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ECONOMIC E F F E C T S O F POSTW AR NATIONAL SEC U R ITY E X P E N D IT U R E S Leo Fishman, professor of economics and finance, and Betty G. F ish man, lecturer in economics, West Virginia University Any meaningful discussion of the economic significance of national security expenditures must be based 011 the magnitude of those expenditures. Although it is a m atter of common knowledge that Federal expenditures for national-security purposes have been much larger since World W ar I I than they were before the war, the full extent of their increase as compared with prewar years is not so widely appreciated. Nor is it generally realized that if the entire postwar period is considered, it appears th at national security ex penditures are continuing to increase, rather than declining or re maining stable. Although the increase in expenditures for m ilitary purposes dur ing the Korean hostilities was so very much smaller than the in crease which occurred during W orld W ar II , the decline which occurred at the end of the Korean hostilities was smaller still. Thus, as the table below indicates average annual Federal expenditures for national security during the first 3 full years after the end of hos tilities in Korea were very much higher than the corresponding figure for the 3 full years immediately preceding the outbreak of hostilities, or for the first 3 full years after the end of W orld W ar II. National security expenditures compared with gross national product and total purchases of goods and services by the Federal Government, 1939 and 19^6-56 Period ...................................... ..... 1939 1946. ______________ __________ 1947 ............................................. 1948 ..................- ................ ......... 1949.................... .......................... ... 1950. ______________ _______ 1951. ________________ _____ 1952 ........................................... 1953 ......... -................................ 1954....................... ......................... 1955................................................. 1956_____________ __________ Gross national product (billions of dollars) 91.1 209.2 232.2 257. 3 257.3 285.1 328.2 345.4 363.2 361.2 391.7 414.7 313.2 232. 9 248.9 389.2 National security expenditures2 Total Federal purchases of goods and services 1 (billions of dollars) Amount (billions of dollars) 5.2 20.9 15.8 21.0 25.4 1.3 21.2 13.3 16.0 19.3 22.1 41.0 54.3 59.5 48.9 46.8 47.2 36.6 19.2 20.7 47.6 18.5 37.3 48.8 51.5 43.1 41.3 42.4 32.1 16.8 16.2 42.3 Percent of gross national product 1.4 10.1 5.7 6. 2 7.5 6.5 11.4 14.1 14, 2 11.9 10.5 10.2 10.2 7.2 6.5 10.9 Percent of total Federal purchases of goods and services 25.0 101.4 84.2 76.2 76.0 83.7 91.0 89.9 86.6 88.1 88.2 89.8 87.7 87.5 78.3 88.9 1 Gross expenditures by the Federal Government for the purchase of goods and services less total sales by the Federal Government. Total sales by the Federal Government in billions of dollars amounted to 2.7 in 1946, 1.3 in 1947, 0.5 in 1948, 0.4 in 1949, 0.3 in 1950, and 0.4 for each of the years 1951-56. 2 Includes expenditures for military services, international security, and foreign relations (except foreign loans), development and control of atomic energy, promotion of the merchant marine, promotion of defense production and economic stabilization, and civil defense. These expenditures are not comparable with the “major national security” category in the budget of the United States Government for the fiscal year ending June 30, 1958. Source: U. S. Department of Commerce. 518 ECONOMIC GROWTH AiSTD STABILITY 519 In 1956 Federal expenditures for national security totaled $42.4 billion, accounting for 89.8 percent of total Federal purchases of goods and services and 10.2 percent of our gross national product. By way of comparison we may observe that in 1939, the year in which World W ar I I began, Federal expenditures for national security were only $1.3 billion, accounting for only 25 percent of total Federal purchases of goods and services and only 1.4 percent of our gross national prod uct. Even in 1949, the last full year before the outbreak of hostilities in Korea, Federal expenditures for national security were much lower than they were last year, amounting to $19.3 billion, a figure which represented 76 percent of total Federal expenditures and 7.5 percent of our gross national product for that year. Present indications are that total Federal expenditures for national security during 1957 may reach a new peacetime high. Although some p art of the apparent increase in national security expenditures is the result of changes in our price level, most of the increase cannot be attributed to rising prices, nor indeed to any eco nomic factors. I t is fairly obvious that most of that increase is at tributable to changes in our international relations and to changes in modern methods of warfare, rather than to any changes in our economy or our economic policies. B ut it is equally obvious that such large expenditures for national security purposes must themselves have some effect on our economy and on economic policy. Many questions con cerning the economic effects of national security expenditures suggest themselves, and we will attempt here to deal with only a few of them. The most persistent, and in one sense the most basic, query is, “Can we afford such huge expenditures for national security, and if so, for how long can we continue to make them?” The answer to the first part of this query is decidely “Yes.” We have not paid for the in crease in national security expenditures by a reduction in our civilian standard of living. Quite the contrary. Our population enjoys a higher material standard of living now than it did in the years pre ceding W orld W ar I I or even in the years immediately following World W ar II. And, barring a general economic recession, it seems likely that our standard of living will rise