Costs of war: War on bankruptcy

No one knows what the final cost will be of the bailout package for the US financial sector agreed this month by the administration and the congress. But the headline figure so far for this one-off rescue package - US$700 billion - is noteworthy, because it is now roughly the amount the US spends on defense every year.

In Fiscal Year 2008, which ended on 30 September, the US defense budget was just under US$695 billion - including US$515 billion in the so-called base budget for the Pentagon and military spending by other departments, and a US$180 billion special spending provision for the wars in Iraq and Afghanistan.

Defense spending has more than doubled in the seven years since the war on terror was declared, a rate of increase not seen since the massive military build-up in US president Ronald Reagan's first term in the early 1980s.

Now the military says it needs to recapitalize a force strained by seven years of war while simultaneously transforming itself to meet new threats.

The US military needs to replace and repair equipment that is being used up "at very intense rates" in Iraq and Afghanistan Assistant Defense Secretary Michael Vickers told ISN Security Watch. At the same time, the military has to "deter rising conventional and strategic threats, like ... China or rogue nuclear powers."

That requires modernizing capabilities such as the US nuclear arsenal and the country's high-tech air and naval assets at the same time as "fighting this war on terror and getting better at irregular warfare," he said.

"It's the coming together of investment challenges and strategic challenges."

That is something of an understatement.

For the 2008 fiscal year, the US federal budget deficit - the amount by which government's spending exceeded its income - was a record US$455 billion, nearly three times what it was the year before and well above the administration's rosy predictions when spending levels were set last year.

For many critics, that level of borrowing looks increasingly unsustainable, and they predict that the irresistible force of rising pressure on government spending is about to meet the immovable object of declining tax revenues.

Such prognosticators of fiscal doom tend to focus on the structural problems presented by the entitlement programs in the federal budget. They have good reason to. The cost of these programs, principally Social Security and Medicare, is largely driven by factors outside the control of policymakers, like demographics and medical costs, making it all-but-impossible to cut spending on them.

But although defense spending is technically in what is called the discretionary part of the budget - which policymakers can set at whatever level they want - the convergence of politics, money and bureaucracy mean that, in practice, military spending tends to be a ratchet, turning only in one direction: up.

The warning by former president Dwight Eisenhower against the unhealthy power of the military-industrial complex is well-remembered. It is much less widely known that in the first draft of the speech in which he coined the term he had called it the military-industrial-congressional complex.

And with good reason: it is Congress, supposedly the guardians of the public purse, the overseers of government spending and the body which actually sets the budget each year, which has created that ratchet.

Unlike in many other modern democracies, lawmakers in the US do not just get to vote "yes" or "no" on the government's proposed budget. Members of the powerful congressional appropriations committees and their staffs actually write the budget, line by line.

It is this extraordinary control over the detail of the government's spending plans that creates the possibility of earmarks - congressional additions to the budget designed to benefit a lawmaker's home district, rather than respond to a request on the part of the department or agency in whose budget the item appears.

Much attention has been focused on earmarks as a driver of unnecessary spending, but some experts say this is a misconception.

"Congress doesn't tend to change the administration's budget request [for defense spending] all that much,” Steven Kosiak, of the Washington think tank the Center for Strategic and Budgetary Assessments told ISN Security Watch.
Kosiak said that typically only five percent of line items were altered. "The changes are incremental, marginal," he said.

"On the other hand, there is a lot of proactivity [in the Pentagon] in putting items in [the budget] that they know have congressional support" even if that is only because they generate jobs in key lawmakers' districts.

"Earmarks are an annoyance," he said, amounting to "maybe a few billion dollars a year. They are not a central driver of why we're spending so much."

That central driver is principally, according to Kosiak, the ballooning costs of military procurement.

Big-ticket high-technology programs designed to move the military into next-generation warfare, like the Air Force's new F-35 or the Army's digitally networked Future Combat System, almost invariably come in way over budget.

That is because officials almost invariably low-ball the costs, said Kathleen Hicks, a former senior career policy official in the defense secretary's office. "There is not realism in the investment account," she told ISN Security Watch.

Hicks, who left the Pentagon in 2006 after 13 years and is now at the Center for Strategic and International Studies, said officials rely on the fact that, by the time the real expense becomes apparent, the programs will be protected from cancellation because the large amounts of money already spent on them create a "sunk costs argument" - cutting now will mean wasting the funds already invested.

"The whole incentive mechanism is backwards," she concluded, especially when account is taken of the special status of the Iraq and Afghanistan expenses, which - despite being by this point largely foreseeable - are still funded by an annual emergency supplemental appropriation.

As such, the money is outside the budget caps set by Congress to control spending and limit the deficit. Typically, such supplemental spending was requested during the summer, when the process of considering the regular budget was almost complete - ensuring that there was little opportunity for Congress to evaluate the proposals.

When Democrats took control of Congress after the 2006 mid-term elections, they pledged to end the practice of funding the wars in that way. But although they have managed to insist that the supplemental spending proposals are sent to Capitol Hill in February just like the regular budget, they have so far failed to ensure that they are included in the base budget.

That is hardly surprising. The US$180 billion supplemental for 2008 is nearly a quarter of the whole defense budget. If it had been included in the base budget, cuts in other non-defense programs, or tax increases, would have been needed to offset the cost under the Congressional spending rules.

The new administration, whoever heads it, will find itself looking at a big problem.

View Shaun Waterman's latest columns here:

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