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Does Defense Spending Make the Economy Grow?

Does massive U.S. defense spending help the economy to grow?

January 3, 2001

Does massive U.S. defense spending help the economy to grow?

During his bid for the U.S. presidency in 1992, former Senator Paul Tsongas provided one of the campaign’s most salacious soundbites: “The cold war is over — and Japan won.” Mr. Tsongas was lamenting the fact that U.S. taxpayers had shouldered the expense of competing mano-a-mano with the Soviets, leaving economic powers such as Japan and Germany free to invest in their economies rather than their militaries.

Of course, by that logic, Japan and Germany should have boomed during the 1990s while the U.S. economy languished. But we all know what really happened: The U.S. economy soared through a decade of unprecedented growth — and Japan and Germany (along with the rest of Europe) sputtered along.

So much for the idea that the former Axis powers, Germany and Japan, benefited from being forced to devote a relatively small portion of their economies to defense — while the victors, the United States and the Soviet Union, supposedly “destroyed” or at least “damaged” their economies by wasting resources on the military.

That conventional wisdom has long been overdue for a rethink, at least as far as the European-American dimension is concerned. From the vantage point of maintaining a vibrant economy, it just might turn out that it does not pay to keep the military on short rations.

Leaving aside such notable authoritarian governments as North Korea and Myanmar, there are countries that spend an unusually high proportion of their GDP on defense — like Israel and South Korea — and yet have experienced extraordinary economic growth. And recent U.S. history shows some reasons why higher military spending may be economically beneficial.

This year, the United States is spending just under $300 billion on the Pentagon budget, an easily affordable sum. At 3.3% of GDP, this is the lowest proportion of national wealth the country has devoted to defense since 1940, the year before Pearl Harbor.

Throughout the Cold War, the United States on average spent 8% of GDP on defense, peaking at 15% in 1952 for the Korean War and at 11.5% in 1969 for Vietnam. But look what the United States got for its money — quite apart from the military Keynesianism that built the aerospace industries of California, Texas and Georgia and transformed the industrial geography of America.

The big prize of the last half-century, the Internet, was originally financed by the Pentagon’s DARPA, the Defense Advanced Research Projects Agency. The United States also used the subsidies from the Pentagon’s R&D budget to stake out a dominant position in the world’s civilian airliner industry. And the need to fit eight nuclear warheads onto a single missile gave the United States a lead it retains in micro-processing and miniaturization.

Why is this question of defense budgets and their usefulness so relevant these days? Well, it is about to concentrate on European minds. The EU’s 15 nations currently spend $140 billion to maintain total armed forces of two million people.

The United States, in contrast, spends more than twice as much on its 1.3 million troops. In addition, U.S. soldiers are several times more effective than their European counterparts because the Pentagon invests nine times more on technology per soldier than the EU does.

The only European country that spends as much per soldier as the United States is Britain. It also is generally believed to be the only European force able to fight on the same terms as the United States. France does almost as well, which is why Britain and France have Europe’s leading defense industries. But then they devote 3% of GDP to defense, compared to Germany’s 1.5%, and a European average of 1.8 %.

Europe’s new Security and Defense Policy (ESDP) could change all that. Most interest has focused on the headline goals of fielding a European rapid reaction force of 60,000 troops able to remain deployed for up to twelve months, with naval and air support.

But perhaps more interesting is the investment required to make them useful, or at least more useful than they were in Kosovo. Back then, the Pentagon’s after-action report to Congress warned that the Europeans’ backwardness “will seriously affect our ability to operate as an effective alliance.”

So the Europeans have begun shopping. They are planning to buy over 200 Airbus jets as military transport — with a total price tag of around $10 billion. They need a new secure battlefield communications system and unmanned reconnaissance aircraft like the U.S. Predator. The French are pushing for an independent European satellite system (launched by their Ariane rockets, of course) and a European version of the U.S. Aegis ship-defense system, which could cost as much as $50 billion.

Remember that $160 billion gap between U.S. and European defense budgets? Of course, on pure economic terms, Europe could afford to bridge that gap. But it probably won’t do so, because that essentially would mean reducing government-supplied social services. There is little sign that Europe’s voters are ready to spend these kinds of sums on defense, or that their politicians will take the risk of asking them.

So how will Europe “pay” for all those defense goodies currently on its shopping list? The answer is simple, but is one sure not to please the incoming Bush administration. In a nutshell, the prospects are declining for U.S. sales in Europe. Why?

Because Europeans want — and need — to sell more to themselves. How else can they create the financial maneuvering space they need to feed the integration of their defense forces and industries? It is painful enough to consolidate defense companies across national borders. But, according to this logic, it would be intolerable if Europeans kept buying a lot of military stuff from the United States.

All of this will certainly have political consequences: Under those circumstances, the incoming Bush Administration will feel even less strongly about continuing to shoulder its part of the European theater security burden.

This already seems to be in the offing, given what candidate Bush said during the presidential campaign. For a long time, U.S. policymakers tend to view Europeans’ lower defense spending as an effort to make the United States pay for something Europeans should be paying for anyway.