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FEDERAL EXPENDITURES FOR NATIONAL SECURITY M ILITA R Y E X P E N D IT U R E S, ECONOMIC GROWTH, AND STA B ILITY A rthur E. Burns, professor of economics, dean, The Graduate Council, The George Washington University I t is difficult to fit m ilitary expenditures into the “growth and stability” pattern currently being studied by the Joint Economic Committee. Although military outlays are not necessarily incon sistent with the objective of stability and growth, they may be and at times have been. During war and periods of tension such as the present, the national security objective is paramount. Expenditure levels and patterns are not likely to be greatly influenced, or influenced at all, by considerations of growth or stability. Other instruments of policy are usually required to assume a measure of stability. The impact of military expenditures on growth and stability de pends on many thing besides the level, rate of change, duration, and pattern of such expenditures. The source of funds is obviously im portant. Heavy reliance on deficit financing during World W ar II, in contrast to the tax financing of the Korean war, produced different results from the stabilization point of view. Differences in tax struc tures to finance any given level of expenditures are likely to alter the impact of military outlays. Consumer and business expectations may differ from one period to another. The levels of employment and plant utilization clearly affect the impact on prices, production, and growth. And, obviously, so do governmental policies which affect the responses of the system. These and other variables play a part in determining the effects of military expenditures on the growth and stability of an economy. Moreover, a distinction between short-run and long-run conse quences of m ilitary outlays, particularly on the matter of economic growth, throws light on the problem. I t is important, also, to go behind the military expenditures to the indirect consequences th at may flow from them. Under some circumstances these consequences may be highly stimulative to employment, output, and income. The “stir ring up” impact of World W ar I I on the depressed American economy helps to account for the growth of the last decade. Many technical developments and new products developed for m ilitary purposes have a high transfer value to the civilian economy. Again this reflects it self in growth potential. These indirect consequences help reduce the real cost of the military to the economy as a whole over time. One of the striking fiscal facts of the present and recent past is the size of m ilitary expenditures. Large-scale military outlays seem des tined to remain in the Federal budget for an indefinite period. This 9 7 7 3 5 — 5 7 -------3 4 509 510 ECONOMIC GROWTH AND STABILITY constitutes a sharp break with past experience, and bears obviously on the question of future economic stability and growth. A short review of military expenditures up to World W ar I I brings out the changed role of m ilitary expenditures in the American economy. H is t o r ic a l R e v ie w Throughout the 19th century total Federal expenditures moved upward, from about $10 million annually to some $400 million an nually at the close of the century. D uring the 1920’s they averaged about $3 billion, and in the late 1930’s some $9 billion. The wars of 1812 and 1861-65 boosted Federal expenditures greatly; postwar out lays for both war-connected outlays 1 and civil purposes remained permanently above prewar levels. Compared with prewar expendi ture levels postwar outlays following the W ar of 1812 approximated 150 percent; following the Civil W ar the percentage was 230. Fol lowing W orld W ar I the postwar expenditures were about 260 percent of prewar. W ars not only increase total expenditures but they seem to exert a permanent outlay-increasing effect on the postwar periods. This effect shows up more strongly in civil than in war-connected expendi tures. U p to W orld W ar I I , the war-connected component showed a persistent decline (except in war years) as a percentage of total Federal outlays. To be sure, war-connected outlays have exceeded civil expenditures in all years except a few during the 1850’s and again during the 1930’s. But the war-connected share trended down w ard; it was a smaller percentage of total outlays during the 1930’s than at any other time in United States history. The great growth in Federal expenditures, both m ilitary and civil, throughout United States history was accompanied by a rapid rise in population. Less than $2 per capita per y e a r2 in the first decade of the 19th century, they rose to $10 in the 1890’s, and to $25 in the 1920’s. Depression spending policies brought a further threefold increase by the end of the 1930’s. War-connected expenditures per capita per year accounted for only one-third of the per capita Fed eral expenditures just before World W ar II, in contrast to four-fifths in the first decade of the 19th century. W artime per capita expenditure changes are of course substantial. The percentage increase over prewar per capita outlays shows a high degree of uniformity. During the Civil W ar, W orld W ar I, and World W ar I I, the percentage increases are 733, 776, and 630. The high level of depression spending by the Federal Government during the second half of the 1930’s moderated the percentage increase in per capita outlays in W orld W ar II. C osts P er S e r v ic e m a n The long-term changes in m ilitary expenditures per serviceman are of particular importance for the problem at hand. Estimates prepared by M. Slade Kendrick (in 1926 prices) place the cost per 1 Costs of the military services, veterans, and interest on the public debt. See M. Slade Kendrick, A Century and a Half of Federal Expenditures, Occasional Paper No. 48, National Bureau of Economic Research, New York, 1955. 