Friday, August 01, 2008

Defense spending becomes more important to the economies of rural areas

"Defense is an important and growing part of the rural economy — in many places the most important and fastest-growing part," the Federal Reserve Bank of Kansas City reports in the latest edition of Main Street Economist. The U.S. spent $660 billion on defense in 2007, the most since 1945 after adjusting for inflation.

"Many rural areas should also be well-positioned to capture an increasing share of the defense-related expenditures in the future. The largest component of rural defense spending — military personnel expenditures — is expected to grow quickly heading forward, and policymakers are increasingly looking to locate bases and troops away from major population centers," write Chad Wilkerson, a bank vice president and Oklahoma City branch executive, and Megan Williams, an associate economist. Many of the country's largest military operations are already located in rural areas.

Military incomes and defense contracts are the two largest components of U.S. defense spending and account for more than 4 percent of total rural U.S. economic growth. They have exceeded overall rural GDP growth by a significant margin since 2001, when defense spending began to increase significantly. Several rural areas, including Indian tribes, captured major defense contracts for goods or services.

"The recent rise in national defense spending has clearly increased the economic prospects of these as well as other rural areas across the country," the authors write. "Defense is almost certain to maintain an important role in the U.S. economy over the next few years, since many near-term defense spending decisions have already been made. One way in which planned military spending could have implications for rural areas in the near term is through the current round of military base realignments. Another is through the mix of defense spending that will occur over the next year or so, since some types of military expenditures are more heavily concentrated in rural areas."

While some rural facilities will lose defense personnel in coming years, no rural bases are slated to close, and expected losses are minimal. Modest changes in military-related expenditures are expected through 2013, but projections through 2025 indicate gradual declines of procurement and research and development contracts and continued solid growth in personnel and operations. Wilkerson and Williams warn about over-reliance on military spending for economic sustainability, especially because cuts in local defense activity can have significant effects on smaller communities.

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