In a debate last year over the future of America’s aircraft carriers, retired U.S. Navy Commander Bryan McGrath, a noted naval analyst, defended the cost of the new Ford-class carrier with a comparison to consumer spending. Most notably, McGrath cited the $4 billion Americans spend on pet grooming each year. More recently, Loren Thompson, president of the Lexington Institute, made a similar comparison to consumer spending regarding the Pentagon’s budget for acquiring weapons. Their point is that if Americans can afford exorbitant sums on trivialities, they can surely afford the relatively small percentages of gross domestic product dedicated to national defense. But comparisons between defense spending and consumer spending are not apples-to-apples comparisons.
Several points demonstrate why consumer spending is a poor comparison for defense spending. First, consumer spending is done via the discretionary income or credit of the American people themselves. The U.S. government spends money for defense from discretionary accounts—as opposed to mandatory spending for entitlement programs—but its income is taken from the American people by way of taxation or increased debt. Therefore, purchases the Department of Defense makes that are affordable but unnecessary or wasteful means less money for the American people over the long run. The necessity of a particular program or the necessary size of the acquisition budget is a matter of debate, as Commander McGrath and his sparring partner, Jerry Hendrix of the Center for New American Security, have ably demonstrated. That a particular weapon system—or the defense budget as a whole—might be affordable is largely irrelevant. But because the government that pays for those systems receives its income from the wealth of the American people; the purchases are a question of necessity rather than affordability as compared to individual consumer purchases.
That the money the Pentagon spends is a product of taxation or public debt also changes the incentive structure for financial decision-making. When a person spends more than he or she can afford on pet grooming, he or she spends less on other niceties, dips into savings, pays bills late, or harms his or her credit. The damage, though, is relatively contained. When the Department of Defense spends its money poorly—as it often does—the damage is transferred to the American people via taxes or increased debt. Moreover, the harm people inflict on their personal financial situation often—though certainly not always—motivates them to adopt better spending habits. Because the tens of billions of dollars wasted on programs such as the F-35 Joint Strike Fighter or Crusader howitzer are dispersed among millions of taxpayers, the Pentagon has fewer incentives to spend more wisely in the future.
The second reason consumer spending and defense spending are incomparable is that their effects on the broader economy differ. While the multiplier effect of the pet-grooming industry is unclear, a great deal of consumer spending has positive effects on other sectors and industries. Defense spending does not. In 2012 the Aerospace Industries Association (AIA) attempted to claim that cuts in defense spending stemming from the Budget Control Act of 2011 would have an adverse affect on the U.S. economy, causing the loss of around 2 million jobs. However, economist Benjamin Zycher rebutted the AIA study, demonstrating that it used an inflated Keynesian multiplier. Zycher argued that because the defense sector is a small part of the overall economy, the structural shifts would be mild—affecting over the short run only specific individuals and communities particularly tied to the defense industry.
Finally, defense spending—unlike consumer spending—is a net drag on the economy. Because money spent on defense, and all other government projects, is taken first through taxes, costs are engendered in the form of operating the tax system and the loss of productive economic activity. According to Zycher,
The lowest, barely plausible assumption about the excess burden of the federal system is 20 percent; that is, the economic cost of a dollar of federal spending is at least $1.20 in term of the resulting reduction in the size of the private sector. A more reasonable estimate of 35 percent is still conservative given the scholarly estimates of the excess burden of the federal tax system available in the literature.
That estimate does not include interest on the debt and the taxes that will be needed to pay for it as well. When people point to the affordability of defense spending, they are right, but they are not telling the full story. Nor are they making an accurate portrayal when comparing defense purchases to consumers’ spending.