The effect of defense spending on the output of real Gross Domestic Product in the United States since 1947

The Effect of National Defense Spending on Real Gross Domestic

Product in the United States 1947-2011

Andrew E. ArterJames J. Jozefowicz

Indiana University of PennsylvaniaDepartment of Economics

Background

• Historical context & the change in the nature of war• Technology• 1947 as a base year

Purpose

• The “Inevitable Trade-Off”• Post September 11th

• Ongoing Debate • Recession and Stimulus

Previous Literature

• Smith and Tuttle (2007)

• 1947:Q2 to 2004:Q4

• No Positive Correlation

• Trade-Offs

Previous Literature

• Atesoglu (2007)

• 1948:Q1 to 2007:Q1

• Positive Correlation

• Sensitive to previous literature

Previous Literature

• Schultze (1982)

• Long term 30% effect

• Not Empirical

Data

• Sources: Federal Reserve of St. Louis (FRED), Bureau of Economic Analysis

• Quarterly Data: 1947:Q2 - 2011:Q2

• AR(1)

• All Real

• OLS

Variables

Variable Explanation Expected Sign

GDPD GDP Deflator (Quarterly % Change)

?

NDEF Real Non-Defense Spending +

DEF Real Defense Spending +

PCON Real Personal Consumption Expenditures

+

INV Real Gross Private Domestic Investment

+

INT Real Aaa Interest Rate +

URATE Unemployment Rate (Quarterly % Change)

-

Variable Explanation

GDP Real Gross Domestic Product

Dependent Variable

Independent Variables

Descriptive StatisticsVariable Mean St. Dev. Max Min

GDPD 50.28674 32.57418 112.1180 12.59800

NDEF 1225.584 392.3076 1849.986 389.8640

DEF 242.4568 213.9279 831.3000 17.50000

PCON 4312.429 2571.264 9392.700

1149.700

INV 886.9012 612.4344 2266.300 167.1000

INT 6.703800 2.833538 15.01000 2.536667

URATE 5.721401 1.641089 10.70000 2.600000

Descriptive Statistics

• Number of Observations: 256• Maximum DEF: $831.3 Billion (2010:Q3)• Minimum DEF: $17.5 Billion (1947:Q3)• St. Deviation DEF: $213.9 Billion • Maximum NDEF: $1.85 Trillion (2002:Q3)• Minimum NDEF: $389.9 Billion (1947:Q4)• St. Deviation NDEF: $392.3 Billion

Descriptive Statistics

• Maximum Real GDP: $13.33 Trillion (2007:Q4)• Minimum Real GDP: $1.77 Trillion (1947:Q3)• Maximum PCON: $9.39 Trillion• Minimum PCON: $1.15 Trillion• Maximum INV: $2.27 Trillion• Minimum INV: $167.1 Billion

Econometric Issues

• Serial Correlation (D.W > 1.789)

• AR1

• Delayed Effects of Spending

• Insignificant Variables

Results

Variable/Stat

Model 1 Model 2 Model 3 Model 4 Model 5

Constant -31.749(-0.145)

39.457(0.225)

71.051(0.565)

383.539(1.499)

262.348(1.512)

GDPD -3.211(-0.654)

-1.862(-0.400)

OMITTED 8.186(2.384)

7.237(2.318)

NDEF 0.658(7.758)

0.657(7.778)

0.662(7.949)

0.699(8.061)

0.718(8.297)

DEF 0.954(6.302)

0.947(6.346)

0.945(6.597)

0.968(5.885)

0.949(5.742)

PCON 0.825(20.735)

0.820(21.969)

0.829(21.971)

0.896(25.229)

0.909(26.399)

INV 0.875(25.765)

0.876(26.069)

0.874(24.791)

0.879(25.383)

0.902(28.704)

INT 2.905(0.815)

OMITTED 2.361(0.676)

2.681(0.729)

3.959(1.096)

URATE -8.367(-2.272)

-8.859(-2.452)

-8.337(-2.275)

-5.805(-1.576)

OMITTED

Durbin-Watson

2.006 1.990 1.996 1.922 1.859

Adjusted R-Squared

0.999973 0.999974 0.999973 0.999972 0.999972

Time Trend

9.676(2.911)

9.059(3.017)

7.744(4.752)

OMITTED 7.924(2.693)

Summary of Results

• Model 2

• Signs of coefficients are robust

• Omitted TIME and URATE show significant changes

• Omitted INT and GDPD show insignificant changes

Summary of Results• All Independent Variables are statistically

significant except for INT

• Durbin-Watson Stat > 1.789 across all models

• PCON and INV are significant contributors

• DEF and NDEF are both significant

• DEF is positively correlated

Conclusion

• Definite Positive Correlation

• Regression is not serially correlated and explains a large part of the story

• Results are coherent with Atesoglu (2007)

• PCON and INV have a significantly bigger effect than Government Spending (NDEF + DEF)

Lessons

• DEF is not a waste

• Relative size of spending

• Stimulative action should revolve around PCON and INV for greatest GDP output

• Trade-Offs always exist

Questions