Tuesday, March 29, 2011

Does the Pentagon have a downward sloping demand curve?

Greg Mankiw amusingly blogged that Even terrorists have downward sloping demand curves, because AP reported that:
When an admitted al-Qaida operative planned his itinerary for a Christmas 2009 airline bombing, he considered launching the strike in the skies above Houston or Chicago, The Associated Press has learned. But tickets were too expensive, so he refocused the mission on a cheaper destination: Detroit.

In the current US federal budget debate about cutting expenditures, the attitude seems to be that the budget of the Pentagon and intelligence agencies is off-limits. Indeed Mankiw wrote a New York Times Op-Ed with what he believes to be a presidential address in 2016 with the news that the nation is bankrupt:
MY fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means. We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.
He went on to state he (the president) returned from an IMF meeting in Beijing and secured a loan with onerous conditions and went on to detail his (Mankiw's) prescriptions of what must be cut, but conspicuous by its absence is military spending:
We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion
Notwithstanding the fact that America spends about 50% of the global military budget, is there something wrong with this picture? Consider this story about the Pentagon threw away $17 billion to fight roadside bombs with little success, or this rhetorical question about Operation Odyssey Dawn: How many teachers will 112 Tomahawk missiles buy you? (At $1.4 million a copy, 112 missiles will buy a LOT of teachers.)

Mankiw believes that terrorists have downward sloping demand curves. It is unclear whether Mankiw, or anyone else, believes that the Pentagon does as well.


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