No, cutting Pentagon spending will not destroy local economies.
In the closing days of the U.S. election season, the airwaves are full of dire warnings about the massive job losses that will supposedly occur if the Pentagon's budget declines significantly in coming years (it hasn't, yet). A series of ads by Karl Rove's Crossroads GPS is typical of the genre. In New Mexico, for example, where Rep. Martin Heinrich is trying to succeed retiring Sen. Jeff Bingaman, one GPS ad explains, "Heinrich voted for deep, automatic cuts that could cost New Mexico 20,000 jobs." Similar ads are running in Virginia. The unsubtle message: No sitting member of Congress deserves to be returned to office or elevated to a higher office if he or she voted for legislation that would actually cut spending.
But an equally effective series of ads might have talked about the jobs that would be created when government spends less and taxes are cut. The Pentagon might be a jobs program, but it isn't a very efficient one. It creates the kinds of jobs that politicians like to claim credit for, but military spending doesn't produce more growth in the economy or generate more innovation than a comparable level of spending by private individuals, businesses, and entrepreneurs.
First, some context. Overall U.S. military spending is likely to decline modestly, but most of these savings derive from the end of the Iraq war and the drawdown in Afghanistan. The Pentagon's base budget (excluding the costs of the wars) remains near historical highs in real, inflation-adjusted dollars and is currently projected to keep pace with inflation, at least into the early 2020s.
Such facts haven't stopped Crossroads and others from asserting that hundreds of billions of dollars have been cut, with hundreds of billions more looming under last year's Budget Control Act. The claim that such cuts, were they to occur, would threaten U.S. national security, is debatable. But most of the focus has been on the tens or hundreds of thousands of people who will be thrown out of work if the cuts go forward.
The source of these statistics? The Aerospace Industries Association (AIA), the trade group representing the interests of some of the United States' largest defense contractors.
The AIA has sponsored several studies on the economic effects of sequestration, and all have concluded -- unsurprisingly -- that they would be catastrophic. One study by George Mason University's Stephen Fuller predicted that a reduction of $45 billion in Defense Department procurement spending would result in the loss of 1,006,315 full-time, year-round equivalent jobs. A subsequent paper, published this July, concluded that the automatic cuts to both defense and non-defense spending would eliminate 2.14 million jobs.
A number of scholars have challenged Fuller's conclusions. The Mercatus Center's Veronique de Rugy faulted the report as "packed full of mistakes, arbitrarily high multipliers … and obscure methodology and exaggerations." The Brookings Institution's Peter Singer noted that no more than 3.53 million jobs -- direct, indirect, and induced -- are sustained by the defense industry, so it is barely credible that a 10 percent reduction in Pentagon spending would result in the loss of one-third of all defense-related jobs.
More to the point, the Defense Department's "role isn't to sustain defense contractors' profits independently of the security they are actually meant to provide," de Rugy wrote at National Review's The Corner, a conservative blog. "Private-sector profit margins or even private-contractor job losses shouldn't prevent sensible reductions in federal spending."
Economist Benjamin Zycher produced perhaps the most thorough assessment of Fuller's study (and others like it) and showed how they grossly exaggerate the harmful economic effects of spending cuts and largely ignore the benefits. "[T]he defense sector is too small a part of the economy," Zycher notes, "for changes in defense spending to have large aggregate effects on GDP." And, historically, defense spending has not had that effect. There is no correlation between defense spending and GDP growth, and Zycher concludes, therefore, that cuts would have very little long-term impact in the future.
Like de Rugy, Zycher argues that it is appropriate for resources to shift out of the military sector and into private sector as wars end and threats diminish. The United States cut spending after the Korean War, after the Vietnam War, and after the Cold War, and these reductions did not throw the national economy into a tailspin, though some individuals and firms did have to seek out other opportunities.
Government spending takes money out of the private sector in the form of taxes or debt (which is simply taxes on future generations) and redeploys that money in the public sector. Granted, the Pentagon represents a special part of the public sector, one that, ideally, creates a genuine public good-- safety. But much of what Americans spend on their military doesn't actually defend them -- it goes to defending people in other countries who have chosen not to defend themselves. Americans are growing increasingly aware of the unfairness of the current system, and they're tired of it.
But the claims that Pentagon spending has uniquely salutary economic effects -- or, conversely, that cuts will have disproportionately harmful ones -- suffer from a basic conceptual error: They ignore the opportunity costs. Simply put, Pentagon spending cuts can be expected -- all other factors being equal -- to generate greater economic activity elsewhere.
The reason why was captured by French philosopher Frédéric Bastiat in 1848. The bad economist, Bastiat explained, focuses only on those economic activities that are plainly visible; a good economist, by contrast, takes account of both the seen and the unseen. It is not enough, for example, to focus on the economic activity that occurs when a careless child breaks a window. True, the glazier gets to sell the shopkeeper a new one, but the shopkeeper had the benefit of a fine window before it was broken. Paying for the repair (the seen) necessarily prevents him from spending that same money elsewhere, thus denying the shoemaker or the butcher of a sale (the unseen) and denying the shopkeeper the benefit of a new pair of shoes or a healthy meal.
The discussion that has taken place during the closing days of the U.S. election season about possible military spending cuts has been predictably narrow. Politicians in Washington focus on the jobs they supposedly create when they spend the people's money, and too little attention has been paid to the unseen benefits that would accrue if the resources that are currently spent on the military were released into the private sector. Put another way, there has been too much focus on the visible effects of ships and planes that are built, and not nearly enough on the houses, schools, and businesses that never are.
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