Paying for Security

Abstract

To investigate the direct and indirect effects of defense spending on economic growth, the authors develop a multilink (via investment, employment, and exports) defense-growth model and test it with U.S. data for the time period from 1951 to 2000. By doing so, they advance previous scholarship on the indirect effects of the defense-growth trade-off through both a theoretical and empirical investigation of multiple indirect channels. Using a nonlinear four-sector production function model that incorporates labor, capital, technology, and exports, they test the direct and indirect impacts of defense spending on growth. Defense spending has a negative, indirect effect on economic growth via investment and export while the direct impact on growth seems to be rather small. Nonmilitary government spending has economic effects on growth that are similar to those associated with military spending.