1 In 1926 prices, as shown in Kendrick, op. cit. 511 ECONOMIC GROWTH AND STABILITY serviceman per year at somewhat less than $1,000 during the 1820’s. F ifty years later they had increased on the average only 50 percent. M ilitary technology had changed, but not in a revolutionary manner. In the years preceding W orld W ar I the annual average approxi mated $2,400; the increase came largely from changes in naval ship construction. In nearly a century before World W ar I the average annual outlay per serviceman had risen somewhat less than 300 percent. United States participation in World W ar I was of such short duration that cost figures are somewhat unreal. They averaged $3,300 per serviceman in 1918 and $6,000 2 years later. Between 1922 and 1938 they ranged from $2,300 to $4,000 per year, averaging about half again as high as pre-World W ar I. W orld W ar I I costs averaged nearly $9,000 per serviceman for the years 1941-45. In contrast the 1861-65 costs averaged somewhat under $1,000 per year. Between World W ar I I and the Korean war costs per man came to $5,000 annually, about twice the cost per man of 20 years earlier. Korea cost more per man per year than did World W ar II. The enormous and rapid changes in m ilitary technology explain a large measure of the increased cost per serviceman per year during the present century. Compared with the last 2 or 3 decades, the 19th century was technologically quiescent in the m ilitary sphere. Not only have costs per man increased but the present era keeps a larger percentage of men of m ilitary age under arms. The high levels of military outlays and their dominating position in the Federal budget reflects these facts. M il it a r y E x p e n d it u r e s a n d N a t io n a l O u tput U ntil recently m ilitary expenditures as a percentage of gross na tional output have always been of relatively small importance. The Kuznets estimates beginning with 1869 range from 1.3 percent for that year down to 0.4 percent for most of the 1880’s and 1890’s. From 1900 until World W ar I the average is 0.8 percent. This went up to 16 percent in 1918 but by 1923 the percentage was back to 0.8, the prewar average. From 1931 to 1939 m ilitary outlays averaged 1.3 percent of the depressed gross national product of those years. World W ar I I changed matters abruptly. By 1943 some 40 per cent of gross national product went into the military. The extensive demobilization after that war brought military outlays down to 5 percent in 1948-49. W ith Korea the percentage rose to 14; since then military outlays have averaged 9 to 10 percent of gross national product. The recent period is thus unique. The complexity and scale of military operations during 1941-45 caused an unprecedented com mitment of output to war purposes. Since then rapid changes in military technology, the maintenance of large armed forces, and the extensive deployment of these forces contribute to the present large commitment of resources to military purposes. The attached table shows for 5-year intervals the volume of Fed eral outlays and the war-connected outlays since the beginning of the present century. From 1936-40 to 1941-45, total expenditures rose $56 billion per year, of which $50 billion is military. While civil expenditures in the aggregate have risen from pre-World W ar I I 512 ECONOMIC GROWTH AND STABILITY to the present, there has been little or no real per capita growth in such expenditures over this period of time. Thus, the budget problem is mainly caused by W orld W ar I I , Korea, and the world tensions summed up as the cold war. To the extent that growth and stability are affected by Federal expenditures, it is the m ilitary component of such expenditures th a t dominates the picture. M il it a r y E x p e n d it u r e s , G row th, and S t a b il it y I t was pointed out above that one of the unique features of the present era in American history is the tremendous amounts spent since 1940 on the military. In terms of the m ilitary absorption of gross national product, the present peacetime rate or percentage is 8 to 10 times that of the 1930’s, about 12 times th a t of the 1920’s, and more than 20 times th at of the 1880’s, and 1890’s. The resources thus committed to the support of the m ilitary are not available for other purposes, i. e., to achieve increased productive capacity and a growth m consumption levels. A comparison of re cent rates of gross national product absorption by the m ilitary with the rates of earlier periods raises some searching and disturbing ques tions about the prospects of long-term growth m productive capacity and consumption levels. These questions frequently bring forth gloomy answers. Federal expenditures [Millions] Years 1901-5 ........................................................................................ 1906-10 ...................................................................................... ........................ ............................................................. 1911-15 1916-20............................. ............................................................. 1921-25............................. ................................................................ 192&-30 ....................................................................................... 