Econ lesson: Getting Our Money’s Worth

Our defense budget, like any other budget, is finite. Our resources are limited. To get the maximum value from limited reserves, their deployment must be carefully directed and prioritized.

Defense Secretary Gates, along with the Secretary and the Chief of Staff of the Air Force, want to end production of the F22 in order to shift limited resources to other more pressing needs. "The Air Force’s top two leaders explained … that … they couldn’t justify spending billions more on stealth fighters when other higher service priorities exist and money is tight. The $13 billion for the 60 additional fighters could be better used to repair the service’s nuclear enterprise, ramp up its unmanned aircraft fleet and better fight irregular wars.”[1]

I cheered when I read this and said to myself, we will now see how deeply the military industrial complex President Eisenhower warned us about is entrenched in defense policy making, just as Wall Street is currently demonstrating its power to influence the government’s financial policy (and what a mess that is). Lockheed Martin and Boeing have scattered their F-22 plants widely around the country, but “strangely” concentrated them in the states of the congressional members of the defense appropriations committees. This has nothing to do with economic efficiency and everything to do with political support for keeping the money coming.

“Lockheed Martin Corp. is lobbying the Obama administration to purchase additional F-22 fighter jets by arguing that continued production of the plane would preserve nearly 100,000 jobs across the country, including 19,500 in California…. The F-22 program is directly responsible for 25,000 jobs at Lockheed and its major suppliers. But Lockheed officials say when jobs from sub-suppliers are added in, the F-22 program maintains 95,000 jobs in 44 states.”[2]

Shame on Lockheed. If jobs were the reason for keeping up the production of the world’s best jet fighter (designed to out maneuver Soviet Migs), we would do better (and for less) to hire several million people to sweep streets with brooms. But it should be obvious that the nation’s output available to be shared around and consumed one way or another, not to mention the nation’s defense capability, would be much less in that case. So “jobs” is not the right criteria for choosing the government’s expenditure priorities. In the case of the military budget, the goal should be to produce the maximum defense possible from a given level of expenditures (determined by defense needs relative to the needs for other government services and the fact that the more government takes from us in order to provide these services the smaller and weaker our economy, which builds these things, will be). Budgets are about priorities, and trade offs, and hopefully efficiency.

The private market produces efficiency by forcing low priority and/or inefficient producers from the market, thus freeing up the resources (including workers) they used for better things. Fortunately, the government is demanding increased efficiency from GM and Chrysler as a condition for the injection of additional taxpayer money. This means fewer jobs at GM and Chrysler as the price of the prospect to survive (eventually) on their own. It was a mistake (by the Bush administration) for the government to interfere in the first place rather than to allow the existing tools of bankruptcy to clean up and restructure these firms if need be, but at least Obama has drawn a line in the sand on the use of additional tax payer bailout money (at least with regard to GM and Chrysler).

We are a wealthy nation, able to support the strongest military in history AND to enjoy a very high standard of living for the average person, because each person is able to produce a lot. This results from the very careful allocation of our resources (people, capital, and technology) to their most productive uses (minimizing the number of people needed for each activity so that they may engage in other activities thus increasing our overall output). With changing tastes and technologies this needs to be a very dynamic process. If the jobs to produce no longer wanted products are artificially preserved, the value of our output will decline.

The profit incentive of the private sector rewards good resource allocation decisions and punishes poor (or unlucky) ones. Government is needed to establish and enforce reliable and predictable rules of the game for private interaction, but government over reach can undermine the virtuous workings of the profit incentive in competitive markets. Competition and consumer sovereignty in the private help direct man’s natural greed (i.e. self interest) toward the social good and help keep it in check. Government has a more difficult time of it. It is difficult for an individual congressman to uphold the national interest against the interest of his constituency to preserve their jobs. But our national defense and general well being demand it. Good luck Mr. Gates.

[1] Robert O’Harrow Jr., "An Era Begins Closing On F-22", The Washington Post, April 13, 2009.

[2] Julian E. Barns, "Lockheed Lobbies For F-22 Production on Job Grounds", Los Angeles Times, February 11, 2009.

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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