A Trillion-Dollar Defense Budget May be a Bad Investment

By James Durso

The American people are getting a bad return on their defense budget, and it may get worse in the future.

After appropriating about $2.26 trillion for the Afghanistan misadventure, and another $2.21 trillion to destabilize Iraq and deliver it into the hands of Iran, some in the U.S. Congress think  the Pentagon’s request for $813 billion for Fiscal Year (FY) 2023 should be increased to $840 billion.

H.R. McMaster, the former White House national security adviser, and other defense hawks, advocate the defense budget be increased to 4.5% of GDP or $1.2 trillion. McMaster justifies the budget increase because American “restraint” is to blame for aggressive moves by Russia and China, which will be news to citizens of the Middle East and Afghanistan who were on the sharp end of U.S. restraint.

Sky-high recommendations like these are, unfortunately, not uncommon.

The report of the 2018 National Defense Strategy Commission, “Providing for the Common Defense,” commission claims “America is very near the point of strategic insolvency,” but overlooked the risk to America’s fiscal solvency caused, paradoxically, by its defenders. The Commission recommended “Congress increase the base defense budget at an average rate of three to five percent above inflation through the Future Years Defense Program (FYDP) and perhaps beyond.”

The Biden administration requested a national defense budget for FY 2023 of $813 billion. (The “national defense budget” funds the Department of Defense (DoD), and selected activities of the Department of Energy, i.e., nuclear weapons, and other federal agencies. The DoD share is $773 billion, $30 billion increase over FY 2022.) The Chairman of the Joint Chiefs of Staff, General Mark Milley, advocates a 3%-5% real increase to the budget each year for “preparing the military to meet the threats of the future while fighting the battles of today.”

Where does the defense budget come from?

Well, Congress appropriates money, but where does money come from?

Mostly, the money comes from individuals and businesses, as in payroll taxes and income taxes, or from domestic and overseas lenders via the Treasury securities (government bond) market. The biggest foreign buyers of Treasuries are Japan and China, which lately have reduced their bond holdings, which will increase borrowing costs because reduced demand will require higher interest rates to attract buyers. And higher rates will crowd out other spending, probably in the private sector.

And the introduction of a basket-based reserve currency by the BRICS countries (which may soon include Iran) may weaken the dollar, potentially pushing up borrowing costs across the economy.

Overseas lenders have financed much of America’s national debt of over $30 trillion and now hold about $7.5 trillion in Treasury securities; American citizens and the American government hold the rest. (The U.S. GDP is over $24 trillion dollars.) If foreign demand for Treasuries is weak, and income tax rates are being cut, the government must offer a higher interest rate to attract buyers, further contributing to the budget deficit and pressure on government spending.

Increased spending to support Ukraine in the war with Russia, on top of the post-9/11 increase in government spending (estimated at $8 trillion), may signal the U.S. will borrow even-greater sums of money when the usual buyers with loanable funds are busy with domestic concerns. So, interest rates will rise because the bond market always says “yes” to The Treasury Department.

The Office of Management and Budget assumes inflation will be 2.3% (yes, really, though the Consumer Price Index was up 8.6% in May), so the official annual budget increases will be 5.3% and 7.3% (before the Pentagon asks Congress for  supplemental appropriation money counter inflation.) If the Pentagon is funded at $813 billion for FY2023 by the end of the decade we get:

  • $813 billion at 5.3% for 7 years = $1.17 trillion
  • $813 billion at 7.3% for 7 years = $1.33 trillion

There is little public support for higher defense spending and support for the proxy war with Russia in Ukraine is slipping. High inflation will make the prospect of more money for the Pentagon, which just lost two wars, a non-starter as many taxpayers coping with unprecedented energy and food prices.

And the Pentagon’s inability to pass a recent financial audit – that was first suggested in 1990 – further weakens its case for more money.  And adding Sweden and Finland to the North Atlantic Treaty Organization (NATO) will double NATO’s border with Russia, and add $8 billion in upfront costs and another $1.5 billion annually, all for the privilege of defending two wealthy countries whose neutrality has served them well.

But just when the military wants an unprecedented haul of cash, its reputation is in free fall.

