How Military Spending Affects the Economy

The Stockholm International Peace Research Institute (SIPRI) has excellent data on military spending by nation. According to its research, the five biggest spenders in 2019 were the United States, China, India, Russia, and Saudi Arabia. Together, these countries made up around 60% of global military spending.

In 2019, U.S. military expenditure increased by almost 5.3% to $732 billion. China increased its military spending by 5.1%, India increased its spending by 6.8%, Russia increased it by 4.5%, and Saudi Arabia decreased it by 16%.

As with any government spending, these investments have an impact on the economies of the nations that make them.

The Why of Military Spending

Military spending is one area where there is no private solution. No single corporation or group of citizens is motivated and trustworthy enough to take financial responsibility for maintaining a nation's military.

Key Takeaways

  • Every dollar spent on defense is a dollar not spent on other public services.
  • On the other hand, dollars spent on the military wind up in the private sector as payment for goods and services the military requires.
  • Military spending may skew civilian technology development, but talent and applications flow both ways.

Adam Smith, a father of free-market economics, identified the defense of society as one of the primary functions of government and a justification for reasonable taxation.  The government is acting on behalf of the public to ensure that the military is capable of defending the nation.

In practice, defending the nation expands to defending a nation’s strategic interests. And, the whole concept of “sufficient” is up for debate in any democracy.

The Hole That Debt Built

Capital is finite, and capital going into one spending category means less money for something else.

This fact becomes more urgent when we consider that any government spending that exceeds revenues results in a deficit, adding to the national debt. A ballooning national debt has an economic impact on everyone. As the debt grows, the interest expense of the debt grows and the cost of borrowing increases due to the risk that increased debt represents. In theory, the increased debt will eventually drag on economic growth and drive taxes higher.

The Cost of Borrowing

The U.S. has historically enjoyed generous debt terms from domestic and international lenders. That tends to reduce political pressure to cut military spending in order to reduce the deficit.  

Some advocates for decreased military spending might tie it to a real or potential 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 priorities. Many nations 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 U.S. enjoys are far from universal, so the trade-off between military spending and public infrastructure is more painful for many nations.

Employment and Military Spending

Jobs are a big part of the economic impact of military spending. In addition to supporting the troops, military spending creates a considerable infrastructure to support the active-duty personnel.

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.

Public vs. Private

A free-market economist would point out that the public dollars supporting those may be sucking the equivalent number of jobs—or more—out of the private economy due to the taxation required 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.

Technological Developments

One argument for the negative economic impact of military spending is that it diverts critical talent and technical skills towards military research and development.

Guns and Butter

This famous model illustrates the balance between military and civilian spending priorities.

On the other hand, technology and talent flow back and forth between military and civilian roles. Military research has been vital to the creation of the microwave, the internet, and global positioning systems (GPS), among other applications. We now have drones taking wedding photos and, at least in tests, delivering packages for Much of the expense of creating the basic technology was covered through military spending.

Guns and Butter

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, the size of that military can be disputed but its existence cannot.

The economic cost of defense spending shows up in the national debt and in a dislocation of potential jobs from the private sector to the public. There is an economic distortion of any industry that the military relies on as resources are diverted to produce better fighter planes and weapons.

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 Big Question

The real question is what an “adequate” amount of military spending is, given that every extra dollar spent above the necessary level is a loss to public spending on any other purpose.

In a democracy, that issue is debated by publicly elected officials and changes from year to year. In recent years, military spending in the U.S. as a percentage of the overall budget has been declining as military engagements abroad wind down.

In non-democratic nations, however, the level of adequate spending is decided by a select few and may come at an even greater cost to the country’s citizens.

Article Sources
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  1. Stockholm International Peace Research Institute. "Military Expenditure."

  2. Stockholm International Peace Research Institute. "Trends in World Military Expenditure, 2019," Pages 2-3.

  3. The Library of Economics and Liberty. "An Inquiry into the Nature and Causes of the Wealth of Nations–Book V, Chapter l."

  4. The Library of Economics and Liberty. "An Inquiry into the Nature and Causes of the Wealth of Nations–Book IV, Chapter 5."

  5. TreasuryDirect. "Summary Schedules of Federal Debt – Daily, Unaudited."

  6. U.S. Government Accountability Office. "Action Is Needed to Address the Federal Government's Fiscal Future–Highlights."

  7. U.S. Department of the Treasury. "Interest Rates - Frequently Asked Questions."

  8. Congressional Budget Office. "Discretionary Spending in 2019."

  9. Government Publishing Office. "Budget 2019: Contents of the Historical Tables," Pages 58-59.

  10. The World Bank. "Military Expenditure (% of General Government Expenditure) - United States."

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