Of Defense and Deficits

By Lieutenant Eric Schuck, Supply Corps, U.S. Navy Reserve

Rising federal spending played a significant role in the return to positive GDP growth by offsetting reductions in private-sector consumption and investment. For example, between 2007 and 2009 private-consumption spending fell by approximately $200 billion. Over the same time span, federal spending rose from $906 billion in 2007 (with $611 billion spent on Defense) to $1.056 trillion ($701 billion on Defense) in 2011, although this represented a drop from the 2010 peak of $1.07 trillion ($718 billion on Defense). From a GDP perspective, increases in spending at the federal level offset some, but by no means all, of the reductions in the economy stemming from reduced consumer spending.

These federal expenditures were largely deficit-financed. Deficits may be gauged in terms of their raw dollar values or as percentages of GDP, with the latter measure typically preferred as a better relative gauge. In 2007 the federal deficit was -1.2 percent of GDP and rose to -10.1 in 2009 before contracting slightly to -8.7 percent in 2011. The sum of these deficits—the federal debt—rose in value as a result. Gauged against annual national income, total federal debt rose from 64.6 percent of GDP in 2007 to 98.7 percent of GDP in 2011. However, it should be noted that only about two-thirds of this debt is privately held and about one-third of the debt is held outside of the United States, and it is this fraction that is the greatest concern. As an obligation to pay outside of the government itself, externally held debt is a leakage of tax revenues from the U.S. Treasury that imposes constraints on federal expenditures, while budgeting internally held debt does not. Consequently, the total debt is less of a concern than the externally held debt.

Taken as a whole, the picture then is of a U.S. economy that is recovering weakly and facing profound unemployment and public-debt problems. This is the budgetary environment confronting the Department of Defense in general and the Navy and Marine Corps specifically. And while larger macroeconomic policy issues are beyond the purview of the Sea Services, naval leaders must recognize and understand that the current fiscal position of the federal government requires striking a balance between a long-run problem—debt—whose solution involves spending less and taxing more, and a short-run problem—unemployment—which demands the exact opposite. Navigating that budgetary seam is the single biggest challenge for the Navy and Marine Corps in the present economy and will define U.S. defense policy for the next decade. The best way do that is to find ways to retain capabilities and people while simultaneously cutting long-run expenses.

Breaching the Budget Minefield

Successfully surviving the budgetary battlefield requires acknowledging some basic—but not always obvious—strategies. These are:

• Be least cost for the mission.

• Avoid a Keynesian shootout.

• Put people before pay.

There are a variety of ways to model economic decision-making. Private firms, for example, typically strive to maximize profits, and they have the latitude to increase or decrease production as part of that goal. They also have the ability to enter or to exit specific markets as profits dictate. The current budget environment requires cost-minimizing as the objective. Unfortunately, that’s easier said than done. The Navy and Marine Corps simply do not (and cannot) operate like businesses that flex output and product lines in the same way as private firms. They are service providers whose mission is “to kill people and to break stuff” when directed to do so by National Command Authority. Regardless of the current demand for specific services or the likelihood of requiring specific capabilities, the military must maintain a certain range of capacity across the full threat spectrum. As such, the military pays for the ability to generate an outcome, not necessarily the output itself.

Once the types of desired capacities are stated, the challenge is to find the cheapest way possible to make those outcomes feasible (which is in keeping with the current cost-minimizing budget environment). Platforms, manning, and equipment must flow from missions, not the reverse. Failure to focus on least-cost solutions to specific and clearly articulated operational capabilities is a surefire way to lose in the impending budget battles. Put more simply, the Navy and Marine Corps need to explain that we need a certain number of expeditionary strike groups because they enable us to achieve core missions and services, not that we can achieve certain missions because we have a specific number of strike groups. It is a small distinction, but an important one when the budgetary objectives are to reduce costs. In short, wed ourselves to missions, not platforms, and sell it cheap.

This will start by sticking to missions where the Navy and Marine Corps enjoy clear, specific, and unique advantages not only over other services but other means of expressing the national interest (e.g., the State Department, Central Intelligence Agency, etc.). Forward presence and expeditionary strike clearly meet these criteria: No one else can do this. At the same time, the Sea Services must avoid being one-trick ponies, even when we clearly have the best trick and the best pony. Ballistic-missile defense, while an important supporting element for maintaining forward presence and expeditionary strike, is not a service-defining mission. Similarly, while the Navy’s contributions to the nation’s strategic-weapons capabilities have noticeable survivability advantages relative to other providers, the expense and inflexibility of the capital required to preserve this capacity means the SSBN(X) program may be better put on the back burner in favor of continued service-life extensions for current SSBNs.

