Defense Spending and the Economy

Contrary to a contemporary mythology which claims that defense downsizing will raise unemployment, empirical evidence indicates that "compensated" decreases in defense spending should lower aggregate unemploy­ment.  Traditional budgetary analysis has obscured the causes and conse­quences of trade-offs by using unsuitable measurements and methods.  Relation­ships between trade-offs, unemploy­ment and partisan politics are better articulated by using direct measurements of budgetary trade-offs than by applying conventional methods of analysis.  More realistic measure­ment of partisan influences also eliminates much of the confusion surrounding these issues, confirming the obvious connection between partisan politics and budgetary choices. When discretionary spending shifts from defense to domestic spending in peacetime, aggregate unemploy­ment decreases, but during the war, this relationship reverses.  During peacetime, shifts in federal spending depend on partisan unity.  Thus, budgetary trade-offs are not an illusion, but a tangible conse­quence of partisan political competition in the US. This simple argumentative research mainly shows that the US government should not at any point downsize or cut the military budgeting.

The Economics of Defense Spending

            Recent defense industry layoffs are undeniable, easily observed occurrences.  Indeed, in some areas of the United States, defense layoffs appear to be almost catastrophic to the local economy.  Out of the cacophony of fear and foreboding, a mythology about the positive economic effects of defense spending has taken hold among those affected by defense downsizing.  According to this mythology, built on half-truths and isolated anecdotes, defense spending is a vital part of a healthy American economy and a solid employment market.  On the other hand, some scholars doubt that any significant change in really in the offing. In light of intense opposition to defense down-sizing among certain members of Congress and the efforts made on behalf of local constituents to save bases and other lucrative industrial links to the defense sector, many scholars have expressed skepticism regarding the so-called "peace dividend" anticipated by the end of the Cold War.  Remarking on this skepticism, some analysts have suggested that budgetary priorities have become so institutional­ized, as evidenced by the high degree of incremental behavior exhibited in budgetary behavior, that political choices are illusions.  More generally, an increasing number of scholars have argued that traditional political institutions, such as political parties, have lost their capacity to effect significant change in government spending, regardless of changing international conditions (Whitten " Williams, 2011).

In a famous groan of frustration, Harry S. Truman once remarked that he wanted to find a "one-armed economist."  One of the most noticeable aspects of the academic literature on the economic effects of government spending, and defense spending, in particular, is its lack of consensus.  Combing the scholarship on defense spending, one can find many competing theories and methodologi­cal controversies regarding analyses of the manifold economic implications of defense spending. Many scholars have argued that defense spending produces negative economic consequences.  Theoreti­cal­ly, the arguments are persuasive. At the same time, some few research indicates that defense burdens the economy, draining scarce resources away from more productive endeavors and causing economic problems like slow economic growth, unemployment, and inflation.  Arguments in favor of defense spending for the sake of economic benefits are not as common, or without controversy, but they have been made.  Many American politicians, representing areas affected by reduced defense outlays, continue to bemoan defense downsizing, asserting that such a policy will cost job.  Nye Jr (2016) argues that defense spending is economically beneficial.  Even some critics of defense spending have argued that it is an economically unproductive means of stimulating employment. Certain economists have even argued that military spending contributes, Keynesian-style, to economic, develop­ment, sparking a lively debate that is echoed in recent concerns about defense downsizing. Most of the scholars claiming that defense spending has positive economic spillovers find support in the Third World, though such evidence is not uniform and liable to many mediating circumstances.  Thus, there is no consensus among scholars on the question of how defense spending affects the economy. In general, the most serious challenge to theories about potential trade-offs between defense spending and economic well-being is, however, that cross-national studies do not consistently support the hypothe­sis that military expenditures cause economic problems.  Exceptions abound, and some countries with high defense spending apparently thrive.  Amidst the competing samples of evidence regarding defense spending's effect on the economy are more fundamental conceptual, theoretical and method­ological concerns.

