The Defense Dividend and What it Means for Cities

by Bruce Katz, Milena Dovali and Victoria Orozco  · October 19, 2023


For the past 30 years, with the fall of the Berlin Wall and the dissolution of the Soviet Union, the notion of a “peace dividend” took hold in the United States.  To use an old metaphor, less funding for guns meant more resources for butter.

Times have changed. The world has, once again, become a dangerous, polarized place. Russia’s invasion of Ukraine, rising tensions with China and the reignited Mideast conflict following the Hamas assault on Israel have meant that defense spending in the United States (and among its allies across the world) is on the rise.

The numbers speak for themselves.  In FY 2023, Department of Defense Appropriations totaled $797 billion, an almost 10 percent increase over FY 2022. Remarkably, Congress provided $45 billion over what the Biden Administration had initially requested, a product of growing national security concerns as tensions with China worsened during the fiscal year.  The expanded spending will advance national security by modernizing the military, developing new technologies, and enhancing the readiness and resiliency of defense facilities.

Since the start of our republic, national defense investments have had profound local implications. If history is any guide, a subset of US cities and metros will experience a substantial defense dividend from the current level of spending.

At its most basic level, the defense dividend comes from additional spending for contracts and personnel, resources which then get recycled in the metropolitan economy. Yet smart communities can go further, leveraging defense spending to grow quality jobs, equip workers with the skills they need, fund local suppliers, redevelop central business districts with excess office capacity, accelerate the clean energy transition and drive the formation and expansion of innovative technology companies.

At the same time, the development of strong metropolitan ecosystems around military-funded bases, production facilities and R&D capabilities has broad national security implications. As recently observed, “Militaries very rarely decisive outcomes, they win battles. [In attritional conflicts such as Ukraine], it’s economies that win wars.”[1]

Compared with other industrial policy achievements of the Biden era (e.g., the Bipartisan Infrastructure Law, the CHIPS and Science Act and the Inflation Reduction Act), federal defense spending has unique features.

  • Unlike these other investments, defense spending does not represent a one-time-only surge in expenditures. Rather these are annual appropriations that provide a predictable flow of funding over multiple years and a new floor for future spending.
  • Unlike most federal agencies, the Department of Defense is not allocating resources through block grants or competitive programs. It is, rather, a super-sized employer and a massive buyer of goods and services.  Defense appropriations, therefore, involve direct federal spending rather than being distributed through states, localities and a plethora of public authorities and agencies. It is also a central element of what has been labeled The Procurement Economy.
  • Unlike many federal programs, defense spending is not allocated across the country based on need criteria and will not affect all areas of the country equally. Rather, as described below, it will disproportionately benefit communities that have distinctive military assets developed over decades if not, in some cases, centuries.

Realizing a defense dividend requires local and state leaders to understand their special role and function within the nation’s sprawling defense establishment and work to leverage its impact to the maximum extent possible. The military industrial complex, to use an evocative phrase popularized by President Dwight Eisenhower, is spatially distributed in ways that give cities, metropolitan areas and states radically different starting points as the federal government makes its procurement decisions.

Fortunately, the Department of Defense is unusually transparent about its spending patterns and procurement decisions. Just last month, for example, the Office of Local Defense Community Cooperation released a report entitled simply Defense Spending by State, FY 2022. The report is a treasure trove of information and a starting point for every city, county, metropolis and state trying to understand their role in the defense establishment.

As summarized in the report’s introduction:

“The report’s graphs, maps, and tables present a range of findings, such as total spending figures, categories of contracted goods and services, major defense vendors, numbers, and types of defense personnel, and, for the first time, grants awarded by DoD.  This snapshot provides public and private leaders with a starting place to assess how defense investments across installations, communities, and the private sector can be optimized by supporting regional innovation, industrial capability and capacity, supply chain resilience, and cultivating a skilled workforce.”

Within this report, it is revealed that the Department of Defense’s total expenditure across all 50 states and the District of Columbia amounted to $558.7 billion, equivalent to 2.2% of the nation’s GDP. Most of these funds, $389.5 billion, were dedicated to contracts, while personnel payroll accounted for $159.4 billion, and grants constituted $9.7 billion.

Here is a 5-part typology that might be helpful to communities as they begin to sort out their own, customized defense dividend. This typology is not exhaustive nor totally reflects how the Department of Defense organizes itself.  Rather, it is built from the bottom up as a practical guide to enable local communities to recognize different kinds of defense spending, leverage it for maximum local impact and help the Department of Defense take full advantage of the economic ecosystems that communities offer.

