The big news from yesterday (still settling in across Washington) is that President Obama and Defense Secretary Robert Gates teamed up to propose a sweeping overhaul of the defense budget--calling for the elimination of unnecessary systems and spending the savings on special forces, intelligence equipment, and other tools of counterinsurgent warfare. In other words, by retooling the Pentagon, Obama and Gates plan to move a lot of money around, but they also plan to increase the overall defense budget. In the final year of the Bush administration (and excluding the costs of the wars in Iraq and Afghanistan) the defense budget was $513 billion. In FY 2010, if Gates and Obama get their way, it will be $534 billion--$534 billion that will be spent much differently than last year's outlays were. But you'd never know that from the news coverage.
Brian says the Wall Street Journal gets it right with this:
Mr. Gates's proposed baseline 2010 Defense Department budget of $534 billion is up 4% from last year.
That would be a 4% nominal increase so the natural question would be what is the expected increase in the price-level over the same period? OK, I suspect expected inflation is so low that we are still talking about a real increase even after the adjustment from nominal to real increases. For example, this source notes that the nominal interest rate on 5-year government bonds is 1.65%, while the interest rate on indexed bonds of the same maturity is 0.93% so we are likely talking expected inflation that is less than 1%.
My real complaint is with this reporting, which got a lot of liberal blog attention yesterday:
Obama assigned Gates to rein in spending for the 2010 fiscal year that begins in October. U.S. defense spending is set to reach $654.1 billion for the current budget year, including war costs, a 72 percent gain since 2000.
How do we interpret a 72 percent nominal increase since 2000 in terms of a real increase? Table 1.1.4 from this source provides various price indices both for 2000 and for 2008. While the GDP deflator increased by 22.5% over this period, the deflator for defense purchases increased 36.57%. Interestingly, table 1.1.5 reports a 98.46% increase in national defense spending but in real terms, that translates into only 62% in real spending if we use the GDP deflator. The reported increase according to table 1.1.6, however, is only 45% as BEA uses the specific deflator for defense purchases. While it is clear that reporters should be using inflation-adjusted figures when reporting defense spending increases over time, it is not clear which deflator should be used in their reporting especially when the relative price of defense related spending has increased.