ABSTRACT
This chapter discusses the macroeconomic effects of defense and nondefense spending. According to traditional Keynesian macroeconmic theory, nondefense or government spending would have aggregate demand or output effects either through direct channels on spending or indirectly through consumers who view the increase in government debt as increases in their wealth. Robert J. Barro finds that defense spending associated with wars is transitory while other changes in defense spending yield permanent effects. Granger-causality tests for both defense and nondefense spending reveal no significant impact of the variables upon the economic performance variables. The empirical results on employment effects are indeed mixed, Edward Greenberg finds defense spending to have a positive impact upon employment levels. Seymour Melman, Alan Garner and James E. Payne argue that defense expenditures divert resources from more productive uses in the civilian sector, and thus have a negative impact upon economic growth.
