Krugman, Keynes, and war

by Russ Roberts on October 31, 2011

in Stimulus

Krugman writes:

First things first: Military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups. Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs.

Interesting that Valerie Ramey’s work that concentrates on military build-ups (because they are reliably exogenous) often finds a multiplier that is less than one, meaning that government spending crowds out private spending rather than spurring it on. Barro and Redlick’s work is similar. Where is the evidence that military spending stimulates the private sector? What does Krugman have in mind?

As the Hayek character in The Fight of the Century says in response to the claim that WWII ended the Great Depression:

Wow. One data point and you’re jumping for joy
The last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank

Pretty perverse to call that prosperity
Rationed meat, rationed butter… a life of austerity
When that war spending ended your friends cried disaster
Yet the economy thrived and grew faster



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