still further in the years ahead, even if there is no reduction in our national security expendi tures. Although it does not bear directly on the question of whether we, as a nation, can afford our huge national security expenditures, it will doubtless be reassuring to some persons to learn that the increase in our national security expenditures since the end of World W ar I I has not been financed by an increase in our Federal debt. On the contrary, there was a slight reduction in the Federal debt between 1946 and 1956, and it is anticipated that there will be a further reduc tion this year. In other words, our national security expenditures have been financed by Federal taxes, rather than by Federal borrowing. The answer to this first question, in turn, gives rise to a second. “Would our standard of living have been even higher in the postwar period if we had not had such large national security expenditures?” To this question, it is impossible to make an unqualified reply. Our answer must depend on whether we believe our economic resources would have been just as fully employed during this period as they actually were, even if national security expenditures had been reduced to a much lower level. 520 ECONOMIC GROWTH AND STABILITY However, if we are willing to assume that we would have had full or nearly full employment of our economic resources during the post war period, even though our national security expenditures were re duced to, let us say, their prewar level, then we can say with some certainty that our standard of living during this period would have been higher than it actually has been. For if some of the economic resources which have been used to produce goods and services for national security had instead been used to produce consumer goods or to produce capital goods, which in turn would be used to produce consumer goods, obviously the total supply of goods available to civilian consumers would have been larger than it actually was. Since our anwser to the previous question involves a qualification concerning the overall level of economic activity, it seems reasonable to turn our attention next to the effect which national security ex penditures have had on the level of economic activity during the post war period. Here again, it is impossible to dispose of the matter with a brief and simple statement, unless we are willing to content ourselves with the observation that the effect has varied at different times. F or the period as a whole, the effect has undoubtedly been stimu lating. B ut what about the years 1946, 1947, 1950, and 1954, when Federal expenditures for national security purposes declined? Surely, it cannot be argued that they provided a simulating effect on our economy in those years. On the contrary, the reduction in na tional security expenditures when hostilities ended in Korea (from an annual level of $53.3 billion during the second quarter of 1953 to an annual level of $43.2 billion during the second quarter of 1954) con tributed to the dip in overall economic activity which we experienced in the latter part of 1953 and the early months of 1954. In other words, the direction of change in the magnitude of national security expenditures, provide the change be large enough, is more significant in this connection than the actual magnitude of those expenditures. In order to understand the effect of national security expenditures on the general level of economic activity, however, we must consider more than the figures on national security expenditures alone. We must know something about the timing of those expenditures, the general level of economic activity in the civilian sector of the economy, the underlying strength or weakness of civilian demand for goods and services, the manner in which national security expenditures are financed, and the particular types of goods and services which the Federal Government is purchasing for national security purposes. There have been times during the postwar period when, because of the strength of civilian demand for goods and services and the timing of increases in national security expenditures, those expenditures have exerted a strain, rather than a beneficent stimulating effect on our economy, and have probably contributed more to the upward move ment of prices than to an increase in production. _ There have been other times, such as the recent past, when shifts in procurement policies from one type of weapon or facility to another have had significant effects on our economy irrespective of any change in the magnitude of expenditures. The economic significance of shifts of this type is particularly marked when shifts are made sud denly, rather than gradually; when those shifts involve a change in ECONOMIC GROWTH AND STABILITY 521 the geographical pattern of production for national security pur poses; and when they give rise to a completely different pattern of demand for basic raw materials, and for the factors of production. O f course, the economic significance of shifts of this type is neces sarily greater when the expenditures involved themselves are greater. I t has been recognized by many economists in recent years that an increase in Federal expenditures can have a stimulating effect on the economy, even if it is financed by taxes, rather than by borrow ing.1 Nevertheless, it is true that the stimulating effect of the in crease will be more moderate when it is accompanied by a balanced budget than when it involves an increase in the public debt. Another im portant question relating to the effect of national se curity expenditures concerns their influence on economic growth. “I t is salutary or otherwise?” This question, like the one on our standard of living, cannot be answered unless we are willing to make some assumptions regarding the level of economic activity which would have prevailed during the postwar period if national security expenditures had declined to, say, their prewar level. F or economic growth is closely