Lastly, the Navy needs to avoid becoming the “Narmy.” The explosive growth of the Navy Expeditionary Combat Command over the past decade has been a tremendous success story. Explosive Ordnance Disposal, the Naval Construction Force, Naval Expeditionary Logistics Support, and coastal and riverine forces have all clearly demonstrated their worth and flexibility. However, some of these skills, no matter how proficiently provided, are either redundant relative to other services or are more cost-effectively performed by the Reserves. Just because we are better at it doesn’t mean we should keep doing it, especially if it jeopardizes funding for core missions.

Time for an Old/New, High/Low Concept?

Focusing on performing missions at the least cost also means examining recapitalization efforts. This is an excellent time to revisit the “high/low mix” concepts of the 1970s that led to both the Oliver Hazard Perry–class frigates and the Ticonderoga–class cruisers. The Perrys were never designed to be perfect. They were designed to be available. Over the next decade, the “optimal” ship that can meet all missions may simply have to give way to a certain number of “feasible” ships whose principal function is to perform limited—but service-defining—tasks that free more-capable vessels for other missions. Simply put, a lot of capabilities do not require gilt-edged equipment: the Danish Absalon class has done just as well chasing pirates as U.S. Arleigh Burke–class vessels, and at much lower cost. Identifying such missions, adopting lower-cost platforms to provide them, and, most critically, accepting this will be crucial. Above all else, the goal for the next decade must be to achieve the defined missions at least cost.

Paring funds will not be painless. There will be profound resistance; most of this will focus on the employment impacts of reduced manning and procurement. However, under no circumstances should the services consider themselves (or, equally important, their contractors) as “job creators.” This is a fight that the military can, and quite frankly will, lose. As mentioned previously, existing research on the potential effects of sequestration suggest the proposed levels of cuts will lead to noticeable job losses across the nation. 6 Most of those projected losses stem from what economists refer to as “multiplier” effects. Basically, while a reduction in the number of F-35s on order will lead to a drop in the Lockheed Martin workforce, most of the effect will occur outside of Lockheed Martin as unemployed workers reduce consumption spending. This is a standard and not remotely controversial aspect of macroeconomic analysis. But such multiplier effects do not occur in a vacuum. There are a variety of government-spending multipliers, and the effects for military spending tend to be markedly lower than the multiplier effects for other types of government spending. Recent work by economists Robert Barro and Charles Redlick pegs the long-run military-spending multiplier at around 0.6 to 0.7. 7 This means that every $1 cut from military spending leads to a $0.60 to $0.70 reduction in overall economic activity: The cost is less than the cut. By way of contrast, the government-spending multiplier for the Department of Agriculture’s Supplemental Nutrition Assistance Program (SNAP, a.k.a. “food stamps”) is closer to 1.8, so a $1 drop in food stamps would lead to a drop in overall economic activity that is $0.80 greater than the original cut. 8

Military spending simply does not stimulate the economy as much as alternative programs. Using defense spending for economic stimulus—what is known as “military Keynesianism”—is simply not a defensible position when contrasted with other programs outside of defense. Indeed, based purely on the comparison of multipliers, defense spending is where cuts should occur because the consequences are relatively smaller.

What spending on the Navy and Marine Corps does accomplish, however, is absolutely unique. Only the Sea Services can give the around-the-clock/around-the-globe type of presence that the American people can and have come to expect for decades. In the battle for budgets, the Navy and Marine Corps are far better served emphasizing the uniqueness of the capabilities they provide to the nation and avoiding discussions invoking any form of military Keynesianism. We are service providers, not job creators.

Personnel Realities

Lastly, the military services need to be as honest as possible in their budgets and the room for potential cuts. In Fiscal Year 2012, total personnel expenditures were nearly $142 billion. 9 As a line item, this was second only to operations in the overall defense budget. Personnel costs are perhaps the easiest and fastest way to achieve targeted reductions in defense costs, if for no other reason than the fact it takes less time to adjust manpower levels than it does hardware levels. Currently, the Navy and Marine Corps are choosing to reduce manpower by selectively thinning the active-duty force. Some members are simply separated completely while a certain fraction is allowed to convert to Selected Reserve status.

