Two of the most popular myths about the United States are probably the presence of UFOs at Area 51 and the belief that involvement in geopolitical conflicts helps keep the economy afloat.
As for the first, Agents Scully and Mulder of The X-Files have long been proving the presence of extraterrestrial life (just kidding). Let's debunk the second, starting with the fact that every dollar spent on defense is not spent on other public services.
This may not seem like a big problem in the short run, but as has been observed in the past, cuts in spending on social programs such as health care and education exacerbate inequality in the long run.
As for the idea that the U.S. benefits from arms sales, it is clear that some companies make lots of money, but the overall effect on the economy is low - U.S. arms exports account for less than 1% of total exports.
Moreover, a drop in sales of all other products and services offsets the positive effect. For example, it is estimated that the wars in Afghanistan and Iraq cost the United States between 5% and 9% in lost exports.
What about defense spending becoming a fundamental driver of Reaganomics?
Increased defense spending combined with tax cuts led to a significant increase in the budget deficit. The national debt went from 26% of GDP to 41% in less than a decade. Worst of all, it increased the economy's dependence on borrowed funds.
As a result, interest rates rose, making borrowing more expensive for businesses and consumers, limiting investment and consumption. Thus, the private sector must also pay the price of geopolitical instability.
No wonder the stock market, especially the S&P 500 index, is always volatile and tends not to rise on news of further escalations or wars. Even now, the prospect of a direct conflict between Israel and Hezbollah worries investors.
So, is a war in the Middle East of no interest to the United States?
Given that armed conflicts are expensive, obviously not. As for the idea that the country can benefit from arms sales, it is essential to understand that the defense sector is relatively small within the overall economy (2.9% of GDP by 2024).
From an economic point of view, investments in armaments are investments in nowhere. For example, money earmarked for bridge construction will boost the construction sector, and the bridge will contribute to economic development for many years to come.
The funds earmarked for producing a fighter jet will also boost the construction sector, but that's about it. Only munitions suppliers will benefit from it. So, betting on long-term economic growth over military acceleration is a mistake.
What should investors do with this information?
Even if the country is not directly involved in the conflict and merely provides military support in the form of weapons, tanks, etc., that does not mean its economy will grow unless this sector represents a significant share of GDP.