Julia R. Cartwright is a senior research fellow in law and economics at the American Institute for Economic Research.
Whenever a war or military buildup arrives, it is accompanied by a curious reassurance from commentators and officials: Military spending is good for the economy because as defense contracts are awarded, factories hum, unemployment ticks down and gross domestic product climbs.
But this assumption rests on a misunderstanding of what GDP measures and what it doesn’t.
GDP is the sum of four categories: consumer spending, investment, government expenditures and net exports. Every dollar spent by the government counts the same as every dollar of consumer spending. A billion dollars spent on a new hospital wing adds the same to GDP as a billion dollars spent on artillery shells.
A distinction should be made.
Consumer spending and investment dominate healthy economies because they are disciplined by reality. When millions of people independently decide what to buy, whether it’s a new car or a medical procedure, they cast a vote with their own money about what is valuable to them.
Prices rise where demand is strong, signaling producers to make more. Prices fall where demand weakens, signaling them to make less. Resources flow continuously toward their most productive uses, guided not by decree but by the sum of the preferences of millions of people. This is why private markets — for all their imperfections — tend to generate genuine wealth.
Government spending operates by different rules. Some of it is valuable, such as public health infrastructure, education, basic research, courts and contracts. But government budgets are not disciplined in the same way.
Unlike private expenditures, which reflect individuals spending their own income, public spending must be financed. It comes from taxes, which reduce private purchasing power; borrowing, which shifts the burden to future taxpayers; or money creation, which risks inflation. In each case, resources are being reallocated, not created.
Defense procurement has produced $10,000 toilet covers and contracts have seen billion-dollar cost overruns. The F-35 fighter jet program, now projected to exceed $2 trillion, has faced persistent questions about performance. The Pentagon even buried evidence of $125 billion in bureaucratic waste. With war spending, these distortions are amplified: The product is not something anyone voluntarily purchases. It is death and destruction.
During World War II, U.S. GDP surged but Americans faced rationing of meat, butter, gasoline and shoes. New car production was halted, consumer goods disappeared from shelves, and factories that made refrigerators instead produced military equipment. GDP said the economy was booming. But declining living standards told a different story. Resources had been redirected toward the war effort. The guns came, quite literally, at the cost of the butter.
These reallocations have lasting effects. When workers and capital move into defense industries, civilian sectors shrink. Ford, General Motors and Chrysler halted civilian automobile production entirely from early 1942 to 1945, retooling their lines for tanks, jeeps, and bombers, delaying civilian automobile innovation. Nylon, invented in 1938, was diverted to parachutes, freezing its consumer market in place. Electrical engineers who might have pioneered consumer electronics spent their most productive years designing radar systems and proximity fuses.
There are recent examples too. Following 9/11, U.S. defense spending increased significantly, contributing to GDP growth in the early 2000s. Yet this period was also marked by rising deficits and, ultimately, the financial crisis of 2008.
To sustain its ongoing war in Ukraine, Russia is spending more than 7 percent of GDP on its military. This has helped it avoid immediate economic collapse from sanctions. But while GDP numbers have held up, they conceal an economy being consumed from within; workers diverted from productive industries, goods scarcer and inflation rising. Avoiding collapse is not the same as creating prosperity.
This is not an argument against maintaining a military or fighting necessary wars. It is an argument for honesty about what GDP measures. Economic growth is not simply the volume of spending; it is the creation of value. That means goods and services that people want, that improve their lives and expand future possibilities. By that standard, war is not a source of prosperity but a diversion from it.
GDP can tell you how much money is being spent. It cannot tell you whether that spending is making people better off.
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