Military bases: Each of the Armed Services (i.e., Army, Navy, Air Force, Marines, Space Command) has bases for its personnel across the country. These bases are often vast enterprises that have enormous economic benefits for the communities in which they are located.  As a report of the Texas Comptroller concluded:

“Texas’ military bases aren’t just barracks, mess halls and firing ranges. They’re more like cities, and in some cases like large cities. Modern military bases include machine shops, garages, water treatment plants, hospitals, wellness centers, hotels, stores, restaurants, day-care centers, movie theaters and more, employing civilians and military contractors as well as service members.”[2]

El Paso’s Fort Bliss, for example, is an army base supporting over 28,400 active duty and civilian employees, ranking 10th in defense personnel nationwide. The DOD report shows that bases yield a dual benefit. In FY 2022, El Paso received over $562.6 million in contract spending (in part related to the operation and maintenance of the base) and $1.9 billion in personnel spending. This direct spending represents 6.4% of the metro’s Gross Domestic Product.

Command Centers: Some military bases or installations serve broader purposes for either separate Services or the military as a whole. Scott Air Force Base in St. Clair, Illinois, for example, supports close to 8,400 active duty and civilian employees. The base is home to the United States Transportation Command (TRANSCOM), which is responsible for the logistical movement of troops, equipment, munitions and other supplies across the world.  The command’s role has been on display recently, coordinating and delivering supplies for the war in Ukraine. In FY 2022, St Clair, Illinois received $1.3 billion in contract spending (second highest in the state of Illinois) and over $790.3 million in personnel spending (highest in the state), representing a significant 16% of St Clair County’s Gross Domestic Product.

Production Hubs: The military is a platform for advanced manufacturing in the United States.  Unlike civilian manufacturing, the offshoring and outsourcing of defense related manufacturing has been constrained; the threats to national security are too profound. With enhanced federal spending, the Department of Defense has already declared its intention to build the next generation of fighter jets, drones, nuclear submarines, hypersonic weapons, artificial intelligence, and cybersecurity.

This is compelling some rapid shifts in focus and investment.  As the Financial Times reported yesterday,

“Analysts say the Ukraine war has provided something of a wake-up call for the US defense industry, which had been de-emphasizing production of weaponry needed in traditional land wars and focusing more on technologically advanced surveillance and reconnaissance systems needed for counter-terrorism missions and deterring China in the Pacific.”[3]

The local implications are significant. Boeing, for example, has a major presence in St. Louis County in Missouri. The company employs about 15,800 people in the area, and it has been a part of the community for nearly 80 years. Boeing’s St. Louis operations are focused on advanced manufacturing; the company also has several research and development facilities in the area. In FY 2022, St. Louis County received $5.4 billion in contract spending (equivalent to 6.08% of the County’s Gross Domestic Product); Boeing itself received $4.1 billion.

Innovation Hubs: Each of the Services have major research and development facilities that enable the testing and development of next generation technologies and weapons. The largest of these facilities include the Naval Undersea Warfare Center in Newport, RI, Wright-Patterson Air Force Base in Dayton, OH, and the Army Research Laboratory in Adelphi, MD.  As a result, Newport, RI and the surrounding community received nearly $586 million in contract spending and $753 million in personnel spending.

Distributed R&D: Each of the Services as well as other DOD entities such as the Defense Advanced Research Projects Agency (DARPA) have ample research budgets and work closely with networks of researchers at universities, research institutions and industry partners across the country. All this is complemented by additional federal R&D funding to promote business innovation and technology transfer in defense-related areas, such as the SBIR/STTR awards. Massachusetts Institute of Technology, for example, received $1.1 billion in contract spending in FY 2022; the University of Dayton, located near Wright-Patterson Air Force Base in Dayton, OH, received $157.4 million.

In some cases, DOD funds special university centers to enable closer collaboration between the military, corporations, start-ups and researchers and accelerate technological breakthroughs and improvements. The National Robotics Engineering Center (NREC) at Carnegie Mellon University, for example, conducts research on a wide range of robotics technologies, including autonomous vehicles, unmanned aerial vehicles, and exoskeletons. These kinds of centers are likely to grow in number and size given the changing nature of warfare and the rise of Defense Tech. In September 2023, for example, DOD announced the award of nearly $240 million dollars to eight regional “innovation hubs” around the United States to help the development of a domestic microelectronics manufacturing industry.

