Re: Now that the US will spend 40? Billion; Effect on econom

$40 Billion isn't such a big deal in a budget that tops out at nearly $2 trillion. It does though represent $40 billion not spent on something else. To the extent that it is taken out of the economy in new taxes, then it distorts that part of the economy that got taxed. The problem with government expenditures is that it is very difficult to determine ROI. Highway systems are fairly easy to evaluate because they provide a direct economic benefit. But $40 billion on the millitary is has a very low ROI for the economy (in general) because it provides no direct increase in economic activity. The $40B spent represents $40B taken. Net sum there is $0. Of course being defenseless can be a big cost too. So in general, we might look at it as the fixed cost of doing business in the U.S. just went up by $40 billion. In a $5 tillion economy, that's not a big deal...but it could buy a lot of science, roads for Sen. Byrd, hairplugs for Sen. Biden, TV appearences for Sen. Clinton, etc.

The ultimate impact of an expenditure of X is greater than X. This is known as the [link|http://www.cnmi-guide.com/info/essays/economics/33.html|multiplier effect]. It's based on the marginal propensity to consume -- the amount of money that's spent rather than saved or otherwise withdrawn from circulation. Given an MPS of 0.8, the impact of $40b would be $800b. This starts to get significant.

The other side of the coin is directed spending. We've currently seen "pump priming" in the sense of reducing interest rates to stimulate investment...but the investment hasn't happened. The other tack (the first is called "monetary policy", it influences the money supply) is direct government expenditure directed at specific projects. This is Keynsian "fiscal policy", and has the advantage of specifying exactly where the economic activity will occur (or disadvantage if you're opposed to direct government meddling with the economy). In a situation in which the private sector won't step in and start increasing activity, such a leadership role may have advantages.

Peace.

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