[Congressional Record Volume 141, Number 127 (Wednesday, August 2, 1995)]
[Senate]
[Pages S11223-S11224]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


              LOWER MILITARY SPENDING YIELDS HIGHER GROWTH

   Mr. SIMON. Mr. President, I refer to my colleagues an 
article from the July 15 issue of The Economist. The article discusses 
the economic impact of reduced military spending in light of worldwide 
declines in defense budgets over the last decade. While the impact of 
such a peace dividend is difficult to calculate, the article brings up 
an interesting point:

       In the long run, most economists think that lower defense 
     spending should stimulate growth. One reason for this is that 
     cash can be switched from defense to more productive areas 
     such as education. A second is that smaller military budgets 
     should lead to lower overall government spending, hence lower 
     borrowing than would otherwise have been the case. As a 
     result, interest rates should be lower, stimulating private 
     investment.

  The article also refers to a recent IMF study which finds a clear 
relationship between lower military spending and increased economic 
growth. It concludes that a 2-percent per capita rise in GDP will 
result from the decreased spending worldwide in the late 1980's. Its 
authors also estimate that if global military spending is reduced to 2 
percent of GDP--the United States currently spends 3.9 percent--the 
dividend will eventually lead to a rise in GDP per head of 20 percent.
  I bring this to light as we consider increasing military spending by 
$7 billion, while making deep cuts in education, job training, health, 
and programs for the poor. Already, our Nation spends more on the 
military than the next eight largest militaries combined. It is a 
mistake to turn back against global trends to a course which, in the 
long run, will lead to lower growth and hurt our international 
competitiveness.
  This Congress skewed priorities of spending more on the military and 
less on social investment will nullify the dividend we hope to reap 
through balancing the budget and lowering interest rates. Simply put, 
investment in a B-2 bomber creates a plane that sits there incurring 
operating costs, but investment in a child's education creates 
opportunity, productivity, and long-lasting benefits to society.
  I ask that the article be printed in the Record.
  The article follows:
                  [From the Economist, July 15, 1995]

     Fewer Bangs, More Bucks--Since the End of the Cold War, 
     Military Spending Has Declined in Most Countries, Yet the 
     Promised ``Peace Dividend'' Is Proving Elusive
       Francis Fukuyama, an American political analyst, claimed in 
     1989 that the collapse of communism heralded the end of 
     history. Few believed him, but many looked forward to the end 
     of at least one aspect of the cold war: high defence 
     spending. No longer would countries waste precious resources 
     building tanks and bombs. Instead, they could use the cash 
     for more rewarding activities: higher social spending, more 
     capital investment or increased aid to the world's poor. Was 
     this optimism warranted?
       That overall defence spending has fallen is uncontested. 
     According to the United Nations' latest World Economic and 
     Social Survey, world military expenditure decreased at an 
     average rate of 7.2% a year between 1988 and 1993. The 
     biggest declines came in former Warsaw Pact countries, where 
     defence spending fell by an average of over 22% a year. In 
     America, it fell by 4.4% a year (though the Republican 
     Congress is planning to stem this decline). The cuts are not 
     as steep as some had hoped; but the share of CDP devoted to 
     military spending has fallen everywhere (see chart).
       Assessing the economic impact is harder. One crude notion 
     is to calculate what countries would have spent on defence 
     without the cuts. A previous UN report in 1994 suggested that 
     had governments maintained their defence budgets in real 
     terms from 1988 to 1994, global defence spending would have 
     been $933 billion higher than it was. That suggests a peace 
     dividend of almost $1 trillion. But such a calculation is 
     flawed: 1987 was a year of high defence spending; had another 
     base year been chosen, the dividend would probably be lower. 
     More important, the sums fail to take into account the 
     broader economic impact of reduced defence spending.
       As with any big reduction in public spending, defence cuts 
     tend to reduce economic activity in the short term. That may 
     cause unemployment to rise, particularly in regions where 
     defence-related industries are heavily concentrated. Between 
     1988 and 1992, for instance, the increase in the unemployment 
     rates of the four American states that are most dependent on 
     defence spending--Connecticut, Virginia, Massachusetts and 
     California--was some two-and-a-half times greater than that 
     in the rest of the country. Such regional effects often make 
     defence cuts politically awkward.
       In the long run, however, most economists think that lower 
     defence spending should stimulate growth. One reason for this 
     is that cash can be switched from defence to more productive 
     areas such as education. A second is that smaller military 
     budgets should lead to lower overall government spending, and 
     hence lower borrowing, than would otherwise have been the 
     case. As a result, interest rates should be lower, 
     stimulating private investment. Some economists also argue 
     that lower defence spending will result in fewer distortions 
     in an economy. They point in particular to anti-competitive 
     mechanisms that often feature in military contracts or the 
     trade preferences given to military imports.
       But big defence budgets can also have positive side-
     effects. In countries such as South Korea and Israel, spin-
     offs from military research and development have helped to 
     foster expertise in civilian high-technology industries. In 
     poor countries with low levels of education and skills, 
     military training might be a good way to improve the 
     educational standard of the workforce. During the cold war 
     some poor countries also relied on the rival superpowers not 
     just for military assistance, but also for other aid. If 
     their erstwhile benefactors cut this aid along with military 
     support, it might leave them with fewer resources overall.
       Until recently, there has been little conclusive evidence 
     about the long-run economic impact of lower defence spending. 
     This is partly due to the difficulty of getting 

[[Page S11224]]
     comparable data, and to the problem of separating short-term from long-
     term consequences. But in a recent working paper\1\ Malcolm 
     Knight, an economist at the IMF, and two colleagues, use a 
     long-run growth model and sophisticated econometric 
     techniques to measure the effect of military spending on 
     growth in 79 countries between 1971 and 1985. They find a 
     clear correlation between lower outlays and higher growth.
     \1\``The Peace Dividend: Military Spending Cuts and Economic 
     Growth''. By Malcolm Knight, Norman Loayza and Delano 
     Villanueva. IMF, May 1995.
---------------------------------------------------------------------------
       The authors then simulate what the long-run effects of the 
     decline in military spending of the late 1980s are likely to 
     be. Unsurprisingly, they are positive. Industrial countries, 
     for instance, can expect a long-run absolute increase in GDP 
     per head of 2% from the spending cuts that occurred up to 
     1990.
                            delayed payment

       Mr. Knight and his fellow authors then try to estimate what 
     the long-run effects of further cuts in world defence 
     spending might be. They assume that global defence spending 
     is reduced to under 2% of GDP (the current level in Latin 
     America, the region with the world's lowest defence 
     spending). If industrialised countries achieve such a target, 
     the authors expect an eventual increase in their GDP per head 
     of 20%. In other regions, such as Eastern Europe, the effects 
     will be even greater. However, it will take a long time for 
     these benefits to work through. Even after 50 years, for 
     instance, the improvement in the level of GDP per head in 
     rich countries would have reached only 13.2%.
       Unfortunately, the model does not explain whether this 
     increase would be attributable to more productive public 
     investment, or to lower interest rates. In practice, the cuts 
     in military spending since the 1980s appear to have been used 
     to keep overall public spending under control. This means 
     that the clearest long-term economic benefit from the end of 
     the cold war is likely to come from lower interest rates--
     unless, of course, public spending rises for other reasons.
       For those defence employees faced with the sack, it may be 
     scant comfort to hear about the long-term gains to the 
     economy that accompany fewer military bases. But, providing 
     that governments keep public spending in check, the world 
     will indeed benefit from a substantial peace dividend--even 
     though it will not produce the immediate pay-off that 
     optimists were hoping for.
     

                          ____________________