ABSTRACT
It is commonly perceived by both government and non-governmental officials that US government defense spending has a significant effect on the performance of the US economy. The perceived effects of defense spending permeate the actual budgetary debate every fiscal year. The budget debate for fiscal 1991 concerning the size of the federal government deficit, reductions in defense and non-defense spending increases, and possible tax increases is simply the latest version of the continuing argument concerning the links among these budgetary, fiscal, and macroeconomic variables. Is it better to reduce budgetary increases in the defense and/or non-defense areas to reduce the size of the federal budget deficit or to increase taxes? Do increases in defense spending necessitate, for fiscal reasons, tradeoffs in entitlements and other social programs? Do increases in defense spending spur economic growth and create employment without boosting inflation by tightening the money supply through deficit spending?
