economic consequences of military spending

Economic Consequences of Military SpendingAuthor(s): Faye DuchinSource: Journal of Economic Issues, Vol. 17, No. 2 (Jun., 1983), pp. 543-553Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4225328 .

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JOURNAL OF ECONOMIC ISSUES J Vol. XVII No. 2 June 1983

Economic Consequences of Military Spending

Faye Duchin

The great success of the nuclear freeze referendum in the recent elec- tions can fairly be interpreted as popular support for winding down military spending. At the same time, there obviously also exists an effective consensus in the United States for significant, sustained increases in military spending.

An increase or decrease in military spending involves a shift among government programs or a transfer between public and private purchasing power. In all cases the changes will inevitably absorb some idle resources, bid others away from alternative uses, and leave idle yet others now in use. This is so because any economic activity requires a distinct combina- tion of labor skills, of manufacturing and service sector infrastructure, of dependence on imports like specific minerals, and so on. Particular menus of public spending, coupled with implicit or explicit industrial and trade policies, have a direct impact on such aspects of the "quality" of life as the amount and types of work that need to be done and the nature of edu- cational and training requirements.

Even in the absence of deliberate long-term economic policy, the struc- ture of our economy will change in the future as it has in the past. During this century the composition of the American labor force has shifted, in- dividual sectors have grown and declined, and the importance and composition of trade have changed with the transition from agriculture to

The author is Associate Director, Institute for Economic Analysis, New York Uni- versity. This article was presented at the Annual Meeting of the Association for Evo- lutionary Economics, New York City, 28-30 December 1982.

543



544 Faye Duchin

manufacturing to production of "services," assisted first by mechanization and then by automation of manual and now mental labor. If we could know in advance the economic consequences of pursuing different policies, including alternative military policies, over the next twenty years, my guess is that different options might lead us along surprisingly different paths.

This article describes several empirical studies of the economic consequences of military spending. The results suggest that with present technology we can distinguish the long-term economic impacts of alternative policy options within a credible analytic framework. When such an analysis is carried out, differences among outcomes might provide sufficient motivation for making deliberate social choices based on a common un- derstanding of their likely implications.

Empirical Studies

The economic effects of military spending have been examined in a number of detailed, empirical studies over the past twenty years. Work in the early 1960s focused on the effects of disarmament. Wassily Leontief and Marvin Hoffenberg [1961] examined the detailed sectoral consequences of a transfer of expenditures from military to civilian purchases and the impacts on aggregate employment. At about the same time, Mur- ray Wiedenbaum [1963] concluded on the basis of his analysis of the industrial impact of disarmament that reductions in military spending would lead to enormous diversification problems and perhaps dull the leading edge of growth.

In the late 1960s, Department of Labor analysts, among others, examined the economic impacts of the defense buildup in Vietnam. Richard Oliver [1970] estimated employment changes in each sector of the economy; Max Rutzick [1970] analyzed the impacts on the occupational struc- ture of the labor force.

In the 1970s the United Nations sponsored several empirical studies of the economic implications of disarmament in the rich countries as linked with increased development aid to the poor countries. Country studies included several on the Norwegian economy, most recently that by Adne Cappelen, Olav Bjerkholt, and Nils Petter Gleditsch [1982]. Leontief extended his earlier work in this area, this time examining not just the past but also and especially the future in the context of a world model, in a study with the present author [1983] that examines the effects of increases as well as decreases in military spending.

The U.S. Department of Defense has sponsored numerous inquiries



Military Spending 545

into the "attainability" of different military objectives. Among those that are at least partly public, one by David L. Blond [1981], for example, has analyzed proposed future defense programs on the basis of whether key industrial sectors will be able to satisfy military requirements.

Methodology

All but one of the studies described above (Wiedenbaum's) have been carried out using the input-output (10) methodology. The first IO framework developed and implemented by Professor Leontief in the early 1930s was an open, static model: information about all categories of final demand (including investment), during the single year for which the analysis was to be carried out, needed to be specified from outside the model (that is, exogenously). Then the total output and the amount of labor required to satisfy that bill of goods could be computed with a given technical IO matrix. Put another way, the given final demand could be trans- formed, via the 10 matrix, into detailed sectoral outputs.

To this day, the large majority of empirical IO studies use this framework, often coupled with a separate econometric model that projects the several categories of aggregate final demand (GNP).

An alternative approach has been followed in the World Input-Output Model (described in the last section of this article) and in subsequent work carried out at the Institute for Economic Analysis. By progressively "closing" the system for the different categories of final demand, one can determine simultaneously the detail and the aggregates. The changing constraints under which each economy is assumed to operate-limited foreign exchange, availability of specific categories of labor and of raw materials, and so on-need to be provided from outside the model. In recent work we have begun to interpret and project 10 tables by the sys- tematic use of technical, sectoral studies to supplement the traditional reliance on a formal (that is, mathematical) manipulation of accounting data.

