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The U.S. Should be Careful about Increasing Defense Spending

Defense spending is set to increase in response to Russia’s unprovoked invasion of Ukraine. While this may seem like the right move, we should be careful not to spend more than what is necessary.

With war raging on NATO’s eastern border, improving America’s military capabilities and readiness seems smart. But bolstering defense spending usually comes at a high cost, with wasteful rent-seeking from special interest groups and government agencies looking to benefit from a crisis. More importantly, defense spending also creates a substantial distortion in the economy, which reduces productivity and living standards. Ignoring these issues may make the government increase defense spending beyond what might actually be necessary.

And the current sentiment on Capitol Hill regarding defense spending is shifting. Normally, it’s Republicans who are prone to increasing the defense budget and Democrats who resist such policies. But today, even top Democrats have admitted that the U.S. should boost its military appropriations beyond the $770 billion expected just two weeks ago. Indeed, the House is already about to approve this week a $14 billion package in emergency funds to Ukraine. And last week, President Biden approved a $350 million package of weapons, the largest single transfer of arms to another country.

However, government officials seem to overlook that the defense sector is highly susceptible to rent-seeking and lobbying from private firms. Since the government is the sole consumer of their products and services, defense contractors do not engage in the usual price and quality competition as in the market, but rather in political influence competition. Instead of investing resources and time to reduce costs or improve the quality of their products, defense contractors waste those resources and time lobbying the government to get defense contracts. These lobbying efforts eat up a significant chunk of these contractors’ funds. The result is that military products end up being more expensive and of lower quality.

Russia’s unprovoked invasion of Ukraine is prompting an increase in military spending.

Moreover, the government itself not only allows but also encourages rent-seeking. Government agencies have no incentive to reduce costs. They tend to overinvest beyond their assigned budgets. That creates an incentive to grow in size and spend resources on observable outputs, even if they are entirely unnecessary and wasteful. Consequently, government bureaus are eager to find defense contractors providing expensive goods and services that allows them to spend their budgets. Since ultimately the government is funded by taxpayers’ money, this process only results in concentrated benefits for military producers and the government and dispersed costs on everyone else. This explains why the stock prices of defense contractors has skyrocketed in the past few days.

The other, not so obvious problem that defense spending brings is a significant distortion of the economy. Resources are always scarce, and using them for military purposes means that they cannot be used for other purposes elsewhere. As mentioned before, the defense sector does not follow the rules of the market, so defense contractors have no incentive to prioritize efficiency in their manufacturing process. Hence, the inputs they demand will tend to be employed less productively than when used in the private sector, in which companies always have to be efficient to survive. Such a reduction in productivity and alteration of the economy unfailingly decreases the U.S. standards of living.

Even worse, the distortion of the economy is not just temporary. The structural impact that defense spending produces is similar to any other government intervention because it creates a wholly new set of profit opportunities that otherwise would not have existed. Defense contractors will increase the demand for their inputs, thus increasing the producers’ profits of these inputs. Such profit opportunities will then draw the attention of new entrepreneurs who will be eager to engage in these now more profitable military-related activities. That, in turn, means that there will be fewer entrepreneurs producing non-military goods and services. This also reduces the efficiency and productivity of the economy, with a corresponding decrease in the U.S. economic welfare.

Russia’s reckless invasion of Ukraine is a dangerous threat to the world. However, increasing the U.S. military budget without considering the complex problems of such a measure could lead the government to raise defense spending beyond what is necessary. Before expanding the already massive $770 billion military budget, it should be taken into account that both defense contractors and government officials exploit the lack of control in military spending to engage in lobbying and wasteful activities while claiming to provide defense and security. At the same time, even more important is the fact that defense spending diverts resources, both in terms of capital and entrepreneurial ingenuity, away from productive activities towards unproductive military activities. Therefore, in looking for more safety, the U.S. will instead become much poorer.