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Saturday, December 1, 2018

Guns or Butter: It’s Time to Be Honest about Which Is Driving Federal Debt

Defense spending isn't the major debt driver today, and it likely won’t be in the near future.

 In October, Senate Democrats—led by insurgent 2016 presidential candidate and possible 2020 presidential candidate Senator Bernie Sanders (I-VT)published a report claiming that War on Terror spending has been significantly responsible for America’s deficits since 9/11. With Democrats now in charge of the House of Representatives, this factually incorrect but popular narrative may impact federal policy.

Democrats do have two points in their favor: America’s national defense budget is large, inefficiently spent, and often influenced by corruption. And war-related increases in defense spending have been a significant factor in America’s increasing deficits since the turn of the century.

As Institute for Spending Reform President Jonathan Bydlak told me in an e-mail, “the national debt has increased by $15 trillion since 9/11. Pentagon spending contributed to this growth.” However, Bydlak also wrote that

looking forward, all discretionary spending…will continue to decrease as entitlement spending skyrockets. It will not be possible to deal with rising deficits and debt without considering their biggest drivers.

Bydlak summarized the political situation in a phone call. He said that Republicans downplay the impact defense has on past deficits, and Democrats downplay the impact entitlements have on future spending.

Bydlak’s observation about future spending is especially on point. The Department of Defense’s budget is shrinking as a percentage of the federal budget. It is currently 14 percent of the budget, which is smaller than expenditures for Social Security and the federal health care system—both of which will take up larger portions of the federal budget.

The facts are clear: while increased defense spending has contributed to the national debt’s massive increases since 9/11, it is federal health care programs and Social Security that have been driving our debt’s growth for years—and will do so even more in the future. An April 2018 CBO report projected that publicly held debt would grow from $14.7 trillion in 2018 to $27.1 trillion in 2028.

This astonishing change doesn’t even tell the full story, as CBO only looks at publicly held debt. For a point of comparison, the debt at the end of Fiscal Year 2018 was over $21 trillion. Additionally, CBO’s spending projections optimistically assume that Congress will follow through on “current law” related to spending cuts and tax increases. In reality, Congress rarely actually follows through on such matters.

A Primer on Federal Deficits

According to the Office of Management & Budget, federal deficits from 2001 to 2017 peaked in 2009, hit a low point in 2015, and are going straight back up. Trillion-dollar deficits are projected.

Like Obama, President Donald Trump has increased spending and reduced revenues.

Spending more than the government takes in is the literal reason for an annual deficit. However, many factors affect spending and revenues. For example, President Barack Obama’s first year in office saw a trillion-dollar deficit. Much of that deficit (and deficits in subsequent years) came from reduced tax revenues because people were poorer due to the recession. Obama’s high-cost policies and welfare “tax cuts” in the 2009 stimulus made things worse.

Obama’s predecessor, George W. Bush, ran deficits in part because of increased defense spending and tax cuts, though the tax cuts reduced and increased revenues at various points in his two terms. Recessions at the beginning and end of his presidency played roles.

Like Obama, President Donald Trump has increased spending and reduced revenues (the latter through tax cuts). The 2018 deficit of $779 billion is affected by those decisions. Yet Trump’s deficits have also been more affected by increased costs in Medicare, Medicaid, and Social Security than any president so far.

So, What’s Up with Defense Spending?

Manhattan Institute Senior Fellow Brian Riedl recently refuted the Senate Democrats’ October document. They claimed that “without the wars in Iraq and Afghanistan, the enormous post-9/11 defense buildup, and several rounds of costly, regressive tax cuts, the federal budget would not be $779 billion in deficit, but rather $156 billion in surplus.” That assessment blamed $283 billion of the 2018 deficit on defense spending increases from 2001 to 2018.

According to Riedl, Democrats are correct in their math but misleading in their analysis. They added up dollar values that are greater than the deficit. That, he wrote, could happen with any part of the budget. Riedl said the following was more honest accounting:

Since 2000, CBO data shows that federal spending has risen by 3.0 percent of GDP, as follows:

  • Entitlement spending rose by 3.3 percent of GDP;
  • Defense discretionary spending rose by 0.2 percent of GDP;
  • Non-defense discretionary spending rose by 0.2 percent of GDP; and
  • Net interest costs fell by 0.7 percent of GDP (due tolow interest rates).

In other words, defense spending has gone up since 2001, but entitlement spending has gone up by more than 16 times as much. Additionally, Riedl noted that the Senate Democrats’ report paints nearly all tax cuts and all post-9/11 war spending as Republican problems. Riedl explained in detail that Democrats as a party voted for many tax cuts, as well as the Iraq and Afghanistan invasions.

