No Keynesians, Military Spending Doesn't Boost the Economy

The notion that higher military spending prompts a stronger economy is getting a workout in light of President Trump’s argument that Saudi military contracts will lead to a million jobs in the United States. There is only one problem with the view that military spending leads to significant economic growth and jobs: It isn’t even close to being true.

The link in people’s minds between defense spending and wealth and job creation became firmly established in World War II, when dramatic economic growth seemed to be twinned with military spending. In fact, the U.S entered that war with significant unused industrial capacity that could be ramped up easily, as well as pent-up demand.

The military spending mirage has achieved new prominence recently thanks to Trump’s exaggerated claims. But it is hard, or even impossible, to find any economic proof for them.

First, let’s dispose of the specific estimates of how many American jobs, if any, a Saudi arms deal would generate. It’s nowhere near a million. In fact, Trump originally claimed the deal would result in about 40,000 jobs, a claim that has increased dramatically with every iteration. It is hard to see how selling more arms to the Saudis would result in additional U.S. employment.

To begin with, despite the President’s claims, there is no reason to believe the Saudis are even prepared to spend $110 billion on additional arms. So far, Saudi promises to place a big order - not even arms orders themselves - come to about $14.5 billion. And this hardly represents a large long-term investment in the U.S economy. Under Crown Prince Mohammed bin-Salmon’s 2030 economic development plan, the Kingdom would obtain half of all of the jobs involved, largely by transferring knowledge and technology from the United States, exactly the practice the Trump Administration is fighting in China. Not surprisingly, American defense contractors, hungry for petro-dollars, are eagerly signing up; Raytheon, for example, is in the process of opening up a subsidiary in Riyadh.

How many jobs does defense spending result in under the best of circumstances? Not many. The national security and defense segment of the aerospace and defense industry supports about 355,000 direct U.S jobs - including the design and manufacturing of military aircraft, ground systems, ships, tactical vehicles, and related systems, according to the Aerospace Industries Association.

These jobs primarily serve U.S direct military needs, as well as that of many European, Asian and Mideast countries. Saudi military contracts represent a small piece of a small piece of a small piece of the total pie. In fact, all private-sector defense workers make up less than 0.5 percent of the U.S labor force. Even if the $110 billion estimate of additional Saudi spending somehow materializes, that’s a drop in the bucket for a $20 trillion national economy.

Few if any U.S jobs depend directly on total weapons sales to Saudi Arabia, much less the phantom $110 billion the Saudis are reportedly prepared to spend. Lockheed, for example, has said that a Saudi weapons deal would create just a few hundred jobs - mostly in Saudi Arabia itself.

It’s easy to understand why many would assume that multi-billions in arms sales would lead to tons of U.S employment. But how much of that spending would go to enhanced profits on fixed costs, and how few would go to support additional jobs? Aerospace and defense companies achieve and maintain success because they can and do avoid hiring unnecessary labor. They have developed the scalability needed to ramp up production significantly, while creating few additional jobs.

It’s also easy to see technological development as stemming from military spending. The Internet, drones, and GPS all resulted from military investment. But here, one once again runs into Frederic Bastiat’s distinction between the seen and the unseen. How much more technological development would we see if more was carried out by non-defense industries? How much more capital, R&D capacity and skilled labor would be available for more productive non-military uses? The seen hand of government may appear to shape economic growth, but it is actually the invisible hand of the marketplace that does so most efficiently.

Obviously, in and of itself, this economic data does not constitute an argument against defense spending. It may be necessary to project military strength, and even crucial to a country’s place in the world. But as far as economic growth is concerned, what is war (and military spending) actually good for? Like the song says “absolutely nothing.”