Journal Article

The long-run effects of a permanent change in defense purchases

Abstract: In this article, Mark A. Wynne explores how a permanent reduction in defense spending might affect the average U.S. household. He finds that, in the long run, Americans will reap a peace dividend. For example, if Congress reduces annual defense spending from 6 percent of gross national product to 3 percent, in the long run private consumption as a share of GNP could rise 3 percentage points. In the short run, some businesses and households will sustain losses. Over time, however, the economy will reabsorb the resources freed by lower defense-related production and will expand production for private consumption. ; Underlying Wynne's analysis is the assumption that Congress will use the funds saved on defense spending either to lower taxes or to reduce the federal deficit. Wynne develops a simple empirical model to explain the relationship between the share of GNP spent on private consumption and the share spent on defense over the past one hundred years.

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Economic and Financial Policy Review

Publication Date: 1991

Issue: Jan

Pages: 1-16