Wednesday, June 21, 2023

Government Spending, Part 3: Military Spending, the Military Industrial Complex, and "The Next Ten Countries Combined"

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff submits one last analysis of military spending in the U.S. government budget.

Click to enlarge

The last two weeks we’ve determined the following about defense spending in the USA:

1) In 1955 defense spending including veterans affairs was 69.3% of the federal budget and “human priorities” such as Social Security, healthcare, unemployment, welfare, and education was 24.6%.

Today defense spending's share has fallen by three-quarters to 17.6% of the federal budget and human priorities has nearly tripled to 64.8%.

2) Including all levels of government—federal, state, and local—defense spending is 12.6% of combined budgets. Human priorities is 61.5% or nearly five times greater.

3) In 1955 defense spending including veterans affairs was 13.1% of GDP. Today it’s 4.4% of GDP which reflects primarily the enormous growth of the U.S. economy and the improved technological efficiency of the armed forces.

4) Korean War expenditures cost 10% of GDP annually. The combined Iraq and Afghanistan wars cost 0.6% of GDP annually at a time when human priorities averaged 20% of GDP.

5) Finally the total estimated cost of operations in Iraq and Afghanistan from 2001 to 2017 was $1.2-$1.7 trillion (source: Obama’s own budget director Peter Orszag). From 2001 to 2017 the federal government alone spent $35 trillion on human priorities and state & local governments several trillion more.

Although the Economics Correspondent isn’t na├»ve enough to believe every penny of the military budget is spent wisely, the statistics clearly show that in the 21st century military spending and particularly wartime operations have been reduced to a drop in the bucket compared to what American government spends “helping people.”

MILITARY INDUSTRIAL COMPLEX

Which brings us to the next criticism of defense spending: that it’s bloated and out of control at the behest of the military industrial complex, a cartel of giant corporate military contractors who pull the puppet strings of government to start wars so that they may sell more weapons systems to the Pentagon for unconscionable sums of money.

The Economics Correspondent agrees without doubt that large defense contractors lobby heavily to sell their systems to not only the Pentagon but also to other countries’ militaries. But just how big is this evil, shadowy corporate creature whose tentacles spread throughout and dominate the economy?

Breaking down the $814 billion 2023 defense budget (not veterans affairs, just the military) we look at the one pure “military industrial complex” budget item: procurement of new weapons.

Procurement is the third largest defense budget subitem (yes, third) after military personnel salaries/pensions and operations & maintenance. 

The 2023 cost? $170 billion.

$170 billion to buy new weapons and replace existing weapons (like munitions) is 2.9% of the $5.88 trillion the federal, state, and local governments will spend on human priorities. So while it’s not a meaningless number, $170 billion is hardly the make-or-break budget item driving 2023’s forecast $1.5 trillion deficit. 

And "buy one less aircraft carrier," which the political left forever espouses to solve all the federal government's budget woes, is going to fall far short when the cost of ***all military procurement*** is just 11% of the budget deficit.

However the USA’s recent military assistance to Ukraine will probably drive higher procurement costs spread out over the next few years to replenish depleted weapons supplies and could add several dozen billions more to future procurement budgets. This in turn could add another 0.34% to 0.68% to the equivalent of combined "human priorities" spending, assuming procurement budgets are elevated anywhere from $20-$40 billion per year down the road.

However there are two more budget items that partially pay out to military contractors. A large share of the $146 billion for “Research, Development, Test, and Evaluation” likely goes to defense contractors, and a smaller share of a larger item—”Operations and Maintenance” at $309 billion—also goes to contractors for “maintenance and modernization,” although the larger combined O&M budget items are training, recruitment, exercises, disposal, and overseas bases administration.

It's hard to find exactly how much of each subfunction is paid to contractors but Bloomberg estimates a grand total of $409 billion for the last complete year (2021) although some of those transfers include “Drugs and Pharmaceutical Products” ($36.8 billion), “Facility Related Services,” ($24.5 billion), “Management Advisory Services” ($21.7 billion), and “Construction Related Services” ($19.6 billion). 

Yes, these dollars go to contractors too, but they’re not exactly Northrop Grumman or Lockheed Martin-type weapons dealers. 

Backing those soft-contractor expenses out we get a final estimate of $306 billion for the purchase of new weapons systems, maintenance of existing systems, and R&D for weapons systems. Not an insignificant number, but again just 5.2% of what government spends on human priorities.

