
How an Order for 10 Submarines Led to Misleading News on the Economy - danso
http://fivethirtyeight.com/datalab/10-submarines-misleading-news-economy
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anigbrowl
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.

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akiselev
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.

~~~
javert
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.

~~~
jrock08
Yeah, that's not how economics works...

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.

~~~
javert
> 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.)

~~~
jrock08
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.

~~~
javert
> 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.

------
mpyne
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).