Some Impacts of Military Spending on the U.S. Economy

Every billion dollars of military expenditures directly employs a certain amount of labor-the civilian and military personnel of the defense- related agencies-and absorbs additional employment indirectly-the labor required in the "private" sectors of the economy to produce the goods and services purchased with part of the original billion dollars.' The indirect component has often been called the "business employment" or



546 Faye Duchin

"private employment" generated by military spending. Below we show the decomposition of national employment in 1977 into the direct and indirect (that is, private) amounts attributable to different categories of final demand, to indicate the relative magnitudes.

Gov. Gov. Other Final Total Final Households Military Civilian Demand Demand

Private Employment 54,100,000 2,020,000 6,580,000 14,720,000 77,240,000

Direct Civilian Employment 1,425,815 994,000a 10,706,690 - 13,126,506

Armed Forces 2,100,000a 2,100,000

Total Employment 55,525,815 5,114,000 17,286,690 14,720,000 92,646,506

aFrom U.S. Bureau of the Census, Statistical Abstract of the United States, 1978, Table 599. Sources for other entries cited in text.

An average billion dollars of U.S. military spending requires less private employment and more total employment than the average billion dollars of non-military final demand. This was the finding of Leontief and Hoffenberg [1961], confirmed by Leontief and Duchin [1983] and again on the basis of the most recent available data analyzed in this section (see [U.S. Department of Labor, a, b, and c]). Naturally this conclusion does not necessarily hold when comparing specific military and non-military programs nor for all categories of labor. Furthermore, it cannot auto- matically be extrapolated to the future since military "average labor productivity" could increase faster than that of the rest of the economy.

If we examine the occupational composition of those employed in the United States over the last two decades, the two most striking changes are the decreased proportion of farmers and farm laborers (from 8 to 3 percent) and the increase in professionals (from 1 1 to 15 percent), including the emergence of several categories of computer specialists. There has also been an increase in the proportion of clerical workers, both among the employed and the unemployed, and a decline in the proportion of semi-skilled workers, both employed and unemployed. These shifts reflect many technological, economic, and social developments. For example, in 1977 the net international trade in goods and services increased U.S. requirements for agricultural, clerical, and many categories of professional and managerial employment; but it resulted in a net loss of skilled and




especially semi-skilled positions. Changes in military spending have also had their impact.

A comparison of the occupational composition of the employment generated by military final demand in 1968, the peak year for military spending in Vietnam, and in 1977 shows that in both cases the proportion of professionals is greater than in the rest of the economy and in particular includes a much larger representation of engineers and computer programmers and analysts. Military end-use requires a much smaller proportion of sales, service, and farm workers than other categories of final demand. While the production of military goods and services absorbs a considerably larger proportion of skilled and semi-skilled workers than the rest of the economy (about 46 versus 30 percent in 1968), their importance has declined by 1977 (42 versus 28 percent). Table 1 shows the proportions of selected occupations used intensively in military production in 1968 and 1977-especially engineering, computer-related, and metal-working occupations.

Table 1. Military as a Proportion of Total Employment for Selected Occupations

1 968a, c 1977b, c

All Occupations 6% All Occupations 2.6% Aeronautical Engineers 59 Electrical Engineers 10.5 Electrical Engineers 22 Industrial Engineers 8.3 Technical Engineers 20 Mechanical Engineers 8.4 Mechanical Engineers 20 Other Engineers 9.3 Metallurgical Engineers 20 Computer Programmers 5.3 Physicists 38 Computer Systems Analysts 5.6 Draftsmen 14 Other Computer Specialists 6.4 Machinists 19 Draftsmen 6.0 Pattern and Model Workers 25 Machinists 6.3 Sheet Metal Workers 25 Tool and Die Makers 6.8 Tool and Die Makers 54 Other Metal Working Craftsmen 5.5 Airplane Mechanics 19 Assemblers 7.5

Inspectors 6.7

aFrom Rutzick, "Skills and Location," Table 2. Includes private plus direct civilian employment except for All Occupations, which includes private employment only.

bThis column includes private employment only. eThe two columns unfortunately use somewhat different occupational classification schemes. For example, aeronautical engineers, physicists, and airplane mechanics (column 1) are included in more aggregate categories in column 2, and vice versa for the computer occupations.

In 1970 about 25 percent of national employment originated in the manufacturing sectors and 58 percent in the service sectors; by 1978, the



548 Faye Duchin

former fell to 22 percent and the latter rose to 62 percent. While military business employment has also shifted from manufacturing toward services, the military makes relatively little use of the private service sectors, and manufacturing still provides more than half of its business employment (66 percent in 1968 and 54 percent in 1977).

