Feldstein: Let the Stimulus Be Military

by Chris Sturr | December 24, 2008

Martin Feldstein, econ professor at Harvard and chairman of the Council of Economic Advisers under President Reagan, reveals in this op-ed from yesterday’s WSJ that if he has to be a Keynesian he insists on being a military Keynesian. We are not surprised.

Two noteworthy bits: Marty says that if there should be an increase in DoD spending, “The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.” Oh goody. And he actually uses the term “surge” to describe what he is proposing.

Defense Spending Would Be Great Stimulus

All three service branches are in need of upgrade and repair.

By MARTIN FELDSTEIN | OPINION | DECEMBER 23, 2008, 10:04 P.M. ET

The Department of Defense is preparing budget cuts in response to the decline in national income. The DOD budgeteers and their counterparts in the White House Office of Management and Budget apparently reason that a smaller GDP requires belt-tightening by everyone.

That logic is exactly backwards. As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That’s why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments.

A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.

The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military’s annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.

An important challenge for those who are designing the overall stimulus package is to avoid wasteful spending. One way to achieve that is to do things during the period of the spending surge that must eventually be done anyway. It is better to do them now when there is excess capacity in the economy than to wait and do them later.

Read the rest of the article.

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