This paper employs an applied general equilibrium model to simulate the long-run
effects of reductions in U.S. defense expenditures. In the long-run these reductions
significantly affect only the output of the defense and government industries, and
do not significantly affect the distribution of income or the relative price of
capital and labor. The structure of the tax or expenditure changes which accompany
defense reductions may cause large allocative and distributional effects. Thus, the
fiscal decisions which accompany defense expenditure reductions are the key to
determining their impact.
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