How War in Europe Boosts the U.S. Economy

Proponents of support for Ukraine usually invoke U.S. strategic interests or moral obligations. Lately, they are making a more calculating case: It is good for the economy.

In the two years since Russia invaded Ukraine, the U.S. defense industry has experienced a boom in orders for weapons and munitions. Business is coming from European allies trying to build out their military capabilities as well as from the Pentagon, which is both buying new equipment from defense manufacturers and replenishing military stocks depleted by deliveries to Ukraine.

Industrial production in the U.S. defense and space sector has increased 17.5% since Russia launched its full-scale invasion of Ukraine two years ago, according to Federal Reserve data.

Biden administration officials say that of the $60.7 billion earmarked for Ukraine in a $95 billion supplemental defense bill, 64% will actually flow back to the U.S. defense industrial base.

“That’s one of the things that is misunderstood…how important that funding is for employment and production around the country,” Lael Brainard, director of the White House National Economic Council, said in an interview Wednesday.

While war often has economic spinoffs, these are occurring without the U.S. actually doing any of the fighting.

Recent spending by European governments on U.S. jet fighters and other military hardware represents “a generational-type investment. The past few years are equal to the prior 20 years,” said Myles Walton, a military industry analyst at Wolfe Research.

While the $95 billion aid package, which also includes funds for Israel and Taiwan, passed the Senate on Feb. 13, its fate is uncertain in the House, where it is opposed by Republican allies of former President Donald Trump, front-runner for the GOP presidential nomination.

Among their objections: The U.S. can’t afford to support Kyiv as federal deficits mount, Russia would prevail anyway, and the U.S. needs to better secure its own border before providing more aid overseas.

The latest money, on top of previous commitments, could inject funds worth about 0.5% of one year’s gross domestic product into the U.S. industrial defense base over several years.

The State Department recently said the U.S. made more than $80 billion in major arms deals in the year through September of which about $50 billion went to European allies—more than five times the historical norm, said Walton.

Poland has placed orders worth about $30 billion for Apache helicopters, High Mobility Artillery Rocket Systems, or Himars, M1A1 Abrams tanks and other hardware, the department said. Germany spent $8.5 billion on Chinook helicopters and related equipment, while the Czech Republic bought $5.6 billion of F-35 jets and munitions.

The boost to the U.S. defense industry is just one way the fragmentation of the world economy along geopolitical lines is tightening U.S.-European relations, often to the benefit of the U.S.

The cutoff of Russian gas supplies sent energy prices and inflation up sharply in Europe, while boosting European demand for U.S. liquefied natural gas.

The U.S. became the world’s largest LNG exporter last year, and its LNG exports are expected to almost double by 2030 on already-approved projects. Around two-thirds of those exports go to Europe.

Five new LNG projects are being constructed in the U.S., representing investments of around $100 billion in total, said Alex Munton, director of global gas and LNG research at Rapidan Energy Group. Most of those projects only began construction after the start of the Ukraine war, he said, as the disruption to Europe’s gas supplies proved the value of LNG to potential backers and helped to move planned projects forward. “The U.S. economy benefits significantly because of these massive investments,” Munton said.

Foreign direct investment to the U.S. increased by almost 50% between the 12 months through June 2021 and the same period in 2023, according to the Paris-based Organization for Economic Cooperation and Development, an association of market-based democracies. European companies in particular are lured by access to cheap and abundant energy.

Military aid is, by itself, no economic panacea. While defense companies are adding jobs, those tied to Ukraine are a relatively small share of national employment and income. “I don’t think you can say confidently that the U.S. economy is larger as a result of the war, but certain sectors of the economy are certainly larger,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.

The money also takes time to flow. Congress has to authorize funds to replenish Pentagon stocks, and then the Pentagon has to sign contracts for new equipment. Foreign sales of major weapons can take years and sometimes fall through. Poland’s annual military budget is about $16 billion, so it isn’t clear how the country can pay for $30 billion of new weapons orders anytime soon, said William Hartung, senior fellow at the Quincy Institute for Responsible Statecraft.

“We know that there are tens of billions in potential contracts on the table for U.S. firms based on the direct and indirect effects of the war in Ukraine, but it’s less clear how soon the companies will see those funds,” he said.

While European governments are paying for their orders, much of the spending is being financed by U.S. taxpayers or by borrowing, adding to the federal deficit.

“Military spending has been crowding out other spending,” said Jason Furman, an economist at Harvard University. He noted that Vietnam War spending in the 1960s contributed to an overheating of the U.S. economy and high inflation.

The Biden administration, though, sees benefits. Military experts are concerned that decades of deindustrialization and miliary downsizing have left the defense industrial base unable to deliver the weapons and munitions necessary for a more dangerous world. Many weapons systems orders are backlogged for years.

The Ukraine war served as a warning for American defense strategists, said Cynthia Cook, a defense industry expert at the Center for Strategic and International Studies, a Washington-based think tank. “What Russia’s war pointed out relatively quickly is the constraints in the U.S. defense industrial base especially in terms of serving production rapidly. The good news is that this lesson has been learned when the U.S. is not directly at war.”

British defense contractor BAE Systems plans to create 500 jobs by expanding facilities in Minnesota, while General Dynamics will create around 120 position at a new plant in Texas, according to Cook.

Biden administration officials say funding allocated for Ukraine is rebuilding America’s defense industrial base, jump-starting and expanding production lines for weapons and ammunition, and supporting jobs in 40 states.

The administration might also hope for political benefits by noting the impact on employers in electoral swing states such as Pennsylvania and Arizona, each of which will receive more than $2 billion, according to the Department of Defense.

Nick Timiraos contributed to this article.

Write to Tom Fairless at [email protected]