June 2007

Can We Afford the Military We Need?

With the wars in Iraq and Afghanistan to pay for, the 1990s “peace dividend” has given way to a substantial increase in military spending. This spending, combined with increases in non-defense related government spending and the long-term cost projections for entitlement programs, prompt a vital question: can America afford the military many say we need? Is the solution new taxes, new revenue sources, spending cuts--or all of the above? What impact will these fiscal factors have on America's role in the world? How big a military do we need, and can such a military be accommodated given America's fiscal situation?

AEI’s Frederick W. Kagan and Thomas Donnelly were joined by Robert D. Hormats, vice chairman of Goldman Sachs International and author of the new book The Price of Liberty: Paying for America’s Wars, to discuss the likely future path of military spending, the factors driving that path, and the possible lessons of history. AEI’s Kevin A. Hassett moderated the discussion.

Robert D. Hormats
Goldman Sachs

After great victories in World War II, the Korean War, and Vietnam, there was a backlash against the military. When a country engages in war and borrows large sums of money, they must be repaid quickly. It is imperative that wartime funding engage the American people as it has in the past. Previously, citizens have been more involved in foreign wars through increased taxes or other forms of sacrifice. Participation is important, as it demonstrates that Americans are invested in the conflict and supportive of the government. During World War I, Woodrow Wilson capitalized patriotism by offering war bonds, encouraging families whose relatives were fighting in the trenches to join the struggle financially.

Americans are not currently engaged in the war in Iraq. It was incorrectly thought that the war would be cheap and quick. But although the war has been incredibly expensive, national security only accounts for 2 percent of GDP. The government is going to have to take some actions that are unpopular. The Eisenhower administration was conscious of the need to create a stronger country and more viable financial systems for future generations. Today, the United States is capable of funding the military its security needs require, but in order to do so successfully, the government must begin to implement the 9/11 Commission's recommendations, no matter how unpopular they may be. 

Frederick W. Kagan
AEI

The United States is not as unique as it believes itself to be with respect to modern warfare. During the Napoleonic Wars, the British borrowed heavily as standard practice. Opposing fiscal orthodoxy, the British raised taxes and increased borrowing in an attempt to prevent bankruptcy.

The notion that defense spending is discretionary is incorrect. This war is not a luxury, and involvement in and financing for it cannot be limited at this point. Defense spending is necessary for survival in a world of threats. Unfortunately, the American people still view spending as discretionary and their wars as optional. There are many unconventional but effective ways to fund wars.

Thomas Donnelly
AEI

The cost of building a sustained, successful force is not a very great challenge. Building a million-man force would cost slightly more than 1 percent of GDP over the course of time. There are several ways to finance this hypothetical force. Borrowing is one option, as it benefits the international community. The U.S. personal income tax rate is substantially lower than many industrialized European countries. Taxes should be raised and greater fiscal discipline should be imposed on the federal government. Social welfare entitlement programs have skyrocketed in recent times, and in approximately six years, entitlement programs will exceed national defense spending by three times. Reforming entitlements emphasizes the belief that the government's first priority is national security. Even though federal debt is about 40 percent of GDP, this is relatively low for a highly industrialized country.

AEI intern Amy Kaufman prepared this summary.