[Dialogue] Defense spending

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Two-Thirds On Defense


Jurgen Brauer and Nicholas Anglewicz


June 10, 2005




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Jurgen Brauer <http://www.aug.edu/~sbajmb>  is a professor of economics at
Augusta State University in Augusta, Georgia. Nicholas Anglewicz is an MBA
student there.

Many Americans believe that 19 cents on defense for every 81 cents on
non-defense is a reasonable way to spend a tax dollar. But by another
calculation, the tax dollar splits 68 cents for defense and 32 cents on
everything else.  It is a common misconception that U.S. defense expenditure
is equivalent to the Department of Defense outlays. Instead of $436.4
billion of defense expenditure, as Congressional budgeteers count,
government statisticians in the Bureau of Economic Analysis (BEA) counted
$548.0 billion for calendar year 2004-a whopping $112 billion difference.
And by our own calculations, U.S. defense expenditure is much higher than
even the BEA's numbers suggest, namely $765.6 billion in calendar year
2004-about $330 billion or 75 percent more than the Department of Defense
outlays.

To account for the difference, one needs to recognize that, for example,
nuclear weapons-related outlays are budgeted under the Department of Energy
line item, not that of the Department of Defense. Likewise, Veterans Affairs
has its own department and budget. It is a defense-related category,
reflecting obligations incurred to American servicemen and women on account
of past U.S. military activity. Picking through the budget, the BEA, housed
in the Department of Commerce, reclassifies each line item into "defense"
and "non-defense" categories. For calendar year 2004, national defense
outlays thus amounted to the aforementioned $548.0 billion.

The BEA also recognizes that the total fiscal year 2004 federal outlays of
$2,292.2 billion consist to a very large degree of Social Security, Medicaid
and other trust fund payments. These trust funds happen to be run via
federal government accounts, but as they merely transfer funds among
citizens, they do not constitute expenditures for federal government
functions per se, such as agriculture, education, transportation or
diplomacy. Thus, subtracting transfer payments out of the federal budget,
the BEA calculates that in addition to the $548.0 billion for defense, the
federal government spent only another $262.1 billion on all other federal
government functions, for a total of $810.2 billion. Hence, BEA arrives at
the ratio of 68 cents for defense as against only 32 cents on everything
else.

While the BEA's reasoning is economically correct, even the BEA leaves out
an important item: the allocation of federal interest payment on the
government's debt. Most years, the U.S. federal government runs a budget
deficit. That deficit needs to be financed by borrowing. The resulting
interest expense should therefore be allocated to defense and non-defense
spending in proportion to their respective share in causing the annual
deficits. If for example overall non-interest outlays are $90, split between
$60 for defense and $30 for everything else, and revenue was only $81, then
the $9 deficit should be attributed as $6 on account of defense, and the
remaining $3 on account of non-defense federal government outlays. The
interest on the resulting debt should be allocated in like fashion.

It turns out that the BEA's computation of total federal government outlays
of $810.2 billion for calendar year 2004 excludes, incredibly, some $321.7
billion of net interest payments that (fiscal) year. Thus, if 68 cents on
the federal dollar are attributable to defense, then 68 cents on the
interest-dollar is attributable to defense as well. For calendar year 2004,
this would add $217.6 billion to the defense outlays, for a total of $765.6
billion. In like fashion, non-defense federal outlays then run to $366.2
billion. (The details are more complex but, if anything, understate the
military's share in interest due; for example, the defense spending driven
budget deficits of the Reagan years occurred during a high interest rate
time period.)

On a per-capita basis, the average American in 2004 then did not pay $1,488
for defense but $2,605. In a word, the military ran on $217.08 per citizen
per month, while the remainder of the federal government ran on $103.83 per
citizen per month.

You might shrug your shoulders and say, "Well, it's worth it." True, in a
democracy, it's up to voters to make that determination. Just keep in mind
that when the press reports 19 cents for defense versus 81 cents for
everything else, the split really is 68 cents versus 32 cents.  Defense is
not one-fifth of federal spending but two-thirds of it.

Considering the ongoing carnage in Iraq, perhaps it is time to reconsider
that expense.

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