Where the Deficit Didn’t Come From

March 1, 1987

In 1986, the federal budget deficit reached $220.7 billion, and amount equal to 5.2 percent of the Gross National Product (GNP). The American public is justified in finding this unacceptable and in asking what went wrong and where the fault lies.

A great many people, however, seem to have decided that the main reason for the deficit is increased spending on defense. Where they got this idea, it is wrong. Opinion pollsters say that the average citizen overestimates the defense share of the federal budget by seventy-five percent. (See “What the Public Doesn’t Know,” October ’86 issue, p.4.) From there, it is only a short leap to the conclusion that defense spending must be responsible for the nation’s economic difficulties.

We believe that it is important for the American public to understand where the deficit didn’t come from. Furthermore, it is time to lay to rest two other myths — that defense has not done its “fair share” toward reducing federal expenditures and that the proposed defense program is unaffordable. These are misconceptions, spread by people who either don’t know what they’re talking about or who fiddle with the facts to promote their own set of budget priorities.

· Rise of the Deficit. The best index for studying the development of the deficit is federal outlays — the amount of money the government has actually spent year by year — since the deficit is the gap between revenues and outlays. This review should begin in 1969, the last year when the budget was balanced. It was from that point that the deficit level grew, following an erratic but generally upward course in the 1970s and hitting awesome numbers in the 1980s.

When defense spending and the deficit are compared with each other as percentages of federal outlays from 1969 to the present, though, the correlation is more negative than positive. The defense share of federal outlays dropped steadily through the 1970s. Even the Reagan Administration’s defense recovery program has not compensated completely for that decline. Defense expenditures today are still a smaller percentage of federal outlays than they were from 1951 to 1972. The hard evidence of two decades is clear: Defense spending did not cause the deficit.

Unfortunately, it is not possible to say with equal directness and simplicity what did cause the deficit. The deficit is a product not only of government spending and tax policies but also of the nation’s general economic health and of such factors as inflation, employment, and interest rates. Nevertheless, some things obviously contributed more to the deficit than others did.

An example is the category of outlays that the Office of Management and Budget calls the “Human Resources Super-function.” It consists of spending for education, training, employment, social services, Social Security, health, Medicare income security, and veterans’ benefits. In 1969, the cost of this Super-function was $17 billion less than defense outlays. By 1985, it had increased by 617 percent and was still climbing and by then amounted to nearly twice the total of defense outlays.

· The “Fairness” Issue. There has been a recurring complaint that as the government struggles to get the budget within Gramm-Rudman-Hollings deficit reduction ceilings, defense has not borne its “fair share” of the cuts. This argument makes sense only to those with short memories. It forgets that defense was taken down by seventeen percent as a share of federal outlays in the 1970s, while non-defense programs gained by a corresponding percentage. When the Fairness in Cutting movement came along in the 1980s, defense had already been through the wringer repeatedly.

Nor was that the end of it. Between FY ’82 and FY ’87, the Administration’s budget request for defense was cut by $176.5 billion. Not a dime of this went to relieve the deficit, though, Congress reallocated all of it to fund non-defense programs more generously than the Administration had requested.

When deficit levels trigger the automatic Gramm-Rudman reduction mechanism, half of the cuts must come from defense — even though defense accounts for less than thirty percent of budgeted outlays. This is because most of the Human Resources Super-function programs have been declared exempt or partially exempt from reductions.

The President’s FY ’88 budget seeks growth of three percent, after inflation, for defense. That does not nearly offset the seven percent real decline of the past two years, but when the budget was delivered to Congress, some there declared it “Dead on Arrival.”

· Deciding on “Affordability.” No budgetary exercise alone can establish the level of affordability for national defense. That depends on how much security the nation wants what risks it is willing to take, and the threat perceived to its interests in the world. In 1945, at the climax of World War II, the United States put 89.4 percent of its federal spending into defense. That was deemed “affordable” in view of the circumstances at the time. As a practical matter, we can assume that the limit of affordability today is somewhere well below that level.

Our best guides to making useful judgments about affordability may be GNP — which measures the nation’s economic means — and the precedent of government spending in the postwar era. The biennial budget request for FY ’88-89 would set defense expenditures at just over twenty-eight percent of federal outlays and slightly above six percent of GNP. In a postwar historical perspective, that is relatively modest. In 1955, defense spending was 9.1 percent of GNP; in 1960, it was 8.2 percent; and in 1970, 7.8 percent. A defense budget that requires six percent of GNP cannot be regarded as “unaffordable.”

Those who want to attack the proposed defense program on economic grounds should find some new arguments or else hide from people who have looked into the truth of the matter. Defense takes less of the tax dollar than the average citizen thinks it does. It did not cause the federal deficit. Defense has been subjected to its share — and then some — of budget reductions.