Barro and de Rugy on Defense Spending and the Economy | Cato Institute


Earlier this week, Harvard economist Robert Barro and Veronique de Rugy of the Mercatus Center published a short paper assessing the economic effects of defense spending. Their findings are consistent with those of other studies, including one that Cato published last year by Benjamin Zycher. To wit, from Barro and de Rugy’s abstract:

While the impact of across-the-board federal defense spending cuts on national security may be up for debate, claims of these cuts’ dire impact on the economy and jobs are grossly overblown…

[A] dollar increase in federal defense spending results in a less-than-a-dollar increase in GDP when the spending increase is deficit-financed…

[O]ver five years each $1 in federal defense-spending cuts will increase private spending by roughly $1.30

The Barro-de Rugy paper should be of particular interest to Republican politicians and those who advise them. 2012 GOP presidential candidate Mitt Romney and his fellow Republicans attracted considerable scorn (including from yours truly) during a campaign in which they railed against government spending, but also wailed against military spending cuts. His critique was not primarily, or even chiefly, about the potential impact of sequestration on national security; rather, echoing the hardly objective estimates flogged by the Aerospace Industries Association and the National Association of Manufacturers, Romney asserted that cuts in military spending would result in the loss of hundreds of thousands of jobs.

Romney, of all people, should have known better. Government spending extracts resources from the private sector, in the form of taxes and/or debt, and the net effect of this spending is negative over the medium to long term. Barro and de Rugy show that the gains, to the extent that there are any, are particularly short-lived. The reverse is also true: Cuts in spending might result in brief declines in GDP, but Barry and de Rugy conclude that “the adverse effects … will be minor even in the short run.” “In the longer run,” they continue:

when reduced public debt and taxes … are factored in, real GDP should be higher than otherwise. This conclusion is consistent with findings that a smaller share of government consumption in GDP tends to enhance long-term economic growth.

They conclude:

There may be grounds for objecting to defense cuts based on reasoned arguments that these spending reductions would impair national security. But Keynesian arguments that a smaller defense budget will retard economic growth are not convincing.

I would like to believe that such findings would be sufficiently compelling to warn Republicans away from their embrace of military spending as a jobs program once and for all. But, as Tad DeHaven has observed here and here, such situational Keynesianism is a seemingly permanent feature of the nation’s political landscape.

via Barro and de Rugy on Defense Spending and the Economy | Cato Institute.