The theoreti­cal foundations for studies concerning the impact of government spending on economic performance span a broad spectrum of economic thought.  Given the range of theories involved, a brief purview of the literature also reveals a striking disparity of conceptualizations and statistical methods employed in analyzing the question of how defense spending affects the economy, producing widely disparate findings. One of the central issues is the direction of causation and lag effects, which are in dispute in a variety of ways.  Whitten " Williams (2011), for example, has argued that beneficial economic effects are hidden by budgetary statistics, which do not account for immediate effects on capital formation and eventually jobs.  He argues that the timing of federal outlays does not indicate when contracts are begun and that contracts stimulate economic activity prior to disburse­ments, as reported in budgetary outlays.  Thus, according to Bilmes (2013), the time-sequence and causality operate in reverse relation to the reporting of data on spending.  With such a divergence of opinions regarding the effects of defense spending, it is no wonder that the policy issues surrounding defense downsizing are so susceptible to sensational speculations.  Moreover, in the midst of so much disagreement, the practical application of academic scholarship in policy-making is dubious.  Even if useable knowledge on this subject were available, its use by US government officials is not assured.

Despite arguments to the contrary, the idea that peacetime defense spending stimulates aggregate employ­ment, and thereby reduces unemployment, is utter nonsense.  While it is true that defense spending provides government-subsidized jobs for select, high-tech industries and high status, highly skilled occupations, the costs of this subsidy are borne by more numerous, lower-waged, less affluent people in other economic sectors.  However, the evidence also indicates that when trade-offs favor defense during wartime and when there is actually a drain on the available workforce because of conscription, unemploy­ment declines during wartime. Usually, research indicates that those individuals who are unemployed because of defense downsizing may not be the same people who benefit from a general reduction in unemploy­ment.  Other workers may find jobs, but this does not alleviate the individual plight of unemployed defense workers whose skills may not easily transfer into the other kinds of employment (e.g. missile design versus healthcare).  Defense industry layoffs are much more visible than employment trends in areas related to domestic spending.  Employment in the many programs supported by domestic spending is more diffuse, more difficult "to see" because non-defense spending is not as concentrated in isolated industrial sectors.  Perceptions drawn from the media or personal experiences can be distorting.  Anecdotal evidence should be viewed skeptically, including evidence drawn from a single example such as the United States. Although the relationship between government spending and unemployment appears to hold in the United States, the support of a single case does not bode well for a generalization, as critics of this hypothesis have noted.  However, critics of the defense-unemployment hypothesis have been missing one important fact.  Most countries do not vary in their spending as much as the United States.  In essence, for most advanced industrialized countries, percentage-based differences in government spending are relatively constant by comparison to changes found in the United States. The United States, however, is a significant outlier in this particular phenomenon (DeGrasse, 2016).


            In a nutshell, fluctuations in defense vis-a-vis domestic spending are practically nil in most OECD countries, but not in the United States. This is due to the fact that those countries do not shift spending as radically as the United States. Therefore, there is no relationship between military spending and lowered development other than the "opportu­nity costs" which might generally be associated with defense spending as such. From the arguments presented in the paper, it is very clear that huge budgeting in the military is a guarantee of peace and security as well as increased development within the states. It is very critical for the US government not cut the military budget allocations even if there are a lot of critics towards the same.


Bilmes, L. (2013). The financial legacy of Iraq and Afghanistan: How wartime spending decisions will constrain future national security budgets. Browser Download This Paper.

DeGrasse, R. W. (2016). Military Expansion, Economic Decline: Impact of Military Spending on United States Economic Performance. Routledge.

Nye Jr, J. S. (2016). Bound to lead: The changing nature of American power. Basic Books.

Whitten, G. D., " Williams, L. K. (2011). Buttery guns and welfare hawks: The politics of defense spending in advanced industrial democracies. American Journal of Political Science, 55(1), 117-134.

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