Ex­perts: De­fense buildup won’t amp up econ­omy

Lim­ited im­pact seen if U.S. adds $54 bil­lion to the mil­i­tary’s bud­get.

Austin American-Statesman - - BUSINESS -

In­vest­ing another $54 bil­lion in the U.S. mil­i­tary won’t do much for the over­all econ­omy.

Pres­i­dent Don­ald Trump last week pro­posed a 10 per­cent in­crease in de­fense spend­ing. The ex­tra money will cer­tainly be felt in the com­mu­ni­ties sur­round­ing. But it only equates to 0.2 per­cent of gross do­mes­tic prod­uct.

And sig­nif­i­cant cuts in other pro­grams, in­clud­ing for­eign aid and diplomacy, may be re­quired to pay for the de­fense in­crease.

“If it’s at the cost of pre­ven­ta­tive mea­sures, that’s not go­ing to help our econ­omy or our se­cu­rity,” said Con­stance Hunter, chief econ­o­mist at ac­count­ing firm KPMG.

Granted, Trump pro­posed the in­crease more as a way to strengthen Amer­ica’s mil­i­tary than to cre­ate jobs.

Un­clear im­pact

The im­pact on the econ­omy will de­pend on how Trump spends the $54 bil­lion, ex­perts say. The

pres­i­dent has yet to of­fer specifics.

Dur­ing the cam­paign, Trump of­ten said the mil­i­tary is too small to ac­com­plish its mis­sions, and he pledged to in­crease the Navy’s ac­tive fleet to 350 ships. Cur­rent plans call for ex­pand­ing the Navy to 308 ships from the cur­rent 272.

The im­pact of re­cruit­ing more sol­diers and pay­ing for their train­ing and wages would be dif­fer­ent than the im­pact of or­der­ing more naval ships or F-35 fighter jets. In­vest­ing more in pro­duc­ing ships and jets would likely pro­duce fewer jobs.

And a large por­tion of this in­crease could be spent in­ter­nally at the de­fense depart­ment.

“I would expect that much of the in­crease of the de­fense bud­get we’re talk­ing about would be con­sumed in­ter­nally by the De­fense Depart­ment,” said Todd Harrison, who an­a­lyzes de­fense spend­ing for the Cen­ter for Strate­gic & In­ter­na­tional Stud­ies.

With so much of the U.S. econ­omy de­pen­dent on con­sumer spend­ing, de­fense spend­ing doesn’t make a sig­nif­i­cant im­pact, said Ford­ham Univer­sity econ­o­mist Gi­a­como San­tan­gelo.

“If his in­ten­tion is eco­nomic growth, he shouldn’t be talk­ing about de­fense spend­ing. If he wants to talk about de­fense, he should talk about our de­fense needs,” San­tan­gelo said.

Tough trade­offs

To pay for the in­crease in de­fense spend­ing, Trump has pro­posed $54 bil­lion in cuts to for­eign aid and do­mes­tic agen­cies such as the En­vi­ron­men­tal Pro­tec­tion Agency.

Those cuts are likely to draw strong op­po­si­tion from Democrats in Congress, and the plan has been crit­i­cized by some Repub­li­cans who ques­tion Trump’s de­ci­sion to ex­empt So­cial Se­cu­rity and Medi­care from cuts.

“This is re­ally a non­starter,” said Richard Im­mer­man, a Tem­ple Univer­sity pro­fes­sor who worked for the Of­fice of the Di­rec­tor of Na­tional In­tel­li­gence from 2007 to 2009 un­der for­mer Pres­i­dent Ge­orge W. Bush.

Rea­gan plan?

Trump’s pro­pos­als to boost mil­i­tary spend­ing and cut taxes might re­mind some of for­mer Pres­i­dent Ronald Rea­gan’s ap­proach, but this pro­posed spend­ing would still be well be­low the rel­a­tive level Rea­gan spent dur­ing the arms race with the Soviet Union.

If ap­proved, the $54 bil­lion in­crease in spend­ing would mean the coun­try was spend­ing 3.4 per­cent of its Gross Do­mes­tic Prod­uct on de­fense. That would be up from 3.2 per­cent of GDP last year.

Dur­ing the 1980s, Rea­gan’s de­fense spend­ing reached 6 per­cent of GDP and ac­counted for as much as 28 per­cent of the fed­eral bud­get. Rea­gan’s Cold War mil­i­tary buildup and tax cuts bol­stered em­ploy­ment among de­fense con­trac­tors.

“In a lot of ways, I think Trump is fol­low­ing the Rea­gan model,” said Howard Stof­fer, a pro­fes­sor at the Univer­sity of New Haven who worked at the State Depart­ment for 25 years. “But Congress is go­ing to be un­likely to give him a $54 bil­lion in­crease.”

In­vest­ing bat­tle

While mil­i­tary com­mu­ni­ties and econ­o­mists wait to see how the spend­ing drama plays out, Wall Street is al­ready pick­ing win­ners.

Since Trump was elected, the S&P de­fense and aero­space sec­tor has gained 17.4 per­cent, which is well above the over­all 11.6 per­cent gains the S&P 500 recorded dur­ing the same time.

Whether the im­proved for­tunes of the sec­tor trans­late into new jobs is un­clear. The com­pa­nies that make mil­i­tary equip­ment use ad­vanced man­u­fac­tur­ing tech­niques, so there are fewer jobs in­volved in mak­ing the planes and ships than there were in the past.


Pres­i­dent Don­ald Trump re­acts after speaking March 2 on the air­craft car­rier Ger­ald R. Ford in New­port News, Va. If ap­proved, the $54 bil­lion rise in de­fense spend­ing would mean the U.S. was spend­ing 3.4 per­cent of its Gross Do­mes­tic Prod­uct on de­fense. That would be up from 3.2 per­cent of GDP last year.

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