The Day – ‘Peace dividend’ dwindles as nations increase defense spending

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The economic and fiscal benefits of lower military spending enjoyed by the West since the end of the Cold War look set to diminish as Russia’s invasion of Ukraine forces a renewed focus on defending Berlin in Washington.

The coming increase in security spending threatens to crowd out space on already stretched government budgets for politically popular social priorities and could well lead to higher taxes and bigger deficits.

It could also divert money from more productive sectors of the economy, depriving some societies of the resources they will need in the future to support aging populations.

“It’s going to be very painful,” said former International Monetary Fund chief economist and Harvard University professor Kenneth Rogoff. “The peace dividend has paid off a lot.”

Former President George H. W. Bush and his then British counterpart, Prime Minister Margaret Thatcher, popularized the term “peace dividend” to highlight the gains the West would derive from the disintegration of the Eastern bloc. led by the Soviet Union in the early 1990s. The benefits, indeed, were enormous.

The United States has cut discretionary defense spending from an average of 6.3% of gross domestic product from 1966 to 1991 to 3.6% since then, according to White House data.

This effectively saved the federal government trillions of dollars over that time, even after taking into account the money diverted to the wars in Iraq and Afghanistan. It also allowed Washington to run a budget surplus in the late 1990s, freeing up resources that businesses can devote to increasing productivity as the Internet proliferates.

With the United States continuing to guarantee its security, European countries have been even more aggressive in their cuts. Germany, the region’s largest economy, has saved more than 500 billion euros ($536 billion) since 1991 because it managed to keep military spending below 2% of GDP, according to Hubertus Bardt from the German Economic Institute in Cologne.

“There has been a substantial relief to public coffers from reduced defense spending,” he said.

Of course, like all government spending, increased military spending boosts GDP. Just ask the defense contractors.

But the “value for money”, so to speak, is far less than for some other forms of expenditure – for example, infrastructure, such as roads and airports.

And while the US economy has benefited from commercial applications of military-funded breakthroughs, those gains are far from certain and obviously not the primary focus of the defense effort.

“Defense is expensive. It is ineffective,” Kori Schake, director of foreign and defense policy at the American Enterprise Institute, wrote in Foreign Affairs this month. “But it is an essential insurance policy designed to ensure that the United States can protect itself, its allies and its interests.”

With Russian aggression suddenly changing the perception of regional threats in Europe, Germany led the charge by shifting to rearmament. The government has earmarked 100 billion euros to bolster its military after years of underinvestment, has already announced plans to buy fighter jets and is now eyeing a spending spree on missile defences.

“The attack on Vladimir Putin has changed the security situation in Europe,” German Finance Minister Christian Lindner said in March, unveiling plans for new defense investments. “The peace dividend is exhausted.”

In a demonstration of this new paradigm, German Defense Minister Christine Lambrecht announced a doubling of defense support for Ukraine to €2 billion after international criticism of the country’s wavering stance. An anti-aircraft tank expedition was also authorized to aid the war effort.

Other European countries are also increasing their military spending, with non-NATO Sweden, for example, now aspiring to meet the 2% of GDP target pursued by the alliance members.

Not everyone has the financial clout to do so. Analysts at debt rating firm Moody’s Investors Service have identified Italy, Spain, Belgium and Portugal as countries that could face what they called “fiscal risks” if they emulated Germany’s example and increased defense spending to the equivalent of 2% of GDP.

European Union countries are also normally subject to strict rules limiting debt and deficits, potentially preventing any attempt to increase military spending. Italian Prime Minister Mario Draghi said the regime should be relaxed to reflect the need to prioritize defence.

Another way to complement these efforts would be joint investment at EU level. Bloc leaders have discussed funding €2 trillion in new military and energy spending, possibly with the use of common debt.

In the United States, President Joe Biden called on March 29 for a roughly 4% increase in defense spending to $813 billion in fiscal year 2023 which begins October 1, including $682 million in funding for Ukraine.

Most of the money from the president’s request — $773 billion — is earmarked for the Pentagon in what the White House describes as “one of the biggest investments in our national security in history.”

The proposal was immediately rebuffed by congressional Republicans who argued that it failed to keep pace with inflation or challenges such as China’s growing military might and Russia’s war on Israel. Ukraine.

Perhaps in a nod to progressive Democrats — who have long argued the government should spend less on defense and more on social programs — Biden’s budget sees military spending fall below 3% of GDP in 2026 , then fall further to 2.4% in 2032 , the last year of the fiscal window.

Some economists – including a number of Democrats – doubt defense spending will follow such a downward trend as a share of the economy, even as European nations step up their own efforts.

“It seems highly implausible that we as a country need not increase defense spending much faster than current GDP growth projections, given the growing threats from Russia, China and potential threats in the Middle East,” said Lawrence Summers, who served as Treasury Secretary under President Barack Obama and is a paid contributor to Bloomberg TV.

He argues that any further increases in spending should be paid for by higher taxes on the wealthy and businesses, rather than funded by the government issuing more debt.

Other economists have also called for social spending cuts to help make room for national security. Glenn Hubbard — who served as chief White House economist to Republican President George W. Bush — supports reforms to the government’s massive Social Security and health care programs that would cut benefits for the wealthy.

The United States and Europe “face tough fiscal choices,” said Hubbard, who is now a professor at Columbia University. “It’s advancing, year after year, on the removal of the peace dividend.”

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