Military Spending and Growth: Empirical Evidence from a Post-Keynesian Model

Abstract

This paper revisits the military spending - economic growth nexus by introducing a simple Post-Keynesian model that accounts for both the direct and indirect effects of military expenditure, specifically through the channel of income inequality. A simulation analysis distinguishes between different types of military expenditures, showing that military wages are less harmful - and can even be beneficial - compared to arms purchases, which exacerbate inequality and diminish growth. Decomposition analysis reveals that even when the direct effect of military spending is mildly positive, the inequality-induced indirect effect is strongly negative, resulting in an overall negative impact on growth. Furthermore, using panel data from 150 countries for 1960-2019 and applying Seemingly Unrelated Regression (SUR) methods, we find that military spending negatively impacts economic growth both directly and indirectly by increasing income inequality. Our findings underline the importance of considering the composition of military expenditures and the mediating role of inequality in evaluating defense spending's macroeconomic consequences.