I. THE PROBLEM
It is believed that defense contractors follow a labor retention policy and that such hoarding is due to cost-based government contracts. These beliefs arise from the frequent observation that the cancellation of weapons projects leads to employment reductions but usually by much less than the numbers involved on the project. For example, in 1965, a number of British military aircraft were cancelled. At the time, it was estimated that employment on the projects was about 30 000 and that cancellation would immediately resulting 25 000 redundancies and the closing of five major plants. In fact, one year later the number of redundancies due to the cancellations was about 7000-8000, and only one plant was closed. The major firms responded in a variety of ways. Work was withdrawn from sub-contractors; new defense contracts were obtained and natural wastage increased. Such responses suggest that prior to cancellation the number of redundancies is generally over estimated and that some labor is re-allocated to other work. The redundancy figures could also be deliberate exaggerations, probably reflecting an attempt by producer interests to influence the decisions of vote-maximizing governments.
Military expenditures have long played an important role in the American political economy, if for no other reason than that they are by a wide margin the largest category of discretionary federal spending. Because of the size and relative controllability of the defense budget, suspicion lingers that it is used for political and economic purposes unrelated to national security. One possibility is that defense spending is used counter cyclically to mitigate the effects of recessions and spur economic recovery. Another is that defense spending is used as an explicitly electoral tool, with spending levels rising just before elections to stimulate the economy and improve incumbents’ Election Day prospects.

That defense budgets are sure to shrink in the 1990s makes the question more important. The impending budget squeeze is a consequence of the virtual disappearance of the Soviet– Warsaw Pact military threat in Europe, and the tantalizing prospect of friendly superpower relations. . It therefore becomes that much more important to understand the domestic political and economic factors which drive military spending. Previous research into these questions has attempted to tie changes in the