How The Defense Industry Became A Defining Feature Of The U.S. Economy

A hundred years ago, the United States did not have a defense industry. At least, not in the sense that term is used today.

Companies like Dupont and Bethlehem Steel that had benefited handsomely from selling to America’s military and European allies during World War One had reverted to peacetime pursuits.

The War Department had demobilized from nine million personnel at the beginning of 1919 to a mere 397,000 in 2023, and what remained of weapons production was largely confined to Navy shipyards and Army arsenals.

That’s the way it had always been in America—minimal military outlays in peacetime, which ballooned when the nation went to war and then quickly reverted to one percent of the economy when peace returned.

At that level of expenditure, it wasn’t possible to sustain a large peacetime defense industry. Nor was it necessary: big oceans to the east and west, weak neighbors to the north and south insulated the nation from military threats.

World War Two was conducted on much the same model, with private industry mobilizing to become the “arsenal of democracy” until Axis powers were defeated, and then just as rapidly demobilizing.

The war ended on August 15, 1945, and by the end of the year, 70,000 BoeingBA
workers, 99,000 Douglas Aircraft workers, and 86,000 North American Aircraft workers had lost their jobs.

Three years after the fighting ceased, the military’s budget had fallen to $10.6 billion—about $139 billion in today’s dollars.

And then everything changed. It wasn’t the Korean War that wrought the change, but Russia’s testing of a fission weapon in 1949, a fusion (thermonuclear) weapon in 1953, and an intercontinental ballistic missile in 1957.

These developments made it clear Moscow’s bellicosity was not mere rhetoric, and that America could no longer depend on vast oceans and weak neighbors to protect it from attack.

For the first time in its history, the United States faced a chronic peacetime threat to its survival, and defense spending during the Eisenhower years (1953-1960) reflected that fact.

Military outlays claimed over half of the federal budget every year, averaging nearly ten percent of the entire economy.

It was this unprecedented level of peacetime military outlays that made possible the existence of a dedicated private-sector defense industry—an industry that had grown so big by the time Eisenhower left office that the departing president cautioned against its potential “unwarranted influence” within the government.

Fast forward to 2023, and here is where we stand: Congress in December belatedly passed an omnibus appropriations bill for fiscal 2023 including $858 billion for national defense, roughly half of which will be dispersed in the form of contracts to the private sector.

If the breakdown of outlays remains the same as recent years, over half of contract dollars will go to procurement of equipment and supplies, another third or so to services, and the remainder to research and construction.

That is, by any measure, big business. In fact, at over $400 billion annually, defense contracts awarded to the private sector are worth an amount equivalent to a quarter of the entire Russian economy.

The Congressional Research Service estimates the U.S. defense industrial base currently includes over 200,000 companies.

Of course, not all of the money goes for weapons. It covers a myriad array of commodities and services, from healthcare to maintenance to missiles to fuel.

But the bottom line is that the defense industry has become a permanent, in fact defining feature of the U.S. economy. In many states, the industry is an engine of growth.

For example, in the most recent year for which complete data are available, 2021, Alabama received $12.2 billion in defense contract awards representing nearly five percent of the state’s economy. Connecticut’s $18.4 billion in contract awards represented a similar infusion of funding—about five percent of the state’s economy.

The multiplier effect of these outlays on local economic activity is substantial, not only because defense industry jobs pay more than those in many other sectors, but also because they support high-tech companies within the states—Boeing, Lockheed MartinLMT
and Northrop GrummanNOC
in Alabama, General DynamicsGD
, Lockheed and Raytheon TechnologiesRTX
in Connecticut.

It is unlikely that business conditions in either Alabama or Connecticut could sustain anything like the current level of local economic activity in the absence of military contracts.

Other states don’t benefit to quite the same degree, but outside the upper Midwest the defense industry has become a hard-wired contributor to local economies, and given the role of Congress in disbursing defense funds, that isn’t likely to change.

It is a common observation in political circles that technology breakthroughs in the defense industry don’t occur today to the extent that they did during the Cold War, but the federal government doesn’t have a firm methodology for assessing whether that is true.

What can be said with certainty is that military contracts sustain a vast array of cutting-edge research projects at universities and companies, and that the expertise generated to execute those projects is often applicable across the entire economy.

Because the defense industry tends to operate outside the rhythms of the commercial business cycle and is constrained by law to secure most supplies within U.S. borders, it likely has a moderating impact on the ups and downs of a market economy.

Moreover, past complaints about “misplaced priorities” in federal spending have lost some of their appeal as voters come to realize that defense contracts awarded in Fort Worth or Oshkosh or Palmdale are soon translated by workers into mortgage payments, tax receipts that support schools, and various commercial purchases.

For all these reasons, the defense industry today has become a defining feature of the U.S. economy, in a way that might have seemed unimaginable a century ago.

Many companies that supply the defense department contribute to my think tank.