Does Military Spending Make the U.S. Economy Stronger?

August 15, 2014

In several discussions of my book New World Disorder: The Decline of U.S. Power, people have asked me about the impact of U.S. military spending on the economy. In the book, I contended that military spending and government spending generally are contributing to the present economic crisis. One person disputed this saying he could see no difference between the government purchasing drone missiles and a worker buying a washing machine in terms of impact on the economy. Both, he argued, stimulate the hiring of people to make something. I disagree. The purpose of this essay is to elaborate and explain my view on the question.

This is an important question because so much of public spending in the U.S. is for military purposes. When you add up all of the military spending, it constitutes over 60% of discretionary U.S. government budgeted spending . Furthermore, the U.S. dwarfs all other nations in the world when it comes to military spending. Military spending has been estimated to be over $640 billion a year.

The nation closest to the U.S. in military spending is China who spends about $150 billion followed by Russia at $68 billion. In fact the U.S. spends more than the top eight military spenders combined. China, Russia, Saudi Arabia, France, United Kingdom, Germany, Japan and India spend a total of $607 billion on defense while the U.S. spends $640 billion. The U.S. also spends more in relation to the size of the total economy than all of the wealthiest nations in the world. Defense Department spending in the U.S. in 2010 was about 4.7% of Gross Domestic Product (GDP), a measure of the size of an economy. France was at 2.2%, Germany at 1.3% and UK is 2.3%. (numbers come from the National Priorities Project, The Cost of War Project, The Stockholm International Peace Institute, and the World Bank).

With military spending at such stratospheric levels, my contention that military spending is contributing to the present crisis of value needs to be carefully considered. In my book New World Disorder and in a previous essay “Is the Global ‘Economic’ Crisis Coming to an End Anytime Soon?” I contend that we are at an early stage of what I call a crisis of value. I define such a crisis as follows. Capitalism has an inherent tendency to produce greater claims on the value generated by the global capitalist system than the system is capable of generating. Military spending represents a claim on value; it does not produce value or offer a return that contributes much to the reproduction of the system and/or the people who work and live in the system.

I define value as the labor time required to produce goods and services needed for people to live a decent life, reproduce the next generation, and reproduce the capitalist system we live under. Reproduction is essential in order to sustain any political/economic system. In a capitalist system, the reproduction process works in a specific way.

In a capitalist system the people producing the goods and services that they and the society need to reproduce themselves and the system are compensated in the form of wages with only a portion of the value they produce. That portion needs to be adequate for workers to reproduce the next generation of workers. The rest is devoted in one way or another to reproducing the system. Some value is used by the owners of the businesses where value is created. They use it to buy machinery, technology and other items needed to maintain the business. Some is used for business services like finance and insurance. And some value is allocated to government through taxes to provide needed public services. While business services and public services are essential to keeping the system running, they do not produce value in the sense I am using the term here. In fact, these activities are financed out of the value created by labor in the value-producing industries.

That does not mean other kinds of production are not important. But the capitalist system depends on value-producing labor that contributes directly to the reproduction of the system and the people in it. Building a house, producing an automobile, growing food, making clothes and shoes are all examples. There can’t be business services without such businesses. There can’t be personal services without value producing workers who will use some of the value they create for haircuts and entertainment. We can’t, as the old joke goes, run the world by taking in each other’s wash. If non value- producing activities take too much of the value produced we have a crisis. Workers don’t get enough of the value they produce to reproduce themselves. Capitalists see their profit rates falling and are unable to sustain their businesses.

Where do government services fit into this picture? Government services are mostly financed out of the wages and salaries of workers producing value. And because this is so, government has a claim on the total value produced by the system. Police officers and fire fighters could not provide the protection they offer unless someone else was creating value that can be used to pay for police and fire protection. We generally pay for those services through taxes. And the taxes we pay reduce the amount of the value we create that can be directly devoted to living a decent life and reproducing the next generation.

In New World Disorder I argue that the crisis of value that began in the late 1960s and continued into the late 1980s was temporarily resolved by reducing labors’ claim on the value they were producing. This strategy to resolve a crisis was accomplished both through the use of labor saving technologies and by shipping living wage jobs to areas of the world where labor and other costs were lower. But this strategy has produced a new global crisis because it has resulted in rising claims on value as labor’s share of value has declined below what is needed to reproduce the system.

In the U.S. and in other nations, the taxes required for government services are more burdensome for most people because less value is being generated and labor’s share of that value has been reduced.  The fiscal crisis is not only very serious but it is systemic because this situation was part of the “solution” to the last crisis. We continue to need police and fire protection as well as health care, education and a number of other government services. Roads need repair, infrastructure like bridges, water and sewer lines need to be maintained. All of these needs represent a claim on value through taxes. But the labor time for value production and the wage compensation for the labor time that finances public services has been diminished.

