More fundamentally, Fuller’s analysis fails to consider the impact that massive, ongoing Pentagon spending has on the economy. In a forthcoming paper to be published in The Review of Austrian Economics, George Mason University economists Chris Coyne and Thomas Duncan argue that the permanent war economy—military spending now consumes roughly 20 percent of our budget, at a cost of over $700 billion including war spending—draws resources into the military sector at the expense of the private economy, even in times of peace. They find that the huge defense budget undermines market processes and decreases our standard of living.
Academic studies corroborate the claim that government spending can reduce private-sector activity. A 2011 National Bureau of Economic Research (NBER) working paper by Lauren Cohen, Joshua Coval, and Christopher Malloy of the Harvard Business School finds that federal spending causes local businesses to scale back their employment, which causes declines in sales rather than growth. In other words, when government spending grows, the private sector shrinks as normal economic activity is crowded out.