How much defense spending can we afford?

Public Interest, Spring, 2003 by Murray L. Weidenbaum

At a time when international tensions and budget deficits are both increasing rapidly, many Americans are raising a perennial question: How much military spending can the United States afford? The truth is that the country can afford to devote a substantially larger share of its resources to military purposes than it now does. That simple conclusion, however, is only the beginning of serious analysis of the subject. A host of related questions quickly come to mind: What is the real cost of maintaining a large military establishment? Are there limits to the size of the military budget? How much military expenditure is enough? Does military spending stimulate or retard economic growth? What is the exact relation between spending on guns and on butter? Economic analysis can cast considerable light on these important issues and help us to formulate budget priorities, In the end, though, it is mainly political criteria that must determine how much of our resources we allocate to national defense, and a political question as to how much we are willing to spend.

The real costs

The costs of military spending are usually described in billions of dollars or as a percentage of the gross domestic product (GDP). These substantial costs, however, can more meaningfully be expressed in the number of men and women pulled away from civilian pursuits, tile technology diverted to military ends, the many barrels of oil pumped from tile earth, and the vast amount of space taken up by military equipment and debris. In short, the real costs of military activities are measured in human and natural resources and in the stocks of productive capital absorbed in producing, transporting, and maintaining weapons and other military equipment. It is in this broader sense of opportunities lost that military spending should be considered.

Not only do we lose the opportunity for civilian use of goods and services, but we also lose the potential economic growth that these resources might have brought about. For example, the production of a military capital asset such as a missile may entail the same amount of economic activity as the production of a civilian capital asset such as machinery for a truck factory. But while the former will eventually be exploded or buried, the latter would continue to enhance the nation's productive capacity over an extended period of time.

Thus the real cost to society of allocating productive resources to military programs is not the money spent but the fact that these resources are not available for other purposes. In general, more missiles and tanks mean fewer new cars, homes, and schools.

This trade-off occurs no matter how the military budget is financed. If the economy is near full employment and the military outlays are financed through taxation or through borrowing from the private sector, part of these expenditures will be undertaken at the expense of private investment and part from reduced current consumption. A portion of the individual incomes and corporate profits given up in the form of higher taxes would otherwise have been saved and invested in new capital facilities. If, instead, the deficit is financed through increases in the money supply, the same shift in resources is achieved by inflation as the Department of Defense bids resources away from other uses. Thus at least part of the burden of defense expenditures will be borne by future generations, since they are deprived of the returns on the curtailed private investment.

Yet in practice, not all resources used in military programs have been diverted from other uses. Some of these resources might not have been employed at all if it were not for the expansion of defense activities. Additionally, certain categories of defense activity, while absorbing resources that the civilian economy would use, replace similar goods and services that the civilian economy would otherwise have had to provide. The food, clothing, and shelter provided to members of the armed forces is a case in point. Even if we had no military establishment at all, a portion of the nation's output would still be devoted to feeding, clothing, and sheltering these people. Likewise, some of the military's research and development is part of the economy's investment in future growth and would probably be undertaken, at least in some form, in peacetime.

Guns or butter

Economists disagree as to whether increases in military spending come primarily out of resources that otherwise would be devoted to investment or to consumption. Because investment contributes far more directly to economic growth, the cost in terms of lost opportunities is higher when military spending is pulled from investment resources than when taken from money that would otherwise go toward current consumption--that is, for items that generate little or no future benefit.

The argument that military demands substantially crowd out private investment rests on the notion that a large and growing federal deficit forces the Treasury to expand its presence in capital markets. This puts upward pressure on interest rates. In turn, rising interest rates inhibit private capital formation. Intuitively, it would seem that the expanding deficits that so often accompany a military buildup contribute to rising interest rates. However, the empirical evidence on the causal relationship between budget deficits and interest rates is not very impressive. From 2001 to 2002, for example, military outlays and the budget deficit were both rising at a time when interest rates were declining or stable at a very low level. Clearly, nongovernmental factors were the main determinants of interest rate levels at the time.