Defense Spending and the Federal Deficit

If the Reagan administration is serious about reducing the federal deficit, it will have to look at reducing defense spending.
By David C. Morrison
November/December 1984
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Cutting the 1985 defense budget could have reduced the federal deficit as much as 40%.
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"We are faced with a threat, in my opinion, far more destructive than anything the Soviets can throw at us," Senator Barry Goldwater (R-Ariz.) warned this spring, "and that is the federal deficit."

Indeed, for all its lip service to a balanced-budget amendment, the Reagan administration is amassing record-breaking deficits. The Congressional Budget Office forecasts average annual deficits over the next five years of $204 billion, for a total addition to the national debt of more than $1 trillion by 1989. (More optimistic administration forecasts peg this budget shortfall at $896 billion.) As noted by former Treasury Secretary W. Michael Blumenthal, "Annual $200-billion deficits will add as much to the national debt in less than five years as has previously been accumulated in two centuries."

Deficit spending is a time-honored means of funding military programs—witness President Johnson's "guns-and-butter" approach to paying for the Vietnam War (and the wildfire inflation that ensued in the 1970's). The current scale of the problem, however, is unprecedented. High deficits raise the U.S. interest rate, attracting foreign funds and pushing up the exchange rate for the dollar. An overstrong dollar makes U.S. goods unattractive to foreign buyers, reducing U.S. economic competitiveness and feeding the trade deficit. Higher interest rates also put a damper on investment, capital formation, and the ability of consumers to buy goods.

Military spending's contribution to the deficit disaster is hotly contested but undeniable, as attested by a simple exercise: If the Pentagon's share of the 1985 budget were the same as it was in 1978, military spending would be $71 billion less—a reduction that would erase 40% of the $176-billion deficit projected for 1985.

This unwelcome fact was pointed out repeatedly by the president's ex-Council of Economic Advisors chairman, Martin Feldstein, who told Congress late last year that "the things that raise the deficit are defense spending, interest on the national debt, and the tax reduction. The thing that has reduced the deficit has been the decline in domestic spending [social programs], excluding social security." Social spending, of course, was all but squeezed dry in the first two years of the Reagan administration. Short of raising taxes, which the Republican platform swears not to do, little slack remains in the budget — save military spending.

All of this may seem grim, but more bad news is likely just around the corner. The General Accounting Office reported this spring that the Pentagon's present $1.9-trillion five-year plan is understated by at least $173 billion and at most $324 billion. Where the administration hopes to find the money is anyone's guess, but one thing is certain: We will all be paying the immediate and indirect costs of the Reagan buildup for many years to come.

David C. Morrison is a research analyst at the Center for Defense Information in Washington, D.C.

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