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How Does the United States Military Budget Affect the Economy?

August 11, 2017

President Donald Trump ran his campaign largely on the premise that the United States’ engagement in international trade, diplomacy, and development has weakened its position in international politics.

The most readily available critique of large military budgets is that they squander money from potentially more important federal programs. Indeed, President Trump’s purports to do just that; the proposed $54 billion increase in defense spending above the Budget Control Act cap will cut nonmilitary programs by the same amount. [1] There is no doubt that some of the 37% of Americans who believe the country spends “too little” on defense may have received some sticker shock. [2]Raising the bar even further, House Armed Services Committee chairman Mac Thornberry presses for a $696 billion budget in FY 2018, more funding than at any point in the Iraq and Afghanistan wars and $28.5 billion above President Trump’s initial request. [3]

Image: The chart shows U.S. defense spending trends from the year 2001 to 2017.Source: Wiki CommonsImage: The chart shows U.S. defense spending trends from the year 2001 to 2017.
Source: Wiki Commons Credit: Wiki Commons

This potential exchange Americans face in the upcoming fiscal year is a new iteration of a model analyzing the relationship between defense spending against domestic spending – “guns or butter”. While simplistic, the guns or butter model demonstrates that there are tradeoffs in discretionary spending. Should the United States spend more protecting its civilians or providing for them? Americans are roughly split over whether the country spends too much, too little, or just enough on defense. [2] 

Image: This curve shows the trade-off between gun production and butter production.Source: Wiki CommonsImage: This curve shows the trade-off between gun production and butter production.
Source: Wiki Commons Credit: Wiki Commons

The size of the U.S. military budget has other significant effects on the economy. A 2010 study by political scientist Uk Heo measured the impact of defense spending on economic He found that increased spending “shows a contemporary, harmful effect on economic growth, but the lagged effect…[offsets] the negative effects.” [4] In short, going to war or building up causes an initial dip in growth, but the overall effect is insignificant. However, a large military budget leads to many other externalities, such as tax hikes, large deficits, inflation, and, most notably, cuts to social welfare. [4] In addition, more spending on defense programs likely decreases private investment due to a bottleneck effect on capital stocks. [4]

The global security environment has changed significantly since President Obama left office. Russia has further asserted itself in the North Atlantic and Black Sea regions, as well as Syria. China continues to build its navy and invest in its military. North Korea successfully tested its first ICBM. However, these changes do not give the new administration carte blanche to neglect the equally, if not more vital, needs of constituents. The Department of Defense must decide which regions truly demand a more forward force structure, and from which the United States can afford to relax its grip. 

In many cases, the United States can achieve the same goals without forward military presence through diplomacy – often with far less collateral damage. In March 2013, when now-Secretary of Defense James Mattis was serving of Commander of U.S. Central Command, he said in a Senate Armed Services Committee hearing that “if you don’t fully fund the State Department, then I need to buy more ammunition.” [5] In short, the less the United States devotes to diplomacy and development, the more it needs to defend. For example, should the United States does not work to incorporate China into the existing international order, it will have to invest more heavily in hard power approaches for preventing geopolitical crisis in the first island chain. 

Image: These pie charts show the percentage breakdowns of the FY 2018 budget request.Source: U.S. Department of DefenseImage: These pie charts show the percentage breakdowns of the FY 2018 budget request.
Source: U.S. Department of Defense Credit: U.S. Department of Defense

The United States has traditionally been at the forefront of military research and development. To maintain this status, the Department of Defense (DoD) relies heavily on contractors. Of the top ten defense contractors, eight are located in U.S.; the remaining two reside in NATO countries. [6] As such, the U.S. not only outcompetes the rest of the world in military spending, but also in R&D. These two facets are not inseparable, and in fact the latter presents a boon for lowering the economic burden of the former. It takes far less time to train soldiers than to, say, build and commission aircraft carrier or design and deploy an entirely new system. However, RDT&E, or research, development, test, and evaluation, accounts for only about 13 percent of the DoD’s proposed $640 billion total budget; procurement of these systems, ships, and the like will account for less than 20 percent. [7]

Accordingly, pursuing diplomatic means to mitigate conflicts instead of military means may free up room to reduce troop, equipment, and vehicle levels abroad, thereby reducing the personnel and O&M costs. , Prioritizing the United States’ technological edge is also a sensible way to appease the hawkish voices in the federal government and reallocate more funds to the “butter” side of spending,  Slowly and steadily replacing outdated systems for newer, safer, and less costly ones will maintain readiness without driving up personnel or O&M costs. Should current and future administrations heed Secretary Mattis’ words on the importance of diplomacy, they may unfetter the economy from the negative consequences of a large military budget. Regardless of how the next year’s fiscal budget changes moving forward, there are clear implications to domestic programs, spending, and savings. Policymakers of both parties should duly note these effects to butter before weighing in on guns.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1] Michael D. Shear and Jennifer Steinhauer, “Trump to Seek $54 Billion Increase in Military Spending,” The New York Times, February 27, 2017

  [2] Art Swift, “1 in 3 Americans Say US Spends Too Little on Defense,” Gallup, March 2, 2017

  [3] The Associated Press, “Armed Services Panel Chairman Seeks $696 Billion DOD Budget,” New York Times, June 26, 2017.

  [4] Uk Heo, “The Relationship between Defense Spending and Economic Growth in the United States,” Political Research Quarterly, December 1, 2010.

  [5] Dan Lamothe, “Retired generals cite past comments from Mattis while opposing Trump’s proposed foreign aid cuts,” The Washington Post, February 27, 2017.

  [6] Aude Fleurant et al, “The SIPRI Top 100 Arms-Producing and Military Services Companies, 2015,” Stockhold International Peace Research Institute, December 2016.

  [7] Press Operations, “DoD Releases Fiscal Year 2018 Budget Proposal,” United States Department of Defense, May 23, 2017.

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