Sunday, November 4, 2007

A Few Words on Defense Spending

The purpose of this blog is to talk about Dayton and vicinity, so very rarely will it touch on national issues or politics. However, given the discussion in the Dayton Banana post, some brief remarks about defense spending, as this is one area of national public policy that has local economic implications.

Good sources (meaning they are not ideologically left or right) are two policy houses: Defense and the National Interest and the Center for Strategic and Budgetary Assessments (formerly The Defense Budget Project). I use Defense and National Interest graphics below.

The discussion is about the so-called "Military Industrial Complex" To understand this term and the concern, read Eisenhower's farewell address here.
Looking at defense spending in the context of the national economy a common measure is defense spending as a % of Gross Domestic Product (GDP). Over time one sees this measure at around 6%-7% during the Cold War and steadily declining. This means that as the national economy grew after WWII defense spending became less and less signifigant.

During WWII defense spending was huge, pretty much driving the economy (perhaps a proof the theory of economic pump priming), then dropping after the war and rising again due to Korea and the start of the Cold War.

What's interesting here is the relatively high % during the 1950s, when Eisenhower was president. This was the context of Eisenhower's warning in the farewell address.

Another way to look at defense spending is to compare how much was being spend over time, and projections, in current year dollars (to smooth out inflation).

The following graph shows defense spending being pretty stable in the post WWII era, with fluctuations within a certain range. Interesting to see that high Korean War era spike, though.

One thing the above chart does not show is that defense spending as a share of the Federal discretionary budget dropped from around 70% in the Truman/Eisenhower era to 50% today. This is not of the total federal budget, as things like Social Security, Medicare, and Food Stamps are not considerd discretionary spending.

At 70% one can undestand Eisenhower's concern about the influence of the military industrial complex on the Federal budget process. Even at 50% this is half of the budget pie. One can speculate on why the drop from 70% to 50%, perhaps due to increased Federal involvment with urban policy and and environmental and social spending?

I marked up the above graph, showing some key periods. One thing to compare is the brief era between WWII and the start of the Cold War, and the post Cold War minimum.

At the end of the Cold War there was talk of a "Peace Dividend", where defense spending would drop below the Cold War minimum range.

This did not happen.

Spending dropped to the Cold War minimum and no further.

Somewhere within the difference between the post Cold War mimimum and the post WII demoblizatioon top is the cost of being the world's technologically dominant military superpower. And this difference is what contributes to the local economy as the defense activity here is not "fly and fight" but more on the R&D/weapon system aquistion.


Greg Hunter said...

Recovered Good to see a Vet in the debate. Here is the Vanity Fair link for a MIC contractor>
I love the Data, but here again I think you must miss the breadth of Eisenhower's experience. He was 10 years old in 1900. Do you think Eisenhower's speech was formed on just his experience in the COLD WAR. He was alive when they beat plowshares into swords. Eisenhower's view is much longer than your data presents.

I would also argue that our head start in development has had a great influence and a comparison of our spending versus the rest of the world should be evaluated.

Anonymous said...

"One can speculate on why the drop from 70% to 50%, perhaps due to increased Federal involvment with urban policy and and environmental and social spending?"

Jeff, I think one of the main reasons for the disparity is that the economy has grown faster than military spending. That doesn't mean military spending is under control; it just means that percentage wise, military spending is a smaller piece of the GDP pie.