Saturday, October 29, 2011

Armed Keynesians

Paul Krugman has been writing about the fact that Republicans seem to have noticed that government spending can create jobs - so long as it is spending on defense.  Of course spending on other things also creates jobs, and as Krugman points out, the history of defense spending is the best available proof of Keynesian validity (because it provides examples where dramatic, essentially endogenous changes frequently have occurred.)

He makes another point:

That said, there’s also the Keynes/coalmines point: there’s a strong tendency to take any spending that looks like a business proposition – building bridges or tunnels, supporting solar energy or mass transit – and demanding that it appear to be a sound investment in terms of its financial return. This makes most such spending look bad, since almost by definition a depressed economy is one in which businesses aren’t seeing good reasons to invest. Defense gets exempted because nobody expects bombs to be a good business proposition.

The moral here should be that spending to promote employment in a depressed economy should not be viewed as something that has to generate a good financial return; in effect, most of the resources being used are in reality free.

I wonder if we’ll ever have a political system mature enough to understand this.