National debt and Defense Spending

by: sjwillis39

February 18, 2010 2:49 PM

Updated: I changed the graph to include when recessions have happened over the last 100 years. I also added a few more thoughts down at the end.

I posted the majority of this as a comment in a diary but I thought it could use a little more thought and could warrant a full diary.

There has been a lot of talk lately about the national debt; faultguy posted an interesting article that said something to the effect that the national debt to GDP ratio is on its way to be at the highest level since 1950. So I wanted to look at what were the factors that contributed to getting to this level. My main hunch was that military spending would be a large factor.

Debt-defense w rec

This graph shows the relationship between gross public debt as a percentage of GDP and Defense spending as a percentage of GDP. What stood out to me as that there seems to be more or less two different eras for the debt to GDP: 1900-1979, and 1980-2010. I have also included the recessions that are shaded in grey which correspond with some of the spikes in the national debt.

From 1900-1950: increases in Defense spending as a percentage of GDP (proxy for war spending) were positively correlated with the national debt. Changes is defense spending as a percentage of GDP explained about 51.68% of the change in national debt as a percentage of GDP over the period. This suggests that a large portion of the national debt is due to war spending. The coefficient is 2.35, which means that for every 1 percent increase in defense spending as a portion of GDP the gross national debt as a percentage of GDP increase 2.35 percent.

1900-1980: I added this and it seems to have even stronger predictive power than 1900-1950 but it still is pointing in the same direction. This has an even stronger positive correlation, and explains 53.98% of the change in national debt as a percentage of GDP. The coefficient is a little larger as well at 2.497 which means that for a 1 percent increase in defense spending it increases the national debt by about 2.497 percent.

1979-2010: This is going to blow your mind because it certainly blew mine. 1979 is the point where the gross public debt/gdp ratio is at it's lowest. It reached a point of 32.26%, so from this date to the present defense spending as a percentage of GDP is still correlated only now it is negative! The explanatory power has fallen as well to about 23.4% of the changes can be explained by defense spending as a percentage of GDO for gross national debt as a percentage of GDP.

Now this is the part that will blow your mind. For an INCREASE in defense spending it will LOWER the deficit. So the interpretation is a 1 percent increase in Defense spending as a percentage of GDP will lower the gross national debt by 6.15%!

If I were interpreting this I would say that something else became the driving factor in the National debt. When you look at the percentage of the budget dedicated to defense it has been shrinking considerably since 1900. From 1900-1970 it averaged 49.02% of government spending; from 1971-2010 it has only 27.24% of spending.

percent spend

This shows the percentage of the budget that is dedicated to defense. If we again look at the period 1980-2010 the amount going to defense is pretty flat and actually down.

After considering these factors I think that it is fairly safe to say that yes the previous high was due in a large part due to war/defense spending. We were spending 54% of our money on that category and were only 5 years removed from spending nearly 90% of the federal budget on that. Compared to now where we spend only 24% of the budget on defense (still a whole lot) and over the last 20 years it has been roughly flat with a max of 24.27% and a minimum of 19.55% with an average of 22.37%.

So something changed considerably from the last time the debt was at this level, then we spent a lot of money on a war and the debt came down as we lowered defense spending. Now defense spending is at among the lowest levels in the last 100 years (But trending upward) and we are still approaching record debt levels.

I think that it would be very hard to say that our current debt is due to fighting a war and it will return to manageable levels after the war is over and defense spending decreases like was the case after World War One/World War Two/Korea/Vietnam (even this is hard to see in the numbers but could be due to trying to accomplish having both "guns and butter" so increasing both war and other spending). The other lines in the budget (namely Medicare and Social Security which together make up about 40% of the budget and growing) seem to have taken a diminished the importance of defense spending in relation to national debt.

So I do strongly believe that the National debt is something to worry about and that unlike the previous high's reached after World War Two where we could rapidly lower spending after the war was over this time it will not be so easy.

The solutions are not really palatable for either party. It would take large substantial cuts in entitlments and some form of tax increases.

