The 4 Percent Solution

As the Iraq war begins to draw down, there are growing fears lawmakers will again seek a peace dividend, as they did at the end of the Cold War. At the very least there is the prospect that the emergency wartime supplementals that have maintained what some would call artificially high levels of defense spending will be reduced or go away completely.

That explains why some have been calling for a floor to be set under defense spending. The Lexington Institute’s Dan Goure argues in a recent paper that the floor should be set at 4 percent of GDP. Others inside and outside of government have settled on the same figure. In fact, the president of the Association of the U.S. Army, Gordon Sullivan, has been calling for such a floor to be set since 1998, and Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, called for the 4 percent figure back in October 2007.

Conveniently, when you add in the supplemental spending bills, defense spending is currently just about 4 percent of GDP. Goure says the single most important decision awaiting the next president is how much will be spent on defense, as the future of the country rests on that decision. His argument for sustained high levels of spending is based on the fact that the current force is worn out from fighting two wars and in many cases is obsolete, and that to stay modern and relevant, the U.S. military must recapitalize.

As Goure says, the costs of maintaining a modern military will continue to rise. He cites a Congressional Budget Office report that said the future force is rapidly becoming unaffordable because of the growing cost of pay and benefits, increasing O&M costs for both aging equipment and newer more sophisticated items, recapitalization needs across the force and the continuing need for transformative technologies.

There are certainly benefits to pegging defense at 4 percent of GDP. Indexing defense spending to GDP would provide somewhat greater stability in defense planning. It would also insulate defense spending from the predicted growth in entitlement spending. Those who push for the 4 percent solution repeatedly point out that compared to past defense build ups it’s relatively cheap. As Goure says, the Reagan defense buildup was purchased for approximately 6.2 percent of GDP, which was reached at the height of the buildup in 1986.

The defense spending debate may be focusing on the wrong budget figure. The more problematic figure is the percent of the federal budget that goes to defense. Defense spending has steadily climbed as a percentage of total federal outlays from 16 percent in 2001 to 20 percent this year, which leaves just 18 percent of the budget left over for other discretionary funding. Discretionary spending, things such as highways, bridges and farm bills, and the part of the federal budget where Congress actually gets a say, has dropped to 38 percent of total outlays, while mandatory spending has risen to 56 percent. As most every federal budget analyst has warned, entitlement spending, Social Security, Medicare, and Medicaid, will climb rapidly over the next decades. There is also the little problem of tax revenues, which of course correlate strongly with economic growth. Growth from 2004-2007 pushed up tax revenues. A slowing U.S. economy will lead to the reverse.

One of the reasons there was a vigorous defense debate back in the 1980s — eventually leading to various efforts at defense reform — was because defense spending crowded out non-defense discretionary spending. Members of Congress began calling attention to wasteful defense spending. But back then, federal discretionary spending totaled 44 percent of the budget, mandatory or entitlement spending was slightly lower at 42 percent, the difference accounted for by net interest spending.

Along with the defense buildup and the war costs since 2001, non-defense discretionary spending rose as well, to almost 20 percent of total federal spending. But in the last two years it has declined, and is projected to continue to decline. As defense crowds out other spending, members of congress won’t like that, and as we have seen in recent months, they will begin targeting “gold plated” weapons systems for spending cuts, much as they did in the 1980s.

The problem with pegging defense spending at a percentage of GDP is that it does not rest on the solid base of a strategy tied to force planning, which would leave the defense budget open to attack from lawmakers. This is where analyses such as that done by Goure fall short. He runs through a list of costly modernization programs but doesn’t ask whether the country really needs all of them. Same thing with force structure, there is no analysis of whether the ground forces are right sized or not. At the end of the paper he says some of the nuclear arsenal could be trimmed along with the second engine for the Joint Strike Fighter.

Absent the rigorous analytical assessment, lawmakers will first target costly weapon systems, followed by cuts in force structure. The defense debate is still desperately in need of a sound strategy backed by a rigorous assessment of potential threats and a detailed discussion of what force structure and weapons are needed to carry out that strategy.