years.
Is that a serious question? The mean Republican has moved from about a 0.20 in the 60s to a 0.75, while the mean Democrat barely moved from ~ -0.35.
There are still a significant number of Dems in the 0 to 0.20 “moderate” range, while there are no moderate GOP.
The furthest left dem is a -0.75 while the the furthest right GOP is well above 1.0
In other words, there is no way an objective person could look at that data and come up with your “Dems charged left and GOP moderated” nonsense.
Mike V, be real – a San Francisco liberal leads the Democrats in the House.
A moderate leads the Republicans.
Moderate Democrats lost House seats mostly to moderate Republicans, in part, because they weren’t liberal enough.
The remaining Democrats in the House are much more liberal – that’s why the standard deviation is the lowest in over 50 years.
Once again, according to the data, nothing you said there is true. The question is the central tendency the the parties. Standard deviation is irrelevant, and I don’t even think you know how to interpret it correctly. Sure, the furthest right Dem has moved left, but the furthest left Dem is exactly where they were 50 years ago. Meanwhile, the furthest right GOP has moved way, way further right, and the furthest left GOP has moved way way further right. The point is that the parties are *not* moving in symmetrical but opposite directions.
One party is moving very far away from moderation, and one party is not, but your overwhelming bias drives you to the opposite conclusion. It takes some really ridiculous mental-masturbation to come up with the nonsense that you did based off that graph. But hey, keep throwing out irrelevant stats concepts like “standard deviation” and people will take you seriously, one day.
Nancy Pelosi reads a -.38 on the first dimension DW score, and she moved towards the center with every congress.
Paul Ryan is currently an 0.85 on the first dimension DW score, and he moved to the right with each new congress.
Check the data for yourself. https://legacy.voteview.com/dwnomin.htm
By the way, classic PeakTrader interaction:
1. You say something unequivocally false.
2. Someone replies with fairly concrete data to contradict you.
3. You reply by ignore the data and make new incorrect statements and/or add meaningless anecdotes for extra oomf.
4. Go back to step 1.
Mike V, I can create a set of criteria that shows Democrats are center right.
House Democrats are much more liberal than reflected in the mean. They don’t break ranks on big issues. Otherwise, they won’t get any money for reelection.
republicans moved farther to the right. in fact, they moved so far that they began to support mysogynists, racists, and white supremacists. even put one in office.
I didn’t know Lincoln was a white supremacist.
Is that what your Senator, Robert Byrd, said?
still in denial about trump?
Minorities who know Trump say he’s not a white supremacist.
And, the people who voted for Trump, including minorities, don’t believe Trump is a white supremacist either.
The people who believe that are liberal/socialist/fascists.
white supremacists feel he is one of their own.
“defense spending does not always rise in a manner consistent with counter-cyclical fiscal policy.”
Count me in on NOT wanting defense spending to be our counter-cyclical fiscal policy. There are so many other places where we should have accelerate government purchases – such as infrastructure investment. Alas we did not do that either.
Agree. Defense spending is a miserable counter-cyclical policy. And it isn’t even good as relates to “event studies”, to connect this with JDH’s recent post on the subject. For example, Prof. Ramey did a very interesting study in which she looked at a helluva lot of defense spending events. If memory serves she had around 100 pages of brief narratives describing a history of expected defense shocks. It’s an interesting stroll down memory lane. I don’t envy the grad student who no doubt got stuck doing a lot of the tedious research. All of her event shock expectations came from mainline media sources (e.g., Business Week, NY Times, etc.). The problem is that there are inside and outside sources and sometimes they have different understandings of just what is a positive or negative demand shock. For example, once I had to answer some question from the Chief-of-Staff. Answering the question required a lot of “stumbling along” research going back decades. One of those stumbling along excursions included a real time history of events surrounding a key authorization to the build up for Vietnam. Prof. Ramey’s interpretation (based on mainline sources) was that there would be a larger than previously expected request from the Pentagon, so an event study should predict a positive shock; however, internal real time history maintained by the Pentagon tells us that within the building it was the authorization request would in fact be much smaller than the Pentagon had been contemplating a few months earlier. So for insiders the actual request was a negative demand shock. So should we believe defense contractors relied more upon mainline media sources and therefore expected a positive shock; or should we believe defense contractors relied upon insider information and therefore found the actual authorization request to be a negative shock? The point is that event studies don’t do a very good job of identifying what defense contractors actually expect. There is an inherent ambiguity in all defense related event studies. With classified and “close hold” information it’s just inevitable. And that means that there will always be an inherent ambiguity in the expected economic stimulus. Some might view a build-up as a positive shock while others might view it as a negative shock. Event studies need to capture prior expectations of the key players as well as the actual authorizations.
