This is pretty lightweight. True, most people imagine that durable goods orders consist of consumer and business spending, and so a large government order like this skews the total slightly. On the other hand, that money isn't going into a void, or leaving the US economy, but will go out to General Dynamics' employees, suppliers, and shareholders over the lifetime of that contract - which is to say that it will mostly stay within the US and thus counts as much as any other kind of economic activity.
It's not leaving the US economy but it sure is going into a void. The defense contracting system, especially on large projects like submarines, is very inefficient. A lot of that $18 billion is probably in cost plus contractors where the contractors gorge themselves.
People assume that the money just keeps circulating and that it doesn't matter. "So what, the contractors spend it," etc. I already see someone posting this fallacy.
That's true, but that leads to a zero sum game, economic stagnation.
To get economic growth, money needs to be invested were a productivity gain can be had.
For instance, if you pay $100 to a landscaping man, he in turn spends it on food, and there is no growth in productivity.
In constrast, if you pay $100 to an engineer, he in turn spends it on food, AND he figured out how to do X more efficiently, which lowers the cost of X. Or he invents a new Y that saves everyone time. Or pay $100 to a scientist, and he cures a disease.
Where does tax money come from? The rich. All of their money is invested. If you take it from them, they don't spend less on personal luxuries. Rather, they invest less.
That means less investments in engineering and science (and anything productive and thus profitable), and more investements in landscaping (to continue the running example).
I am actually a big believer in national defense, so it's fine when the money is used on submarines wisely... but it is not fine when it is wasted.
To think otherwise is a form of the broken window fallacy, which should be clear by now.
If I pay $100 to a landscaping company, the company pays it's workers (even if we have a company with one person). The company keeps some portion of the money and invests in improvements for the company, e.g. better equipment or advertising. The employees use the money to pay other companies for services which, similar to the landscaping company, reinvest a portion. These companies grow to be bigger companies, thus employing more people who can afford yards which need landscaping. Growing the economy. Not the zero sum game you imply.
You assert that investment in companies is a better use of money, but in reality if I or someone else buys a share of any large and widely traded company, I'm pretty likely buying that share from a shareholder who, after selling the stock, has no vested interest in the company. How is that exchange producing value for the economy? I likely bought the stock from someone who after selling the share, invested it in a different company, by buying a share from someone else in the market. The money doesn't enter the economy, it doesn't pay someone a salary, it just stays locked up in the stock market betting that the valuation of a company will go up. In the very unlikely scenario that I do buy a share from a company directly, and assuming that the company does not have significant cash reserves, the money from the share would be used to pay someones salary or reinvested in the company thus creating a net positive for the economy, but then we are back in the landscaping example, not the engineer or science example.
> Growing the economy. Not the zero sum game you imply.
It's not growing net economic output for a landscaping company to expand their business. It's just diverting money from other uses. To get increased economic output, you have to spend the money you are getting on something that expands production.
In other words, landscaping is a consumptive activity, not a productive one (and that's fine).
So as far as I can see, your analysis falls prey to the same fallacy I was trying to guard against.
The fallacy is that it doesn't matter if money is miss-spent (e.g. by government) because it all gets consumed, anyway; it doesn't go anywhere. If there was only purely consumption (or, rather, exactly enough production to support existing consumption), in the net, it would be a zero sum game. Someone who holds this fallacy doesn't understand production or appreciate its significance. When production exceeds consumption, then consumption can and does expand to equal it out, but the expansion of production has to come first.
Re: The stock market. When you buy a share of stock from one of the original founders, you are locking up your money, but freeing up his money to go be invested in something he thinks will be more productive (otherwise he wouldn't want to sell the stock). He may also invest in a publicly traded company, but eventually, on down the line, the money gets invested in expanding productivity, such as venture capital. That's why the venture capitalist profession exists.
By the way, the reason those companies are so valuable is because regular investors are willing to pay X (which turns out to be huge) for a certain % of the company's earning potential. (Even if that potential is getting reinvested in the company instead of paying dividends, it's the same principle.)
