Quote of the Day: Why Global Defense Spending Will Be a Drag on the Global Economy

Australian author, financial analyst and former banker, Satyajit Das at the Marketwatch debunks the (Keynesian) myth of economic prosperity from the war economy (bold mine)

First, there is pressure to increase spending on defense and national security in the U.S., Europe and the U.K. Some economists have argued that this spending could boost economic activity. However, any rise will be artificial and short-lived — money expended on defense could otherwise have been put to more productive use, generating greater wealth. Moreover, defense spending will place additional stress on already fragile public finances in many countries.

Second, dislocations may affect normal trading and financial activities.

For example, between 2010 and 2014, Western investors invested over $300 billion in Russian stocks and bonds. Western sanctions on Russia now make it difficult for a number of heavily indebted companies to refinance existing foreign currency borrowing or raise new capital internationally. Western sanctions on Russia are also costly for European economies, especially Germany. Around 350,000 German jobs directly depend on German-Russian trade, with roughly 8%-10% threatened by sanctions.

Third, rising security concerns and political risk reduce the attractiveness of global supply chains and deter foreign investment. An uncertain geopolitical and global security environment may reinforce the trend to close economies, with capital controls and trade restrictions. For instance, China is moving to domestically source previously imported critical defense and infrastructure components to ensure self-sufficiency.

Fourth, actual conflict increases the cost dramatically. There is the direct cost of dealing with the issue. There is also the indirect cost by way of disruptions, restrictions on normal commercial and personal life, and the loss of confidence which impinges on economic activity. Even minor conflicts can disrupt critical resource supplies, such as oil or crucial minerals, and trade routes. It can displace large numbers of people, resulting in large numbers of refugees.

Fifth, even if the conflict is internal to a country or relatively small in scale, the collateral effects are significant. The Syrian civil war illustrates the tremendous humanitarian cost and the economic expense of dealing with the crisis. Germany has estimated the cost of integrating refugees fleeing the conflict may cost up to 900 billion euro over the long-term. The need to reintroduce border patrols within the EU may reduce GDP by 0.8% or around 100 billion euro, in direct costs as well as the effects on trade and tourism.

Combating and controlling failed states, resulting from conflict, such as those in the Middle East, Africa and central Asia, requires commitment of vast resources, by way of manpower and treasure.

Sixth, asymmetric warfare, cyber-attacks or isolated terrorist attacks, are costly to economies. Increased security measures designed to prevent or minimize the effects of such attacks are expensive. The large and rising homeland security costs in the U.S. and elsewhere is a large and unproductive expense.

In addition to the well-known economic problems of low growth, deflation, demographics, slowing productivity, and environmental issues, reversal of the peace dividend now weighs heavily on the prospects for the global economy.