66 Finance & economics The Economist April 16th 2022
Gunsandbutter
I
n the wakeof 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, It
aly and Norway, among others, have already decided to spend
more on defence. America and China, the world’s two biggest mil
itary spenders, are also ramping up their allocations. Pressure on
smaller countries to do likewise seems inevitable. What are the
economic consequences of this push? When governments spend
more on soldiers and arms, they have less available for other
things. A common assumption, therefore, is that extra spending
on armies is harmful to growth and development. But the rela
tionship is not so straightforward. In some cases bigger defence
budgets may in fact yield substantial economic benefits.
That there is a tradeoff between spending on the army and on,
say, roads or hospitals is a lesson that students of economics in
ternalise 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 ex
treme, could be corrosive for an economy. If a government short
changes the education system in order to buy shiny new weapons,
the longrun impact on productivity and, ultimately, growth
would be baleful. Some economists think America is nearing that
danger zone. The randCorporation, an influential thinktank
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 infra
structure, that may undermine longrun growth prospects, since
America has a pressing need for better roads, ports and more. Sec
ond, defence spending contributes to the publicdebt load. In both
cases, the analysts conclude, anything that erodes America’s eco
nomic strength will ultimately hurt the armed forces.
Perhaps there is something to the point that these tradeoffs
are damaging to the economy at America’s levels (over the past de
cade its military budget averaged more than 4% of gdp, second
highest in the oecdclub of wealthy countries). But a complicationemergeswhen examining trends over time. The oecdmember
that spends the most on defence, at about 6% of gdp, is Israel. It al
so consistently boasts one of the fastestgrowing economies in
the group. By contrast, Japan is one of the lowest military spenders
as a share of gdpin the oecd, and one of the slowest growers. In
fact, it is almost impossible to discern a pattern in the data: there
are also countries such as Ireland, with military budgets similar to
Japan’s and growth records similar to Israel’s. A basic regression
reveals no consistent relationship between gdpgrowth and mili
tary spending for the 38 countries in the oecd.
A sprawling body of research has come to a similar, albeit more
nuanced, conclusion. In a discussion paper at Monash University
in 2014, Sefa Awaworyi Churchill and Siew Ling Yew examined 42
separate studies. 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 gunversusbutter framework. The potential returns on civil
ian investments, from health care to education, are so great in
poor countries that military spending has a particularly high op
portunity cost. In rich countries with good schools and hospitals,
the opportunity costs ought to be lower.
One way in which defence spending might be said to boost the
economy is as a jobs programme. If the armed forces were a corpo
ration, they would be America’s largest employer with 2m workers
(counting activeduty personnel and civilians), beating Walmart
and Amazon. That said, it would be an eyewateringly expensive
jobs scheme, running at nearly $400,000 per employee a year.
Defence spending may deliver better returns as an undeclared
form of industrial policy. In a paper last year Enrico Moretti of the
University of California, Berkeley, and two colleagues looked at
government funding for research and development (r&d), with a
focus on defence spending, in oecdcountries. On average, they
found that a 10% increase in governmentfinanced r&dleads to a
5% increase in privately financed r&din the targeted firm or in
dustry. Moreover, there are knockon benefits for productivity. If
France and Germany raised their defence spending to roughly the
same level as in America, Mr Moretti estimates that their produc
tivity growth rates would be slightly higher as a result. Dividends of deterrence
An obvious objection is that the government could achieve the
same results by supporting r&din general, without pumping
money into the armed forces. In an economic sense that may be
true. But there is a political constraint—namely, how to marshal
support for experimentation that may fail. Public support for de
fence is less susceptible to mood swings. Without having to worry
about its next grant application, the American military system has
been free to churn out innovations, from duct tape to the internet,
without which modern life would be scarcely imaginable.
Important as it is to trace the impact of military spending on
growth or innovation, such exercises risk missing the wider con
text as demonstrated by Russia’s war in Ukraine. A foundational
element for any successful economy is peace and stability, giving
firms the confidence to invest and people the space to flourish.
Textbooks may talk of guns or butter. But in a world unsettledby
revanchist powers, the truth is that it is both guns and butter.A
strong defence is, regrettably, a necessity for a strong economy.nFree exchange
What a coming wave of bigger military budgets means for the economy