Defense Expenditures over the Last Half Century and Prospects for the Near Future

September 26, 2017

One common complaint heard about the current recovery is that the rate of growth has been particularly slow. In the past I’ve noted that omitting defense spending from GDP, the shortfall is not so large. Given past correlations, I believe we may soon see a pickup in defense spending which will boost GDP growth relative to what it otherwise would have been.

This is not because defense expenditures systematically rise during recessions.

Figure 1: Defense consumption and defense spending in bn. Ch.2009$ (blue, log scale). NBER defined recession dates shaded gray. Source: BEA 2017Q2 2nd release.

Notice that in several cases defense expenditures fall, in others it rises. Hence, defense spending does not always rise in a manner consistent with counter-cyclical fiscal policy.

Rather, defense spending has tended to rise during the last two periods of Republican presidential administrations. Defense spending in 2017Q2 has risen 0.3% relative to 2016Q4, but it is too early to tell if this means anything given fluctuations in spending.

Figure 2: Defense consumption and defense spending in bn. Ch.2009$ (blue, log scale). Light blue periods denote Democratic presidential administrations, light red denote Republican. Source: BEA 2017Q2 2nd release.

One has to go back to the 1960s to see a rapid rise in defense spending during a Democratic presidential administration (associated with the Vietnam war). Defense spending also rose somewhat during the Carter Administration, although it noticeably accelerated during the Reagan Administration (this is shown by the steepening of the slope in 1981Q1, since the series is plotted on a log scale).

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