Does Military Spending Stimulate or Retard Economic Performance?

The current military buildup, the fourth since the end of World War II, once again raises an old debate: does military spending provide economic stimulation through higher demand and technological innovations, or does military spending retard economic
performance because it draws resources from more productive activities. This paper
reviews the debate with almost a half century worth of data, and concludes that neither
view garners strong support. The major effect of military spending may be context
specific, with the impacts depending largely on what else is happening in the economy.

Introduction

The United States is the midst of a major expansion in its military spending, the
fourth such expansion since the end of World War II. The military budget is projected to
reach $400 billion in constant (1996) dollars in Fiscal Year (FY) 2005, which is
approximately the level the military budget reached at the peak of each of the three
previous post-World War II buildups. These buildups were followed by drawdowns,
giving military spending a cyclical pattern without an upward time trend (Figure 1).
Figure 1 goes here
Over the same time period, of course, the economy has grown substantially.
Thus, the ratio of military spending to gross domestic product (GDP) commonly thought
of as a measure of the defense burden, has fallen substantially, albeit with its own
cyclical pattern (Figure 2).

Figure 2 goes here

Similarly, the share of the federal government budget spent on the defense
function has also declined substantially (Figure 3)

Figure 3 goes here

Whenever military spending changes, there are discussions and debates as to its
economic impacts. Broadly speaking, there are two sets of views. One sees the military
as a drain on the economy, especially in the form of depleting the private sector of key
technological and managerial resources. Whatever benefits there are from demand
stimulation and technological spin-offs are swamped, in this view, by the drain of
resources that could, and should, be utilized for investment in human and physical capital
and for research and development. This view of the economic costs of military outlays
can be found in the writings of economists and policy makers from Adam Smith1 to
Dwight Eisenhower, and received its most complete recent articulation in the works of
Seymour Melman (1965; 1983), Lloyd J. Dumas (1986) and others.

TO READ MORE: CLICK HERE