Abstract
This paper employs an applied general equilibrium model to simulate the long-run effects of reductions in U.S. defense expenditures. In the long-run these reductions significantly affect only the output of the defense and government industries, and do not significantly affect the distribution of income or the relative price of capital and labor. The structure of the tax or expenditure changes which accompany defense reductions may cause large allocative and distributional effects. Thus, the fiscal decisions which accompany defense expenditure reductions are the key to determining their impact.
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