Misapprehensions about Military Spending

The passing of each year’s defense budget is often accompanied by screams of outrage from both sides of the political aisle, and this year was no exception. Even though the proposed budget by President Barack Obama and Defense Secretary Robert Gates increased defense spending by more than $15 billion, Sen. James Inhofe (R-OK) blamed Obama for “disarming America. Never before has a president so ravaged the military in a time of war.”1On the other side of the spectrum, Representative Barney Frank (D-Mass) remarked, “If we do not get military spending under control, we will not be able to respond to important domestic needs.”2 Only in Washington can the military budget be both too small and too large.

Unfortunately, as with many economic issues, the heated nature of the debate has led to a substantial amount of misleading information. Although in basic dollar terms, 2010’s $664-billion military budget will be the largest in American history,3 it is not exceptionally large either in terms of the proportion of the government’s budget consumed or as a percentage of GDP. Even with the added costs of two simultaneous wars and the continuation of the Global War on Terror, overall military spending constitutes both a smaller portion of the US budget4 and a smaller portion of GDP5 than it did at the beginning of the 1990s. Looking at the defense budget for 1986, which is 6.3 percent of GDP, Obama’s desired 4.5 percent of GDP seems rather small. Why the confusion? While military spending has been increasing almost every year for decades, most people forget that the United States’ economy has continued to grow during the same period of time. The pace of growth offsets the increase in spending. In fact, a growing economy makes increases in spending possible.

When searching for room or reason to reduce military spending, a lot is made of the comparisons between the US’s defense budget and the military spending of many other countries around the world. In quantitative terms, the United States spends considerably more on its military than any other country in the world. In fact, based on expenditures in the 2007 fiscal year, the United States alone constitutes 44.3 percent of all global military spending.6 The second-largest spender in the world, China, has a budget that is only 7.3 percent of the total sum of global military spending.7 But again, these numbers are misleading. While the US spends on 4.5 percent of its GDP on defense, China actually spends about the same as the US (when adjusted for PPP): 4.3 percent of GDP.8 Many countries actually spend much more. Israel, thanks to defense issues arising from the conflict with Palestine, spends 7.3 percent of its budget on defense.9 Saudi Arabia, who nobody usually accuses of having militaristic aspirations, spends a whopping 10 percent of its GDP on military purposes. The overwhelming difference in the share of global spending spent has less to do with inherent American militarism and more to do with America’s wealth. America’s GDP is much larger than the rest of the world’s, which allows it to spend much more on the military. China, Israel and Saudia Arbia, on the other hand, are able to purchase much more on less dollars, which makes estimations of their military budgets seem much smaller than they actually are.

Even though neither side of the budgeting argument wants to admit it, defense spending as a percentage of GDP in the US actually peaked in 1953, and has been steadily falling since.9 Even though the US Government made significant sacrifices at the end of the Cold War in order to maintain an extremely high level of weapons capacity, these were offset by a continuously strengthening economy. In the end, each process fuels the other: a growing economy allows for a quantitatively larger amount of military spending, while a proportionally smaller amount of military spending will free up more resources to help the economy grow.

There is no reason that this trend shouldn’t, or won’t, continue. The most current spike in spending is similar to increases in spending that occurred during other Republican administrations, which was later offset by further cuts. Ronald Reagan oversaw a military spending increase of about 1.5 percent of GDP during his first five years in office, which is similar to the increase under the exiting Bush administration. If history is any guide, the most recent increase will undoubtedly disappear as priorities shift in the coming years.


Works Cited
1 Corley, Matt “Inhofe: Gates’ Defense Budget ‘Disarms America’ And ‘Cuts Funding For Our Troops In The Field’” Think Progress. Apr 7th, 2009.http://thinkprogress.org/2009/04/07/inhofe-defense-budget/

2 Bauman, Nick. “Barney Frank to Obama: Cut Military Spending” Mother Jones. Feb. 24, 2009. http://www.motherjones.com/politics/2009/02/barney-frank-obama-cut-military-spending

3 Kaplan, Fred “ The New Pentagon Budget – So New?” Slate Magazine. Feb. 26, 2009.http://www.slate.com/id/2212323/

4 U.S. Defense Spending - % to Outlays.” Wikipedia.http://en.wikipedia.org/wiki/File:U.S._Defense_Spending_-_%25_to_Outlays.png

5 “Budget of the United States Government: Historical Tables Fiscal Year 2010” Table 15.5 — Total Government Expenditures by Major Category of Expenditure as Percentages of GDP: 1948–2008. GPO Access. http://www.gpoaccess.gov/usbudget/fy10/sheets/hist15z5.xls

6 “Worldwide Military Spending” Military Budget.http://www.militarybudget.info/WorldwideSpending.html

7 ibid.