And while we’re speaking of industrial complexes: Medicare, Medicaid, and state/local government healthcare programs will spend $2.2 trillion of tax money in 2023, nearly all of it as reimbursements to or purchases from doctors, hospitals, clinics, laboratories, pharmaceuticals, medical device makers, etc… 

That's over seven times more than the Pentagon pays its contractors for weapons.

So who is bigger, has more to gain and has more lobbying influence over our tax dollars? The military industrial complex at $306 billion? Or the healthcare industrial complex at $2.2 trillion? 

(We won’t even talk about the welfare industrial complex) Perhaps it’s long past time people added “healthcare industrial complex” to their vocabulary and gave it seven times the weight of its military nephew.

“SPENDS MORE THAN THE NEXT 10 COUNTRIES…”

Finally we get to the last soundbite of “the United States spends more on defense than the next ten countries combined” as if this signifies the lions share of government spending is military (when in fact only 17.6% is).

Checking the data confirms that yes, ***on a nominal basis*** the United States does spend more than other countries like Russia, China, etc… although it’s no longer the next ten countries combined, but rather “only” the next nine (yes, admittedly nine is still a lot although that number is still falling).

But the real fallacy in this comparison is ignoring the per-capita costs of running a military in the United States versus running one in China and Russia.

Starting with personnel: the standard of living of a U.S. soldier or officer is far higher than his/her Chinese or Russian counterpart, making him/her a lot more expensive to employ.

Although the best data the Correspondent could find is from 2018-2020, the Kremlin recently raised its average army lieutenant’s salary to 66,100 rubles per month. In U.S. dollars that’s about $791 per month, or $9,500 a year.

A Russian lieutenant colonel made 88,700 rubles per month ($1,062 per month, or $12,747 a year).

The Economics Correspondent has an active lieutenant colonel in his family and knows he's paid more than ten times that, and Chinese counterparts make even less than Russians.

The healthcare, pension, housing subsidies, and other benefits for U.S. service personnel are also far better/more expensive than for Russians and Chinese.

The same holds true for weapons systems, maintenance, and R&D. Try paying technicians, engineers, and factory workers developing and producing M1A2 Abrams tanks and F-35 fighters the same salary as their Russian counterparts are paid to make T-90 tanks and Su-57 aircraft (all 21 of in existence so far). 

Then watch the Americans all quit their jobs and go work in another industry.

So of course the U.S. military budget is going to be larger than a lot of other countries’ combined. It's like complaining that "America spends more than the next X countries combined on information technology." Sure, what does it cost to employ an American software engineer compared to a Chinese one?

A much more accurate measure that offsets for cost of living is military spending as a share of national GDP. Using that measure, which critics of military spending *never* mention, the United States falls to anywhere from #15 in the world (Stockholm International Peace Research Institute – 2021) to #20 (World Bank) or #24 (cia.gov).

In all three cases the USA is several spots lower on the list than Russia although not China (yet).

Of course if U.S. allies in Asia and particularly in Europe carried a greater share of the financial burden of military readiness/operations—say NATO members meeting or slightly exceeding their minimum 2% of GDP defense spending targets—U.S. military spending both nominally and as share of GDP would fall considerably further.

If the top five NATO members, South Korea, and Japan were to increase their defense budgets by just 15% to offset regional American cost burdens the USA would fall several more spots on the per-GDP scale—on all three aforementioned lists.
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Links to data:

1) "Government Spending" articles, parts 1 and 2

http://www.cautiouseconomics.com/2023/06/government-budget14.html

http://www.cautiouseconomics.com/2023/06/government-budget15.html

2) Nominal defense spending by country

https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures#/media/File:Global_Military_Spending.webp

3) Defense spending as % of GDP by country

https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures#As_a_share_of_GDP

https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?most_recent_value_desc=true

https://www.cia.gov/the-world-factbook/field/military-expenditures/country-comparison

4) U.S. defense spending by subfunction

https://www.whitehouse.gov/wp-content/uploads/2023/03/hist03z1_fy2024.xlsx

5) 2018-2020 Russian military raises (published 2018)

https://russiandefpolicy.com/2018/01/03/kremlin-raising-military-pay/

6) Estimated defense contractor spending

https://about.bgov.com/defense-budget-breakdown/

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