How Military Spending Affects The Economy

The Stockholm International Peace Research Institute (SIPRI) has excellent data on military spending by nation. According to SIPRI research, the five biggest spenders in 2017 were the United States, China, Saudi Arabia, Russia and India. Together, these countries made up 60% of global military spending. USA military expenditure did not change in 2017, at $610 billion. China increased its military spending by 5.6%, Saudi Arabia by 9.2% and India by 5.5%. As with any government spending, these dollars have an impact. 

Military spending is one area where there is no private solution to replace the public purse. No single corporation or group of citizens is sufficiently motivated (or trustworthy) enough to take financial responsibility for the cost of having a military. Adam Smith, one of the fathers of free market economics, identified the defense of society as one of the primary functions of government and justification for reasonable taxation. Basically, the government is acting on behalf of the public to ensure that the military is sufficiently well resourced to defend the nation. In practice, however, defending the nation expands to defending a nation’s strategic interests, and the whole concept of “sufficient” is up for debate as other nations also bulk up their militaries. (For related reading, see: What Is the Broken Window Fallacy?)

Capital is finite, and capital going into one spending category means that there is less money for something else. This fact gets more interesting when we consider that any government spending exceeding revenues results in a deficit that is added to the national debt. The ballooning national debt has an economic impact on everyone, and military spending is one of many contributing factors. As the national debt grows, the interest expense of the debt grows and the cost of borrowing subtly increases due to the risk that increased debt represents. In theory, the increased debt will also drag on economic growth and eventually a driver towards higher taxes.

As of now, however, the US in particular has enjoyed generous debt terms from domestic and international lenders, so the role that military spending plays in increasing the debt is generally not focused on. Some advocates for decreased military spending have tied it to a certain percentage increase in the mortgage rates people pay, given the relationship between treasury yields and commercial lending. This reasoning holds and military spending does sit as a large percentage of discretionary spending. 

In other nations, particularly ones that are still developing economically, a focus on military spending often means foregoing other important spending priorities. There are many nations that have a standing military but an unreliable public infrastructure, from hospitals to roads to schools. North Korea is an extreme example of what an unrelenting focus on military spending can do to the standard of living for the general population. The generous debt terms that the US enjoys are far from universal, so the trade-off between military spending and public infrastructure is more painful for many nations.

Jobs are a big part of the economic impact of military spending. Of course there are the active troops, but there is also a considerable infrastructure built up around them that requires contractors, trades, consultants, and so on to support the military. Then there are the private businesses that spring up as a result of the military spending, including everything from weapons manufacturers to the restaurants that pop up near military bases. Here again, the free market economists point out that the public dollars going to support those jobs directly or indirectly are actually sucking the equivalent number of jobs—or more—out of the private economy due to the taxation needed to create them.

It really comes down to whether or not you believe a standing military is a necessity. If it is, then some jobs will need to be sacrificed in the private sector to make that happen. Of course, people will still argue about what size that standing military should be. That’s as much a political question as an economic one.

Another argument for the negative economic impact of military spending is that there is a diversion of talent and technical skills towards supporting military research and development. This appears to be a bit unfair as, in the past, military research has benefited the private economy as technological leaps and talented people flowed back and forth. Military research has been vital to the creation of microwaves, the Internet, GPS, etc. In fact, part of the reason we have drones taking wedding photos and potentially delivering packages for Amazon is that much of the expense of creating the basic technology was covered through military spending.

There are definitely some distorting factors that military R&D has on research and technology, but the research spending isn’t an entire loss for the economy as many of the breakthroughs do positively influence commercial technology. (For more, check out How Drones Are Changing The Business World)

The guns and butter curve is a classic illustration of how there is an opportunity cost to every expenditure. If you believe a standing military is a necessity for a nation, then the size of that military can be argued about but the existence of a military cannot. There is an economic cost to having defense spending that shows up in the national debt and in a dislocation of potential jobs from the private sector to the public. There is also an economic distortion of any industry that the military relies on as resources are diverted to produce better fighter planes, drones and guns. All of these costs are necessary for a nation to bear if they are to defend themselves. We give up some butter to have guns.

The real issue is what is an “adequate” amount of military spending, given that every extra dollar spent above the necessary level is a clear loss for the economy as a whole. In a democracy, that issue is debated by publicly elected officials and changes year to year. For example, military spending in the US has been declining as military engagements abroad wrap up. In non-democratic nations, however, the level of adequate spending is decided by a select few and may come at even a greater cost to the country’s citizens.