Fewer Jobs, Slower Growth:
Military Spending Drains the Economy
by David Gold
Dollars and Sense magazine, July
- August 2002
Since 1984, the United States has experienced
another cycle in military spending, the third since World War
II. The military budget rose through the 1980s, fell in real (inflation-adjusted)
dollars during most o f the 1 990s, and has been rising again
since 1998. The Bush Administrations has undertaken another substantial
buildup since September 11.
But the persistence of the usual pattern
overlooks a significant long-term trend. Even with the current
rise, real defense spending is no higher than it was during the
Korean and Vietnam Wars or during the 1980s. And because the economy
has grown since then, the defense burden (the share of military
spending in GDP) has fallen. In the late 1950s, after defense
spending fell following the Korean War, the defense burden stood
at about 11% of GDP; in 1968, at the height of the Vietnam War,
it was 11.8% relative to GDP. Even with the current military buildup,
the defense burden will rise to only 4% of GDP.
The dispute between guns and butter-between
the forces pushing for military expansion and those pushing for
more civilian spending-is ongoing. The Bush military and counter-terrorism
buildup is already creating conflicts in the federal budget and
drawing resources from civilian uses. But if the post-World War
II pattern continues, this buildup will end and military spending
will again decline. In order to analyze the economic effects of
military activity, we need to take both patterns into account.
Whenever military spending increases in
the United States, as it is at present, economists and others
debate whether military outlays help or hurt the economy. Most
recently, as the Reagan buildup began in 1981, the debate entered
the popular press. But neither the ongoing debate nor the recent
one has been adequately resolved.
In the years after World War II, military
production may have provided some benefits by giving a boost to
purchasing power when government spending was low and credit tight,
and by giving a push to some high technology industries. But over
time, other more effective forms of stimulating purchasing power
came into play, and the negative effects on research and development
and investment began to assume a more prominent role. While military
spending might, on balance, have been stimulative at one point,
it most assuredly no longer is.
Military spending represents a direct
demand by the government for products and services. An increase
in military spending brings forward an increase in production
and employment, and as military-industry workers spend their higher
income, it generates further increases in jobs and income. The
issue for debate, however, is not whether an increase in military
spending stimulates employment and purchasing power, because of
course it does, but whether military spending does so more effectively
than other forms of government or private spending.
Using a variety of methods, and covering
different periods of time, researchers have found that spending
on the military generates fewer jobs than spending the same amount
of money on a wide range of alternatives. This conclusion is strongest
when the military budget emphasizes weapons purchases and development,
which is the case at present. For example, the Congressional Budget
Office recently found that every $10 billion spent on weapons
generates 40,000 fewer jobs than $10 billion spent on civilian
programs. These numbers are not large, given the amount of unemployment
in the economy. But they are important in the current situation,
since a large part of the military buildup was financed by cutting
civilian spending. Looking at its impact on jobs, it is hard to
justify military spending as a means of stimulating the economy.
The ability of military spending to stimulate
demand and employment was probably greater in the 1950s than it
is today. Weapons production was more jobs-intensive than it is
now. Moreover, the economy was in greater need of the added stimulation
that military purchasing power could provide; today, with growth
in government social spending, and with the tremendous growth
of credit over the last several decades, our problems are not
lack of overall purchasing power. Current problems lie more in
the area of innovation and investment, and inequalities of income
and power- problems that high levels of military spending can
STRANGLING THE SUPPLY SIDE
Military spending also has implications
for the supply side of the economy. The people, equipment, materials,
and production capacity that are used by military industries are
similar to the resources needed for civilian research and new
investment. While military spending accounted for about 6% of
total output in 1983, about 30% of all durable goods output was
for the military. Because there is direct competition for resources,
military spending may reduce the ability of the economy to generate
new products and rebuild production technology.
Economists have researched this issue,
also. There are a number of studies showing that high levels of
military spending are associated with low rates of economic growth.
British economist Ron Smith, after analyzing data for the United
States and other advanced capitalist countries, concluded that
there is a direct effect whereby countries that maintain large
military establishments also have low rates of investment. This
is because military spending can push civilian investment aside.
Military industry firms outbid civilian companies for engineers,
skilled workers, key materials, and even loans. Military firms
use these resources less efficiently than would civilian ones
because they are less concerned about controlling their costs.
They know the Pentagon will foot the bill.
The Department of Defense frequently argues
that the civilian economy benefits from the spinoff from military
research and development (R&D). Military investment probably
had more impact on civilian products in the years after World
War II than recently. Innovations in aircraft design and computer
technology received a push from the military and space programs
in the 1940s and 1950s. (So did nuclear power, which may be an
example of a negative spinoff.) Today, military technology has
become far too complex to have significant civilian applications.
In any event, looking at the economy as a whole, it's likely that
spinoff was never a very important phenomenon.
Military priorities also have a qualitative
impact on civilian innovation. In the United States, where transistors,
semiconductors, and other electronics originated, the emphasis
on military-oriented research has reduced the ability of companies
to compete with Japanese and European companies. Military requirements
emphasize high-speed applications and products that can withstand
extreme pressures and stresses, with little regard for cost control.
Civilian products need low cost and standardized components, an
area of electronics where the Japanese, in particular, excel.
Because of these differences, several U.S. companies have left
the Pentagon's R&D program, fearing they will be unable to
keep up with civilian market developments if they follow the military's
Whatever the actual effects of military
spending on the U.S. economy. those who make decisions may still
use the military budget in an effort to fight recession.
A problem, however, is that in today's
era of large weapons systems, it may not be possible to increase
the military's budget fast enough to be an effective counter-cyclical
tool. For example, the B-1 bomber was approved by President Reagan
in October 1981, during a recession, but actual production was
not scheduled to begin until the end of 1983, by which time the
recession had ended. Similarly, the Pentagon spent $4 billion
less in the 1983 fiscal year than planned, partly due to delays
in the MX program. Other defense money can be allocated in a more
flexible fashion, but there are severe limits to the extent that
weapons purchases can be used to fight the business cycle.
Since military spending is a poor way
of fighting recession, and it imposes significant long-term costs
in terms of undermining innovations and economic growth, one must
also ask why the country's political leaders turn to the military
budget as a means of economic stimulation. Is it misinformation?
Or are there political constraints and rationales that override
Part of the answer to these questions
is that military spending is used to enforce the dominant role
of the United States in the world economy. Military spending purchases
military forces which are used to project U.S. power and protect
U.S. economic interests against a variety of real or possible
threats. This actually creates another drain on the U.S. economy
because the cost of maintaining U.S. overseas forces and giving
military aid is greater than what is earned through arms sales.
According to a recent Economic Report of the President, "net
military transactions"-money earned
through arms sales minus expenditures
made overseas to support our military forces-have been negative
almost every year since 1946. Another part of the answer lies
in the domestic political power exercised by the military establishment.
Thanks to the political support it receives, military projects
are vigorously supported by local interests in Boston, New York,
Texas, Southern California, etc. Effective or not, military spending
may seem like the easiest way to fight recessions because of the
political backing for it.
Reducing the military budget and shifting
resources to civilian activities would improve our prospects for
long-term economic growth. Conversion is not a cure-all; too much
else is wrong in the U.S. economy to suggest it can all be made
right by a change in the military budget. But the costs imposed
by military spending indicate that conversion is a necessary part
of any program for change.
David Gold is Visiting Fellow at the Center
for Global Change and Governance, Rutgers University-Newark, and
Adjunct Professor, Graduate Program in International Affairs,
New School University. He has recently written on military spending
after the peace dividend; the arms trade; and the economics of