8 “China” CIA World Factbook. May 27, 2009.https://www.cia.gov/library/publications/the-world-factbook/geos/CH.html

9 “Country Comparison: Military Expenditures” CIA World Factbook.https://www.cia.gov/library/publications/the-world-factbook/rankorder/2034rank.html

What do Alex Rodriguez, Bear Stearns and General Motors have in common?

They are all the unseemly result of uncompetitive markets.

Before we can address the article's three namesakes, it would help to review a strikingly brilliant passage from my Econ textbook. I've pulled out only the most relevant bits (and it's still a lot, and it's still a bit heavy). The chapter it's taken from is called "The Evolving Economic Order." I'm pretty sure it was written by Dr. Donald R. Byrne:

It should be remembered that the more competitive markets are, the more flexible downward prices are when a market surplus occurs (whether caused by a fall in demand or an increase in supply). In recent years - that is since WWII - the net of all changes in market structures has been to increase competition on most product and resources markets. It is important to understand how competition has increased in a historical context.

In the late 1800s and early 1900s, the US economy experienced an increased cartelization of markets. The trust era was in full swing. Andrew Carnegie was busy reorganizing the steel industry into a market dominated by his handywork: United States Steel. Judge Gary would preside over the industry with overt and then covert tactics. Alfred Sloan would work the same magic in the auto industry some years later as he [created the conditions] where General motors would remain dominant until the 1960s. Rising competition in the Post World War II era was to gradually eliminate the power of these cartels, much to the benefit of consumers, both poor and rich. The truth is that it was exploitation by economic power, and not class power, became increasingly clear to the intellectually open minded.
The resource market, especially the labor markets, underwent changes similar to those in the product markets, as unions like the United Steel Workers and United Auto Workers cartelized the labor markets. Alfred Sloan and Walter Reuther had much in common. Borrowing from Veblen and later Galbraith, the cartelization of product markets led to the cartelization of productive resource markets, the phenomenon being called by Galbraith "countervailing power." This anti-Marxian result reinforced the traditional economic argument that the demand for productive resources is a derived demand and that ultimately what happens in the product markets will be reflected in the productive resource markets. Power exploits weakness rather than one class exploiting one another. The firm and its labor resource systematically increased its exploitation of the consumer, rather than management and capital exploiting labor.

Technically, as markets become less competitive, productive resources (labor, capital and entrepreneurs) exploit the consumer directly through the control of prices and systematically by expropriating the consumer surplus. Most of the diminished consumer surplus is converted into surplus wages, surplus profits, and excess executive compensation. [...] While the excess executive compensation is a result of exploitation of the consumer, the excess rewards to labor share the fruits of this exploitation; the latter being, in absolute terms, much larger than the former. Autoworkers, professional athletes, entertainers and their agents, and other resources employed in markets where competition is weak, are just as much an exploiter of the consumer as the robber baron of old.
The possibility of being a new hire is very low in both the auto and telecommunications industries. Jobs have either moved to lower labor cost areas within or without the United States, or capital has replaced labor. Residual monopoly power continues to fire the engines of structural change. In the traditional "big three" portion of the auto industry, hourly production labor costs in the neighborhood of $40-50 still prevail. A typical worker often makes $18 in wages, while other labor costs (such as medical insurance, retirement, unemployment insurance, and social security) are about $24 per hour, for a total of $42 per hour. The pressure continues to lower these costs by outsourcing, replacing a permanent work force with contract labor, moving to lower cost labor markets, or to replace labor with capital so that the remaining labor's productivity increases and compensates for these high labor costs.

A resulting oddity occurs in the auto industry. When sales and production rise, employment does not increase, rather overtime rises. The typical $18 per hour rises to time and a half of $27, but the other labor costs (nearly all of them capped) fall often to $10, $8, or even $6. Total labor costs for overtime production significantly fall. Unless labor productivity falls proportionally or more than proportionally, it is cheaper in terms of labor costs to produce on overtime than on straight time. As production and sales fall, overtime is reduced and labor costs per hour are higher than on overtime.

The financial sector is now going through this process. As fees in the security industry become much more competitive and as computer technology revolutionized the security business, mergers and closures sent tens of thousands of employees looking for jobs outside the securities industry. As restrictions on bank branching have become more liberalized, a similar revolution in the information handling (computer technology) and competitive pressures from outside the banking industry have occurred.

