The Economics of National Security


How do we know if we are getting good value out of the money we spend on defense?


Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

—President Dwight Eisenhower, “Cross of Iron” speech, April 16, 1953
(Information Clearing House, n.d.)

The defense budget is not a pot of gold. We cannot fix the deficit or fund all of our domestic priorities simply with the response of, take it out of defense. Dismantling our military will not solve our domestic problem, but it will destroy our ability to protect our interest and to shape the direction of world events. To cut defense, we have to do it right, [like] a sweeping restructuring of our armed forces that will reduce defense spending while still preserving the military capabilities we need.

—Vice President Richard Cheney, speech at Lawrence Technical University,
September 14, 1992 (OnTheIssues, 2011)

Deciding how much to spend on national defense is not easy. It is not, for example, like deciding how many cars to build if you are General Motors. Like national parks, clean air and water, and lighthouses, it is something the federal government provides. National defense is a public service—a public good. By its very definition, a public good or service must be available to all, even those who don’t directly benefit. The private sector does not offer public goods or services such as parks or clean water because these services must be open to all—even those who don’t or can’t pay for them—so they are not a profitable investment. A government-provided public good or service cannot be evaluated based on its profitability, so the political process must determine how many parks to create and maintain, how clean the air should be, and how adequate the nation’s security systems are. Many believe this process is less “rational” than decisions made by the free market because there are no independent data, such as sales figures, to confirm that they are a good value and a good use of the resources they require.

National defense requires a great deal of resources. Total spending on national defense was estimated at $605 billion in 2016 (White House, 2016). Other estimates are higher because they incorporate indirect costs, such as interest on debt accumulated with prior national security spending and care for veterans. However it is measured, it is the single largest discretionary item in the federal budget. (Congress must approve discretionary spending each year; this is in contrast to mandatory spending, which encompasses programs with long-term cost obligations such as Social Security and Medicare.) As the largest discretionary item, national security spending makes a significant contribution to the deficit and debt and requires trade-offs in other areas to pay for it (i.e., less money to spend on other programs or higher taxes).

Is it a good value? Some argue that defense spending ought to be cut, particularly because the Cold War and our long and costly nuclear stand-off with the Soviet Union is over. Others argue that, in light of emerging threats and even emerging superpowers (such as China), spending on defense should be maintained at current levels or even increased. Yet a third group challenges the allocation of money for defense. They argue that, over the last decade, spending has been driven by entrenched constituencies such as defense contractors who are making a great deal of money, and members of Congress who “profit” by bringing job-creating contracts to their district. In his final speech as President, Dwight D. Eisenhower warned of this threat, referring to the alliance between defense and the private sector as the “military-industrial complex” (H-Net, n.d.).

The purpose of this lesson is not to determine which political position is correct regarding defense, but to enable students to ask the right questions about the true costs and benefits of national security spending by evaluating the economic effects of different proposals to change how defense money is spent.

Learning Objectives


  • Providing public goods and services at the most socially desirable level and in the most efficient way involves cost–benefit analysis, but it must also be informed by some consensus about what we value as a society.


  • Examine sources for information and interpretations, and for cases where they corroborate, complement, or contradict each other.
  • Analyze graphs, tables, and charts.
  • Support positions with evidence.


Day 1 of 2


Distribute Resource 1, Opening Scenario. How should we pay for services we share? Students should read the scenario and respond to the dilemma it poses: “Your shop currently makes about $3,000 a month in profits that you take home as your salary. How much of this would you be willing to pay for private security services?”

Tally how much different individuals are willing to pay and make note of the lowest, middle, and highest amounts. (Take particular note of students who are not willing to pay anything at all. They may have very different rationales.) Make a chart of students’ reasons to pay and not to pay for additional security. Reasons that are offered will likely be variations of the following:

  • I won’t pay: If other people pay, I will be safer too, so why should I pay?
  • I will pay: We would be better off cooperating with the other people in the neighborhood to pool our resources and keep each other safe; if only a few people are safe, we are all in danger, and nobody is going to want to put up the resources to protect everybody else.
  • I won’t pay for private security: If we are thinking of paying for private security, it would be better to vote to increase taxes to pay for additional police officers. That way, everybody would be forced to pay and people could not take advantage of increased security without paying.