1931-35 . ........................ ............................................................... 1936-40 ........................... .............................................................. 1941-45 ........................................................................................ 1946-50 ................................ .................................................... ...... 1951-55 ......................................................................................... . Average annual Federal expend itures $536 639 720 8,065 3,579 3,183 5, 215 8,192 64,038 42,335 63,216 Average annual war-con nected expend itures $388 456 520 4,657 2,186 1,707 1,792 2,661 52,415 30,900 47,100 Percent war-con nected 72 71 73 58 61 54 34 32 82 71 74 Source: Statistical Abstract of the United States, 1956, p. 355. While the comparison of rates of absorption seems to jnstify deep concern, several points need consideration as possible offsetting in fluences. 1. Resources diverted ,to m ilitary support may not be entirely diverted from civilian alternatives. For any given increment of out put absorbed by the military, the civilian alternatives sacrificed in the time period might range from zero to the full amount. Some or all of the resources diverted to the military m ight have remained unemloyed but for the expansion of m ilitary expenditures. I f there is sacrifice in the time period, and if the loss is in investment, additional sacrifices will accrue beyond the time period. 2. The value of the output absorbed by any given increase in mili tary expenditures does not necessarily measure the value of output diverted from the civilian sector. As noted above, some of the diverted 513 ECONOMIC GROWTH AND STABILITY resources might have remained unemployed. But the point holds even where resources diverted to the military are diverted from the civilian sector. F or example, when resources shift from low-valued products—e. g., agriculture—to high-valued products—e. g., radar equipment for the m ilitary—increment of gross national product absorbed by the military exceeds in value the output denied to the civilian sector. Structural shifts in output are a characteristic of the development of the economy over tim e; they have special signifi cance for the particular problem at hand. 3. Comparison of rates of absorption of gross national product by the m ilitary over long periods of time may be deceptive. Seventy years ago the military absorbed 0.5 percent of gross national product; today the rate is 20 times greater. However, the stimulative effects per dollar spent have probably changed. I t was noted above that military technology changed slowly during most of the 19th century when compared with the last several decades. While it produced something of transfer value to the civilian sector in the metallurgical field, the contribution to collateral civilian industry appears small compared to recent contributions. Research and development for the military during the last two decades have created new industries, new products, transformed older industries, and introduced innumer able changes in methods. The twentyfold increase in the rate of absorption of gross national product by the m ilitary now, compared with the 1880’s, does not mean a twentyfold increase in the military burden to the economy. The indirect consequences of net value to the civilian economy are not limited to such fields as atomic energy, the electronics industry, synthetics, food processing, and the like. Asian flu vaccine is a product of Army research which might spare the loss of a substantial amount of gross national product. The first two points may be brought out by reference to the increases in military outlays and gross national product caused by the Korean war. Here the short-run implications of an increase in military out lays are discussed. T he M il it a r y P rogram , 1950-53 The Korean war broke out in mid-1950 at a time when the economy was recovering from the relatively mild recession of 1949. The fight ing stopped in mid-1953. M ilitary expenditures rose sharply from 1950 to 1953, and wth them production, employment, and income. The tabulation below shows production changes, by m ilitary and civilian uses, in 1952 prices, at annual rates for the first 6 months of 1950 and 1953. [In billions] Gross national product Total 1st half 1960........................................ ............. ............................. 1st half 1963...................... ......................................................... . For national security For civilian use $302 367 $19 52 $283 315 +65 +33 +32 514 ECONOMIC GROWTH AND STABILITY A t the first-half 1953 rate, the m ilitary absorbed some 14 percent of gross national product compared with 6 percent in 1950. The incre ment to total output over this period was quite evenly shared by the military and civilian sectors. Along with the rise in output went an increase in employment, from 59 million to 62 million, and hours worked per week in nonagricultural employment increased from under 40 to 41. Combining the in crease in people at work and the increase in the workweek suggests an 8- to 10-percent rise in total time worked. F o r this added time worked the economy obtained a 21-percent growth in gross national product. The civilian sector by itself increased 11 percent. Gross national product per person employed rose from $5,100 in 1950 to $5,900 in 1958, or 16 precent. The disparity in changes in out put and in hours worked may be explained, in part, by the shifts in employment, from lower value products to higher