The Relationship between Defense Spending and Economic Growth in the United States

Abstract

Recent increases in U.S. defense spending have renewed interest in the defense—growth nexus. The Feder-Ram—based models have traditionally been used in examining this relationship, but Dunn, Smith, and Willenbockel recommend the augmented Solow model because of several weaknesses inherent in the Feder-Ram model (including its static nature, simultaneity bias, and multicollinearity issues). The augmented Solow model addresses these issues, but it has weaknesses too. Thus, by employing both the Feder-Ram and augmented Solow models, the author tests the defense—growth nexus in the United States for 1954 through 2005. The results indicate that defense spending does not significantly affect the U.S. economy.