The proportion of output of selected sectors absorbed by military final demand in 1968 and in 1977 is shown in Table 2 for the principal military suppliers. Virtually all the percentages were naturally higher in 1968,

Table 2. Military as a Proportion of Total Use of Selected Sectoral Outputsa

1968c 1977 Ordnance and Accessories 76.8% 52.8% Aircraft and Parts 72.4 38.5 Radio, TV, and Commun. Equipment 38.6 25.3 Electron Tubes 17.9) Semiconductor and Related Devices 33.8 16.1 a 14.6 Electronic Components, n.e.c. 3 12.9) Other Transportation Equipmentb 26.4 14.7 Wood Containers 10.5 8.3 Crude Petroleum and Natural Gas 6.6 6.7 Primary Non-Ferrous Metals Manufacturing 15.7 6.6 Non-Ferrous Metal Ores Mining 15.8 6.9

aCan be interpreted as proportion of sectoral output or of sectoral employment. bOther than aircraft and motor vehicles. cFrom Oliver, "Increase in Defense-Related Employment," Table 1.

when military spending accounted for more than 9 percent of GNP and more than 6 percent of business employment, than in 1977, when they were 5 percent and less than 3 percent, respectively. The heavy military reliance on ordnance, aircraft, communication equipment, electronics, and the mining and processing of metals, which are quantified in this table, are to be expected. One striking finding is that the military absorbs about the same proportion of crude petroleum and natural gas (6.7 percent) in 1977 as in 1968.2

Clearly the economic impacts of military spending are uneven, increas- ing demand only for certain occupations and for the outputs of particular sector that are not generally the occupations with the greatest numbers of unemployed nor the sectors with the most unused capacity. Nor, of course, are these the workers of the sectoral outputs released by cutbacks in social programs.

This section has relied upon the "comparative static" approach in which




two independently calculated, static descriptions of the economy have been compared. The next section reports selected results.

Disarmament and Development

This section contains some results pertaining to the development pos- sibilities opened up in the poorest, least industrialized countries by massive transfers of economic aid from the rich countries, financed by the latter's "savings" from reduced military spending.3 While the immediate prospects for implementing such a policy are virtually nonexistent, the conclusions are relevant to other contexts as well-like an improvement in the poor countries' terms of trade-and furthermore need to be re- corded for some future time when disarmament is once again high on the international agenda.

The analysis compares a baseline (Base) and two other hypothetical scenarios (Scenarios 1 and 2). The baseline projects into the future recent trends in military spending and international trade in military goods. Scenario 1 reduces military spending in all regions below that of Base in each of the years 1981-2000, resulting nonetheless in real increases in military expenditures over the twenty-year period. A portion of the "savings," relative to the Base Scenario, of the rich, developed regions is transferred to the poorest, least developed regions. The developed regions are assumed to maintain the same aggregate level of employment as in Base, and the transfers take the form of increased economic aid used to ease the recipients' balance of payments constraints. Scenario 2 is a more ex- treme version in that it continually reduces military expenditures in real terms after 1980 and transfers the entire "savings" (relative to the Base Scenario) of the rich regions to the poorest regions. These assumptions are quantified in Figure 1:

Many aspects of the detailed outcomes of these (and several other) scenarios can and have been analyzed, including aggregate employment and sectoral impacts such as those discussed in the last section. Here I concentrate on the ability of a significant reduction in military spending coupled with a massive transfer of purchasing power (162 billion 1970 U.S. dollars in the year 2000 according to Scenario 2) to improve the material standard of living (measured by aggregate per capita consumption) in the poorest regions.

Table 3 shows personal consumption in 1970 and World Model projections to the year 2000 under the assumptions of the Base scenario for the world, the developed countries on the whole, and the four poorest



U'

Base Scenario Scenario I Scenario 2

Government North America and Soviet North America and 70% of 1980 Base levels purchases of Union: Exogenous in 1990 Soviet Union: Parity at in 1990. 40% of 1980 Base military goods and 2000 at the same level 33 Base level. Others: 75% Scenario levels in 2000. and services for both regions. Others: and 60% the corresponding

specified as a given pro- Base proportions in 1990 and portion of GDP. 2000, respectively. t

Additional None Transfer from donor to Transfer from donor to Economic Aid recipient regions of 15% recipient regions of 100%

of "savings" in 1990, of "savings" in 1990 and 2000. 25% in 2000.

Figure 1.




