WHERE: Room 510,
66 W. 12TH Street
(close to the corner of 6th Avenue)

WHEN: FRIDAY, November 14th, 2:30 TO 4 P.M.
(coffee and tea available starting at 2 p.m., refreshments afterward)

RSVP TO: Frida Berrigan, berrigaf@newschool.edu

Co-sponsored by: The Graduate Program in International Affairs (GPIA) and the World Policy Institute at New School University (NSU)

Convenors: David Gold, Master's Program in International Affairs, New School University and Bill Hartung, Arms Trade Resource Center, World Policy Institute

The Coming Bush Defense Budget Train Wreck in Historical Perspective

David Gold
Professor of Economics
Graduate Program in International Affairs
New School University goldd@newschool.edu

Paper prepared for presentation at the Study Group on the Economics of Security in the Post 9/11 World, New School University, November 14, 2003

This paper is a summary of a longer work in progress. Comments and criticisms are most welcome. Recognizing that this is a work in progress, please do not cite or quote without the author’s permission

The Coming Bush Defense Budget “Train Wreck” in Historical Perspective

Introduction

For the fourth time since the end of World War II, the United States is in the midst of a major expansion in its military budget. While the buildup is widely associated with the war against terrorism and the Bush Administration’s response to the terrorist attacks of September 11, 2001, the present expansion of the military pre-dates 9/11 by three years. Defense outlays1 grew by six per cent in constant (1996) dollars from fiscal year (FY) 1998 through FY2001, a modest but clear reversal of the downward trend in effect over the previous decade (OMB, 2003, table 6.1). The increase will be more than 26 per cent at the end of FY2003, even excluding supplementary outlays for the Iraq war..

The Bush Administration has projected a further increase to $500 billion in current dollars and $375 billion in constant dollars by FY 2008, bringing the percentage growth to 44 per cent over a decade. However, the Congressional Budget Office (CBO, 2003a, b), in its evaluation of the administration’s defense budget projections, concluded that the administration’s proposed defense spending plans seriously under fund the current defense program, and that defense budgets would have to increase at least through FY2020 in order to provide adequate resources for the military program. This appears to be a recipe for a classic “train wreck” in defense budgeting.2

But the possibility of a major political fight over defense plans and budgets is even more evident when it is realized that the Bush proposals would break new ground on several fronts. First, as the budget approaches $400 billion in inflation-adjusted dollars, this would be the largest single-year defense budget since the close of World War II. Despite two major wars – Korea and Vietnam – and a Cold War with a major peer competitor, US defense spending never exceeded $379 billion (1996 dollars), which was the level at the peak of the Vietnam War, in FY1968. Second, at no time did defense spending increase for more than eleven years in a row (FY1978 through FY1989), and even in that buildup, the first three years and the last three years saw relatively small increases in real defense budget outlays. Two-thirds of the increase in defense outlays occurred in a five-year period, FY1981 through FY1986.3 A buildup that continued through FY 2020 would reach twenty years.

These historical patterns do not, of course, represent rigid limits, but neither are they random or ephemeral. The two “barriers” – money and time - are not artificial. They are the result of a complex set of forces that have worked to keep defense spending in the United States from continually rising, or continually falling. The argument I will make in this paper is that these historical limits are the result of the interaction of a set of political and economic forces that create pressures for defense expenditures to rise, and a set of political and economic forces that create pressures for defense expenditures to fall. The balance of these opposing forces over more than half a century has kept defense spending fluctuating within a broad set of limits, and has restrained the time span over which both buildups and draw downs have occurred.

The Long-Run Decline in the Defense Burden

Real defense outlays have fluctuated since the end of World War II but do not show any tendency to grow over time (graphs to be distributed). Since the economy as a whole has grown substantially, the defense burden, measured either by defense outlays as a share of GDP or defense outlays as a share of federal government outlays, have declined with relatively brief interruptions denoted by the four buildups. My argument is that the long run decline in the defense burden is the result of two forces, one representing success by the U. S. military and the other representing preferences by the public and by the political and economic decision-making systems for utilizing resources in civilian as opposed to military activities, in effect, a triumph of “butter” over “guns.”

