Defense of Political Economy Exam 2

Cyclical pattern of defense spending

war means spending surge, post war drawback, then gradual buildup again

continuing resolutions

fund government temporarily at previous levels, prevents new programs, creates uncertaintiy for DOD planning

catagories of defense spending

personnel, operations and management, acquisition, and military construction

contract state

government and private industry are deeply intertwined, government funds and manages tech risk and contractors run production and integration

defense production act

allows government to direct industry during crisis, can prioritize contracts, expand production, allocate resources

outlays

government spending money that it does not have

bow wave

every time you authorize programs you say you’ll pay off in the future, piling up debt in the future to create a bow wave effect

willie sutton effect

how much people are threatening to attack you should determine how much you spend on defense

why is national defense considered a public good

it is non-excludable and non-rivalrous, people may free ride and markets may underprovide

how do political processes distort decisions

voter ignorance, rational ignorance (one vote rarely changes outcomes), weak accountability

MIC

includes defense contractors, military institutions, politicians and defense supplies are highly organized interest groups

aroused public

happens during crisis, citizens pay more attention to defense issues, military monitored closely

apathetic public

occurs during peace, people ignore defense spending details, interest groups gain more influence

sources of military waste

defense procurement practices, political incentives (congress supports programs that benefit local districts), and congressional micromanagment

why might attempts to reduce political spending fail

special interests will redirect spending, political incentives will still produce inefficiencies, other interest groups may capture resources

concentrated interests

pay the costs to get policies adopted, defense industry, advocacy interests, veterans

budgetary cost

direct financial spending required to conduct military spending, excludes prewar buildup and postwar reconstruction

direct resource extraction

taken directly from citizens (direct taxation, forced labor, forced savings)

indirect resource extraction

indirectly taken from society (indirect taxes, domestic debt, printing money)

external resource extraction

obtained from outside country (foreign loans/grants, plunder)

government debt

reduces restraint, can grow quickly, have to pay back discount rate, moral component of passing debt to kids, debt is inflationary

inflation

indirect tax on people, reduces purchasing power, hyper-inflation

how do taxes shrink gdp

reduce private consumption and investment, reduction in aggregate demand means that taxes are anti-inflammatory

politics of government spending

if people don’t connect spending to taxes or if public support provisions of a public good, spending is popular

china defense budget components

personnel, training and maintenance, equipment

chinese strategic priorities

prevent taiwan independence, control near seas disputes, protect territorial integrity

Challenges in estimating china military budget

definition of defense spending, currency conversion, limited transparency for costs

unusual chinese military characteristics

serves the party not the government, involved in many civilian activities, military has source of funds with no political accountability

4 major problems with chinese high budget estimates

overweighting labor costs, inconstitent PPP application, non-equivalent comparisons, strategic misunderstandings

PPP

purchasing power parity, adjusts for chapear domestic china costs and worls for labor/food/basic goods but not weapons and tech

the law of one price

in a competitive market, the identical good sells for the same price from every vendor (global market also ensures similar/same price)

ppp for china distortion

labor and food costs are generally lower in china, china imports weapons, bulk of chinese military spending pays for items with lower ppp rates

positive effects of defense spending

creates jobs, tech spillovers, human capital development

negative effects of defense spending

opportunity costs, crowds out public investment

GDP

total production of economy in a given year (a flow variable)

spending multipliers

if greater than 1=significant contributor to economic growth

if greater than 0 and less than 1= slow contributer to economic growth

if less than 0= causes loss to economy

politics of spending multipliers

spending causes growth, bigger tax base, unchanged tax rates yield bigger government revenue

debt on economic growth

someday you have to pay it back which will shrink future consumption but increase future exports

eisenhower argument

warned in 1961 about the rise of MIC, risk of dominating politics and economy

spin-off theory

military investment creates technological and financial investments for commercial industry

plant level financial

shared production lowers costs (tooling costs spread out among military and commercial planes)

plant level technological

military r&d means innovation spin-offs, early tech access means more learning

firm level financial

military contracts can provide cash flows and reduce risk via diversification

firm level technological

military work keeps design teams active, builds engineering expertise

boeing 707 case study

claim was that miliary tanker KC-135 subsidized the 707, however weak evidence found for this argument

firm

includes certain activities that can not be seperated from each other efficiently, whether due to tech constraints or fear of economic disadvantages

economies of scope

way that one firm activity can help another one

technological spillover

transfer of knowledge between civilian and military sector

guns vs butter spillover

spillover mitigates this tradeoff because defense spending can boost civilian innovation to make spending more efficient overall

spillover measurement

1) identify defense patents 2) track citations in patents to track forward and backward spillover 3) focus on internal spillover in same country

forward spillover/spin off

ways that military tech and innovation benefits civilian industry

backward spillover/spin on

ways that investing in military tech draws on civilian industry

patent

given in exchange for publicizing an invention so that others can learn from it, profits mean to compensate for original costs of research, 20 years long

U.S. and China spillover

U.S. has higher absolute amounts of spillover than China because of backwards spillover variation

why military imitation is hard today

high entry barriers, tacit knowledge, integration complexity, knowledge accumulation