How much defense spending can we afford?

Public Interest, Spring, 2003 by Murray L. Weidenbaum

In a variety of econometric simulations performed since then, scholars have estimated that a short transition would occur after a large cutback in spending for national security programs. Temporarily, unemployment would rise as the economy's growth rate slowed down. Subsequently, however, the peacetime economy would follow a more rapid long-run growth path. Analyses by the economic consulting firm DRI have yielded similar conclusions about a potential reduction of $180 billion in the military budget over five years, concluding that "the national economy can cope with this transition without major problems."

Indeed, that has been the experience in the recent past. Following an initial adjustment period--with its attendant pain and uncertainty--many localities end up with a stronger economy after a substantial defense cut. A study of one hundred former military bases reported that, during the period from 1981 to 1986, 128,000 new civilian jobs replaced the 93,000 military jobs that were lost. The 7 percent average annual increase in employment at these sites compares favorably to the 2 percent average annual increase in employment nationally during the same period. Three-fourths of the closed bases became industrial or office parks; colleges and vocational-technical schools occupied most of the remaining sites.

Other examples of successful transitions have been reported in more recent periods (the conversion, of course, is far from instantaneous, taking three to five years on average). These positive results are not surprising when we consider the valuable assets that the military often leaves behind--land, buildings, airstrips, deepwater harbors, and rail lines, as well as water, sewer, gas, and electricity lines.

On balance, the belief generally held among economists--an idea not as universally accepted by policy makers--is that, given a reasonable period of adjustment, the American economy can attain prosperity with a greatly reduced military establishment. At a more microeconomic level, the people, occupations, and industries benefiting from the changes in sectoral demands will likely be different from those that participated most actively in the military buildup. This is a fact with more powerful political and social implications than purely economic data reveal. The costs of change may justify government-provided transitional assistance (such as special unemployment compensation and retraining allowances) for those who suffer initially from the shift in national priorities.

A political decision

Economic analysis thus does not suggest that a certain fixed share of GDP be allocated to defense. But it does provide a few facts that deserve a more prominent place in the ongoing debate over the right level of military outlays. However measured, the defense program is a relatively minor player in the American economy today--it accounts for one-twenty-fifth of the GDP and an even smaller proportion of the nation's work force. Moreover, the economic importance of this sector of the economy has been declining for many years. Economic activity in the United States marches to the beat of civilian drummers, both domestic and international. Our massive economy is neither propelled nor redirected by modest shifts in the relatively small share of national resources devoted to military purposes. Furthermore, the powers of adjustment in the American economy are substantial.