Defense spending and the state economy: The impact of federal defense spending on state level unemployment and per capita personal income

Annually accounting for the largest portion of federal discretionary appropriations, many Members of Congress and industry stakeholders argue that expenditures from the Department of Defense are a significant driver of the economy at both the national and local level. Based on this observation, I examine the impact of federal defense spending on the economy at the state level. Specifically, I test the hypothesis that federal defense spending is associated with lower unemployment rates and higher levels of per capita income. Using federal defense spending data provided by the U.S. Census Bureau's Consolidated Federal Funds Report (CFFR) for every five years between 1990 and 2010, I find that my hypothesis is partially supported. While defense spending is associated with decreases in unemployment, it is also associated with decreases in per capita income levels. Conversely, non-defense spending is associated with increases in unemployment, but decreases in per capita income. At the same time, per capita defense and per capita non-defense funding are both associated with increased unemployment and increased per capita income levels. To further assess these inconsistences, I examine the impact of population on defense and non-defense funding received by a state and find that increases in population are associated with increases in the defense and non-defense funding received by a state. I conclude that while defense spending may have a minor, though positive impact on the state economy, it is likely that the distribution and real economic impact of both federal defense and non-defense funding is a result of state population levels.