The “Four Percent of GDP” Thing

Aug. 1, 2008

Adm. Michael G. Mullen, Chairman of the Joint Chiefs of Staff, recently told the New York Times the US should spend four percent of gross domestic product (GDP) on defense. In 2000, DOD critic Chuck Spinney said spending four percent would be tantamount to a “declaration of total war on Social Security and Medicare” in the future.

Clearly, the “percent-of-GDP” matter sparks controversy. The debate can become pretty arcane. First, some basics:

  • What is GDP As defined by the US Bureau of Economic Analysis, it is “the market value of goods and services produced by labor and property in the United States” in a year.
    • How big is it BEA says in 2008 it is some $14.2 trillion.

        Does GDP change? Yes, significantly over time. When Spinney spoke, it was about $9.8 trillion. Thus, today’s US economic output is 45 percent larger.

      When Mullen and others (including Gen. T. Michael Moseley, former USAF Chief of Staff) called for a “four percent solution,” they were seeking something specific. It was not, however, an exact dollar amount. In Spinney’s day, four percent of GDP equaled $400 billion. For Mullen, it’s $600 billion.

      Yet GDP, as a measure of economic activity, really has very little to do with defense. There is no reason for three percent, four percent, or any other portion of GDP to be considered the right number—without context.

      What the four-percenters really want is not a specific amount but a commitment to defense. Mullen and others believe funding at the four-percent level is sufficient for a strong DOD program and, even more important, is affordable.

      This is the central point. When officials express defense spending as a percent of GDP, it is a shorthand way of describing the financial burden of defense on US taxpayers. It is a measure of the affordability of a given defense budget.

      This “burden” has shrunk dramatically over the years. In the World War II year of 1944, arms spending consumed a gargantuan 38 percent of the economy. As economic growth mushroomed, the defense share of GDP has plummeted. For example:

      In 1953, the peak year of the Korean War, 14 percent.

      In 1968, at the height of Vietnam, 9.5 percent.

      In 1986, at the peak of the Reagan rearmament, 6.2 percent.

      Then in the early 1990s came the post-Cold War “peace dividend.” In GDP terms, defense outlays fell at an accelerated rate, bottoming out at three percent from 1999 through 2001. DOD through this period did not sufficiently invest in new equipment or maintain readiness.

      With defense spending manifestly inadequate to the job, pro-military groups began to call for pegging defense outlays at four percent of GDP. The fundamental claim was that the nation not only needed to spend more but could well afford to spend more.

      Two factors complicate the situation.

      Complication 1. Defense spending in 2009 is forecast to reach 4.3 percent of GDP. Why, then, is Mullen pressing for four percent, which would be a lower figure

      The answer is that there are two categories of defense outlays—one used to fund today’s wars and another that finances the “core” defense budget, paying for manning, training, and equipping the standing military force.

      The 4.3 percent figure combines both types of spending. Mullen, however, is talking only about core outlays. Funding for that critical function is still bouncing around at three to 3.5 percent of GDP. An extra half-percent of GDP allocated to the core defense budget in 2009 would provide to the US military an additional $75 billion.

      The distinction is important, because war spending does nothing to maintain or modernize the standing force. Indeed, it has consistently failed to completely replace equipment worn out or lost in combat.

      Complication 2. Because the US has in the past devoted a far larger portion of national wealth to defense, it should be able today to commit a far larger share, all things being equal.

      However, all things are not equal. The postwar period has seen a spectacular expansion of many other categories of federal spending—in particular, so-called “entitlements” spending.

      Medicare, Medicaid, Social Security, and other entitlement programs now account for government spending equal to 12 percent of the nation’s GDP.

      The pressure caused by this huge new spending burden has robbed the US of much of its flexibility and capacity to easily expand the defense effort. In pondering ways to increase defense, US officials face the nightmare trifecta—raise taxes, cut popular social programs, or accept a big federal deficit.

      Basic political dynamics in Washington tend to pit the Pentagon against the entitlements—hence, Spinney’s charge of a looming “total war on Social Security and Medicare.”

      It is of course true that, at some unspecified level, military spending (or any other kind of federal spending) exerts a drag on the economy. However, the US is nowhere close to that point. The United States can afford more for defense, and more importantly, it needs more for defense. The question is whether there is the political will to provide it.

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