After I spoke on Wisconsin Public Radio a few weeks ago, a listener wrote me with an important question. In the interview, I said that the Institute for Economics and Peace has calculated that the multiplier effect of reallocating our current violence containment spending would be about 2 to 1. That means that money spent manufacturing and purchasing guns, tanks, police uniforms, and even security cameras could generate twice as much economic activity if it were instead spent on books, computers, school uniforms and movie cameras. I later said that we’re missing out on the multiplier effect when we spend money on violence and violence containment.
Brian wrote me with this question:
Would the purchase not be an economic multiplier for the company that received the order, it’s employees and families and everything they spent money on?
The multiplier effect is the economic concept that every $1 spent generates more than $1 in economic activity. And the answer to Brian’s question is, yes.
The firms that manufacture computers and explosives both generate economic multipliers for each $1 in sales. The firms pay employees, suppliers, and other vendors, who in turn pay other firms and individuals. Employees of both businesses buy groceries, go to the movies, pay the mortgage, pay their taxes, etc. The difference in the flow-on effect is chiefly in the economic activity generated (or not) after the product is manufactured and sold.
The computer serves as an input to a number of other activities: a student’s education (which generates economic benefits for a lifetime), the operations of other firms, or maybe even the creation of a new business. The explosive device does not create any new economic activity. In fact, if used, it is likely to destroy wealth (homes, factories, etc.) and the infrastructure that makes future economic growth possible (roads, ports, power grids, etc.). And so the flow-of effect of spending money on violence or violence containment is limited, or even negative!, compared to spending money on computers.
This is one example, and it obviously gets more complicated. For example, hiring a security guard may generate a net positive return for, say, a bank. But from a macroeconomic perspective, those human resources could be productively used manufacturing computers, used by business schools to train new entrepreneurs, who develop new products, and employ more factory workers, and so on.
The goal is to start categorizing our economic activity in a way that allows us to understand the impact of violence. “Manufacturing” as a category of economic activity includes the production of computers, toys, shoes, guns, fighter jets, and drones. “Violence containment” as a category let’s us measure the economic impact of the subset guns, fighter jets, and drones.
It does get tricky when we use drones, for example, for more than defense purposes. But, using the example I mentioned on air, we know that $40 million for drones on the border will not be producing economic flow-on benefits. We could, alternatively, create those benefits by caring for and schooling the children that have arrived here, thus adding a host of young people to our future work force. And if you are worried that we won’t have jobs for them, well, I’ll note that $40 million at the mean US income would employ about 1,000 social workers, educators, and grocery store and restaurant proprietors, to name a few, and their families and our economy would certainly enjoy the multiplier effect of that spending. The beneficiaries of that spending can be expected to create new jobs — history predicts that well enough.