Military Spending and the Economy


Two months ago, Cato published a study by economist Benjamin Zycher, a senior fellow at the Pacific Research Institute, that showed that military spending contributes very little to GDP growth, and concludes that cuts would have very little long-term impact on GDP. On the contrary, Zycher estimates that cuts on the order of $100 billion a year would reduce costs in the wider economy by $135 billion per year. I wrote about that study when it was published here.

These findings conflict directly with two studies prepared for the Aerospace Industries Association (AIA) by George Mason University Professor Stephen Fuller. In October 2011, Fuller argued that a reduction of $45 billion in DoD procurement spending would result in a decline of about $86.5 billion in GDP in 2013, and the loss of 1,006,315 full-time, year-round equivalent jobs. Earlier this year, in July, Fuller expanded his research to include the effects of sequestration on both defense and non-defense spending. He concluded that such cuts will reduce the nation’s GDP by $215 billion, and cost 2.14 million jobs. Interestingly, Fuller’s second study concludes that cuts to non-defense spending will have a greater impact on economic activity than defense spending cuts.

As defense spending advocates continue to make the case against sequestration (or, to be more precise, that portion of sequestration that applies to the Pentagon) they have relied heavily on Fuller’s research to buttress their arguments. In his acceptance speech before the Republican National Convention Mitt Romney asserted that the president’s ”trillion dollar cuts to our military will eliminate hundreds of thousands of jobs.” The GOP platform claims ”Sequestration [would accelerate] the decline of our nation’s defense industrial base,…resulting in the layoff of more than 1 million skilled workers,” and later contends “If [Obama] allows an additional half trillion dollars to be cut from the defense budget,” that would harm “our national security and a struggling economy that can ill afford to lose 1.5 million defense-related jobs.”

There are two problems with these claims. First, they imply that the Pentagon’s budget has already been cut deeply and that the Obama administration’s current plans include even deeper cuts. It hasn’t, and they don’t. The Pentagon’s base budget in 2012 is roughly equal to that in 2011, and total military spending (including the cost of the wars) is near historic highs in inflation-adjusted terms. And current projections call for the Pentagon’s base budget to rise slightly above the rate of inflation; by 2022, it will be 17 percent higher than it was in 2002. Even under sequestration, which President Obama and the Democrats hope to avoid by convincing Republicans to cave on higher taxes, the Pentagon’s budget in 2013 would be roughly equal to what we spent on it in 2007. (I’ll be discussing sequestration with Dan Mitchell at a Cato Hill Briefing next week, Thursday, October 18th. Details here.)

But the more important flaw pertains to the perennial problem of the seen and the unseen. Spending on military hardware, bases, or the salaries of men and women in uniform, is visible, tangible–and, crucially, controlled by politicians. Spending by individuals in the private sector is the true driver of economic activity, but is less visible, largely because politicians have little incentive to call attention to it. No politician can credibly boast that he or she was responsible for my purchases this morning (gasoline and coffee, for the record). Nearly every politician claims credit when my tax dollars fund a new military facility located in his or her district or state, and nearly all of them will fight mightily to prevent bases and plants from closing, and boast about it if they succeed.

I wish that they were equally boisterous when they succeeded in releasing resources–including both tax dollars and talent–back to the private sector. That is what happens, or should, when the Pentagon’s budget declines, and the savings are not simply plowed into other government programs.

This Friday, October 12th, at Noon, Benjamin Zycher and Stephen Fuller will appear together at Cato to discuss their research. They will be joined by the Wall Street Journal‘s Stephen Moore. More details available here. It is not too late to register, but you can watch online if you are unable to join us in person. I’m looking forward to a lively and substantive discussion.