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AI Summary. China has developed hypersonic glide vehicles capable of launching air-to-air weapons at targets up to 5,000 miles away, putting U.S. command-and-control aircraft, Guam, and Hawaii within range.
AI Summary. Defense spending booms raise real economic output, lift inflation briefly, and widen trade deficits as import demand rises, while boosting both public and private investment and improving long-run productivity through innovation spillovers and private research crowding-in.
Core argument: Defense stimulus widens trade deficits as imports surge while exports remain flat, creating external imbalances despite stronger overall demand.
Defense spending booms [periods when the two-year moving average of defense spending increases 1pp of GDP] in peacetime are followed by a sizable increase in real GDP and by a short-lived rise in inflation. Consistent with a large share of the stimulus being allocated to personnel and operating expenses, government consumption rises by about 9% within three years. Total investment shows a comparable positive response, reflecting both higher public investment in defense equipment and infrastructure and increased private investment, particularly in defense-related industries. Turning to the external sector, stimulus-driven demand leads to wider external imbalances, as both the current account and trade balance deteriorate. Imports accelerate—reflecting leakages from defense spending and stronger demand for foreign goods—while exports remain broadly unchanged. Defense spending booms are associated with a subsequent increase in the stock of capital, in line with the documented boost to investment, and an increase in total factor productivity, which may be explained by changes in capacity utilization and learning by necessity, as firms adapt to surging demand by improving productivity when facing capacity constraints. Total factor productivity [loses] its statistical significance once capacity utilization is controlled for. However, defense spending booms are followed by greater total factor productivity over longer horizons, consistent with evidence showing that the R&D component of defense spending can boost innovation and crowd in private R&D spending.