Death (Machines) and (Optimal) Taxes

In this paper, we consider the social welfare maximization problem facing a government confronting a potential future security threat. The government must choose how much to devote to long lead time military expenditures. The government must also choose whether to run fiscal surpluses or deficits. We show that the government may optimize social welfare by accumulating a precautionary surplus or (more surprisingly) a precautionary deficit. In the event that the government is constrained to maintain budget balance, however, the social optimum is achieved by either increasing long lead time defense expenditures above the level that minimizes expected social costs in the unconstrained case or (more surprisingly) by reducing long lead time expenditures to below the level that would otherwise minimize expected social costs.