Big G

Yes, that is the title of a new paper and it is excellent indeed.  Lydia Cox et.al bring you a fresh and original look at some properties of government spending:

“Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence.

Via the still excellent Kevin Lewis.

Comments

The idea that military industrial complex procurement is short lived seems amusing, in a Cross of Iron sort of way.

Currently, the average age of the B-52 is over half a century old, at 55 years ..

We hear about big programs, but everything isn't bought all over again every year.

You honestly think those B-52G/Hs are still using unmaintained 50 year old engines and avionics?

The same applies to a number of older aircraft, such as the C130 Hercules.

Sure there is maintenance, and even upgrade, but that's not the same as a major order. I can't think such work impacts entire industries in the same way.

The B-52 persists because suppliers want to extend the original procurement.

Many wanted to terminate the B-52, competitors, Boeing wanting to sell a new more costly, ie, profitable contract, but the network of suppliers persist in sustaining the original procurement. Which took longer than the WWII procurement contracts it replaced, a decade from procurement start to first delivery.

The B-52 has a great airframe, and represents a technology plateau, definitely good for 50 years.

We forget that technological plateaus can be long. We are used to rapid change in consumer products. But even if drones had not come on so strong, I'm not so sure a radically new or better long range bomber would have been built. This is partly based on my amateur belief that speed is less important in heavy bombers that payload. The B-1 hasn't ever filled a strong strategic need.

Now of course it's drones forever.

Trivia: The British Brown Bess musket was in service, the same design, from 1722 — 1838. For a long time it represented a technological plateau.

" little crowding out of private expenditure exists"

Good. I'm fiscally conservative and even I hated hearing this tired argument against government spending. Not saying it isn't real but it doesn't apply to most real world situations.

But the 'crowding out doesn't happen' observation is at least a generation old (since the mid 1990s). What this model is saying is: " fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence".

In short, they took a neo-Keynesian model and 'calibrated it' so crowding out doesn't happen. That's the novelty of this paper (i.e., move along, nothing to see here).

Bonus trivia: the WHO says Covid-19 does not necessarily give herd immunity since catching it once won't necessarily prevent you from catching it again shortly thereafter.

>The WHO says...

Interesting. But are there any reliable sources saying it?

@Randy - WHO R U, who who who who...
Think of it this way: you're a C19 skeptic, which means you agree with the early WHO that travel bans are futile, that there's no pandemic? So you surely agree with these WHO's earlier pronouncements? Now WHO is saying no immunity to C19, but, if you're a diehard skeptic on C19, you would argue that C19 death rates are not that much greater than the common flu's (if you extrapolate some of the extreme 'antibody test' studies). So when the WHO says no immunity to C19, you should reply "WHO cares?" (not) and by analogy with the observation there's no cure of the common cold (it comes back year after year), simply shrug and say 'who cares'?

So if you're a C19 skeptic, the WHO is your friend.

A way to talk about boundary conditions on spending if we want to retain those features? Like ok we have no crowding out because we spend on fighter jets. If we start spending on other things, the limited crowding out assumption may not hold.

Military planes and boats crowd out other military procurement. For example, we use the 1960s bomber while retiring two useless bomber projects. e spent on six Ford class carriers but will cancel because they need to develop alternative system in the age of drones. We have to cancel the F22, it is too fragile for the new warfare. We will be unable to move large navy sips into the gulf because of the drone threat. Include nearly a half trillion on SDI which is now effectively cancelled.Hence, Military spending crowded out about 4T of military spending since Reagan.

I for one welcome this abstract. "It depends."

Old hands might remember that I hated things like budget freezes for this reason. Always be optimizing.

Many years ago, a lawyer (I'm not one) colleague told me the first thing they learn in law school is, "It depends."

In conclusion, always be optimistic.

"government spending is concentrated in sectors with relatively sticky prices."

This certainly seems to have cause and effect reversed.

Commodity prices are sticky.

Government procurement prices are not sticky, but persistently increase year after year.

Thus the effort to shift to COTS, "commercial off the shelf" or similar.

Government procurement often lowers prices, eg, vaccine prices. That's why government procurement of drugs is opposed in the US, prices are much lower everywhere government contracts to buy drugs.

flat earther.

We entangle, Big G spends on what is was losing the previously. Almost always catching up to prior obligations gone bad. To a flat earther this looks like a multiplier greater than one.

Federal procurement amounts to an inefficient parastatal sector of the US economy dominated by a few large players and for which many marketplace rules and assumptions do not apply. The organizations and business processes of nearly all of the largest Federal contractors are optimized for exploitation of the Federal government’s idiosyncratic transaction and delivery expectations (those aforementioned short-lived contracts and preceding byzantine competitive/selection processes), and could never be competitive in truly open marketplace conditions. Even those Federal contracting players that have significant private sector portfolios in addition to their public sector portfolios run those Federally-focused business units more or less autonomously, or with significant Federal facilitation assistance. Would be interesting to extend the macroeconomic study of procurement spending: What does it mean when so much of this spending flows down to a more dynamic contractor workforce vice a more static civil service workforce? And perhaps more importantly, what are the macroeconomic impacts of high levels of direct government procurement spending outside of the US economy, such as the hundreds of billions spent on contractors and subcontractors in Afghanistan, Iraq, and elsewhere overseas over the past two decades?

And here I thought you meant General Mills.

When I taught physics, we had big G, the gravitational constant (6.67 x 10 exp -11 m exp 3/(kg x s exp2) and little g, gravitational acceleration at the earth's surface (9.8 m/s exp 2). Cheerios boxes were used.

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