Military spending and investment in the United States since World War Two

During the Cold War, high levels of military spending in the United States were accompanied by a debate as to whether the allocation of these resources to national security stimulated or retarded national economic performance. One key issue in this debate is whether the resources being allocated to the military came at the expense of new capital formation, or represented shifts from consumption. This dissertation investigates whether there was a trade-off between military spending and investment in the United States, using data for the years 1949 through 1988.; The empirical literature on the macroeconomic effects of military spending, and the links between military spending and investment, is reviewed. Many of the studies supporting a military spending-investment trade-off are found to be not applicable to the United States experience. One of the most widely utilized estimating frameworks is applied to postwar United States data; a significant trade-off is found but it appears to be limited to the years of the Korean and Vietnam Wars suggesting that a military spending-investment trade-off is a short-run, and reversible, phenomenon.; The relationship between military spending and investment is then analyzed using cointegration techniques. Only in first differences are the two variables integrated of the same order, indicating the absence of a long-run cointegrating relationship. This supports the earlier findings that the observed trade-off between military spending and investment is only short-run in nature. In addition, a long-term cointegrating vector linking military spending and consumption is found, suggesting a trade-off between these two items of expenditure. Thus, the main conclusion of this dissertation is that it is consumption, not investment, that has been reduced as a result of high levels of military outlays.