The Ronald Reagan Institute’s November 2021 survey found that only 45 percent of those polled report “a great deal of trust and confidence in the military” – down 25 points in three years. The Institute adds “Increasing numbers of Americans say they have little or not much confidence in the military, which is up 15 points in the last three years.”

The military isn’t the only public institution suffering a bad reputation, but it is used to basking in public esteem so it may not know how to recover.

The slide from the February 2021 poll – where the military was at 56 percent – may have been exacerbated by the actions of military leaders in the wake of the violent demonstration at the Capitol on January 6th. And the chaotic retreat from Kabul in August 2021 – the first time the American people witnessed a defeat in real-time – probably pushed the poll numbers lower.

A defeat in Afghanistan, commanders prioritizing woke programs over battle skills, an epidemic of sexual assault, and corruption in the senior officer ranks…no wonder the services are in danger of missing their recruiting targets, which will further weaken support for big defense budgets as a family with someone in uniform is more likely to support the Pentagon’s requests.

America’s military leaders may be unreconciled by the ending of the Cold War with the Soviet Union, which wasn’t marked by an epic armored battle à la Kursk, but by Soviet citizens deciding it was over because the planned economy couldn’t deliver decent household appliances.

The brass missed the Big Game and they and their confederates in the policy community may think that a splendid little proxy war with Russia in Ukraine will make the taxpayers forget all about their defeat in Afghanistan and all those wasted lives and dollars.

Unique in the world’s militaries, the Pentagon doesn’t think it is responsible for defending its country’s borders.

Instead of defending America, it defends American interests, which are not viewed overseas as positively as they are in Washington, D.C. green rooms.

The military is an economic enterprise. It relies on a generous budget to not just pay itself, but also the captive defense contractors that build weapons and provide services – and hire former service members.

Besides the Pentagon and Energy Department ($813 billion), there are parts of the intelligence community ($67.1 billion), and the Veterans Administration, which is really just deferred defense spending ($301.4 billion, a 13.3 percent increase above fiscal 2022).

It’s not “Military, Inc.”  like in Pakistan or Egypt but the military’s economic interests are often opposed to those  of the American people, calling to mind Eric Hoffer: “What starts out here [the U.S.] as a mass movement ends up as a racket, a cult, or a corporation.”

U.S. President Joe Biden and NATO Secretary General have been calling for sacrifice in order to defeat Russia and usher Ukraine into NATO and the European Union (EU).  Stoltenberg admits “it could take years…even if the costs are high, not only for military support, also because of rising energy and food prices.”

The U.S. Congress giddily appropriated $54 billion in war aid and economic support to Kyiv, but no one has mentioned the cost to replace all the military equipment being shipped to Ukraine, much of which is at risk of diversion, according to the Organized Crime Index which reports “Ukraine is believed to have one of the largest arms trafficking markets in Europe.

While it has long been a key link in the global arms trade, its role has only intensified since the beginning of the conflict in eastern Ukraine.” In other words, those weapons may soon wind up in Yemen, Libya, and Syria, where they won’t be promoting U.S. interests.

A rapid conclusion of the Russia-Ukraine war will do the American taxpayers a favor, so the U.S. can hand over NATO to the Europeans and focus on Asia. The Russian army has proved less fearsome that NATO imagined (an analytic shortfall that should publicly be addressed by Congress), so Europe should be able to finally defend itself.

NATO was never a real coalition, it was just about the U.S. defending Europe, while the generous Pentagon budget allowed Europe to spend its money on social welfare schemes and industrial protection.

An across the board budget cut, maybe with limited allowances to offset inflation for selected accounts, may get the attention of the E-Ring and motivate some reforms, especially since the Pentagon claims the terrorist group ISIS-K may be able to launch attacks from Afghanistan against the U.S. very soon. Though why these baddies are still standing after two decades of unlimited funding and battlefield authority for the commanders in Afghanistan wasn’t explained.

The Reagan Institute poll reported Americans still want to engage with the world and they recognize that China is the biggest threat to the U.S.