“Harvard economist Martin Feldstein calculated that each job created by President Obama’s American Jobs Act would cost taxpayers $200,000. When asked about this statistic in a September 26, 2011 interview with ABC News, Treasury Secretary Timothy Geithner did not dispute the figure, and added, “the pricetag is the wrong way to measure the bill’s worth.”
William Ibbs, a professor of civil engineering at the University of California at Berkley, was quoted in a September 26, 2011 Politico article saying, “As a rule of thumb, you’re looking at three years for a project, really going from the time the federal government says we have the money and want to spend it…The politicians really don’t understand how cumbersome the process is these days. Environmental permitting, especially on road projects can take years. You’re hiring attorneys, not really shoveling a lot of dirt.””
https://www.cagw.org/media/wastewatcher/shovel-ready-jobs-swindle
PeakTrader Prof. Feldstein was simply wrong. The cost of each job should have been spread out over the number of years of stimulus. And of course, each job didn’t just cost money, it also added value. Once again, Prof. Feldstein has shown that he doesn’t always understand the difference between stock variables and flow variables.
Ironically, during the Obama transition period there were all kinds of ideas being thrown around as to how best to stimulate the economy. Prof. Feldstein chimed in with a WSJ op-ed and suggested increasing defense spending in procurement appropriation accounts (i.e., tanks, ships, aircraft, etc.). As I noted above, this is a horrible way to try and stimulate the economy. If you want to engage in a little military Keynesianism, then you should focus on O&M funding because that gets money out the door much faster. It was precisely because the Pentagon supported Feldstein’s approach that I eventually declined an invitation to participate in the stimulus brainstorming part of the transition. For someone who once worked for the White House, Feldstein’s understanding of DoD’s rather Byzantine planning, budgeting and execution process was less than I would have expected.
As to the comments about new civil engineering projects, they kind of missed the point. Many projects have already been through the environmental studies and impact statement milestones but haven’t yet been executed because of a lack of money. This has always been true with lots of state & county highway repairs and small bridges. It’s also true of snow removal, clearing waterways, and of course the cost of doing the environmental impact studies themselves, which could be covered by stimulus dollars. And “shovel ready” doesn’t have to be narrowly interpreted as only applying to civil engineering projects. For example, paramedic training for rural communities, grants to provide local schools with IT upgrades, cybersecurity upgrades, etc. There’s never been more money available than we have ready-to-go projects.
2slugbaits, the article also states: “…experts note that factors such as extensive permitting, environmental hurdles, public hearings, and land acquisition often result in even the simplest of projects taking multiple years to get started.”
They have costs – lawyers and government bureaucrats get employment. And, I doubt the private sector spends $200,000 for a job, and financed by taxpayers.
Not all jobs add value. Especially those dictated by politicians.
Defense spending as a share of GDP is near a 75 year low. During the dying days of the Clinton administration and height of ‘the peace dividend’, defense spending was 3.8% of GDP. Today, it is 3.9% of GDP. Very low by post-WWII standards, in fact, the second lowest year as a share of GDP since the start of WWII.
https://fred.stlouisfed.org/series/A824RE1A156NBEA
Cool chart. So in 1929, defense spending/GDP was only 1%. You know – a lot of Republicans heart the 1920’s. Maybe we can get them on board to cutting defense spending to 1929 levels!
Well, this is the Trumpista dream: an isolationist foreign policy. Defense spending remained high because — after fighting two world wars in which the US really had no direct stake — American leadership came to the conclusion that, if it did not provide global security, bad things would happen.
And they will.
That’s why the US needs a robust power projection capability, and that in turn implies defense spending higher than it is today.
And by the way, we’re running an average structural deficit of $1 trillion / year to 2027 on a defense budget near historical lows as a share of GDP — with the economy running near the top of the business cycle,
“That was a useful explanation of the difference between what OMB reports v. what is in the BEA national income accounts.”
But, wait! Rational Expectation economists would have us believe that authorization is the same as spent. Well, at least that is what they claim about taxes.
