What bigger military budgets mean for the economy
"IN THE WAKE of the war in Ukraine, military budgets around the world are about to get bigger. This is most notable in Europe, where the threat of Russian aggression looms largest. Germany, Italy and Norway, among others, have already decided to spend more on defence. America and China, the world’s two biggest military spenders, are also ramping up their allocations. Pressure on smaller countries to do likewise seems inevitable. . .
That there is a trade-off between spending on the army and on, say, roads or hospitals is a lesson that students of economics internalise early on. The classic model for illustrating the concept of opportunity costs is guns versus butter: the more you produce of one, the less you can of the other. In any given year, that simple model holds true. Governments have finite budgets, which can only be pulled in so many different directions.
It is thus easy to see how spending on defence, taken to an extreme, could be corrosive for an economy. If a government shortchanges the education system in order to buy shiny new weapons, the long-run impact on productivity and, ultimately, growth would be baleful. Some economists think America is nearing that danger zone. The RAND Corporation, an influential think-tank supported by the Air Force, not exactly known as a peacenik outfit, published a report in 2021 laying out two risks. First, when the government allocates money to defence at the expense of infrastructure, that may undermine long-run growth prospects, since America has a pressing need for better roads, ports and more. Second, defence spending contributes to the public-debt load. In both cases, the analysts conclude, anything that erodes America’s economic strength will ultimately hurt the armed forces.
A sprawling body of research has come to a similar, albeit more nuanced, conclusion.
. . .Effects are generally quite small, but they found two distinct categories: military expenditure in poorer countries is often detrimental to growth, whereas in wealthier countries it is more likely to be beneficial.
One possible reason, they suggest, is weaker governance in developing countries; a big military budget is a juicy target for corrupt officials.
Another possibility relates to the gun-versus-butter framework. The potential returns on civilian investments, from health care to education, are so great in poor countries that military spending has a particularly high opportunity cost. In rich countries with good schools and hospitals, the opportunity costs ought to be lower.
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