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. -David Gold

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.

STIMULATING DEMAND

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 only worsen.

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 lead.

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 economic considerations?

POWER POLITICS

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 missile defense.

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