Defence spending and economic growth∗

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Abstract
In this paper the connection between defence spending and economic growth is investigated. The econometric approach is based on a two sector production function model of the economy. In light of the plausibility of significant cuts in defence spending during the forthcoming years, a quantitative analysis is made assessing the effects of defence spending cuts. The results reveal that there is a positive and significant relation between defence spending and economic growth. But, findings also indicate that the responsiveness of economic growth to changes in defence spending is small. If there are significant cuts in defence spending—except for very large sustained cuts—the adverse effects on the economic growth of the United States should not be large.

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