Cato Policy Analysis No. 114 November 30, 1988

Policy Analysis

U.S. Military Spending In The Cold War Era:
Opportunity Costs, Foreign Crises, and Domestic Constraints

by Robert Higgs

Robert Higgs is the William E. Simon Professor of Political Economy at Lafayette College and the author of Crisis and Leviathan: Critical Episodes in the Growth of American Govern- ment (Oxford University Press, 1987).

Executive Summary

Anyone who has studied elementary economics has encountered the idea that a society's output may be either "guns" or "butter" and that, once all resources are employed, having more of one entails having less of the other. This categorization of output is only a metaphor to make more concrete the concepts of production possibility and opportunity cost. I propose, however, to take the categorization seriously in order to inquire into how the costs of America's cold war military activities have been distributed between the private sector and the governmental nonmilitary sector. Accordingly, I extend the familiar metaphor slightly, dividing the U.S. gross national product (GNP) into three exhaustive classes: government military purchases, denoted by G-M; all government --federal, state, and local--nonmilitary purchases, denoted by G-NM; and all private purchases, whether for consumption or investment (plus net exports), denoted by _. This categorization permits one to view the societal opportunity costs of military purchases as broadly as possible. One is examining not just the division of the federal budget but the division of the entire national flow of production (as conventionally measured).

To provide empirical terms of reference for the analysis, I consider periods of military mobilization to be defined by a rapid, uninterrupted, multiyear increase of real military outlays, and periods of demobilization by a substantial decrease of real military outlays. In the United States since 1948, three mobilizations have occurred, during 1950-53, 1965-68, and 1978 to the present. The first two were followed by demobilizations. The third (as of this writing) is still in progress--real military spending increased by about 3 percent in calendar year 1987--though budgetary authorizations and appropriations already legislated make an eventual spending retrenchment almost certain.

An increase of the share of G-M in GNP can occur at the expense of either the share of _ or the share of G-NM or of both. A natural distinction may be drawn between "capitalist" buildups, when the share of G-NM declines, and "socialist" buildups, when the share of P declines. Obviously, mixed cases are possible. Demobilizations may be viewed in the same way.

In light of the empirical findings, one may reconsider the institutions and processes by which resources are allocated among _, G-M, and G-NM. Of particular concern is the role of ideology and information. Who knows what, and who believes what, about national defense requirements and capabilities? How is the existing information used in the political processes that determine the broad allocation of resources? How stable are public preferences, and what makes them change as they do?

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