By military success I am referring partly to battlefield success but more important to the perception that the U. S. military and its supporting institutions have been gaining in strength over time, both absolutely and relative to potential threats.4 In economic terms, this is an argument that there is rising productivity in the military where output is defined as capability and input as the quality-adjusted costs of labor, capital and technology. Labor productivity has clearly risen since the advent of the volunteer army, with the military being able to recruit more selectively and with greater incentive to invest in education and training. Improved capital and technology is illustrated by the massive lead the U. S. holds in defense research and development. Problems the military has had in carrying out missions, as in Vietnam and Somalia, have widely been attributed to decisions made by the political leadership and not to problems with military effectiveness. Meanwhile, successes, as in Granada, Panama, Iraq (1991), Kosovo, Afghanistan and Iraq (2003), have provided substantial evidence of improved effectiveness. Even the avoidance of major conflict with the Soviet Union prior to 1989, and with China since 1953, can be interpreted as a measure of the effectiveness of the U. S. military in its role as a deterrent.

At the same time, the long-term decline in the defense burden also reflects rising public preference for non-military uses of resources. Empirical evidence suggests that the basic long-run trade-off in the U. S. is between military spending and both public and private consumption, not investment (Edelstein, 1990; Gold, 1997). While the improved productivity of the military is undoubtedly an element in public and elite preference for civilian use of resources, demands from the civilian side in such areas as health, education, housing, transportation and general consumption are also important. Indeed, graphing the rising health care “burden,” that is, health outlays as a percent of GDP and government health-related outlays as a percentage of government spending would provide almost a mirror image of the declining defense burden.

It might be argued that the sharply lowered defense burden is largely the result of the absence of a major peer competitor. However, the burden was falling even while the Soviet Union and China remained as potential threats, and a possible land war in Central Europe was still a significant planning contingency. When the Reagan Administration instituted a buildup designed to fill in a defense deficit they perceived to have opened relative to the Soviet bloc, the defense share of GDP jumped to 6.2 per cent, still lower than the early 1970s, during the post-Vietnam draw down, and far lower than the late 1950s and early 1960s, when the Soviet bloc was presumably a major threat.

Cyclical Changes in Outlays: Explaining the Buildups

The decline in the defense burden, however, has not been smooth. The cyclical patterns in both real defense outlays and the defense burden is where the shifting coalition of forces can be seen at work. The forces working to increase defense spending seem clear. Most prominently is a change in the national security situation such as wars (Korea, Vietnam, 9/11) or shifts in strategy (NSC-68, Reagan, Bush II). A second is the demands of the military services and defense producers and a third is the need to form political coalitions for both electoral and governing purposes.

National security events are the most obvious and most visible of these factors. The big jump in defense spending for the Korean War, and the subsequent smaller but clear jumps for the Vietnam War, the Carter-Reagan buildup and the response to 9/11, would be first on anyone’s list of causes of the post World War II defense buildups. In each case, however, the buildups began prior to the security event. The rise in defense outlays from 1948 is in part a reflection of the US shift toward a strategy of containment, although this was not a formal policy until the adoption of NSC-68, at the beginning of 1950. The inching up of outlays prior to the Gulf of Tonkin incident may partly reflect an expanding involvement in Vietnam, but there are other sources at work. The 1980s buildup actually began under Carter, and was largely a response to the same political forces that under girded the Reagan buildup. And while the end of the 1990s “peace dividend” is reflected in the rise in defense outlays from 1998, and while this rise might be related to the growing threat from terrorism, the response to 9/11 and the adoption of a doctrine of military preemption was clearly a later phenomena.

The second major source of the cyclical upswings in defense spending can be found in the demands of the military services, the defense industry and the regions, communities and other interests that benefit from defense outlays. The “military-industrial complex” has its origins well before World War II (Koistenin, 1980), but its modern configuration can be dated in the period at the end of the 1940s, when the aircraft (later aerospace) industry won its fight for government support, and when President Truman lost his bid for universal military training. These two political decisions committed the government to treat preparedness as largely a hardware-driven process.

After the Korean War, the defense budget fell but remained considerably higher than the levels of the late 1940s. Thus, the Korean buildup was clearly greater than needed to prosecute the war. Eisenhower, however, was not interested in expanding the defense budget. He was, like Truman, a strong believer in a balanced government budget and selected cabinet secretaries, in both Defense and Treasury, who either shared those beliefs or were willing to support them. As is well known, Eisenhower was no fan of the military-industrial-scientific complex and feared that the US could become a “garrison state.” Eisenhower also took a dim view of intelligence reports that the Soviet Union was moving ahead of the US in important strategic weaponry, the famous bomber and missile gaps.

This period established a pattern that has been repeated at least twice, in the 1970s and the 1990s. A draw down following a security-driven buildup leads to a period when defense producers find themselves with excess capacity, the services find themselves with aging and “last generation” equipment and the R&D apparatus begins to throw out improvements in weaponry. There are also likely to be some doctrinal shifts as the military uses the hiatus between major crises to apply lessons learned from the preceding activities. These pressures led to expanded demands, which in turn lead to larger funding requests.

