The Economic Consequences of the Armed Forces

Conflict is a common occurrence throughout history. Disputes between people for natural resources and political supremacy have plagued the world since the very beginning of human society's existence. But as villages turned into cities and cities came together to form nations, there was a need for an organized line of defense (or offense) against unruly neighbors. This was achieved by the formation of the armed forces of a country.

Although the armed forces' primary objective is to provide a line of protection to a country, it also entails massive consequences for a country's economy. Let's see how.

The Benefits

Costs undertaken by a nation on the procurement of defense equipment, reimbursement of personnel, research and development of technologies, and any related expenditure towards the defense sector is known as defense expenditure.

Defense expenditure within the country increases the GDP of the country. This can lead to more employment and a healthy increase in inflation. Secondly, this can give a boost to secondary heavy industries such as iron and steel, mining, and manufacturing, as there will be an increase in demand for defense equipment that requires such goods.

More importantly, the defense forces serve as a tool for the social benefit of those who are less successful in society. On average 40% of the defense expenditures of countries are used upon personnel reimbursement. Considering that the requirements for joining the armed forces in most countries are very basic, it provides underprivileged individuals with an opportunity to earn without any major financial investment.

Another economic benefit that arises from the armed forces is that its maintenance benefits everyone. Security is a public good, therefore an investment in it benefits every single person in the country, by using a part of the annual budget on the defense forces, which is very lucrative.

The Detriment

The defense expenditure of a nation is a highly debated topic, because of the potential disadvantages it implies.

Firstly, if a country spends on defense goods, it will spend less on human development, infrastructure, and other sectors of the economy which might be better for increasing social welfare. This is a very high opportunity cost, and economists argue that social sector expenditure is a more efficient way of social promotion than defense expenditure.

Secondly, for lesser developed countries spending money on defense may also lead to slower growth. Since they don't have strong industries for producing defense goods, they have to import them, therefore their defense expenditure doesn't help their industries but the industry of a foreign country.

This can lead to a vicious cycle where poorer countries are stuck importing increasingly expensive equipment from richer countries.

Finally, the armed forces are composed of specialized labor (soldiers, medical professionals, engineers, etc.), however, their service in the forces is temporary. When they leave the armed forces, there needs to be further expenditure on preparing such individuals for the civilian job market.

Therefore we can conclude that the armed forces can greatly affect a country's economy. 

How does the military affect the USA’s economy? 

The US government invests in the military as a way to defend the country. Adam Smith identified that the defense of society is one of the main functions of the government and a reason for taxation. 

The Department of Defence (DoD) operates on more than 420 military installations in the 50 states. It has installations in the USA and abroad. As well the land is used to train, maintain weapon systems, and help the wounded troops. Furthermore, they supply housing, healthcare, childcare, and education to military service members and families. As a result, the government ends up spending billions of dollars on military installations and operations, it creates employment opportunities that sustain local communities. This is due to employees spending their military wages on local services and goods.  According to a statistic provided by the DoD in 2015, about 2.3% of US GDP is spent by the department on payrolls and contracts. The highest spending was in Virginia followed by California, Texas, Maryland, and Florida.

More than 24 states have researched the effects of military presence on the state’s economy. It demonstrated impacts on salaries and benefits paid to military and civilian personnel, local business activity, and tax revenues. For instance, in 2015 in North Carolina, military installations supported 578,000 jobs and $66 billion in gross state product. This is about 10% of the state’s economy.  Even small military-based states showed an economic gain in their economy. For example, in Michigan defense spending in 2014 provided 105,000 jobs which meant that more than $9 billion was added to gross state product.

However, every dollar spent on defense means that less money is spent on other public services such as education or healthcare. If the US increases its military spending it leads to slower economic growth. With the benefit of hindsight, we can see that after the Cold War, the reduced military spending was matched with strong economic growth. According to six studies of six major US wars, it demonstrated the costs of war negatively impacted the national economy, taxes, debt, jobs, investment, and inflation. The key things that were reported were debt, inflation, and tax rates increase, consumption and investment decrease, military spending displace, more productive government investment in education, and infrastructure. 

Knowing all of this, candidates have campaigned on tightening government spending and redirecting it to boost the country’s economic growth. However, when it comes to national defense during debates, the questions on military spending are usually unanswered. Therefore, voters should question their candidates on where military spending is going. For instance, the US has the world’s biggest military budget (2019). And about 3.2% of the US GDP is spent on the military which creates an opportunity cost as the percent could have been used on other public services. 

Now is the US defense spending too much or just the right amount of money? This is another issue to discuss later. 

Written by Aidana Assylbek and Rayandev Sen; edited by Alidar Kuatbekov.