As these examples illustrate, the reach of defense spending is far and wide. The economic benefit of these facilities and activities are pronounced, providing cities and metropolitan areas with a steady demand for both talented workers who earn decent wages that recirculate throughout local economies as well as local enterprises that can supply a broad array of quality goods and services to military bases and facilities.

For metros that cross state lines, the economic benefits are even more substantial than DOD’s report suggests. The St. Louis metropolis, for example, encompasses 15 counties in both Missouri and Illinois. Local stakeholders, therefore, can only ascertain the full impact of defense contract and personnel spending by reviewing information for both states.

In many respects, the impacts of defense spending are similar to those of any large employer in a metropolis. But they are only the tip of the iceberg. Local communities, working closely with the Department of Defense, can realize a full defense dividend by acting with intention and purpose.

Here are 5 strategies that build upon existing strategies and hold great promise.

  • Regenerate downtowns: Many central business districts have been hit hard by remote work. In metros with a large military presence, vacant office space can be taken by innovative defense firms as well as defense personnel themselves. In Dayton, Ohio, for example, Infinity Labs, a fast-growing firm in the advanced air mobility sector, has taken space in the historic Dayton Arcade. The potential to move several hundred personnel from “behind the fence” of Wright Patterson Air Force Base to the center of the downtown would have immeasurable benefits, without compromising national security.
  • Accelerate the clean energy transition: The Department of Defense has a clear mandate and interest to accelerate the transition to reliable and resilient clean energy. The 2021 DoD Climate Adaptation Plan strives to reduce the adverse impacts of climate change by strengthening the resilience of critical supply chains and leveraging DoD’s purchasing power. Under this Climate Adaptation Plan, each of the Armed Services has started to release its own climate strategy with specific goals around the reduction of GHG emissions that could have significant implications in regional economies. There is enormous potential for DOD to work with utilities, energy developers and technology firms on accelerating the clean energy transition. In El Paso, Fort Bliss has already worked with the city of El Paso and the local water utility to create the world’s largest inland desalination plant, which now provides fresh water for the city and the base.
  • Boost local businesses: The Department of Defense is one of the largest purchasing entities in the world. The expansion and maintenance of military bases requires the purchase of a broad spectrum of goods and services, a portion of which can be supplied by local and diverse firms. The execution of Intergovernmental Services Agreements, which enable buying decisions to be delegated from the Department of Defense to local governments, has been tested in San Antonio and elsewhere and offers the potential for broader local impacts.
  • Train workers for quality jobs: The boost in defense-related manufacturing has the potential to create good paying jobs for workers who can obtain the necessary skills and credentials through community colleges. The model for business-led skills training already exists. Since 2007, the St. Louis Community College and Boeing have worked closely together to train and successfully place more than 1200 participants as aircraft assembly mechanics.
  • Create innovation centers and districts: The design of next generation defense systems will require continuous innovation and close collaboration between university researchers and defense manufacturers. In St. Louis, Boeing has led a successful effort to create an Advanced Manufacturing Innovation Center in partnership with local universities and economic development organizations. The Center, modelled after the Advanced Manufacturing Research Centre in Sheffield, England, is now moving from concept to reality, backed by federal, state, local and corporate funding.

These strategies, and others, work best when they are part of larger partnerships between defense installations and the broader economic development ecosystems (e.g., city, county and state economic development organizations, business leadership groups, universities, community colleges, infrastructure and energy utilities) that populate cities and metropolitan areas. A local defense council or consortium could play a crucial role in coordinating these efforts, ensuring effective communication and a unified approach to leveraging defense spending for local growth.

The upshot of our analysis is sobering but realistic. As the world enters a new period of sustained geo-political tension and live regional conflicts, a substantial increase in US military spending can be expected for the foreseeable future. A defense dividend will accrue to those US cities, metros and states able to align key policies and strategies to the demands of national security.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Milena Dovali and Victoria Orozco are Research Officers at the Nowak Lab.

[1] Christopher Miller and Ben Hall, “Lessons from the Summer Offensive,” Financial Times, 9/15/2023
[2] Bruce Wright, “Military Installations Worth Billions for Texas,” FiscalNotes, 9/2016
[3] Steff Chavez and Felicia Schwartz, “War tests US defense sector strained by Kyiv demands,” Financial Times, 10/18/2023

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