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Report Shows Increased U.S. Military Spending Slows Economy

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May 1, 2007

Report Shows Increased U.S. Military Spending Slows Economy

For Immediate Release: May 1, 2007

Contact: Lynn Erskine, 202-293-5380 x115

Washington, DC: The Center for Economic and Policy Research released a report today estimating the economic impact of increased U.S. military spending comparable to the spending on the Iraq war. The report, presenting the results of a simulation from the economic forecasting company Global Insight, shows the increased level of military spending leads to fewer jobs and slower economic growth.

For the report, The Economic Impact of the Iraq War and Higher Military Spending, by economist Dean Baker, CEPR commissioned Global Insight to run a simulation with its macroeconomic model. Global Insight's model was selected for this analysis because it is a commonly used and widely respected model. It estimated the impact of an increase in annual U.S. military spending equal to 1 percent of GDP (approximately equal to the military spending increase compared with pre-September 11th baseline).

The projections show the following:

-- After an initial demand stimulus, the effect of increased military spending turns negative around the sixth year. After 10 years of higher defense spending, there would be 464,000 fewer jobs than in the baseline scenario with lower defense spending.

-- Inflation and interest rates are considerably higher. After 5 years, the interest rate on 10-Year Treasury notes is projected to be 0.7 percentage points higher than in the baseline scenario. After 10 years, the gap would rise to 0.9 percentage points.

-- Higher interest rates lead to reduced demand in the interest-sensitive sectors of the economy. After 5 years, annual car and truck sales are projected to go down by 192,200 in the high military spending scenario. After 10 years, the drop is projected to be 323,300 and after 20 years annual sales are projected to be down 731,400.

-- Construction and manufacturing are the sectors that are projected to experience the largest shares of the job loss.

"It is often believed that wars and military spending increases are good for the economy," said Baker. "In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment."

The report recommends that Congress request the Congressional Budget Office produce its own projections of the economic impact of a sustained increase in defense spending.