Wednesday, March 18, 2009

PEACE | What Happened to Our Dividend?

When the Berlin Wall came down in 1989 and the Soviet Union disintegrated, many of us looked forward to a Peace Dividend, a reduction in military spending that would allow more U.S. Government spending on public needs like health care or education, or tax cuts, or a combination.

We got the tax cuts but the Peace Dividend has melted away. Spending on the ongoing wars in Iraq and Afghanistan have replaced spending on the Cold War, and U.S. military spending is still at the level it was in 1990.

In FY 2008, the federal budget shows $751.6 billion for defense. This is made up of four elements: (1) DoD spending (line 051) of $583.1 billion, (2) Nuclear weapons in the Department of Energy budget, $24.2 billion, (3) Veterans Administration, $86.6 billion and (4) borrowing cost of unfunded military expenditure, $57.7 billion.

However, the Bureau of Economic Analysis (BEA), in the Department of Commerce, shows a higher number for national defense consumption and gross investment expenditure, $734.8 billion. If we again add in Veterans Affairs ($86.6 billion) and interest on military-related borrowing (which BEA figures is $163.0 billion), the total is $984.4 billion, nearly $1 trillion. So how does this compare with 1990?

MilEx as Share of GDP.
One measure of the change between 1990 and 2008 is military spending as a share of GDP. The media tend to report the 2008 figure as 4.1 percent. This is the lower line in the first chart below, which I reproduce by permission from Professor Jurgen Brauer of the James M. Hull College of Business at Augusta State University in Augusta, Ga.
Prof. Brauer argues:
But that uses the DoD budget number without the DOE’s nuclear weapons complex, without the VA, and without the interest cost for military-related debt.
If the BEA’s numbers for defense spending are used, as in the top line in the chart, the ratio is 6.9 percent of GDP. By the U.S. government’s own accounts, military expenditure is two-thirds higher than the usual media report.

MilEx as Share of Federal Spending. The second chart shows military expenditure as a percentage of the overall federal budget.
The lower line in this chart ends at 19.9 percent for 2008, about 20 cents of the federal dollar. But Prof. Brauer argues that this is not the right number to use, because the federal budget
is loaded down with transfer payments, that is, monies that come in and go out simply because federal law mandates that they be handled through the feds. Examples are social security contributions that pay for grandpa’s monthly check or money that residents of Oklahoma pay in federal taxes that then go back to Oklahoma to fund schools or build highways there.
When transfer payments are removed, the budget for federal functions is only $1,440.6 billion, of which BEA's $984.4 billion in military expenditure is 68.3 percent, as shown on the top line on the chart. That’s not 20 cents on the federal dollar but 70 cents.

Spending on defense has come down since the 1960s. But compared with 1990 the Peace Dividend has disappeared.