[ed. note: This is a good place to add that these competitive pressures and the bank industry's counter-reactive cartelization have also led to insane business models, as each person struggles for what's left of an ever tightening pie. Revolution in the resource market is directly responsible for once-prudent banks leveraging their balance sheets 20 to 1 and 30 to 1. I heard a story of a hedge fund manager in the 90s that actually maintained a 200 to 1 debt ratio. This was Myron Scholes, a nobel prize winner in economics; smart and dumb never came together in such a perfect storm His company almost singlehandedly destroyed America's financial sector. No shit. Read about it here.]

In the market for professional sports, it is obvious that government protection from competition through the franchise arrangements has created cartels. The National Football League is a government sanctioned cartel, as are the American and National Leagues in baseball, the National Basketball Association, and the National Hockey League. By limiting entry, supply is reduced and the prices are much higher than would have occurred in a more competitive environment. The surplus profits, which once flowed to the owners, now increasingly flows to the workers in the form of surplus wages. Million and multi-million dollar salaries are common among the player-workers.

Whether it be huge profits or huge wages, the consumer/fan is the victim. This exploitation of the consumer is a denial of consumer sovereignty and is a mockery of the market system. Attendance at a professional sporting event has become a once per season occurrence. The exemption (actual or implied) form the anti-trust laws have created a legally sanctioned cartel that enables the expropriation of the consumer surplus and transfers it to the economic rent in the form of surplus wages, surplus profits, and excess executive compensation.

The ongoing labor strife in professional sports is in reality just a struggle over the spoils from this expropriation of the consumer surplus. If the US Congress would lift the exemption and treat professional sports like any other business, consumer surplus would rise and surplus rewards to the owner, executives and/or players would fall. That is what has happened in steel, autos, retailing, telecommunications, and is currently happening in the financial services industry [ed. note: you know, until we decided to piss a fire-hose of money into that colossal grease fire]. A consumer could take his family to a sporting event more than one time per year if the exemptions (actual or implied) from anti-trust laws were eliminated in professional sports (and professional entertainment). Competition would increase the number of teams, the number of athletes employed, the number of games and the number of fans. Remuneration of players, owners and executives would fall toward their opportunity costs and the consumer surplus would take a gigantic leap. The income distribution would be more equal. The economy would become more efficient (price would approach marginal opportunity cost) causing a rise in the per capita standard of living. This would thus approach economic optimality and a more equitable distribution of income. It is gradually happening in the economy and despite the structure unemployment that is occurring, the consumer will gradually be materially better off over time. As labor increasingly invests in human capital, there will be fewer losers and the human costs from structural unemployment will gradually dissipate.

The message is clear. The fundamental problem existing in the United States economy is not a "failure of capitalism," but instead a deviation away from basic capitalistic principles. Free capitalism requires as perfect of competition as attainable; this can only be achieved through strict government regulation. A government must be ever vigilant in keeping control of the economic system in the hands of the consumers, by breaking up trusts, preventing illegal business practices, keeping them from doing apocalyptically stupid things and creating competition when the market fails to. Perpetuation of the variety of cartels that currently hover over our economic system will only cause American consumers to suffer and will inevitably lead to more of the kinds of crises we currently face. We will, in no lesser terms, continue to be screwed by overgrown economic forces whose only intention is to seize power and exploit us further.

The current financial bailout addresses none of these issues. It strengthens the mercantile attitude existing in America's financial sector by alleviating any sense of risk these companies faced before they decided to implode. It forcefully moves money away from consumers into the hands of people that are no better than common thieves. It eliminates competition instead of encouraging it.

A perfectly competitive market place would seize theses companies on the point of failure (which is perfectly legal under FDIC), chop them up and place them in competition with each other. A perfectly competitive market place would do the same to professional sports (creating a variety of leagues, maybe something like Europe's soccer leagues), as well as to entertainment. A perfectly competitive market system would regulate CEO pay, as there is no current market instrument in place for determining what those pigs actually deserve. A perfectly competitive market place would establish many unions and force these unions to compete against each other.

True capitalism, a system where everyone is allowed equal opportunities for competition (whether you're a worker or a firm), is immensely beneficial to all people. Under completely free and fair economic terms, income gaps would decrease, since human capital would become more valuable and certain professions become less unique (you do have to give people the unhindered opportunity to better themselves). We do not have true capitalism in the United States. Thirty years of encouraging mercantilism, starting from the day Reagan stepped into office, have given us a system that is corrupt, unfair, and incredibly unstable. And there are no signs of it getting better any time soon.