Ben Bernanke, Michael O’Hanlon, and Mark Muro on the future of defense spending and its economic impacts

At just over 3 percent of gross domestic product, total U.S. military spending is almost $600 billion a year, constitutes around 5 percent of total national industrial output, and accounts for a major share of the economy in certain regions across the U.S., including as much as 13 percent in Virginia and about 6 percent in the DC/Maryland area.

Since 2010, however, the defense budget has been steadily declining. As the U.S. military ramps down its presence overseas, and military industries are squeezed by long-term trends on multiple fronts, how will the American economy fare?

This question framed a recent event hosted by the Foreign Policy and Economic Studies programs at Brookings, and moderated by Director of Research for Foreign Policy Michael O’Hanlon. Former Federal Reserve Chair and Distinguished Economics Fellow in Residence Ben Bernanke joined the discussion, along with the Metropolitan Policy Program Policy Director Mark Muro

Here are some key takeaways from their discussion:

Cuts to defense funding were not motivated by defense needs and slowed the economic recovery

Ben Bernanke kicked off the event by arguing that while defense spending is closely connected to economic growth, “generally speaking, it’s best to keep military preparedness goals separate from the short-run cyclical [economic] considerations.” Moreover, when it comes to the defense budget cuts made during the recent period of economic recovery, he believes mistakes were made. Outside of the drawdown in forces in Iraq and Afghanistan, Bernanke said the cuts in military spending were not motivated by changes in defense needs and “were actually a negative in terms of our economic recovery.”

Military research and development (R&D) helps fuel the private sector

“There are plenty of examples where military technology has been extremely important for private sector growth,” Bernanke said. “One example I like is laser technology, which began as a military application, but there have since been something like 55,000 patents related to laser technology, and the things that have come out of that include laser surgery, barcodes, DVD players, and a whole range of things.”

Bernanke acknowledged the benefits of these developments, stating that “by far the most important [impact of defense on economic growth] in the United States has been the linkage between defense military appropriations and broader technological trends,” but added the caveat that “if the same money had been spent on basic science [research] that would have probably been an even better strategy… but the political system is not good at making long-run investments with uncertain impacts. But overall, military R&D has had positive spillovers in the private sector.”

Mark Muro echoed Bernanke’s sentiment regarding the importance of technological advances resulting from defense funding, arguing that in many respects, the defense budget has functioned as the nation’s de facto economic development policy.

“The defense budget has turned out to be the only place where one could argue for and deliver certain kinds of useful industry innovations,” said Muro. “Since World War II, the DOD has arguably been the nation’s steadiest and most creative supporter of technology progress.” In that sense, Muro continued, “defense expenditures have functioned as a stealth industrial policy in the absence of a consistent, urgent, non-military development strategy.”

The defense budget shouldn’t be a separate economic driver, but rather one part of a broader strategy

Though Muro praised the military’s frequent and important investments in technology, he warned that recent and forecasted declines in defense funding make it critical to ensure that the nation retains a broad, national strategic plan for economic growth.

“As we think about the size of the military, [we must] consider the rest of our economic strategy and ensure that we protect and build these industries,” said Muro.

The military as an employer

When it comes to the workforce participation, Michael O’Hanlon pointed out that there are currently 1.4 million active duty members of the military, plus an additional civilian workforce that is nearly 800,00 strong working for the Department of Defense and around 900,000 men and women in the reserves, which altogether represent “a couple of percent” of the U.S. workforce.

Bernanke noted that the need to employ 1.4 million active duty soldiers is itself a cost borne by the rest of the economy. This cost could be mitigated by the training and skills that the soldiers subsequently take to the civilian economy. Unfortunately, Bernanke said, the research suggests that a soldier re-entering the private sector will typically have a lower initial wage than a similar person who never served in the military.

Nonetheless, while in uniform, U.S. military personnel today are reasonably well compensated, O’Hanlon argued, with the latest DOD study on the issue suggesting that overall compensation (not including pensions) for enlisted military personnel of given age, experience and skill levels exceeded that for about 85 percent of comparable cohorts in the broader civilian economy. 

Watch the full event video here: