How Stimulating is Military Spending?

BY Paul Solman  November 10, 2010 at 2:00 PM EDT

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s Wednesday’s query:

Making Sense

Name: Rich Tuloch

Question: I learned long, long ago in school that military spending is a form of economic stimulus. If I am correct, the past administration (President Bush & co.) spent a great deal more money as stimulus than seems to be acknowledged in today’s political news. Is military and/or homeland security spending considered economic stimulus, even though it is necessary?

Paul Solman: “Necessary” has nothing to do with “stimulus.” As the English economist John Maynard Keynes noted in his famous 1936 book, “The General Theory,” the idea of stimulus (though he didn’t use that word) is to get people and businesses to spend, even wastefully, when they’re saving too much and thus keeping the economy from full employment.

Keynes used the example of a government program to stuff dollar bills into bottles and bury them in caves so that businesses would have the incentive to undertake their excavation and retrieval.

Anything, in other words, to put idle people and resources back to work.

So ALL government spending can be considered stimulus spending. Some spending is more stimulating, however.

Military spending on Iraq or Afghanistan, for example, is not as stimulating as it might appear at first blush. That’s because a lot of the money is spent abroad and for transportation, which uses oil, which we buy from non-Americans, who certainly don’t use all — or perhaps any — of the money to buy things from us.

Spending on homeland security would fall into the “more stimulating” category, presumably, because it would be spent at home.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._