value products. Farm employment declined from 1950 to 1953, while industrial em ployment rose some 2 million, virtually all in the durable-goods in dustries. Of the latter, spectacular increases occurred in the aircraft, ordnance, and other war-related industries characterized by high valued end products. Over this period, personal income increased; approximately half this increment was taken in higher Federal taxes, which increased $32 billion. A fter all additional taxes, the public at large had $30 billion more income in early 1953 than in early 1950. Taxing, spending, and savings patterns in this period are of inter est. The immediate increase m Federal taxation brought in more cash receipts than cash expenditures for the 3-year period. The ag gregate cash surplus was in excess of $2 billion. This is the first siz able war the United States financed fully from taxation. W ith the outbreak of war, consumers and business engaged heavily in forward buying before m ilitary procurement began making its* added demands on the economy. The civilian spurt in forward buy ing came to an end early in 1951. The consumption ratio dropped as consumer fears of shortages abated. Meanwhile, the forward buying produced a quick 10-percent increase in price indexes. By the second quarter of 1951, the inflationary pressure eased; in fact, many price lines declined. Personal savings increased, and consumer expendi tures gradually expanded with production as the war progressed. Civilian and m ilitary buying coordinated themselves well during this period, bringing about a high degree of stability for a war period. By the end of the war, in 1953, consumer savings were at a poSt World W ar I I high. P er capita consumption was at its highest level. In real terms, residential housing had declined, but all other construc tion and business investment in durable equipment increased. Credit restraints curbed consumer durable-goods purchases to some extent, and allocations restrained the growth of business investment some what. T he Q u e s t io n or R eal C o st The facts outlined above show the main features of the m ilitary impact on the national economy during Korea. T hat impact was clearly stimulative. A big m ilitary effort was supported and, at the same time, the civilian economy advanced to new high ground in all important respects. ECONOMIC GROWTH AND STABILITY 515 In terms of the earlier discussion, to what extent did this increased military program involve a diversion from the civilian economy, and, therefore, a real cost or burden ? Although no conclusive answer is possible, the facts do not point to a major diversion from the civilian economy in the buildup of the mil itary program. The civilian gross national product expanded. But the real question is: Would the civilian sector have had more than the $32 billion increase it in fact had in 1953 over 1950 in the absence of the Korean conflict ? T hat is, would 1953’s gross national product have exceeded $334 billion without the stimulus of rearmament? Some indication might be had from the percentage changes in pro duction over the period 1946-56. The average annual rate of increase in civilian gross national product over this 10-year period is 3.5 per cent. In only 1949 and 1954—both moderate recession years—did civilian gross national product decline. From the period immediately before the outbreak in Korea, through the end of that war, civilian gross national product increased an average of 3.5 percent. In 1951 it was above, and in 1952 below the tre n d : in 1953 it was back on the 3.5-percent trend line. Again, from 1953 to the high levels of 1956, civilian gross national product increased at an average annual rate of 3.5 percent—down in 1954, but up in 1955 and 1956. The figures suggest th at the expansion in the military program be ginning in 1950 was superimposed on the growth curve (in real terms) of 3.5 percent per annum. So far as the civilian sector is concerned, the plus and minus figures during the 3 years of the Korean war just about cancel out, give or take a few billion dollars of output. I t can always be argued, of course, that civilian gross national prod uct could have increased at a rate in excess of 3.5 percent over the years of the Korean war. But there is no compelling reason to believe that gross national product would have exceeded by much the 1953 total (give or take a few billion). There was no great backlog of consumer demand or of private investment (or both) in 1950 to support any unusual spurt in output. The mild recession of 1949 indicated that World W ar I I backlogs were largely worked off, and the increase in voluntary savings after 1950 suggests th at consumers were buying all they wanted. By any reasonable standard, a $334 billion gross na tional product and 62 million employment would have represented a very prosperous state of affairs in 1953. The main point is that the actual 1953 level of gross national prod uct was high when related to the trend from 1946 to 1956. The bulge can be largely explained by the special shift in production and em ployment due to war orders. Much of this bulge ($33 billion in 1953 over 1950), and perhaps most of it, does not seem to have entailed a shift from the civilian sector of the economy. From the facts avail able, it seems that the added gross national product absorbed by the increased defense program from 1950 to 1953 was an increment to output that might not riave been produced in the absence of the mili tary buildup. I t is true, of course, th at consumers would probably have spent even more than they did in 1952 and 1953 