Tuesday, April 7, 2009

Defense Spending Increases or Cuts – the Role of Nominal Confusion

Brian Beutler thinks much of the press is confused about what Defense Secretary Gates and President Obama want to do with the Defense Department budget:

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.

4 comments:

haljett said...

The numbers are flying fast in furious and I think that it's keeping everyone's heads spinning so that no one can get a real grip on what's going on.

I kind of feel like I'm watching the world's fast shell game to be honest.

Anonymous said...

The beast needs fed, 4% don't make the grade. To the feeders of the military industrial complex this is a big cut. To me it is way too little.

A 4% increase in DoD budget means cuts in the five year plan for many programs.

They will blame the cuts for drawing out the acquisitions and overruns however GAO has been following the delays and overruns and there are already reasons beyond cutting budgets.

Further, DoD needs a lot more money for personnel costs and as it rises in percent of total other things have to give. Pay raises, longer serving members, higher paygrades, retirement costs, and health care hit DoD just like the rest of the US.

Congress is looking to a 3.4% pay raise which will go to the civil servants as well.

Also, the expected overruns in the 36% of DoD expenditures that make up R&D and procurement mean that double digits raises are required to put feed in the industrial complex troughs.

Inflation in DoD is independent of deflation in the economy.

Gates' announcements relative to the Air Force is only cutting a satellite program, the rest may not being upped but is not being cut.

The Army is losing Future Combat System to be replaced by something that may be done and work. Money is about the same, maybe better controlled.

There is an interesting chart in GAO 09-543T, http://www.gao.gov/new.items/d09543t.pdf Fig 2 which shows the cost growth in the largest acquisitions. Some of the mid 2000's costs remaining on the major programs are coming due, and there are lots more smaller programs with similar overruns.

Double digit inflation is expected with overruns and the stuff is late and unreliable as well.

It was referred to as a bow wave when the last adminstration began doubling up the defnes sector's growth.

The US will be further indebted if DoD does not get cut.

4% increase is not change.

I am disappointed with Obama here.

ilsm

Anonymous said...

No need to be disappointed with Obama.

His plans are dead bewfore they leave his desk.

The present crisis is all about US defense spending - soon he will have to choose between you eating, or predator drones in Afghanistan.

He cannot have both...Hint: he can't have his military budget.

Anonymous said...

The national security industry runs the military and congress in warfare waste spending.

There is no market, price deflation is not applicable here.

No competition, truth, nor competence for tangibles among the monopsonist buyers and the near monopolist (PAC power) suppliers.

We will see if congress can bankrupt the US buyying off the military industrial complex.

ilsm