Military Spending and Income Inequality

Abstract

While volumes have been written on the individual topics of military economics and income distribution, only scant attention has been paid to the potential impact of military spending on the distribution of a nation's income. The traditional academic focus on the military has centered on issues such as spending impacts on employment, income and inflation, or on whether industrialized countries, in particular the United States, have become too dependent upon the military for their economic well being. Above and beyond these concerns, there is evidence that military spending is associated with increasing income inequality. Among other reasons this association exists because of pay differentials in civilian vs. military related work (including direct armed forces activities as well as military contract work), because of fewer opportunities for women and minorities among military contractors, which then exacerbates existing gender and race pay differentials, and, lastly, because of the profitability of military related contracts relative to commercial production. The relationship between military spending and the distribution of income is examined for the United States during the post-Vietnam War period using time-series data. Empirical estimates reveal that military spending is indeed associated with increasing income inequality, after controlling for macro-economic variables such as taxes, economic growth, interest rates, inflation and non-military spending. The results are generally robust to alternative definitions of both the military spending and income distribution measures.

Military Spending and Inequality: Panel Granger Causality Test

“…Finally, the impulse response analysis and variance decompositions are conducted and the results are consistent with our previous findings in that the proportion of the movements in a variable being due to shocks in the other variable is very small. Abell (1994) using US time series data, and Ali (2007) using panel data, show that military spending is indeed positively associated with income inequality. However, they both treat the inequality measures as stationary.…”

“…nomic inequality depart from those in past studies such as Abell (1994) and Ali (2007). This may result from employing the approach of Granger causality and dealing with the possible nonstationarity of inequality measures, as well as expanding a panel data set with more observations.…”

“…In fact, there are only two papers closely related to our work: Abell (1994) and Ali (2007). As far as we know, Abell (1994) is the first seminal work to examine the relationship between military spending and the distribution of income.…”

“…It is also possible to even have no interdependency. Abell (1994) utilizes US time series data with a single regression (inequality is treated exogenously), and Ali (2007) uses a global panel data with a simultaneous regression (inequality is ad hoc treated endogenously) to examine the relationship between military spending and economic inequality. In this article, we rely on the concept of Granger causality to empirically test the causal relationship between military spending and inequality without assuming the exogeneity or endogeneity of the underlying variables a priori.…”

“…1 Due to the lack of a theoretical structure relating military spending to inequality, and vice versa, a few studies (e.g. Abell, 1994;Ali, 2007) have resorted to the reduced form regression analysis to uncover correlations and associations among variables, without relying on a detailed specification from economic theory.…”