had taxes not increased. But the data seem to suggest that the increment to consumer income taken by the increase in taxation is that portion of income th at con sumers would not have had in the absence of the military buildup. In 516 ECONOMIC GROWTH AND STABILITY a financial sense, the program was self-financing; the increased in come taxed away was created in the production of gross national product that would not have been produced but for the program. A general statement of the problem may be made as follows: Should the stimulus provided by an expanded military program lead to an increase in the total output sufficient (a) to satisfy the normal ex pectations of the public and (b) to provide for expanded m ilitary requirements, then the program in real terms is self-financed, in the sense described above. In monetary terms, should the program create an excess of money income over normal expectations, and added taxes take only this excess, then no income anticipated is lost and no real cost incurred. The 1950-53 experience seems to have approximated this condition. The Korean war has been used as an illustration. A fuller use of resources was probably achieved during this period in consequence of m ilitary procurement. And production shifted toward higher value end products. Thus, the increment to gross national product ab sorbed by the m ilitary entailed no corresponding loss to the civilian economy; on the contrary, there appeared to be, at most, a relatively small diversion from the civilian economy. This argument is limited to a particular short-run period. Under other circumstances, such as those prevailing from 1955 to the present, a comparable expansion of m ilitary expenditures would probably have caused a considerable diversion from the civilian economy. S ome L ong-R u n C o n s id e r a t io n s Over a long period of time, the problem is more complex. A pro longed commitment of resources at the present rate to military p u r poses cannot avoid the problem of diversion. I f m ilitary outlays bring about a somewhat fuller and more stable level of output than would otherwise occur, this would be a partial offset. And the stimu lus of research and development having transfer value would consti tute another offset. More needs to be known about these possible effects of a sustained and dynamic military program. On the long-run problem, some interesting estimates have been pre pared by Dr. John W. Kendrick, as p a rt of a forthcoming publication of the National Bureau of Economic Research. Dr. Kendrick broke down gross national product totals (measured in 1929 dollars) into (1) that portion required for the maintenance of population and cap ital stock, and (2) the margin over maintenance. The m argin over maintenance, in turn, is allocated to (1) national security, (2) pro vision for the growth in population (both consumer goods and cap ital), and (3) the margin for economic growth, both consumption and capital. The accompanying table shows the percentage distribution of gross national product, by time periods, for each of these uses. F or present purposes, columns 3 and 5 are most im portant—and disturbing. The margin over maintenance of population is, in the absence of major war and major depression, relatively inflexible. E x cluding W orld W ar I I and the great depression, it has ranged within 16.6 and 14.6 percent of gross national product. As the nationalsecurity component of this margin increases, the growth component is squeezed, with the major squeeze applied to capital growth. 517 ECONOMIC GROWTH AND STABILITY Percentage of gross national product for — 1 2 Heal gross national product 1889-98............ . 1899-1908_______ 1909-18.......... ........ 1919-28_________ 1929-36.................. 1937-47.................. 1948-53............— . 100 100 100 100 100 100 100 3 4 5 Maintenance Provision for Margin for economic of population Maintenance growth of progress population (including of national (consumer consumer security and capital and capital) Consumption Capital goods) 83.1 83.5 85.1 85.4 97.7 76.9 83.4 0.5 .8 3.3 1.7 .9 17.5 9.2 6.7 6.9 6.0 5.2 3.5 3.1 4.5 1.2 1.6 1.3 2.0 .1 2.2 .9 8.5 7.2 4.3 5.7 -2 .2 .3 2.0 The estimates bring out the possible impact of war and depression on long-term growth. But there is a difference: W ar helps to finance its own extravagances, but prolonged depression never does. Even though sudden spurts in m ilitary expenditures may involve some, and perhaps a large, element of self-financing (in both real and monetary term s), sizable and prolonged m ilitary expenditures probably do so to a lesser extent, and conceivably might not at all. In the long run the growth outcome may depend upon the extent to which military re search and development adds back to gross national product a stimulus that offsets in part the real cost of the military. Over a long enough period there might be a complete offset. In any event, the impact of military expenditures on both growth and stability involves far more than consideration of the expenditures themselves. Revenue sources are vital. Faced with the long-run prospects of large-scale military outlays, revenue sources based on nongrowth considerations—emergency war needs, social-reform pol icies, and simple ease of collection—need constant reexamination. Eco nomic growth may be regarded as an economic, political, and military necessity. To the extent that a large-scale military establishment also continues as a necessity, growth needs may require that it be increas ingly a charge against consumption.
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