This approach cuts manpower costs by preserving the military’s dirty little secret: The past decade has, on balance, been pretty good to the military pay-and-compensation system. While historically pay scales in the Navy and Marine Corps lagged behind the private sector, the growth rate in pay and benefits over that decade dramatically outstripped corresponding growth (if not outright decline) in the civilian sector. By 2009, the average enlisted compensation package exceeded 90 percent of comparable civilian compensation. 10 Certainly some of the difference can be justifiably described as a “risk premium” to compensate for the unique rigors and challenges of military service that are not present in civilian employment. But in an economy with roughly 8 percent unemployment where nearly 42 percent of the unemployed have been without work for half a year or more, it will be difficult to justify increases in the military’s already relatively generous compensation packages. 11 The exceptional support of the American people over the past decade has created room for maneuver in pay packages; the Navy and Marine Corps should demonstrate a willingness to accept pay freezes as part of their cost-containment strategy.

The choice comes down to preserving people or preserving pay. Right now, the soft civilian labor market provides little to no incentive to leave the service. Realistically, retention in the near term is not going to be as expensive as it was in the 2005–2008 period. Pushing for pay increases in a contractionary budget cycle will, though, have the effect of forcing numbers down faster than would be necessary under a pay freeze by increasing the per-member cost burden in a shrinking overall budget. Taking advantage of today’s comparatively strong military compensation system relative to the weak alternatives in the civilian sector will allow the services to preserve more capacity at less cost. While unpleasant to consider, the weak economy does present the opportunity to buy “human capital”—the unique skills of the Navy and the Marine Corps—more cheaply than has been previously possible. In an age of austerity, this is a legitimate consideration for the Sea Services to contemplate.

There can be no doubt that the next decade is going to be a challenge for Navy and Marine Corps budgets. Under the best case, Congress acts and avoids the imposition of automatic sequestration. However, while this would avoid the bluntest cuts, it does not eliminate the likelihood or the necessity of future budget cuts. Cuts will occur. The critical element for the Navy and Marine Corps is to define, rather than to respond, to changes. Achieving that requires first acknowledging that the mission is now to maintain certain capabilities as cheaply as possible. Compared with past environments where the goal was to maximize specific results and to let the budgets follow, the case now is to preserve capacity while minimizing cost. Secondly, the services must avoid the argument that spending money on defense is the best road to economic recovery. It isn’t. But the Navy and Marine Corps provide services to the American people that are absolutely unique, and we are the cheapest path to those capabilities. Lastly, we have room to sacrifice pay for people. The current starting point in military pay and compensation makes it possible to endure multiple years of zero growth in pay and compensation while still staying well above corresponding civilian pay. None of these are attractive choices, but they are still the best choices in the current fiscal environment.

1. Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan, The Budget Control Act of 2011 (Washington, DC: Congressional Research Service, 2011). Mindy Levit and Marc Labonte, The Budget Control Act of 2011: The Effects on Spending and the Budget Deficits When the Automatic Spending Cuts are Implemented (Washington, DC: Congressional Research Service, 2012). Karen Spar, Budget ‘Sequestration’ and Selected Program Exemptions and Special Rules (Washington, DC: Congressional Research Service, 2012).

2. Stephen Fuller, “The U.S. Economic Impact of Approved and Proposed Spending Reductions on Equipment in 2012,” testimony to House Armed Services Committee, 24 October 2011, http://armedservices.house.gov/index.cfm/defense-cuts-resources .

3. National Bureau of Economic Research, “U.S. Business Cycle Expansions and Contractions,” 20 September 2010, www.nber.org/cycles.html .

4. Council of Economic Advisers, Office of the President of the United States, “Economic Report of the President—2012,” www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President .

5. Bureau of Labor Statistics, U.S. Department of Labor, “The Employment Situation—June 2012,” www.bls.gov/news.release/pdf/empsit.pdf .

6. Fuller, “U.S. Economic Impact.”

7. Robert Barro and Charles Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” The Quarterly Journal of Economics, vol. 126, no. 1 (2011), 51–102.

8. Kenneth Hanson, The Food Assistance National Input-Output (FANIOM) Model and Stimulus Effects of SNAP (Washington, DC: U.S. Department of Agriculture Economic Research Service, 2010).

9. Office of the Under Secretary of Defense, “Overview—FY 2013 Defense Budget,” http://comptroller.defense.gov/budget.html .

10. U.S. Department of Defense, “Report of the Eleventh Quadrennial Review of Military Compensation,” http://militarypay.defense.gov/reports/qrmc/ .

11. Bureau of Labor Statistics, “Employment Situation.”

Lieutenant Schuck is the N4 of Naval Beach Group 1 Detachment 119. He holds a PhD from Washington State University and is professor of economics at Linfield College in Oregon.


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