Raising Military Spending Increases Output

Other forms of government spending are presumably similar

A WHILE back I noted a post by a major tea-party figure eagerly supporting the bog-standard mainstream economic assumption that higher government spending creates higher economic output...provided it was military spending. Most people would acknowledge that there's no particular reason why military spending should be different than other kinds of government spending on this score. But it turns out that military spending is actually a singularly good proxy for measuring just how big the multiplier for government spending is. A new paper by Jón Steinsson and Emi Nakamura, assistant economics professors at Columbia, looks at boosts in military spending over the past half-century and separates their impacts in states with lots of military contractors and personnel, and those with relatively few—specifically, California and Illinois. The difference allows them to run a regression to see how much the extra military spending boosted the economy.

In recent work, our approach has been to exploit regional variation in military spending in the US (Nakamura and Steinsson 2011). We use the fact that when the US embarks upon a military buildup, there is a systematic tendency for spending to increase more in some states than others. For example, when aggregate military spending in the US rises by 1% of GDP, military spending in California on average rises by about 3% of California GDP, while military spending in Illinois rises by only about 0.5% of Illinois GDP. Under the assumption that the US doesn't embark upon military buildups like the Vietnam War because states like California are doing badly relative to states like Illinois, we can use regional variation associated with these buildups to estimate the effect of a relative increase in spending on relative output. Our conclusion is that when relative spending in a state increases by 1% of GDP, relative state GDP rises by 1.5%.