The Macroeconomics of US Defense Spending

This brief is a part of series prepared by the Burke Chair in Strategy on current issues in defense budgeting and strategy. Other briefs within this series include,

• “The Coming Challenges in Defense Planning, Programming and Budgeting” which can be downloaded at: https://www.csis.org/analysis/coming-challenges-defense-planning-programming-and-budgeting
• “‘Unplanning’ for Uncertainty” (to be published 8/2010)
• “The Uncertain Costs of War(s)” (to be published 8/2010)

This particular brief focuses on the interaction of the US federal budget and defense spending in the context of the macroeconomic realities with which the US is faced. It also compares US economic prospects and defense spending with those of the rest of the international community.

The first section of this brief analyzes the future global economic outlook with special emphasis given to the future implications of the recent Global Financial Crisis. This section draws heavily upon economic analysis presented in the IMF’s World Economic Outlook and draws several key conclusions:

• First, the 2008 Financial Crisis had a more detrimental impact on “advanced” economies like the US than on “developing” economies like China and India, leading to wider projected disparities between the future GDP growth rates of the advanced and developing economies (Slides 6-7).
• Second, on the average developing economies are projected to enjoy fiscal surpluses in the near future, while the advanced economies will likely find themselves falling deeper into public debt (Slide 9).
• Third, if the IMF’s economic projections come to be fulfilled, advanced economies like the US will find themselves with slower growth rates in fiscal balances than their developing economy counterparts, further implying that availability of funds for defense spending in advanced economies will decline relative to developing economies (Slide 10).

The second section of this brief analyzes the composition of global defense spending and trends in defense spending growth in key competitor nations vis-à-vis the US. This section draws primarily upon research performed by the Center for Arms Control and Non-Proliferation and the Stockholm International Peace Research Institute and arrives at three key findings:

• First, the US still maintains the lion’s share of global defense spending—US annual defense spending dwarfs that of any other nation or coalition of nations (Slides 12-13).
• Second, while US defense spending has increased at a fast rate over the course of the past decade, defense spending in key competitor nations like China and Russia has increased at an even faster rate, narrowing the defense spending gap between the US and these nations to some extent (Slide 14).
• Third, this trend is likely to continue as a fiscal and macroeconomic realities in the near-term may be more favorable to the developing economies than to the US, further narrowing the gap between US and potential competitor nations’ defense capabilities (Slides 16-21).

The third section of this brief analyzes US defense spending in relation to the greater US economy. This section’s analysis is based primarily on CBO reports as well as the DOD’s FY 2011 Budget Request, and arrives at three key conclusions:

• First, while US defense spending will experience real annual growth according to the FYDP, defense spending is projected to decline as a share of both GDP and total federal spending (Slide 23-25).
• Second, with the exception of the Clinton Era and the couple years preceding the Korean War, defense spending as a share of GDP is at its lowest point since WWII (Slide 26).
• Third and most importantly, defense spending does not impose a critical burden on the economy nor is it likely to be one of the primary drivers of growth in federal spending (Slides 29-31).

The fourth and final section of this brief analyzes the interaction of US defense spending and the federal budget, focusing particularly on health care, social security and public debt. This section draws on a number of sources to include the CBO, the OMB and the CBPP:

• First, growth in entitlements spending and debt service payments drives growth in federal spending (Slides 35-37).
• Second, in the absence of significant policy changes, the burden of entitlements and debt service spending as a share of both federal spending and GDP is expected to grow exponentially (Slides 38-44).
• Third, growth in deficit spending leads to a fiscal “quicksand” trap that encourages deeper deficit spending, and ultimately poses a significant national security risk (Slides 46-57).