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1989-92 End of Cold War

SUMMARY:

The disintegration of the Soviet bloc and the Soviet Union between 1989 and 1991 had important consequences for U.S. fiscal policy. The end of the Cold War brought about reductions in defense expenditures that helped close the budgetary shortfalls of the 1980s and contribute to the surpluses of the late 1990s.

DESCRIPTION:

Although the implications of the end of the Cold War for international relations are well-known, the downfall of the Soviet Union also had a lasting effect on the American economy. The removal of the United States’ primary national security threat allowed the country to moderate its defense spending. Whereas the rapid expansion of military expenditures had contributed to the unprecedented deficits of the Reagan era, Presidents George H.W. Bush and Bill Clinton were able to use the "peace dividend" to help close the budgetary gap. During the 1990s both rate of growth of defense spending and the percentage of defense spending relative to GDP declined.

Defense Spending as Percent of GDP
Source: Office of Management and Budget

Nevertheless, some have argued that these reductions were too limited given the changed security environment. Despite relative reductions, absolute levels of defense spending continued to increase. Moreover, in the first decade of the 21st century a large proportion of military spending moved "off budget," as the administration of George W. Bush funded the Iraq and Afghanistan Wars through emergency supplemental bills rather than direct appropriations.

FURTHER INFORMATION:

John J. Accordino, Captives of the Cold War Economy: The Struggle for Defense Conversion in American Communities (Praeger, 2000).

Stephen J. Cimbala, ed., Clinton and Post-Cold War Defense (Greenwood, 1996).

Ann Markusen and Joel Yudken, Dismantling the Cold War Economy (Basic Books, 1992).

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