Will Détente with Iran Create a Peace Dividend?

The possibility of a deal to limit Iran’s nuclear capabilities and end the international trade sanctions against the country raise a fascinating question: Will there be a peace dividend?

A look at history may provide some insight. Based on what we have seen in the past, it is possible that an agreement would have a positive economic impact. But there are many variables that will determine the outcome, not the least of which is what this obstructionist Congress does.

For those too young to remember, the “peace dividend” was a term popularized by former President George H. W. Bush in the early 1990s. It referred to the economic benefit generated by a reduction of U.S. defense spending after the collapse of the Soviet Union. Once the Cold Warand arms race ended, that money would be put to more productive uses than building a nuclear arsenal that everyone hoped would never be used.

Dollar for dollar, nonmilitary spending tends to generate more economic benefits than military spending. The term weaponized Keynesianism is often used to describe the stimulative effects of military spending, but it is typically more modest than civilian spending. The Pentagon is saddled with a noncompetitive bidding system, contractor cost overruns on big weapons systems that don’t work as planned and plenty of good old-fashioned corruption. In other words, it is very costly and inefficient. This is especially true when compared with government spending on civilian and pure research.

The Berlin Wall fell in 1989, a few years after military spending peaked. The end was already near for the Soviet Union, which would collapse in 1991. As the chart below shows, once the Cold War ended military spending fell for most of the next decade. Meanwhile, nonmilitary government spending rose. The reduction in spending, plus an increase in tax revenue during the dot-com boom, led to the last balanced federal budgets we have seen in more than a decade.

Continues here: Could We Get an Iran Peace Dividend?

 

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