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Tuesday 22 Aug 2017 | 21:52 | SYDNEY
Tuesday 22 Aug 2017 | 21:52 | SYDNEY

Reader riposte: Defence stimulus



10 February 2009 16:09

Will Clegg adds some rigour to my slightly sloppy post on stimulus and defence spending, but I still have doubts:

It is true that investment in productive assets has a multiplier effect on economic activity, because of (1) the spending of people who receive income from the assets' construction (and the spending of people who receive income from the people who received income from the construction of the asset etc. etc.) and (2) the efficiency gains that the asset may or may not provide (such as decreased freight costs). However, it is not true that a warship would 'just be a drain on the public purse'.

First, a high degree of maintenance is associated with large defence platforms; bases need to be built and maintained, the equipment itself requires maintenance and parts, meals for personnel need to be prepared and served, facilities must be cleaned, roads and access systems must be built and soldiers need to be hired to operate the machines.

In turn, these soldiers require housing, telephone connections, swimming pools and all the other conveniences of modern life. Further, coastal communities with shipyards suited to military purposes can earn large sums from the ongoing expenditure related to battleships, or other assets. Indeed, shipyards may be the backbone of their economy. The effect of significant government spending on naval assets for one South Australian community may be commensurate to government spending on automobile subsidies for another.

Both expenditures, from an economic and political perspective, have the potential to be equally sensible and equally mad. Regardless, income and sales taxes can be raised from those persons employed in work attendant to the defence asset's operation and maintenance. True, these tax receipts are probably not substantial enough to replicate the initial or ongoing expense of the asset itself. Though, this is true for train-drivers and automobile manufacturers as well.

This brings me to my second point. The Government will invest in railways because it values the particular public goods they provide, say increased economic efficiency and/or access to Australia's hinterland. Similarly, the Government will invest in defence assets because it values the particular public goods they provide, such as increased security for Australians.

This is not to advocate the merits of any particular piece of defence spending. It is, however, to note that defence expenditure can bring some returns — in terms of security, regional influence, and, if the 'blood for oil' or 'blood for free trade agreement' arguments have a grain of truth, commerce. And, because of the costs of assembly and maintenance (every cost is a receipt), some of these returns are economic, as I outlined above.

It is too simple to argue a dollar spent on a battleship is a dollar wasted. Perhaps the opportunity cost of the expense is particularly high at this point. But, it is not an expense that is void of benefit. Anyway, just because Australia is facing a short-term economic crisis (that might last a few years), the Australian Government is still responsible for the defence of the realm and advancing the national interest.

If Australia needed large naval platforms to achieve core security goals 18 months ago, it would take a particularly horrendous crisis (probably worse than the one we now face) to push the marginal cost of this expense above its marginal benefit. If, however, these large naval platforms were not necessary to achieve core security goals, we should probably never have purchased them in the first place, as they are very expensive, and many other demands tug on the government's purse.

Clearly, a warship can create local economic activity in the way Will describes, an he's right to pull me up on that point. But given the efficiency gains from buiding a warhips are zero, I cannot see the benefits being of the same order as a properly targeted piece of infrastructure. Of course, a lot hangs on that 'properly targeted' proviso, and some would argue that governments are pretty bad at assessing these things. Remember the Alice Spings to Darwin railway?

Will is also right that defence is a public good and does offer important non-economic returns. But I would stop short of endorsing Will's last paragraph. First of all, it is possible that our present predicament is horrendous enough to justify cutting major pograms like the new destroyers.

But even if things are not quite that bleak, a moderate recession could still justify to a moderate decrease in defence spending, no? This would not suddenly mean that all our previous judgments about what was required to defend Australia and its interests were wrong. It would simply mean that we have to reassess what those interests are, and how much we are prepared to spend to defend them.

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