related to the general level of economic activity, slowing down when the level of economic activity is low, and in creasing when the level of economic activity is high. However, if we are willing to assume that we would have had full or nearly full employment of our economic resources during the post war period even without our large national security expenditures, then we can argue with much conviction that our large national security expenditures have served to impede our economic growth. M ilitary goods and services, necessary though they may be, are from an economic point of view nonproductive, even wasteful. Re sources devoted to the production of military goods and services do not add to our current standard of living, nor do they increase our capacity to produce more goods and services in the future. I f we had enjoyed the same level of economic activity and had not made such large expenditures for national security purposes, at least part of the economic resources which were devoted to the production of m ilitary goods and services or to the creation of facilities for the production of military goods and services, would instead have been devoted to the production of capital goods, or to other uses which in turn would enhance our capacity to produce economic goods and services for civilian consumption. Under these circumstances the rate of economic growth in this country during the postwar period would have been larger than it actually has been. I t follows from what has gone before that although we must recog nize that national security expenditures will have a significant in fluence on economic developments in the future, as they have at pres ent, and have had in the immediate past, we cannot determine exactly what that influence will be. We may, of course, say that all other things being equal or neutral, an increase in national security expendi tures will tend to have a stimulating or inflationary effect on our economy: a decrease in national security expenditures will tend to have a depressing or deflationary effect; while a stable level of na 1 F o r a discussion of th is p o in t an d a lis t of references to o th e r w ritin g s on th e sam e subject, see W illiam J . B aum ol an d M aurice H. P esto n , M ore on th e M u ltip lier E ffects of a B alanced B udget, T he A m erican Econom ic Review, vol. XLV, No. 1, M arch 1955, pp. 140-148. 522 ECONOMIC GROWTH AND STABILITY tional security expenditures will enhance the possibility of economic stability. All other things are seldom equal or neutral, however, so that generalities of this nature unless they are supplemented by much more precise analysis of the various situations which may arise are of limited value to those concerned with the practical problem of formulating economic policy. Such detailed analysis would be inappropriate in this discussion. Two points which may be made in this connection, however, are worthy of observation. The first is th at national security expendi tures by virtue of the fact th at they are now so large and th a t they vary in response to forces which are independent of economic condi tions and policies, necessarily exercise a limiting influence on the power of the Federal Government to use expenditure policy for the purpose of promoting full employment or achieving economic sta bility. In view of this fact, it is important th a t economists both in and out of the Government service explore the possibility of develop ing other means of implementing the policies set forth in the Employ ment Act of 1946. The second point worthy of observation is that if a sudden large decrease in national security expenditures were to occur as a result of successful disarmament negotiations coupled with a general lessen ing of international tensions, it would probably lead to a substantial reduction in the overall level of economic activity, and m ight very well have more far-reaching effects than a reduction of similar magnitude in the level of private investment expenditures. I t is true that predictions similar to this proved to be completely false after World W ar II. B ut let us not forget th at at th at time, as a result of wartime price control coupled with an acute shortage of many types of consumer goods—especially consumer durable goods— and generally rising incomes, there was a huge backlog of consumer demand to fill the gap caused by the reduction in m ilitary expendi tures. A t present no such backlog of consumer demand exists, nor is it likely that such a backlog will develop in the near future, unless once again we become involved in hostilities on a large scale. This does not mean that we should attem pt to avoid any large decrease in national security expenditures or that we should fear its occurrence. On the contrary, for economic as well as noneconomic reasons it would be highly desirable. But it does mean th at we should be prepared to adopt measures suitable to cope with the situation when it does occur, if it becomes evident that supporting measures are nec essary. W orthy of consideration in this connection is the desirability of developing standby programs providing for increased expenditures on such things as public roads, schools, hospitals, and so forth. E x penditures of this type are similar to national security expenditures in that they do not themselves increase the sum total of either consumer goods, or capital goods which in turn are used to increase the sum total of consumer goods. B ut expenditures of this type, unlike national security expenditures, may be deliberately varied by our economic policymakers in response to variations in other segments of our economy. Moreover, assuming a lessening of international tension, it is clear that expenditures of this type will yield fa r more desirable results than national security expenditures, in the long run as well as the short run, and from a non economic, as well as an economic, point of view.
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