Defense spending has long occupied a sacred cow status in the American political arena.  This status is in part due to conventional beliefs regarding the benefits of defense spending, most notably that it is a good way of stimulating the economy – a claim often used by proponents of larger defense budgets.  At the same time, its sacrosanct nature is also a result of the real, tangible national security issues at stake when considering the importance of the nation’s defense budget, a fact that lead to Adam Smith’s belief that, “the first duty of the sovereign, [is] therefore, that of defending the society from the violence and injustice of other independent societies.”

Yet in an age of increasing concern over a growing national debt, the sixth of the federal budget allocated to defense presents ample opportunity for reigning in federal spending.  In light of this, it may be time to reconsider the extent to which we consider defense spending worthwhile, which leads to two questions for discussion – what are the actual implications of military spending, and how should these implications influence future spending decisions?

These questions gain further importance given the current administration’s focus on revamping America’s military.  This past March, President Trump made true on his campaign promises by calling for a $54 billion increase in defense spending at the expense of budget-cuts for a variety of other non-defense related federal programs.  The figure came as part of the president’s “America First” budget proposal for Fiscal 2018, which highlights the need for a ‘rebuilt’ military that will better be able to defend the American people.  More recently, Congress agreed to include an additional $15 billion (half of the president’s requested $30 billion) to the remainder of Fiscal 2017’s budget in order fund an acceleration of the campaign against ISIS.

To many critics of defense spending, the president’s measures seem to be a continuation of what is sometimes seen as wasteful spending.  After all, with the threat of the Soviet Union long behind us, what need does the United States have for such large military expenditures?  Yet the president’s reasoning is grounded in a position held by most military leaders since the 1950’s, that in the modern era holding back on defense spending until it is considered absolutely necessary is a threat to national security.

In the past America’s location between two oceans provided a free lunch for domestic security, a fact that (partly) lead to the position of power the United States’ is able to enjoy today.  Yet modern technology diminishes the importance of oceans; ever since the second World War long-range strike capabilities have forced militaries around the world to focus on their ability to engage an enemy effectively on day one of the conflict. This has by extension made peacetime military spending all the more important to a nation’s ability to provide for the common defense of its citizens.

Peacetime spending has also allowed for the United States Navy to become a steward of the world’s oceans, which 90% of global trade by volume travels across. This has enabled the United States to exercise its influence abroad by encouraging freer trade policies between nations and preventing any potential disruptions that could interrupt that trade. An example of this can be seen in 2012 when Iran attempted to close the Strait of Hormuz, which has a daily oil flow of around 17 bbl/d, a figure that represents nearly 35% of all oil traded by sea and 20% of all oil traded globally. Such a move would have resulted in a sharp worldwide climb in oil prices, an energy crisis that would have hampered the United States’ already slow recovery from the Great Recession. However, following the deployment of a U.S. Carrier fleet into the Persian Gulf, the Iranian government was forced to keep the strait open and leave trade unimpeded.

Though there are countless other examples of the benefits that arise from American hegemony over the world’s oceans, it’s also important to consider the fact that in instances similar to these the United States may only be solving problems of its own creation.  For example, while the United States prevented a massive disruption in the global trade of oil during the Strait of Hormuz dispute, the Iranian government was only responding to crippling economic sanctions.  These sanctions were of course in response to the Iranian government’s unwillingness to cease its uranium enrichment program, but it’s hard to say whether the United States’ desire to dismantle the program has had more to do with reasons of immediate national security or its desire to maintain its influence and power projection capabilities in the region.

If the decision had more to do with maintaining influence abroad then we must consider whether American hegemony is of benefit to the world economy because of the stability it brings or of detriment to it because of the negative consequences (and following instability) its actions often incur.  While this makes it hard to quantify the benefits of this dimension of defense spending, it’s still possible to investigate the benefits this spending presents domestically.

At face value the domestic benefits of defense spending seem obvious; service in the military puts Americans to work while also providing them the means to better themselves and thus climb the socioeconomic ladder.  In fact, over 2 million Americans are currently enlisted or serve in the reserve component of their respective branch, and another 1.6 million work for contractors that supply the military – making the military the federal government’s largest jobs program.

But it’s not the military’s ability to put people to work that’s in question, instead it’s whether the military is able to do so efficiently.  Here again we can gain insight from Adam Smith who once noted that, “the whole army and navy, are unproductive labourers…Their service, how honorable, how useful, or how necessary soever, produces nothing for which an equal quantity of services can afterward be produced,” meaning that by diverting its resources into defense a nation would inevitably slow its economic growth.

Yet conventional wisdom regarding defense spending finds itself in disagreement with Smith’s reasoning. Instead, proponents of defense spending claim that budget cuts would cause a reduction in total economic output greater than what the private sector would be able to maintain in its place.  In effect, these individuals are assuming that the defense-spending multiplier is larger than one, which offers a method for empirically investigating their claim.

While the economic literature on this subject is varied, the defense spending multiplier is typically estimated to be between 0.4 and 0.7 when the spending is deficit financed. If the true multiplier exists within this range then defense spending would indeed result in an increase in total economic output.  However, as the multiplier is normally estimated to be less than one, this increase in output would come at the expense of crowding out private-sector portions of the economy. In combination with a tax multiplier that is negative and greater than one, these estimates predict that for each dollar reduction in defense spending private spending would increase by more than a dollar as the private sector is able to use these newly freed resources more efficiently.

While this might lead some to the conclusion that we should scrap the Department of Defense altogether, we can once again find wisdom in the words of Adam Smith who posed that, “defence…is of much more importance than opulence,” as without the former, we risk losing the latter. However, these estimates do present evidence that future decisions regarding the necessity of defense spending should be justified on the basis of promoting national security rather than warding off potentially negative economic consequences.

The Economics of Defense Spending