Wednesday, 16 December 2015 10:54

Reconciling Economic Policy and Defense Requirements

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Reconciling Economic Policy and Defense Requirements

Murray Weidenbaum?

Murray Weidenbaum holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis, where he is also honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.

One of the great public policy challenges facing the United States is to reconcile the requirements of the national security with the desire to achieve a prosperous and growing economy. That is a tall order. It helps to think in terms of two personalities, Washington's oddest couple: an economist talking to a senior military officer. The mutual suspicion is awesome. (I served on a commission with the chairman of the Joint Chiefs of Staff.) Every admiral and general looks at an economist as someone with little knowledge of military needs and values, but anxious to put a dollar sign on everything. The economist is not much better. He sees the military leader, no matter how brave in battle, as oblivious to the realities of limited resources - and often offended by the mere mention of cost.

History shows us that the battle of the budget never ends. That is because of the ever-changing technological and political environment. There are at least two sides of the argument. On one side are people concerned about threats to national security. Inevitably, they advocate devoting more of our wealth to the military and cite the military spending by potential adversaries as also an important factor. That is also called "an arms race."

Sometimes an increase in our defense spending may generate a new round of rising military outlays by other nations and also rising tensions. It can get very complicated. Remember when the U.S. faced down the Soviets in Cuba (you read about it). The Kennedy Administration took it as a great victory - and leveled off U.S. defense spending.

The Soviets reacted very differently. They began a major expansion in their military programs - so that they would never be "pushed around" again. Years later, in response, the U.S. accelerated its defense budget.

Many other citizens worry that the economy cannot support the current level of defense. They see civilian priorities as more urgent. They have visions of sick senior citizens, poor farmers, struggling middle class families, and a deteriorating environment. They believe that substantial cutbacks in the military budget should be made.

How can we achieve high middle ground on these vital matters? We hear and read about the billions - and now trillions of dollars - that government spends each year. Inevitably, not all the money is spent wisely. Not every project generates the benefits anticipated. Surely, the pork barrel has military as well as civilian compartments.

What is the basic justification for a high military budget? "We live in a dangerous world," is the response of the first group of citizens. Surely, many people wish us ill. Some of them take actions to achieve that objective. But, sometimes we take the initiative, as in Iraq. Would we have done that if the military budget were much smaller? That is a good question without an easy answer.

A few statistics may help us get going. The U.S. economy now produces $15 trillion dollars of goods and services a year (GDP). About 5 percent of that is devoted to the national security. That is neither trivial nor overwhelming, yet it is significant.

Historical comparisons put those numbers into proper context. In absolute terms, the military budget has been on an upward trajectory since the Korean War. But when we look at priorities (proportions of the economy and budget or who gets what?) that yields a very different picture.

During the Cold War, the United States devoted far larger shares of our resources to defense than we do now. In the 1960s, that ratio averaged 9 percent of GDP. In the 1970s, it was 6 percent. In the 1980s - the time of the massive Reagan buildup -the ratio went all the way to 7 percent. The downward trend resumed in the 1990s with 5 percent. In the first decade of the 21st century, it averaged a bit over 4 percent. It is about 5-1/2 percent today. Thus, since the end of World War II, the trend of military outlays, in relation to the national economy, has been downward.

We have had short-term peaks in military spending for Korea, Vietnam, the Gulf War, and for the current conflicts in the Middle East. But - a fundamental but - each of those peaks was lower than the preceding peak. As a result, over the past 66 years the U.S. has become an increasingly more civilian-oriented economy. We no longer read books about "The Garrison State."

The declining share of national resources allocated to defense extends far beyond the macro economy. The basic building blocks of our defense industrial base have not kept pace with the expansion of the civilian society. Specifically, we have devoted steadily smaller shares of our labor force, capital formation, and R&D to defense. The U.S. is marching to the beat of civilian drummers.

Is that good or bad? You - the public - decide. Technically, we can afford today's military budget. And we can afford to spend reasonably more this year and next. Many independent studies conclude that we can - not that we should - afford to spend more on defense, much more if we truly need to do so. But there is another side to that coin. We do not need to finance a high level of military spending in order to achieve economic prosperity.

After a reasonable period of adjustment, the economy would be stronger with a lower level of military outlays. That's not just theory. That happened after the end of the Cold War! The United States experienced simultaneously higher growth, higher productivity, and lower inflation.

In any event, we should not give the Pentagon, or any other department of the government, a blank check on the Treasury. The battle of the budget fundamentally is not a green eyeshade matter at all. The heart of federal budgeting is choosing among important national priorities.