I'm so confused as to why some spending in your economy are "good" and why some spending is "bad". How are you discounting the net economic gain from service jobs, but not discounting the net economic gain of a reinvested dividend?
I'm perfectly happy to cede that money spent on submarine projects that might line the pockets of a small number of people is suboptimal to some other spending. And I'm not really arguing that. I'm arguing against your insistance that service jobs are zero-sum which is patently false. Service jobs are not zero sum due to the cost of time. For instance, if I clean your home, landscape your yard, or do your laundry, it frees up your time to do something else more productive.
> I'm so confused as to why some spending in your economy are "good" and why some spending is "bad".
Your terms, not mine. There would be no point in producing and in expanding production, if we weren't going to consume.
> How are you discounting the net economic gain from service jobs, but not discounting the net economic gain of a reinvested dividend?
One expands the level of production and the other doesn't. I'm not discounting them in a moral sense, though.
> I'm arguing against your insistance that service jobs are zero-sum which is patently false.
I said that if there were only enough production to equal consumption, it would be zero sum in the net. In other words, the economy would not grow.
> For instance, if I clean your home, landscape your yard, or do your laundry, it frees up your time to do something else more productive.
Yep, agreed. But if instead of doing something productive with my extra time, I work on a government boondoggle project like digging a ditch that isn't needed, there would be no net growth in the economy from that, because what is happening (within the confines of the scenario) is purely consumption.
Anyway, hope I don't sound too terse, this is a fun and interesting discussion and you are raising good points.
Actually the submarine program in question (the SSN-774-class procurement program) is one of the most successful defense acquisition programs in U.S. history, as far as cost performance and compliance with contractual deadlines and milestones.
> Actually the submarine program in question (the SSN-774-class procurement program) is one of the most successful defense acquisition programs in U.S. history, as far as cost performance and compliance with contractual deadlines and milestones.
So what? The Virginia class procurement program is meant to maintain nuclear submarine capabilities in two shipyards instead of one so we get to pay for that inefficiency while GDEB and NNS regularly get applause for cutting costs in a program plagued with lots of low hanging fruit.
Is this supposed to be like how the market for screwdrivers is inefficient by definition since I can buy a Craftsman or a Stanley?
Either way, allowing your industrial base to atrophy to a sole source is one of the classic ways of increasing costs to the taxpayers, so I'm not surprised the Navy is trying hard to avoid it. Just look at all the trouble Russia has had trying to reboot their submarine programs.
I see your point, but in this context it's the wrong point (although I firmly agree that taxpayers should demand value for money). As far as economic activity goes, even if cost-plus contractors do gorge themselves, the monies they bill will be spent in turn, resulting in a normal money multiplier effect.
What I was thinking of was the sort of istuationation Russia has to deal with; recently they ordered some new Mistral warships from France because Russia doesn't have the domestic expertise to build that quality of gear at home. So the money Russia spends on those if the deal goes ahead will leave Russia's economy completely rather than circulating within it and generating new activity as it is spent by shipbuilders.
The economic multipliers of the defense contractors are horrible compared to, say, DARPA/NASA and infrastructure investment. The trickle down of technology is slow and the industry has been growing more and more bloated since WWII.
Manufacturing in the United States accounts for over $3 trillion of the GDP and dwarfs even China's industry. We don't need $500 billion or more a year of defense spending to keep our capabilities maintained and we certainly don't need nuclear submarine manufacturing capabilities in two shipyards.
I honestly thought this was going to talk about the incredible misunderstanding a lot of people seemed to have about the story. Most assumed that the Navy was ordering 10 submarines to be delivered at more or less the same time, which is not at all what was happening.
Rather, the Navy is buying the next 10 submarines it would have been buying anyways, but in a single block contract to reduce the per-unit cost. But that wasn't the interpretation that made it to the taxpayer (which makes sense for the taxpayer, but I don't understand why so many media sources left it confusing).