Table 3. Personal Consumption on a Per Capita Basis in 1970 and Projections to 2000 for Three Scenariosa

Base Base Scenario lb Scenario 2b

1970 2000 2000 2000

World $ 588 $1074 ( 2.0%) $1140 ( 2.2%) $1257 ( 2.6%) Developed Countries 1592 3482 ( 2.6%) 3604 ( 2.8%) 3739 ( 2.9%)

Arid Africa 154 103 (-1.3%) 274 ( 1.9%) 778 ( 5.5%) Low-income Asia 95 97 ( 0.1%) 144 ( 1.4%) 247 ( 3.2%)

Resource-poor Latin America 446 242 (-2.0%) 294 (-1.4%) 405 (-0.3%)

Tropical Africa 128 194 ( 1.4%) 321 ( 3.1%) 607 ( 5.3%)

aAll figures are in 1970 U.S. dollars except those in parentheses, which are average annual growth rates over the period 1970-2000.

bScenario 1 is called D2 in the study by Leontief and Duchin [1983]. Scenario 2 was computed for the study by Cappelen, Bjerkholt, and Gleditsch [1982].

regions that receive additional aid according to the two experimental scenarios. Two of the poor regions, Arid Africa and Resource-poor Latin America, actually experience a decline in the standard of living over the remainder of the century under the assumptions of the Base Scenario, while a third, Low-income Asia, shows no noticeable improvement.

The assumptions of Scenario 1 result in increased per capita consumption in the developed regions and in the world as a whole, with substantial improvement over the Base Scenario outcomes in the four recipient regions. Yet the latter still remain the poorest in the world by the year 2000, and resource-poor Latin America still fails to regain its real 1970 level. Only in Tropical Africa does the three-decade growth rate surpass (by a small margin) that of the developed countries. The remaining two regions grow at less than 2 percent a year.

The final scenario involves a substantial decline in real military spending over the remainder of the century with the entire value of savings transferred to the recipient regions. Even in these most unlikely circum- stances, the projected growth rates achievable by the recipient regions are by comparison very modest.

The outcome of this experiment suggests that while recipient regions are able to usefully absorb economic aid to significantly different degrees, transfering economic resources made available through disarmament (or by other devices for transfering purchasing power) will have a negligible



552 Faye Duchin

impact on the average standard of living if they are incorporated into the existing structures of production, trade, and consumption. Strategies focused on structural change will be indispensable for sustained improve- ments in the standard of living of the less-developed countries-even in the presence and especially in the absence of large "gifts" from the rich countries.

Notes

I. The data discussed in this section are available in tabular form from the author.

2. The World Model study discussed in the final section of the article suggests that it is essentially petroleum (more than natural gas) that is used intensively in military operations. The same is true of nickel, which is not separately identified in the industrial classification employed here.

3. The study on which this analysis is based appears in the work by Leontief and Duchin [1983] and uses a version of the World Model, which divides the world into 15 regions linked by transfers of capital and trade in more than 50 types of goods and services. The model covers the period from 1970 to 2000 and is continuously updated and extended. Eleven sectors of the economy producing exclusively for military end-use are now included. The first version of the World Model and the first empirical results obtained with it are reported in Wassily Leontief, Anne Carter, and Peter Petri, The Future of the World Economy (New York: Oxford Uni- versity Press, 1977).

References

Blond, David L. 1981. "Impact of the Reagan Defense Program on the United States Economy, 1981-1987." Office of the Secretary of Defense (Decem- ber).

Cappelen, Adne, Olav Bjerkholt, and Nils Petter Gleditsch. 1982. "Global Conversion from Arms to Development Aid: Macroeconomic Effects in Norway." Oslo, Norway: International Peace Research Institute (May).

Leontief, Wassily, and Faye Duchin. 1983. Military Spending: Facts and Fig- ures, Worldwide Implications and Future Outlook. New York: Oxford Uni- versity Press, forthcoming.

Leontief, Wassily, and Marvin Hoffenberg. 1961. "The Economic Effects of Disarmament." Scientific American (April): 3-11.

Oliver, Richard P. 1970. "Increase in Defense-Related Employment During Vietnam Build-up." Monthly Labor Review (February): 3-10.

Rutzick, Max A. 1970. "Skills and Location of Defense-Related Workers." Monthly Labor Review 93 (February): 11-16.

U.S. Department of Labor(a). 1981. The National Industry-Occupation Em-




ployment Matrix, 1970, 1978, and Projected 1990. Bulletin 2086 (April). _ (b). 1981. Time Series Data for Input-Output Industries: Output,

Price, and Employment. Unpublished update (received July). _(). 1982. Unpublished Bureau of Labor Statistics 1977 current dollar

MAKE and USE tables and final demands (received October). Wiedenbaum, Murray L. 1963. "Industrial Impact of Disarmament: An Ex-

ploratory Analysis." The American Journal of Economics and Sociology 22 (October): 513-26.



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