You're quite right. The myth that military spending is good for the economy is just another version of Bastiat's Broken Window Fallacy. It drives me up a wall when I hear otherwise intelligent people repeat it.
The U.S.S.R. spent twice as much per capita as the U.S. on military outlays during the Cold War. President Reagan jacked up "defense" spending in the 1980s to counter the Soviet threat, which he claimed had grown under the Carter Administration's "disarmament" policies. After eight years of trying to keep up with Reagan's defense build-up, the U.S.S.R. unravelled. Movement conservatives still credit Reagan with ending the Cold War by bankrupting the Soviet Union.
So, on the one hand, the Soviets' military spending led to their demise. But at the same time it makes the U.S. more prosperous. People hold both positions--apparently in separate, watertight compartments of their brains.
Labels: Boom Not Boon