Explain to students that the last reason is a failure to reach private consensus about how to share the cost of security. This is an example of market failure—a time when the free market does not allocate resources to produce goods and services in a socially efficient way. Many economists believe that, in instances of market failure, the government should step in and provide those goods and services. But how do we know which goods and services the government should provide? And how do we know the “best” way to provide these goods and services?

Students will recognize the following examples of services the government supplies or supplements because of market failure: (1) public parks (everyone benefits from more outdoor space, but a handful of motivated park-goers would not be willing to pay enough to maintain a space they couldn’t restrict to their own use); (2) public transportation (even though people who never use public transportation might benefit from those who do because trains and buses mean less pollution, less traffic, and greater economic development/jobs, the nonriders would not be willing to voluntarily subsidize bus or train tickets to keep them affordable).


Tell students that today they will ask themselves: “What are we willing to give up, collectively, in order to be safer as a nation?” To answer this question, they will look at how current spending on defense compares with defense spending in other time periods, spending on defense by other countries, and other spending to which the government commits.

Data DiveSet up five stations at tables or around the perimeter of the room, depending on available space and layout. Using Resource 2, Data Center Fact Sheets, place three or four copies of data set 1 at station 1, and do the same for the remaining four data sets and stations.

Students should make a chart in their notebooks with four columns: “It Says,” “I Say,” “So . . .,” and “Questions.” Students will spend 2–3 minutes at each station filling in one row of the chart based on information from the data sheets. In the first column, they should copy the most important pieces of data at that station. The second column is for the students’ interpretations (Why is this data important? What does it mean?). The third is for implications and analysis, and the fourth is for questions.

Model this procedure for the class with the first data set, particularly if students will be unfamiliar with the drill. Students should keep their charts for use in the next stage of the lesson to inform their analysis of the costs of defense. Either collect and return the charts or do a quick check of notebooks while students are working, to hold students accountable for completing the assignment as well as to assess their understanding of the data. Give them the feedback they need to be successful in the next steps.

Review key learning objectives from Day 1 (perhaps use an exit slip or other informal assessment):

  • What is the economic challenge presented by public goods, such as national defense?
    [Responses may include difficulty in deciding what is the “best” level of spending, lack of competition, the need for close monitoring to achieve efficiency and ensure that best results are being achieved at the lowest possible cost, and resistance to change because of entrenched political interests.]
  • What do we know about the current costs, including opportunity costs, of defense spending? [Responses will vary, but may include a summary of direct and indirect costs, a discussion of the largest programs in the military budget, a comparison with prior years, and a comparison with other countries.]

Day 2 of 2

In Day 2, students dig more deeply into figuring out what the “ideal” level of defense spending might be and how to achieve the greatest benefit at the lowest possible cost. They examine the costs of national security spending, including indirect costs, and analyze the benefits. Students explore more of the costs and benefits of national security spending through quotes from policymakers; they then critically examine these quotes by generating questions they have and evidence they would seek to evaluate their credibility. Finally, students use all of this information to generate criteria, questions, and necessary evidence to evaluate proposals for reforming national security spending. In preparation for the day’s activities:

  • Remind students that economists define the word “cost” as what one has to give up to get something. This includes direct (monetary) costs—the market prices of the resources used—as well as indirect costs that are not directly observable. (Students might know direct and indirect costs can also be considered “opportunity costs,” or the loss of the next best alternative.)
  • If this is new material to students, ask them about the direct and indirect costs of a decision they have made recently. Review the meanings of “cost” and “opportunity cost” using examples from students’ lives. Discuss the many dimensions of cost, including both private and social cost, in addition to direct and indirect cost.
  • Review key points from the previous day’s lesson, in particular that national security is a public good; to decide how much of a public good to produce and how best to produce it, we must engage in cost–benefit analysis; and that now we know quite a bit about the direct costs of national security and how they compare to other countries and other time periods.
  • Discuss with students what they have learned from their data dive about the costs and benefits of national security. After a brief discussion, ask them to summarize their understandings so far on a three-column chart. The column titles should be “Costs,” “Benefits,” and “Further Questions.” Ask them to make their charts independently, based on their notes from Day 1, and then to share their charts in groups of four to fill in any details they may have missed or forgotten.

Analysis of Commentary on National Security

Distribute Resource 3, Commentary on National Security Spending, ideally as a set of quotes that have been cut apart. As students read these comments, they should choose one of the following labels for each selection:

  • Direct: A quote about direct costs
  • Indirect: A quote about indirect costs
  • Benefits: A quote about the benefits of national security spending
  • Efficiency: A quote about how the goals of national security spending might be achieved more efficiently by other means (new technologies, more competition, etc.)

Students should then select the most relevant quotes from each pile to add to their charts of costs and benefits. Ask students to take a second pass through the quotes, this time through a more skeptical and analytical lens. Tell students that they will not have enough time or information to actually determine the truthfulness of these quotes, but that they should weigh them against what they already know about national security to determine what questions they would ask and what additional evidence they would seek if they were reporters covering the political debate on this issue. Remind students that they should first do this task on their own and then compare their analyses with a partner. As they compare notes, they should clear up areas of confusion. They need not agree on whether changes to national security spending are necessary, but they should be clear on why they disagree.

Applying Costs and Benefits: Developing Criteria to Evaluate Proposals

Distribute Resource 4, Proposals for Altering National Security Spending. In small groups, students should choose their two or three favorite proposals and analyze the costs and benefits of each, referring to arguments made in the quotations whenever appropriate. Using this information, as well as their own values and priorities, ask students to envision themselves as economics experts who write editorials and appear on television news broadcasts offering commentary and analysis on the news of the day. To do their job, they will need to be equipped to judge any proposed changes to national security spending using a consistent set of criteria, rooted in economic theory. Students should use the graphic organizer in Resource 4 to create a set of four or five criteria around economic concepts, such as efficiency, costs, benefits, and trade-offs. (They do not need to use these particular criteria; they can create their own, combine these concepts into larger criteria, or create new names and headings.) Tell students to create a set of questions for each criterion and to decide what evidence they would need to determine whether the proposal meets the criteria. Use the content in Resource 4 to develop these criteria, questions, and evidence.


Distribute Resource 5, James Madison on War. (Consider reading it aloud first.)

Remind students that James Madison was the fourth U.S. President (1809–1817), one of the framers of the Constitution (known as the “father” of the Constitution, signed in 1789), and a moving force behind the Bill of Rights (1791). Tell students to take note of the date of the quote, and ask students what they make of Madison’s statement.

After they have worked with its meaning, provide students with as much paraphrasing as they need. Propose that Madison is saying excessive militarism and a continual state of war is dangerous for a host of reasons, but chief among them is the threat it presents to democratic self-rule because of the financial power it gives the government to raise taxes on its citizens in order to pay for the excessive debt the country will inevitably take on to pay for continual warfare. If the situation persists beyond what is absolutely necessary for national security and safety, Madison believes the military itself, as well as its revenue needs, can be used as tools of oppression by those in power.

Before assigning students a written response to this statement by Madison, ask them why they think they are being asked to work this hard—why they are being asked to read something written almost 220 years ago in its original language.
[Student answers will vary, but if it doesn’t come up, tell them that, in contemporary debate about public policy and the proper role of government, much is made of understanding and (for many) being faithful to the original intent of the framers of the Constitution.]