The third source of buildups is the political coalitions formed during the electoral process. Kennedy ran for office in part on a platform committing the country to a more active foreign and military policy and he received support from a number of political figures close to interests that would benefit from these policies. Twenty years later, Reagan expanded the Kennedy approach by criticizing Carter for neglecting the military and not confronting the Soviet Union, and drew support from military interests. Fast forward another twenty years and George W. Bush is criticizing the Clinton Administration for neglecting military preparedness, wasting military resources on nation building and not confronting the forces behind terrorism. The US is known as a two party system but, at the national level, it is actually a two coalition system, and in these three cases, including military interests in the winning coalitions contributed to pressures to boost defense spending.

One key element in these coalitions is the marriage of higher defense spending with a more aggressive economic policy. Truman did not accept the Keynesian emphasis on a more active government role in offsetting recessions and stimulating long-term growth5, but Keynesian ideas did creep into the drafting of NSC-68. It was there argued, apparently with the input of Leon Keyserling, first a member and than the Chair of the Council of Economic Advisers, along with other members and staffers of the Council, that with appropriate economic policies, the country could afford higher defense expenditures and that higher defense expenditures would also contribute to economic stimulation (Flash, 1965, pp. 36-39). Versions of this argument were used in Democratic critiques of Eisenhower’s defense spending policies throughout the late 1950s (Tobin, 1966 (1958)), and contributed, over time, to the view that defense spending is a source of domestic economic stimulation.6 This marriage was initially formalized under Kennedy, but has been extended first by Reagan and now by Bush to the point where military buildups and large deficits seem to go hand in hand.

A second key element in these coalitions is the use of exaggerated threat assessments, often in the hands of outside experts criticizing an incumbent administration. Over the years we have seen the bomber gap, the missile gap, the Team B assessment of the Soviet nuclear threat and Soviet defense spending, the Rumsfeld Commission report on the ballistic missile threat, the Cox Commission on the threat from China, and, most recently, assessments of Iraq’s weapons of mass destruction capabilities. Each concluded there was a need for a large US response and a rise in US defense spending, sometimes for a specific program, and each was shown later to have exaggerated the threat, often by a large margin.

It could be argued, of course, that the winning coalitions were more perceptive than their predecessors about looming threats, and this explains the ensuing buildups. The Vietnam buildup, however, appears to be an example of a perceptual failure, not a success -- it was the marriage of inappropriate historical analogies (falling dominoes and the Munich comparison) with an incorrect assumption, that “world communism” was monolithic. Similarly, the Reagan buildup was heavily theory driven with a selective use of intelligence regarding Soviet forces and Soviet intentions. The factors that would lead to the breakup of the Soviet bloc by the end of the decade, and the breakup of the Soviet Union in the early 1990s, were already in place (Evangelista, 1999).

Cyclical Changes in Outlays: Explaining the Draw Downs

There are also factors that can explain why defense spending falls after buildups, and the long-term forces that seek to push defense spending down tend to re-assert themselves. One explanation would be the end of the security crisis that stimulated the buildup in the first place. All three of the post-World War II buildups, however, ended before the security crisis was resolved. In part this is a characteristic of buildups; a large jump in outlays is required to reach the force level needed for the crisis, after which annual outlays do not have to grow to maintain the desired level. However, in each of these cases, other forces are present.

In all three, the buildup itself created conditions that reduced public support. The Korean buildup led to a large inflation that, while it was contained by the 1952 tax increase, contributed to economic distortions and public dissatisfaction with the Truman Administration.7 The Vietnam buildup led to inflation, rising interest rates and visible guns-butter trade-offs. The Reagan buildup was accompanied by social spending cuts and large budget deficits. In all three cases, as the buildup proceeded, both out of pocket costs and opportunity costs became larger and more visible.

Also, in all three cases, both the nature of the security crisis and the government’s response to it came under larger and increasingly hostile opposition. Once the Korean War reached a stalemate, public support plummeted. The Vietnam “Quagmire” rapidly engulfed the Johnson Administration, and the Reagan Administration’s apparently cavalier attitude towards the risks of nuclear confrontation contributed to a large and vocal anti-war movement. In addition, the public’s revulsion against apparent war profiteering affected support in all three cases, while the level of casualties in the context of unclear objectives were crucial elements in Korea and Vietnam.