Recognizing a bit of facetiousness, I would point out that authorization and spending are not conceptually the same except in the absence of uncertainty (will my firm get the contract?) and in the presence of perfect financial markets (can I borrow at the same rate with and without a signed contract?).
Unless used for conquest, defense spending does not increase welfare, although it is counted as GDP.
As a deterrent, defense spending prevents GDP from falling, for example, by deterring nuclear attack or providing naval power to keep sea lanes open.
The notion that more defense spending makes us better off — ceteris paribus — is risible.
There are valuable spin-offs to defense spending, which the private sector benefits tremendously.
Also, the U.S. military protects Middle East oil countries. In exchange, they force other countries to buy their oil in dollars, invest dollars in the U.S., and buy military equipment from the U.S.. So, the U.S. is able to consume more than produce in the global economy and in the long run, and attract enormous amounts of capital.
Spins offs are yada yada. I’d rather have my $700 bn, all things considered.
As for global security forces provided by the hegemon, yes, that’s an incredibly valuable service. But remember, if global trading is open and protected, increasing defense spending does not increase welfare. It’s like hiring a more expensive goalie. If the cheap goalie was able to block all the shots on goal, then more expensive goalie is a loss to the system.
You’re very generous risking American lives.
Peak –
I am not trying to be perverse. Rather, defense spending is different in some key ways:
1. Not easy to do cost/benefit analysis
How many bullets or missiles should you budget to kill an enemy combatant? How will you exercise efficiency controls in the field? Have you been watching Burn’s Vietnam series? What is the efficacy of those bombs the US was dropping by the hundreds of thousands? How do you do cost/benefit on activity whose entire purpose is to destroy things? Yes, you can do some of it during procurement and maintenance, but in the field? They used to cut down trees with 50 caliber machine gun fire in Vietnam. Is that a good use of ammo? Hard to say. In a hot zone, it could be a good approach. In the suburbs of Saigon, maybe not so much. Who is going to make that call and enforce the decision? Are you going to assign KPMG to conduct an audit of tree cutting techniques in Vietnam and sanction soldiers who use, say, more than 5,000 bullets per tree?
2. Defense is contingent
Do we need a 12th carrier group? Well, that depends a lot on where, when and how conflicts arise. It comes down to more feelings about risks than some sort of clear plan-based forecast. Coke knows where it needs a new bottler. Who knows whether we need 12 carrier groups?
3. Defense is dependent
If no one else is spending on the military, then we can afford to spend less. If others are spending more, we should spend more. Thus, the ‘optimal’ level is to a significant extent dependent on budgets elsewhere, as well as the perceived willingness of others to engage in conflict with us. It’s a moving target.
All this is really hard to do, and a lot of it is not easy to judge but in wartime. Is the F-22 a good choice or bad? Depends on how it works out in combat. And during wartime, cost/benefit in any sort of normal econometric sense may well be impossible.
4. Defense spending has value if it is never used
Like the police department, the military has the most value as deterrence. But how do we know if the military is deterring? If the police make no arrests, is it because there is no crime, or because the police have deterred the criminals? Very hard to know. Same for the military.
So, am I generous with soldiers lives? I don’t really know. I do know that we spend a huge amount of money on defense, and it only has value in securing global trade (the hegemon function), deterring aggression against the US, protecting the citizens and territory of the US, protecting our allies, and assisting us in achieving positive goals around the globe (eg, favorable treatment from the Saudis).
Making more guns and planes, however, will not improve our well-being by themselves unless Keynesian conditions are met, ie, there is substantial unemployment in that sector. Right now, there’s not.
As for defense spending, I’d probably target 4.5% of GDP, closer to post-war norms. But that’s a pure cost-center, rule-of-thumb approach.
a lot of those spinoffs could be done cheaper, faster and more efficiently if they did not have a defense angle to cover as well.
Defense spending is just another form of welfare–paying people who can consume without earning anything.
PeakTrader: “There are valuable spin-offs to defense spending, which the private sector benefits tremendously.”
Quantify the benefits vs costs or get the heck out.
I have to agree with Steven Kopits. There is an enormous amount of basic R&D the U.S. could do with $700 billion a year. Nation Science Foundation currently gets $6 billion. DOE science currently get $5 billion. Nation Institute of Health gets $30 billion. Less than 10% of the defense budget goes to any sort of “research”. Most of that is just how to kill people more efficiently and has no civilian application. The rest is procurement and operating expenses.
