The Cantillon Effect and U.S. Defense Spending

By Annika Jain

Introduction

The Cantillon Effect, named after economist Richard Cantillon, describes how the introduction of new money into an economy benefits certain groups before others, leading to shifts in wealth and resource allocation. In the context of U.S. defense spending, this effect can be observed as increased military budgets influence various sectors differently.

U.S. Defense Budget Trends

In fiscal year 2025, the United States has allocated approximately $997 billion to defense spending, accounting for about 37% of global military expenditures. This substantial investment underscores the nation's focus on maintaining military superiority and addressing emerging global threats.(Peterson Foundation)

Impact on Defense Contractors

Major defense contractors, such as Lockheed Martin, Northrop Grumman, RTX (formerly Raytheon Technologies), and General Dynamics, are primary recipients of increased defense budgets. These companies often secure significant contracts early in the budget cycle, allowing them to benefit from the influx of funds before broader economic adjustments occur.

The Cantillon Effect in Action

The early allocation of funds to defense contractors exemplifies the Cantillon Effect. These entities can invest in research, development, and expansion ahead of inflationary pressures that may affect the wider economy. Conversely, individuals and smaller businesses, receiving money later in the cycle, may face higher costs without a corresponding increase in income, leading to potential disparities in economic well-being.

Broader Economic Implications

While increased defense spending can stimulate certain sectors, it may also contribute to national debt and divert resources from other critical areas such as education, healthcare, and infrastructure. The concentration of financial benefits among early recipients raises questions about equitable economic growth and the long-term sustainability of such fiscal policies.

What we can draw from this

The Cantillon Effect provides a lens through which to examine the distributional impacts of U.S. defense spending. Understanding this phenomenon is crucial for policymakers aiming to balance national security interests with equitable economic development.

References

• Stockholm International Peace Research Institute. (2025). Unprecedented rise in global military expenditure as European and Middle East spending surges. Retrieved from https://www.sipri.org/media/press-release/2025/unprecedented-rise-global-military-expenditure-european-and-middle-east-spending-surges(SIPRI)
  
  

• U.S. Department of Defense. (2025). FY 2025 Defense Budget. Retrieved from https://www.defense.gov/Spotlights/FY2025-Defense-Budget/(Defense.gov)
  
  

• Congressional Budget Office. (2025). Long-Term Implications of the 2025 Future Years Defense Program. Retrieved from https://www.cbo.gov/publication/61017(Congressional Budget Office)
  
  

• Army Recognition. (2024). US defense budget to reach $851.7 billion in 2025 to counter China and Russia. Retrieved from https://armyrecognition.com/news/army-news/army-news-2024/us-defense-budget-to-reach-851-7-billion-in-2025-to-counter-china-and-russia
  
  

• Economic Times. (2024). Global military spending soars to $2.7 trillion in 2024. Retrieved from https://economictimes.indiatimes.com/news/defence/global-military-spending-soars-to-2-7-trillion-in-2024-russia-us-china-india-germany-account-for-60/articleshow/120689529.cms