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CHAPTER 23 National Defense PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe National Defense In 1960, comprised half of federal government spending In 1999, just over 16% Defense spending can be adjusted on the margin Especially expenditures to defend U.S. interests internationally PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-2 The Level of Military Expenditures Table 23.1 Expenditures o n Natio nal Defense as a Percentage o f GDP Year Percent o f GDP 1945 41.0% 1950 4.8% 1955 10.5% 1960 9.4% 1965 7.2% 1970 8.1% 1975 5.5% 1980 5.0% 1985 6.3% 1990 5.4% 1995 3.7% 2000 3.0% 2003 3.7% So urce: Calculated fro m data in the Statistical Abstract of the United States , vario us PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-3 The Marginal Benefits of Additional Expenditures Marginal Costs of Military = Marginal Benefits MB decline as dollars are spent on less vital items PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-4 The Marginal Benefits of Additional Expenditures The Optimal Level of Military Expenditures PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-5 The Arms Race and the War on Terror What if reaction of other nations to military spending is negative? Arms race Potential prisoner’s dilemma Incentive to heavily arm End up worse off as result PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-6 The Arms Race and the War on Terror An Arms Race as a Prisoners’ Dilemma Game PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-7 Military Alliances Optimal sharing group may be larger than one nation Economic rational for alliances Example: NATO Increased security also increases propensity for war PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-8 Economic Warfare Arms races can cause major economic problems Example: Soviet Union during Cold War Economic warfare can be used to bankrupt an adversary PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-9 Do Democracies Spend Enough? Military spending reduces current consumption Might be investment towards future consumption Example: 1991 war with Iraq Democratic governments might be biased towards short-term spending Leads to inadequate military investment PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-10 Military Procurement Contracts How can contracts be written to purchase uncertain items? Fixed fee Often infeasible Cost plus fixed fee Little incentive to control costs PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-11 Military Procurement Contracts Cost plus percentage fee Incentive Cost plus incentive fee Limited to overspend applicability The perfect contract Does not exist PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-12 Procurement Versus LifeCycle Costs True cost is cost over life-cycle Two aspects relevant to military expenditures Cost of maintenance Cost of finishing a started program PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-13 Conscription Versus Volunteers Advantages of conscription Lower personnel costs Constant costs Disadvantages of conscription Heavy tax on conscripted Misallocates labor resources PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-14 Conscription Versus Volunteers PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 23-15