Now, where do military expenditures fit into this picture? I will leave aside, in this essay, the question of whether we really need all of this military spending and any ethical considerations connected to the present wars.  That will be the subject of my next essay. My focus here is on two aspects of my contention that military spending is actually contributing to the present crisis of value rather than helping the U.S. economy. One is that military expenditures are financed like any other public service so that they are subject to the same argument made above for police and fire protection. Because they are financed through taxes, they constitute a claim on value. And in a crisis where claims on value are exceeding the capacity of the system to generate more value, they contribute to that crisis. As I have argued in my book New World Disorder, the government claims on value that exceed what the system can generate are being made up by debt, which has become so excessive that the payments of principle and interest on that debt are adding greatly to claims on value. So even borrowing for military spending (and all other kinds of public spending) contributes to the present crisis.

But there is another aspect of military expenditures that makes their economic impact even more problematic. One of the things that government spending does is to allocate part of the value produced by labor to a variety of goods and services. Some of these are social needs whose benefits are shared by the entire society and where it would be impractical if not impossible to exclude individuals from these benefits. Examples include military spending, fire and police protection and highway construction. Because benefits of social needs cannot be confined to individuals, private markets can’t work. They are instances of what economists call “market failure.” In addition there are some goods and services that could be provided by private markets but we have decided as a society that everyone should have them. Food stamps, public education, public or subsidized housing, government programs that subsidize health care are examples of what some have called “merit wants.” These different public services have different impacts on society and on our economy.

One important impact is that public spending creates jobs both directly and indirectly. Building a highway or a bridge, for example, directly employs a number of workers. Indirectly other workers are hired because of the spending on the new highway or bridge due to the need for materials for the project and because the new workers spend the money they make which results in even more people being hired. Economists call this a “multiplier effect.”

The multiplier also works in the case of military expenditures. The job of a worker hired to make Cruise Hellfire missiles is an example of direct job creation. The Raytheon Corporation, who hires this worker, also purchases the components of the missile from a number of other firms leading to indirect job creation. When these workers use their wages to buy other goods and services, that spending creates yet more jobs that are indirect benefits of government spending.

Research by the Cost of War Project out of Brown University ( ) has estimated the job impacts of spending due to war  and compared it to alternative uses of government spending.  They estimated that 8.3 direct and indirect jobs are created for every $1 million in military spending. The comparable estimates for other types of spending are: public education 15.5 jobs; healthcare 14.3 jobs; home weatherization and renewable energy investment 12 jobs; construction of residential and non-residential buildings 11.1 jobs. The reasons for these differences include how much labor the different spending categories require; the wage levels; and whether the wages are spent in the U.S. or in other nations. Using these estimates it is clear that the magnitude of the job benefits of war spending are lower than other kinds of public spending. This difference is what economists call the “opportunity costs” of military spending.

When the cold war ended in 1991 with the collapse of the Soviet Union, many people believed there would be a “peace dividend” by using the massive military spending during the cold war for other things. And calculations of this hoped-for peace dividend were made by a lot of activists. But it never happened because there were a series of other wars in the 1990s and then the post 9-11 wars. The fact is that military spending continues to crowd out other kinds of spending that could have greater job benefits at the very time when a crisis of value is keeping many people from finding living wage jobs. But there is even more to this picture of the impacts of different uses of the claims that government makes on value.When we use public funds to wage war there is no ongoing economic return. Bombs, missiles, ammunition, aircraft, tanks etc. are blown up or used up rapidly. More importantly soldiers and civilians die or sustain injuries that require treatment long after the war is over. Expenditures for education and healthcare, to use just two examples, not only generate lasting job benefits but also produce healthy and educated individuals who can contribute to society for years to come.

For these reasons I conclude that military spending is contributing to deepening the present crisis of value. Like all government spending they constitute a claim on value at a time when such claims are exceeding the capacity of the system to generate value. But military spending, because of its relative size, is making a huge claim on value. One estimate claims that the Defense Department is spending $58 million per hour. Tomahawk Cruise Missiles cost $37,000 per hour. Our nuclear weapons cost $2.2 million per hour. If there is any benefit to these expenses (the subject of my next essay), it is short-lived compared to other uses of value like health care and education. And, as the research of the Cost of War Project demonstrates, there is a substantial opportunity cost in terms of employment benefits that alternative forms of spending could generate.

David Ranney August 14, 2014