On the other hand, only 42% think the U.S. should be “More engaged and take the lead” (down from 51% in February 2021) which may offer less leeway for military adventures, and a larger role for diplomacy. Worrying for military bosses, only 33% of those polled regard “Military leadership,  such as officers and generals” as the best, likely due to the disorganized retreat from Kabul, and the abandonment of billions of dollars of military equipment to the Taliban.

Engagement with the world can be improved if the Congress rebalances funding for diplomacy and the military and security services that was shaped by the wars in Iraq and Afghanistan, and the response to terror threats. Monica Duffy Toft argues, “since 9-11, U.S. military intervention abroad has come at an escalating cost to U.S. national, and national security interests.”

More “resources,” that is, money, for the State Department, Commerce Department, and U.S. Trade Representative will help to de-securitize relations with the rest of the world by emphasizing free and fair trade, with explicit direction from the White House that they are the sales team, and that politics without economic considerations is just a hobby.

Another to-do item is to examine the effects America’s willy-nilly sanctions policy has on trade and finance, as seen in the distortion of world supply chains – and the attendant shortages and price jumps – caused by U.S. sanctions on Russia, and whoever else is the villain du jour.

Washington’s eagerness to sanctions anyone and everyone is partly  responsible for the BRICS effort to create a new reserve currency which, if successful, will permanently weaken the collar and the United States.

Instead of parroting the Pentagon’s wish for budget increase of 3%-5% above inflation to fund another round of “great power competition,” the Republicans, if they take control of the Congress in November, should hold hearings on how the nation’s financial challenges will affect its strategic choices, and discuss the opportunity costs of the proposed unprecedented defense spending levels, taking the opportunity to remind the military of Bernard Brodie’s maxim, “Strategy wears a dollar sign.”

General Omar Bradley, the famed World War 2 commander observed, “Amateurs talk strategy. Professionals talk logistics.” At a time when the U.S. no longer commands the world’s economy as it did in 1945, America’s commanders must also talk economics so they will understand an enemy that can bring a government to heel, the “bond market vigilantes.”

In future wars, the Pentagon will have to understand the potential impact on the global supply chain and how it will affect its suppliers before the commanders make their recommendations to the President, who will have to consider the supply chain effects on the U.S. and world economy.

The need to minimize shocks to the global economy may shape how the war is fought, that is, to take more battlefield risk, which may go against the grain of the military establishment.

Is it time to get a Bloomberg Terminal for The Tank?

Congress might also consider multi-year defense budgets to would relieve contractors’ planning uncertainty and reduce the cost of weapons systems; giving DoD authority to spend Operations and Maintenance funds across several fiscal years to reduce budget turbulence and the “use it or lose it” mentality; another round of military base closings to drive infrastructure savings; and reviewing domestic content legislation (the “Buy America Act”).

Pentagon leaders should focus on rebuilding the military’s reputation with the taxpayers (and parents of future enlistees) by

  1. Starting a conversation about how the military can help defend the country’s borders. In the U.S., this is regarded as a civilian, law enforcement function, but it’s time the taxpayers get something back for the money they grant the Pentagon every year, despite the aversion of the brass to this mission.
  2. Ending the military’s epidemic of sexual assault, instead of hyping the nuisance of some scattered right-wing extremists in the ranks. Why any parents of a daughter would encourage her to enlist is a mystery, and this issue is the Deathwatch Beetle inside the service.
  3. Enforcing standards of behavior for senior officers. The Fat Leonard bribery scandal and current investigation of retired General John Allen for improperly lobbing for foreign interests are a signal to military leaders to stop talking about morality and ethics to the troops and start practicing what they preach. Also, a lifetime ban on retired senior officers lobbing for foreign interests will underline where their loyalties lie.

If the Pentagon was a publicly-traded company, the board of directors would have fired the managers and would themselves be the target of a shareholders’ lawsuit. American taxpayers may not be ready to “pay any price, bear any burden” for an expensive military whose record since 1945 can charitably be described as “inconsistent” and is a greater threat to America’s daughters than America’s enemies.

James Durso (@james_durso) is a regular commentator on foreign policy and national security matters. Mr. Durso served in the U.S. Navy for 20 years and has worked in Kuwait, Saudi Arabia, and Iraq.

Featured photo: Photo 55498207 / Afghanistan War © Mattiaath | Dreamstime.com