For homework, ask students to first respond to the essential dilemma of the lesson as they believe Madison would have responded; then, compare Madison’s response to one of the comments from Resource 3, choosing the comment with ideas that are closest to their own. What can we infer about Madison’s values, priorities, and assumptions? How are they similar to and different from what you and the author you have chosen think? How do those values, priorities, and assumptions affect the way you and Madison interpret economic data about national security spending?

Ask students to conclude their homework by listing what questions they still have about national security spending and what further information they would need to adequately answer these questions.


Common Core State Standards (CCSS) Initiative
CCSS.ELA-Literacy.RI.9-10.6. Determine an author’s point of view or purpose in a text and analyze how an author uses rhetoric to advance that point of view or purpose.
CCSS.ELA-Literacy.RI.9-10.9. Analyze seminal U.S. documents of historical and literary significance (e.g., Washington’s Farewell Address, the Gettysburg Address, Roosevelt’s Four Freedoms speech, King’s “Letter from Birmingham Jail”), including how they address related themes and concepts.
CCSS.ELA-Literacy.RH.9-10.6. Compare the point of view of two or more authors for how they treat the same or similar topics, including which details they include and emphasize in their respective accounts.
CCSS.ELA-Literacy.RH.11-12.7. Integrate and evaluate multiple sources of information presented in diverse formats and media (e.g., visually, quantitatively, as well as in words) in order to address a question or solve a problem.

The College, Career, and Civic Life (C3) Framework for Social Studies State Standards
D2.Eco.2.9-12. Use marginal benefits and marginal costs to construct an argument for or against an approach or solution to an economic issue.
D2.Eco.6.9-12. Generate possible explanations for a government role in markets when market inefficiencies exist.


Armbruster, B. (2012). Kristol: Budget cuts ‘would decimate our military,’ but ‘the savings are tiny.’ Retrieved from

Central Intelligence Agency. (2016). The world factbook: Country comparison: Military expenditures. Retrieved from

H-Net. (n.d.). Military-industrial complex speech, Dwight D. Eisenhower, 1961. Retrieved from

Information Clearing House. (n.d.). Cross of iron speech. Retrieved from

Johnson, J. T. (2016). We must get the defense budget right. Retrieved from

New York Times Editorial Board. (2015, July 24). Military cutbacks make sense. Retrieved from

Office of Management and Budget. (2016a). Historical tables, Table 3.1—Outlays by superfunction and function: 1940–2021. Retrieved from

Office of Management and Budget. (2016b). Historical tables, Table 3.2—Outlays by function and subfunction, 1962–2021. Retrieved from

OnTheIssues. (n.d.). Dick Cheney on budget & economy. Retrieved from

Madison, J. (1795, April 20). Political observations. Founders Online. Retrieved from

Pew Research Center. (2016, May 5). Public uncertain, divided over America’s place in the world. Retrieved from

Rubio, M., & Cotton, T. (2015). Rubio, Cotton: Why defense budget must grow. CNN. Retrieved from

Shah, A. (2013). World military spending. Retrieved from

Stockholm International Peace Research Institute. (2016). SIPRI military expenditure database. Retrieved from

Sustainable Defense Task Force. (2010). Debt, deficits, & defense: A way forward. Retrieved from

U.S. Department of Defense. (2016). Operation and Maintenance Programs (O-1) Revolving and Management Funds (RF-1). Retrieved from

White House. (2016). Summary tables, Tables S-4 and S-5. Retrieved from

Extension Activity

Invite students to further explore this issue with independent research through the lens of one or more of the following questions that they can answer in essay form:

  • How much deterrent effect does a strong military have, even if it is not actively engaged in war? Does the doctrine of “peace through strength” make sense?
  • Is national security spending buying peace or is it buying war?
  • What are some reasons why national security spending is at its current level? Who pays for that? Who benefits?

Encourage students to think critically about their ability to fully answer these questions. After a first pass, they may be encouraged to brainstorm ways it may have been difficult to answer the questions, gaps in their information and understanding, and further questions they have about this topic, in order to fully and substantively answer these questions.