"It is often believed that wars and military spending increases are good for the economy," said Baker. "In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment."
I wrote:
Yes, wars & military spending are good for the economy _in the short run_, in a Keynesian (demand-promoting) way. But in the long run, if the economy gets to something close to normally-defined full employment, it hurts growth, because the supply side is hurt. one problem with this notion is the idea of technical spin-offs from the military. However, these are much more expensive to produce than those arising from investment in civilian sectors. The military sector is much more wasteful. As for the reduction of employment, it's much less clear. If the economy gets close to normally-defined full employment, then there's no change in employment. That's because such full employment is defined in terms of the supply of labor-power, not the demand. If military spending hurts technical change, as I think it does, that would hurt labor productivity growth. Ironically, that helps employment, all else constant: the same amount of demand for goods and services implies more employment than with high labor productivity. Dean Baker used a specific model of the US economy. I don't know that model and I cannot judge its validity.
With his permission, I reprint Dean Baker comments on my comments above:
the lower employment result comes from the fact that higher military
spending is projected to raise interest rates, reduce investment, and therefore slow productivity growth. since the Global Insight model is a full employment model (as are all the models in this neck of the woods), employment levels are ultimately determined by the real wage, which in turns depends on productivity growth. So, lower productivity growth gets you lower employment.
I don't vouch for full employment models, but this is the dogma.
Since we can't keep them from being the accepted basis for assessing economic policy, we can at least make them accept all their implications.< -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
