Is Military Spending Like Insurance?

Is Military Spending Like Insurance? — Dr. Weevil writes:

I'm no economist, but it seems to me that Will Wilkinson of The Fly Bottle and Megan McArdle of Live . . . from the WTC are missing the point in arguing that war is definitely (Wilkinson) or possibly (McArdle) bad for the economy. Many economically useful activities aim not to make money but to avoid losing it.

Weevil goes on to mention insurance, and asks “is not the defense budget a form of insurance?” He argues that it is. Well, let's see.

First, sure, insurance can be a good idea. But keep in mind that insurance is exactly like gambling. Because it is gambling. If, like Weevil, you pay in $30,000 and never file a claim, then you're a big loser. If you turn out to be liable for $30,00.01 or more of damages that the insurance company will cover, then you're a winner. But most people are losers in insurance. That's why insurance companies, like casinos, make lots & lots of money. However, most people are willing to gamble, since it's generally worse to need insurance and not have it than it is to have it and not need it. In any case, if you pay in $30,000 and never get anything back, then, as a matter of fact, you're screwed to the tune of $30,000 dollars. You are not in any sense wealthier. That's a nice car, a (state) college education, a fat downpayment on a house, the beginning of a small business. And it's just gone. Poof! Like playin' them slots down on the riverboat in Dubuque. Again, you ain't no richer.

And, yes, military spending is a bit insurance. But it's not really like insurance in that it doesn't really guarantee anything in case of bad luck. You can spend billions on the military and still get your ass kicked by the enemy. There might have been no amount of money that the French could have spent to prevent the Nazi conquest. But if I'm paid up with Geico, they will pay for my fender-bender. So be clear that in order to make the insurance metaphor go through, you have to assume that military spending will result in effective deterrence and prevention of disaster. But that's not an assumption you should blithely make. (And the Soviet economy would have certainly improved had the Nazi's been victorious there, so you have to assume that it's economically better in the long run not to be conquered.) Further, the idea about the military is that it actually deters or prevents disaster. Insurance doesn't do that at all. It just pays to clean up the mess.

So, given that the insurance metaphor is pretty much hopeless, does U.S. military spending insure the U.S. economy against disaster? It depends! If building up a vast nuclear arsenal prevented Soviet invasion, then we were probably Cold War insurance winners. But if you know about insurance, then you know about the notion of moral hazard. The idea behind moral hazard is that someone who has insurance in some domain is more likely to engage in risky behavior in that domain than someone who isn't insured. So simply having insurance can make it more likely that you'll need it. I think military spending is quite like insurance in that it can cause a moral hazard problem.

Because the US has a very powerful military, we're pretty cavalier in our interference with the affairs of other nations. We take risks we wouldn't otherwise take (we don't even think of them as risks!), having the confidence that other nations will be cowed by our might. But this kind of aggressive ultra-confident meddling is precisely the sort of thing that breeds resentment. So we become a target for terrorists and other malcontents. Which fact is used to justify the need for additional military spending (and additional aggressive ultra-confident meddling).

A better kind of insurance might be a foreign policy based on non-intervention and unilateral free trade. Sure, let's have a strong military that can protect us against invasion and the like. But like having too much insurance, having too much military just increases the chances that you'll need it.