The truly effective limit on the military budget is not economic. It is essentially political, in the true sense of the word, that is - the judgment of the people. Thus, the real limit on expenditures for the national security is not the amount of our national wealth. It is the willingness of the society to spend more to produce military goods and services.

How can we account for the downward trend in the military's share of the federal budget? The answer involves some important but boring budgetary mechanics. Most of the funds appropriated each year are not reviewed by the appropriations committees. Even more important, most of that money does not appear in the annual appropriations bills passed by Congress. That is not an oversight.

This situation prevails because the most expensive programs - social security, Medicare, and interest on the public debt - are financed very differently from the rest of the government. They are funded by "permanent indefinite appropriations." That requires some explanation.

Many years ago, Congress passed a law that said the Treasury shall have continuing authority to disburse all the money required to pay the interest on the outstanding Treasury debt. That permanent law will remain on the statute books until or unless it is repealed, which is most unlikely. "Indefinite" signifies that there is no limit on how much the Treasury can spend to cover the required interest payments. Similar statutes were passed years ago to cover Social Security and Medicare benefits.

The result is that the military request for funds is by far the largest part of the budget that is subject to congressional control through the annual appropriations process. That makes military spending especially vulnerable to pressures to reduce the deficit.

The result of this technical fiscal arrangement is that the "entitlements" (especially Social Security and Medicare), receive a rapidly rising portion of the budget automatically. Simultaneously, there is a sharp long-term downward trend in the share of the federal budget devoted to national defense. A few numbers will bring the situation into focus. In the 1960s, 47 percent of federal spending went to defense. During the first decade of the 21st century, that ratio was down to 19 percent.

Looking ahead, the actuarial reports on Social Security and Medicare show rising expenditure trends over the next several decades. Expected increases in interest rates and size of the public debt mean that outlays for interest payments on the national debt also will accelerate. The squeeze on the military budget thus is likely to continue for years to come.

Some complications need to be considered. The real or fundamental costs of maintaining a large military establishment are not financial. The real costs are the men and women pulled away from civilian pursuits. Some may not return from battle, or are badly wounded.

The real costs also include the technology diverted to military ends, the many barrels of oil pumped from the earth, and the many metals and minerals used in producing weapons and related military equipment. In short, the human and national resources and the stock of capital devoted to the national security can be used in civilian activities. The other side of the coin is, of course, the enhanced national security. To cite the obvious - that is often overlooked - during the long Cold War, the Soviet Union - our major military competitor - never attempted a direct attack on the U.S. That's the benefit side.

There are several key points of economic substance that flow from analyzing the data. The prosperity of the nation does not require any particular level of military activity. In fact, our productivity and competitiveness will suffer if defense spending is used to prop up the prosperity of any region or industry. What happens when an unneeded military base is closed and turned to civilian uses? Good studies provide an answer. After a reasonable adjustment period, employment at that facility usually is higher than ever.

Let us turn to a related point. Government can encourage a stronger national economy by other means than spending on military programs. That includes investing in education, research and development, and more efficient transportation. Also, it can reduce tax and regulatory obstacles that inhibit the flow of private investment and innovation. These actions will simultaneously help strengthen the defense industrial base. That is the ability to design and produce weapon systems and other needed military equipment. Those resources are almost entirely in the private sector. That is an example of how to reconcile military and economic factors in a positive way.

Another key point is that there is no fixed share of the nation's economy and budget to which the military sector is entitled. The fundamental challenge facing the national security establishment is to try to convince the American people that a given spending level is justified in the combined light of two basic factors: the continuing threats to the national security, and the priorities of the civilian sectors of the government and of the economy generally. Yes, it is a difficult balancing act.

We should recognize that, however large the military budget seems to be in dollar terms, it really is using a minor part of the nation's resources. Our massive economy is not propelled by modest shifts in the relatively small share devoted to the military. Nevertheless, economic and security factors are closely related.

I do not claim to foresee the likely strategy nor the needed force structure required for our security in the years ahead. Surely, the nation needs a strong and resilient corps of dedicated officers and enlistees trained to meet a variety of contingencies. We also need a strong and diversified high-tech design and production capability - that's the defense industry - to respond effectively to ever-changing national security requirements in an uncertain world.

The dangerous world we live in also requires us to rethink the tendency to reduce the portions of our resources devoted to national defense. That downward trend should not be an objective, but it can be a result of serious nonpartisan analysis.

I give the last word to Adam Smith, the wily Scot who founded economics. This quote is from his classic book, The Wealth of Nations:

The first duty of the sovereign is defending the society from the violence and injustice of other independent societies. It grows gradually more and more expensive, as the society advances in civilization.
Why? Basically, because economic progress means that there is more wealth to defend. Also, advancing technology provides more opportunity and need to spend more money for national defense. *
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