The Political Economy of Rising Defense Costs

Abstract

Rising defense costs in the United States have important implications for the economy and government spending priorities. Despite the Department of Defense outsourcing much of its production to private firms and spending billions on R&D, the cost of providing national security has continued to climb. This paper employs public choice theory to explain the drivers of rising defense costs. Key sets of actors, including politicians, bureaucrats, and defense contractors, have incentives to capture private benefits associated with defense spending. But there are weak incentives to cut costs such that the individuals seeking to maintain spending in areas that do not contribute to defense win out, contributing to the observed rising costs. By examining these incentives, this paper sheds light on the underlying causes of the upward trend in defense costs. The analysis contributes to the existing literature by providing a framework for understanding the factors that contribute to rising defense costs and detailing specific examples of how those factors operate.

Keywords: National defense, public choice theory, rising costs

JEL Classification: D72, D73, H56, H57