What about War Spending, Specifically?

The Congressional Budget Office (CBO) analyzed war spending since 2001 in an October report. The agency calculated the annual average at about $116 billion.

The CBO report is valuable but narrow in scope. It doesn’t include veterans’ care or war-related domestic spending. A new and widely circulated Brown University report from the university’s Costs of War project says the true cost of war is much higher. Accounting for “not only war appropriations” but also “war-related spending by the Department of State, past and obligated spending for war veterans’ care, interest on the debt incurred to pay for the wars, and the prevention of and response to terrorism by the Department of Homeland Security,” the study concluded that $5.9 trillion will be spent on war by September 30, 2019.

The Brown study has additional value because it projects future interest payments on war-related spending.

I calculate the Brown study annual average for war spending at $327 billion. The authors note that some War on Terror-related spending is outside of its scope. Thus, the true cost of war could be higher.

However, the reverse is also true. Five-hundred billion dollars in Homeland Security costs and increased State Department spending may not be appropriate to include in war spending. It is impossible to know how much would have been spent on these departments if war hadn’t been initiated.

The Brown study has additional value because it projects future interest payments on war-related spending. Their estimate is $7.9 trillion “over the next several decades…” The report also includes “estimated future obligations for veterans’ care,” which is important because, for veterans and their families, the costs of war go far beyond the battlefield.

To calculate the total budget effects of the War on Terror, let’s use the Brown study as our marker: $327 billion is more than every single annual deficit in the history of America prior to Fiscal Year 2008. It’s $954 per American each year spent just on the War on Terror.

That’s a lot of money.

Back to Deficit and Debt Drivers

Yet even that massive sum pales in comparison to the amount spent on Social Security, Medicare, and Medicaid in 2017. According to the CBO (as seen in the graphic below), Social Security spending in 2017 was nearly three times that of war spending. Medicare spent nearly twice as much, and Medicaid dollars were $48 billion above that of war.

The Brown study is also useful in looking at the future costs of the War on Terror. Assuming the US does not engage in comprehensive combat as we did in Iraq and Afghanistan, veterans’ care and interest payments will be the main drivers of war spending in the future. The $327 billion average is just that—an average—since 2001. CBO noted, for example, that OCO spending peaked in 2007 and 2008. So, both the CBO average of $116 billion in direct war spending and the Brown average of $327 billion for estimated war-related spending will diminish over time.

Contrast this with Social Security, Medicare, and Medicaid. The CBO projects that Social Security will rise from 4.9 percent of Gross Domestic Product (GDP) in 2018 to 6 percent in 2028. Medicare is projected to drive federal mandatory health care spending (which includes some Affordable Care Act spending and all CHIP spending) from 5.3 percent of GDP in 2018 to 6.6 percent in 2028.

With US GDP projected to grow from $20.1 trillion in 2018 to $29.8 trillion in 2028, this means Social Security expenditures will go from $985 billion this year to $1.79 trillion—a growth of 81 percent and an average increase of $85.5 billion each year. Health care spending will rise from $1.07 trillion to $1.97 trillion in that same decade. This is a growth of 84 percent and an annual average increase of $92 billion. (These are not inflation-adjusted numbers.)

Suddenly, $327 billion out of deficits, which are projected to rise from $779 billion in Fiscal Year 2018 to over $1.5 trillion in 2028, don’t seem so dominant.

That’s a lot of money. But it’s still a lot smaller than entitlements.

This fits with the overall defense budget picture. CBO projects that non-OCO defense will rise from $590 billion in 2017 to $769 billion in 2028. Riedl told me in a phone call that this understates the likely size of defense spending because CBO’s projections assume Congress will implement budget caps on defense. He said $150 billion should be added to the estimate for the next decade (not accounting for any wars that may take place).

That’s a lot of money. But it’s still a lot smaller than entitlements.

Looking Even Longer

So, clearly, war and overall defense spending have not driven US federal deficits since 9/11. They have contributed, just as a thousand other policies have. They aren’t the major driver today, and they won’t be in the near future, even if policymakers go back to the old “guns vs. butter” policy debates of past generations. In an e-mail, Riedl said that decades out, the difference is even starker.

“According to CBO data, the Social Security and Medicare deficits will rise from 1.9 to 6.3 percent of GDP over the next 30 years,” said Riedl.

The deficits specifically attributed to these Social Security and Medicare’s shortfalls will also result in interest payments of 6.3 percent of GDP by 2048—bringing their total shortfall to 12.6 percent of GDP.

Even eliminating the entire defense budget (a stable 3 percent of GDP) would cover less than one-quarter of Social Security and Medicare’s shortfalls by that point.

Image courtesy of Illinois Springfield via Flickr.