Global Policy Forum

By Jurgen Brauer and Nicholas Anglewicz*

Many Americans believe that 19 cents on defense for every 81 cents on non-defense is a reasonable way to spend a tax dollar. But by another calculation, the tax dollar splits 68 cents for defense and 32 cents on everything else. It is a common misconception that U.S. defense expenditure is equivalent to the Department of Defense outlays. Instead of $436.4 billion of defense expenditure, as Congressional budgeteers count, government statisticians in the Bureau of Economic Analysis (BEA) counted $548.0 billion for calendar year 2004—a whopping $112 billion difference. And by our own calculations, U.S. defense expenditure is much higher than even the BEA's numbers suggest, namely $765.6 billion in calendar year 2004—about $330 billion or 75 percent more than the Department of Defense outlays.

To account for the difference, one needs to recognize that, for example, nuclear weapons-related outlays are budgeted under the Department of Energy line item, not that of the Department of Defense. Likewise, Veterans Affairs has its own department and budget. It is a defense-related category, reflecting obligations incurred to American servicemen and women on account of past U.S. military activity. Picking through the budget, the BEA, housed in the Department of Commerce, reclassifies each line item into "defense" and "non-defense" categories. For calendar year 2004, national defense outlays thus amounted to the aforementioned $548.0 billion.

The BEA also recognizes that the total fiscal year 2004 federal outlays of $2,292.2 billion consist to a very large degree of Social Security, Medicaid and other trust fund payments. These trust funds happen to be run via federal government accounts, but as they merely transfer funds among citizens, they do not constitute expenditures for federal government functions per se, such as agriculture, education, transportation or diplomacy. Thus, subtracting transfer payments out of the federal budget, the BEA calculates that in addition to the $548.0 billion for defense, the federal government spent only another $262.1 billion on all other federal government functions, for a total of $810.2 billion. Hence, BEA arrives at the ratio of 68 cents for defense as against only 32 cents on everything else.

While the BEA's reasoning is economically correct, even the BEA leaves out an important item: the allocation of federal interest payment on the government's debt. Most years, the U.S. federal government runs a budget deficit. That deficit needs to be financed by borrowing. The resulting interest expense should therefore be allocated to defense and non-defense spending in proportion to their respective share in causing the annual deficits. If for example overall non-interest outlays are $90, split between $60 for defense and $30 for everything else, and revenue was only $81, then the $9 deficit should be attributed as $6 on account of defense, and the remaining $3 on account of non-defense federal government outlays. The interest on the resulting debt should be allocated in like fashion.

It turns out that the BEA's computation of total federal government outlays of $810.2 billion for calendar year 2004 excludes, incredibly, some $321.7 billion of net interest payments that (fiscal) year. Thus, if 68 cents on the federal dollar are attributable to defense, then 68 cents on the interest-dollar is attributable to defense as well. For calendar year 2004, this would add $217.6 billion to the defense outlays, for a total of $765.6 billion. In like fashion, non-defense federal outlays then run to $366.2 billion. (The details are more complex but, if anything, understate the military's share in interest due; for example, the defense spending driven budget deficits of the Reagan years occurred during a high interest rate time period.)

On a per-capita basis, the average American in 2004 then did not pay $1,488 for defense but $2,605. In a word, the military ran on $217.08 per citizen per month, while the remainder of the federal government ran on $103.83 per citizen per month. You might shrug your shoulders and say, "Well, it's worth it." True, in a democracy, it's up to voters to make that determination. Just keep in mind that when the press reports 19 cents for defense versus 81 cents for everything else, the split really is 68 cents versus 32 cents. Defense is not one-fifth of federal spending but two-thirds of it.

Considering the ongoing carnage in Iraq, perhaps it is time to reconsider that expense.

About the Authors: Jurgen Brauer is a professor of economics at Augusta State University in Augusta, Georgia. Nicholas Anglewicz is an MBA student there.