Military Finance 101 with Travis Sharp
by Travis Sharp
August 4, 2018
Starting from 0, where do civilians start with the U.S. Defense Budget?
The defense budget continues to grow faster than the rate of inflation, which is about 2% per year, due to generous personnel pay increases, growing maintenance costs, and weapons procurement overages. As a result, the defense budget must increase more than 2% each year just to maintain the same-sized force as today. That fact has important logical implications. If the United States froze its defense budget at today's level, providing no more increases, then at some point in the distant future the U.S. military would consist of one exquisitely-armed soldier sporting the best equipment, healthcare, and training that money can by. But he or she would be pretty lonely.
The point is that maintaining the U.S. military's size and capabilities will cost more money each year, forever. The only ways to change that are to fix the internal cost growth problem, which people have tried and failed to do, or reduce the size and capabilities of the force.
Again, from 0. How does one begin to break down the gigantic defense budget & figure out what that number really means?
Understanding the enormous size of the defense budgets requires us to hold two opposing ideas in our minds at the same time, which F. Scott Fitzgerald said requires a first-rate intelligence. On the one hand, the U.S. defense budget measured in absolute expenditures is far larger than any state's in human history. We probably spend at least twice as much as China, our nearest competitor, although China's official spending figures are ambiguous. On the other hand, the U.S. defense budget consumes no more than 4% of U.S. GDP, a tiny fraction of our overall wealth.
Herein lies the contradiction: the U.S. defense budget today is simultaneously enormous and affordable. That being the case, we really should not say, "We cannot afford the defense budget" because, economically speaking, we can. Rather, we should say, "We cannot afford the defense budget because we'd rather save the money or spend it on different things." We select our political leaders to make precisely those types of choices.