Tell me why my statement is wrong or hit the road.
One spin off you are now using, internet. Care to do the cost benefit yourself?
The spin offs are so ubiquitous to you lives you can’t even perceive many of them.
Yes, and don’t forget GPS, canned food, freeze drying, the microwave, radar, duct tape, the jeep, the first computer, wristwatches, drones, jet engines, disposable razors, superglue, night vision, nuclear technology, epipen, etc..
Since you mentioned epipen, we can add several medical procedures related to gun wounds, and quick response procedures to casualties.
Somehow it seems when you hate it turns off the brain, especially the common sense portion of the thinking.
I almost forgot. In tghe extended peace period after Vietnam we did have several ERs from several of those cities , bastions of liberalism, for training some of the Defense medical staff in gun shot wounds. So the benefits work both ways.
you missed the point peak. many of those items could have been developed without the overarching goal to kill the enemy. probably cheaper as well. research does not need to have a military component to be successful.
Baffled, and you are defying history with wishful thinking. The point is they are directly related to defense efforts, beneficial, and developed first for the unique defense needs. Unless those unique needs evolved outside defense, it is highly unlikely they would have even seen the light of day.
What you miss is that some of these advancements are so ubiquitous to your daily existence you don’t even notice them and their defense origin. A really quick example. I had a neighbor, retired Colonel, who was the 1st to fly through the eye of a hurricane, and the 1st to make pre-mission weather flights. Much of our weather forecasting and equipment advances have been due to defense needs and then expanded outside.
There’s another list of advancements that have not been needed outside of defense. Most you will never know.
“I had a neighbor, retired Colonel, who was the 1st to fly through the eye of a hurricane, and the 1st to make pre-mission weather flights. ”
i guess you are right. nobody in the civilian domain would have ever thought to do such a thing, flying through a hurricane, without prompting from the military. why would civilian populations in houston and miami be interested in understanding hurricanes to a greater degree?
Baffled, do you know how incoherent that response was? Might, maybe, coulda don’t match up with didn’t, and defense did.
corev, you do understand the defense R&D budget is dramatically greater than all the other federal R&D dollars available? you don’t think if that money is shifted to NSF or another civilian agency, similar results could’t be obtained?
first, you need to understand many of the folks conducting the defense R&D research had their scientific training supported by civilian sources such as NSF. further, many of those same folks who made these breakthroughs were civilian researchers, not dedicated defense researchers. the breakthroughs were made because funding came from the military. those same researchers could have made similar advancements if their funding had been a civilian source was well.
or do you believe the same researchers become smarter when they obtain defense funding, and dumber when they obtain civilian research funding? don’t be such a hack corev.
Remember Werner von Braun? Very likely, had he –and his compatriots–not spent considerable time figuring out how to destroy London, he would never have been valuable in the early days of NASA and space exploration. Physicists and engineers obviously have limited training and vision: I.e., destroy first, build second.
Even someone as simpleminded as me (see) can understand that.
U.S. military responsible for almost all the technology in your iPhone:
http://www.businessinsider.com/the-us-military-is-responsible-for-almost-all-the-technology-in-your-iphone-2014-10
So, government ISN’T the problem?
Don’t kid yourself the USA had no direct stake in WW1 and Ww2.
The economic stakes were huge. The US was the arsenal of democracy long before it entered either war.
And then there is the strategic interests.
Kaiser Wilhelmine Germany had a plan to fight a naval war w USA long before Ww1.
And then there was the Zimmerman Telegram which proposed an alliance between Japan Mexico and Germany against the USA. Meanwhile American flagged ships were under submarine attack by U boats in international waters. America could hold to neutrality no longer.
As to Ww2 it began w an Asian power staging a surprise attack on American soil. Pearl Harbor.
A triumphant Nazi Germany would have developed nuclear weapons and intercontinental bombers,both were on the drawing boards. Usa had no strategic interest? No direct interest?
I am also of Anglo Saxon origin and recognize that those are the roots of American culture and that France is an American ally since the foundation of the USA so I would also also argue for cultural interests. You have argued that you have greater affinity w America than president Obama because of your ethnic origins so you would no doubt agree that the same logic could be applied to analyzing America’s interests?