The Bush Buildup The current expansion in military spending began under the Clinton Administration, and has speeded up under Bush, especially since 9/11. The Bush Administration has stated its long-term strategic objectives, and has put forward a set of defense spending plans.8 As many observers have pointed out, the two do not mesh; the budget as currently projected will not fund the plans (CBO, 2003b; Kosiak, 2003). This is the same type of “train wreck” that the Clinton Administration was criticized for and the Bush Administration was supposed to resolve. Will history tend to repeat itself and the present buildup begin to turn down in the relatively near future? Or is the present situation unique, with a set of global problems and domestic issues more conducive to a longer-term rise in defense outlays?

History, of course, does not repeat in any mechanical or automatic sense, but there are a number of features of the present that are reminiscent of the past. The factors leading to the long-term decline in the defense burden remain in place. The demand for civilian use of resources remains high, for such activities as health care, education, private consumption and, especially since 9/11, homeland security. The rapid military victories in Afghanistan and Iraq can only reinforce the public’s perception of US military dominance and the massive US lead in skills and technology. Some of this perception may be undermined if the guerilla-type conflict in Iraq continues to inflict casualties but, as in Vietnam, the blame for that may reside with civilian leadership, not the military.

The demands that push up defense outlays during buildups remain strong. The procurement pipeline is full, with such large, and expensive, systems such as the F-22, the F-35 (formerly the Joint Strike Fighter), and missile defense soon to need major procurement funding. It appears that the services and the industry have largely beaten back the attempts by Defense Secretary Rumsfeld, with the apparent support of the President, to “skip a generation of weapons” in order to fund a substantial transformation in military practice. With the exception of the Crusader, no major system has been cancelled, and even the Crusader remains as an RDT&E program. Personnel outlays will also rise, especially in the area of health care.

So far, no major procurement scandal has erupted, although the Boeing tanker leasing deal, cost overruns on major systems, looming technical problems with missile defense and profiteering on Iraq reconstruction contracts could become more important in the next few years.

One area that is different from the past is the macroeconomic impact of the buildup. The revival of productivity growth in the 1990s has proven to be long lasting, and has contributed to a low, if not essentially zero, inflation rate and a low-interest environment. Thus, a deficit-financed buildup is less likely to have the negative impacts that were seen in the period following the Vietnam and Reagan buildups, in the late 1960s and in the 1980s. Employment gains remain non-existent and could be a major political problem, but if the recent revival in information technology investment proves more than a passing blip, even that negative could turn positive. If investment and employment growth do accelerate, however, the deficit could be more of a problem, as interest rates will tend to rise and deficit hawks in Congress will intensify their efforts to rein in spending. Thus, guns-butter debates could intensify.

The nature of the security crisis and the response of the public and elites is the major uncertainty. As the military commitments in Afghanistan and Iraq become more protracted and costly, they will both drain resources and test political commitments. On top of this, there is the possibility of widening scandals regarding the misuse of intelligence and the Wilson-Plame affair. Whether the quagmire effect has political resonance is hard to gage9 but the rapidly escalating costs of effecting real regime change is bound to have implications in terms of budgetary trade-offs. It is striking how recent estimates of war costs from conventional sources are beginning to resemble the worst-case scenarios that emanated from critics before the Iraq War.10 One impact is that the type of “muscular internationalism”, or “assertive nationalism”11, practiced by the Bush Administration may have to be reined in, since it is clearly costing far more than planned. It seems highly likely that “guns-guns” debates will intensify, as costs for Afghanistan and Iraq conflict with demands for weapons procurement outlays and personnel expenses.

One wild card is the possibility of another major terrorist incident on US soil or affecting US citizens. Such an incident could lead to further escalation and defense spending increases, or it could push the already growing sentiment to challenge the directions of current policy. A domestic incident would also highlight shortfalls in homeland security, brought about partly because of budgetary priorities linked to the decision to prosecute the war in Iraq and partly because national tax cuts have a trickle down effect on state and local governments, weakening their tax base and reducing their outlays on police, fire, emergency medical services and other elements of homeland security.

A second wild card is the economy, as a strong IT-driven recovery will ease cost pressures, while a weak recovery will embolden administration opponents and lead to stricter limits on defense budget growth. It does seem clear that, over time, the US public and leadership is unlikely to ratify the immense costs of the Bush revolution. The timing may be uncertain but the US defense burden is not likely to reverse its basic downward trend.

References

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Office of Management and Budget (OMB). Executive Office of the President of the United States. 2003a. Historical Statistics, FY 2004. Washington, D. C., U. S. Government Printing Office.

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Ohanian, Lee E. 1997. “The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War,” American Economic Review, 87, 1 (March), pp. 23-40.

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Snider, Don M., Daniel Goure and Stephen A. Cambone. 1999. Defense in the late 1990s: Avoiding the Train Wreck, Washington, D. C., Center for Strategic and International Studies.