The Biden administration will reassess the U.S. defense budget &mash; a decision that involves balancing trade-offs between defense spending and economic growth. In this report, the authors consider what the effect on growth would be if the United States were to reallocate funds from defense to infrastructure spending, change defense spending and apply the difference to U.S. public debt, or increase taxes to finance defense spending.
- Would reallocating funds from defense spending to infrastructure spending boost growth?
- How does deficit-financed defense spending affect growth?
- How do tax policy changes affect growth compared with defense spending changes?
Like all new administrations, U.S. President Joseph Biden's administration will reassess and possibly change the size of the U.S. defense budget. Such a decision involves balancing trade-offs; a larger budget gives the country more funds to promote and defend its global interests, it but also reduces funds available for domestic programs, including those that might do more to boost economic growth.
The economic trade-offs associated with defense spending have been underexamined compared with other aspects of the debate about U.S. grand strategy. Yet these trade-offs might be of greater public interest in coming years. In early 2021, as the United States remains in a recession amid the coronavirus disease 2019 pandemic, questions about how different budget choices affect economic performance might become more salient. Once the immediate crisis has passed, the country will have an even larger public debt than before and might also have to grapple with the question of what level of defense spending is sustainable in the long term.
In this report — the first in a series on the security and economic trade-offs associated with competing visions for U.S. grand strategy — the authors examine the relationship between U.S. defense spending and economic growth. To do so, they consider what the effect on growth would be if the United States were to adopt any one of three policy changes: reallocate funds between defense spending and infrastructure investments, change its overall level of defense spending and apply the difference to public debt, or increase taxes to finance defense spending.
- Prioritizing defense spending over infrastructure investment, a long-standing domestic concern, might undermine economic growth and, therefore, resources available for defense in the long run.
- Prior to the pandemic response, spending on national defense was roughly half of discretionary spending, so defense spending contributes notably to annual deficits, even if it is not the main driver.
- Economists generally believe that the rising U.S. public debt will eventually undermine growth, but there is disagreement as to exactly when or how.
- As public debt rises, there is a risk that defense spending might eventually have a deleterious effect on growth, unlike during the Cold War, when public debt was lower.
- The economic literature is not conclusive on how increasing taxes to maintain or increase defense spending would affect economic growth.