Will Obama's military cuts hurt the economy?

(MoneyWatch) 

President Obama and Pentagon leaders late last week unveiled a new defense strategy for a smaller, more flexible military force, which the president says will prepare the nation for the threats of the future while restoring balance between the defense budget and domestic spending.

The plan would cut defense spending by 10 percent over the next decade, and there are worries that this could harm our ability to recover from the recession and potentially lower long-run economic growth.

How valid are these concerns? Beginning with the worry about the effect of the cuts on the recovery from the recession, anything that reduces spending on domestic goods and services will slow the economy and hurt our ability to recover. Thus, if cuts to defense spending cause the demand for goods and services to fall substantially, there would be a corresponding decline in gross domestic product (GDP), and a slower recovery.

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Will the cuts cause significant declines in spending on domestic goods and services? To answer this, there are several things to consider: the timing of the cuts, the degree to which the cuts come from domestic rather than foreign spending, the size of the cuts, and their composition.

The first thing to note, in a point made by Ezra Klein, is that although the growth of defense spending will be reduced, that growth will still be positive. Thus, relative to the old, higher spending trajectory for defense spending, this is certainly a reduction -- but there will still be growth over time. Therefore, while it's likely that economic growth will be lower than otherwise as a result of the cuts, the net impact  of defense spending will still be positive.

The other factors are more difficult to evaluate. As noted in The Washington Post, "The strategy review will not spell out potential $480 billion to $1 trillion in spending cuts that the Pentagon is facing over the next decade. Details of those reductions will begin to trickle out next month." So we don't know the composition of the cuts, their timing, whether they will come from spending in the U.S. or spending in foreign countries, and so on.

But we do know the size of the cuts -- an average of to $48 billion to $100 billion per year -- and that is enough to matter, especially to a recovering economy. And although the exact cuts are unknown, it's probably a safe bet that several weapons system will be cut. (For example, there is already talk that Boeing (BA) is canceling plans for a new factory). Again, those types of cuts would matter.

However, I expect many of the cuts will be delayed. That's good news for the recovery, but it also means the cuts will need to be even larger in the latter years of the 10-year window for spending reductions. But even if the cuts are larger than average in the later years, so long as the economy is relatively healthy when the cuts are made, they shouldn't have large negative effects. However, if the recovery is very slow -- if there are still many years to go, as many analysts expect -- then the chances that these cuts will hit too soon increases quite a bit.

Turning next to the concerns about long-run growth reported by Binyamin Appelbaum of The New York Times, the worry is that cutting military spending on research and development (which represents 12 percent of total military spending) will reduce technological spillovers to the private sector and harm long-run economic growth.

There is less than full agreement among economists about the degree to which these types of spillovers are important to economic growth. However, even if there are important spillovers, as Ezra Klein notes, there are more effective ways to produce the type of R&D that enhances future growth than relying upon spillovers from military technology. Thus, to the extent this is a problem, the answer is to redirect the spending to non-military research efforts.

There are concerns about the economic impact of the cuts to defense spending in both the short-run and long-run. However, those concerns are likely overblown. In short short-run, so long as the cuts to overall government spending are delayed until the economy is on better footing -- as they are likely to be -- they should not have a large impact on the economy. And in the longer run, there should not be any substantial harm to economic growth so long as research outside of the military receives adequate support.

[tsigili]

No.......they will endanger the country's security and well being, which in turn, can damage the economy.

[Martha12345]

One sad result will be the large number of unemployed vets. To come home to an economy in the tank is going to be very rough on these fine young men and women. Some could be kept in the military and put along the border, but even then, it would only be a drop in the bucket.

[omnibus66]

My personal experience in the military (Air Force) was that a 10% cut would not affect the readiness or performance capability, but with a big IF. If the cuts were taken up by the colossal waste of manpower and material which is almost everywhere to be seen, then a 10% cut would be almost meaningless. But sadly, the ones who run the show enjoy the fruits of the waste, so the cuts will end up in the wrong places.

[mecanik-2009]

Taxing people to put others to work doesn't add up. The amount of corruption in the government system eats up the profit of adding workers. Let private business handle creating the jobs. The over priced military hardware takes away more jobs then it creates by taxing legitimate businesses out of business.

[ludvig1-2009]

When they closed the Nuclear Submarine Shipyard at Mare Island in Northern California, 10,000 jobs were lost. Result: City of Vallejo declares bankruptcy and crime soars.

[melbatom]

No the cuts will not hurt matters that are critical. I bet the military made the offer to cut where they are and will and with the 10 year window there will be little effect. The project says that the military intends to begin a NEW operational program unknown to the general public at this stage which will increase our effectiveness in doing the job required of the military. MAKE NO MISTAKE about his our security and existence is dependent on our ability to defend and destroy an enemy who attacks.

[formerlyluvnut]

In one way yes but in another way it will help much much more.

[Toddwest]

The Military budget is 2/3rds too large to sustain over extended decades (10 plus years) when the economy is BOOMING. As things have been for the last five years and will continue to be for years to come, the United States simply cannot afford to spend this type of money, and that is a hard cold reality. Even at 1/3 the size, the military might of the United States is capable of beating any standing army, in fact multitudes of them together. Advances in technology also means that fighting enemies in far away lands will continue to get cheaper. A nation, any nation, with over a half trillion a year in military expenditures is in way over its head to pay for it.

[B_Erhart]

...research outside of the military receives adequate support.
I believe the seed corn was tossed into the fray back in Newt's
stint as speaker. Incessant continuing resolutions and no definite goal for energy, space or technology. ENTIRETY of South Korea has 45mbs broadband. I live 20 miles from Cleveland - 1.25 mbs the best you can get. Lets keep babysitting the world while this place rots in place. Untold trillions lined mil ind co coffers - now they can build in China, India etc.

[expatriate2]

There are 195 nations in the world and the United States has a military presence in 150 of them. Military cuts? You bet. But at the same time start paying attention to domestic programs.