The Political and Economic Sources of Inflation in the American Military Budget

Three complementary explanations are tested for the phenomenon that, since 1940, the inflation rate for military goods and services has been higher on average than the inflation rates for the nonmilitary government sector or the economy as a whole. First, higher rates of public-sector inflation are often attributed to the low productivity of labor-intensive government activities compared with the relatively capital-intensive private sector. Because military goods and services are not necessarily labor intensive, however, this pattern explains only a small part of military inflation. A second, more important, consideration is that rapid buildups in military spending, usually associated with wars, lead to high inflation. For political reasons, however, retrenchments at the ends of wars do not produce a corresponding drop in prices, leading to higher average inflation over time. Finally, there is evidence that the Pentagon's interest in higher military spending may have influenced the construction of the deflator series.