The entitelments and other non-discretionary portions of the budget are large and growing and at the current projection can not be maintained, these need to be addressed. The likeleyhood of that any time soon is not good, as we can see we would rather kick the can down the road and make more promises on top of the ones that we can not pay.

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I must say...

by: KauclairThu Feb 18, 2010 at 23:20:33 PM CST

...you blew my mind, SJ.

I'm all doped out on melatonin and fighting to stay awake-- but I think I grasp most of what you've eloquently laid out here.

So taking the graph from way back that began this discussion:

I understand that FG's recent diary sparked this particular thread, and stop me if I'm jumping off subject (no promises though)...

... I remember you laying out some serious questions as to the validity of some of the projections, and where the "blame" should lie this far into Obama's presidency.

But even in this chart, the war spending is a pretty small factor when compared to the rest-- and I came across the below pie chart when I was looking for actual numbers for defense spending vs the rest of the the federal budget (I've written diaries on it in the past)

So why are we here?? In your opinion?? If you're debunking the claim that defense spending is to blame for our current trend... if we've been here before, but under different circumstances, for different reasons... then what are we doing now??

Is it the stimulus?? Tax breaks to the extremely wealthy?? Are we pointing ourselves in the correct direction or just setting the country up for failure??

I understand economics is a beast. Many different factors contribute to shifts one way or the other- and one cannot always accurately predict the course of events that will swing the trend into the correct direction.

I'm just curious as to your thoughts on all of it-- cuz I have no fucking clue.

(4.00 / 1)

Well thank you

by: sjwillis39Fri Feb 19, 2010 at 10:46:07 AM CST

I will try to answer your questions.

Why are we here?

We demand more government services than we are willing to pay for or to put it another way we demand a tax level that does not pay for the services that government provides.

This is not something that can last forever, the way I see it and I could be wrong is that starting in 1980 we pivoted away from mostly paying for what we got. So we had more a less a system of tax and spend what came in. Now we have a mindset in government which is tax a little bit (always trying to cut taxes or the middle class) but continue to spend like before or actually for the last 10 years spend faster than almost ever before.

What politians are doing is trying to sell us a "free lunch" that this borrowing will have no consequence and that it is perfectly fine and necassary to do. Well like the saying goes there is no such thing as a free lunch. There are real costs to our growing debt that will and are becoming a problem. So that in my opinion is why we are here, we as a nation have dedcided that we want government to do all of these things and that we don't want to pay that much for it and the politicans have decided that just borrowing money is easier than lowering spending or raising taxes to really pay for it.

What are we doing now that is different than in the past?

Well my argument above is that Military spending did a fairly good job of explaining why in the past the national debt was so high. The way to bring it down was to cut military spending down to what it was in pre-war levels. So let's say we do that now and go back to 1999 era levels where defense spending was "only 19%" (still too high in my opinion but bear with me) that would cut just under $200 billion from the budget a lot of money but small in comparison to the defict that is $1,350 billion dollars (or $1.35 trillion). We could cut all defense spending and still have a deficit of $400 billion dollars!

So if we take 1950 for example the last time it was this bad, they cut defense spending from nearly 90% of the federal budget to about 55%. Defense isn't of the magnitude and instead we would need to do something along the lines of cutting Medicare, social security and defense but quite a bit to see the same results while holding the other spending constant. On the flip side we could raise taxes to bring them in line with what it truly costs to provide all the government services. There isn't really an easy way out.

To answer your other questions, Is it the stimulus? Tax breaks to the extremely wealthy?

I would say that these do not help but they are not the lurking issue. You can argue that both of these in the long run may have help the economy enough that the costs associated with them were justified. I wouldn't argue that for either of them but some people may say that. In reality they are a short term problem that doesn't help the long run.

I don't think that the stimulus was a good policy that accomplished what it set out to do and that the number of net jobs created for the amount spent is very expensive.

Tax breaks for the wealthy, I like lower taxes but I do not like tax cuts without corresponding spending cuts, I think it is just as irresponsible as spending increases with out other cuts or new taxes.

So yes these are not great policies in my opinion and contribute to the problem especially the growing interest on the national debt which is about 8% of the federal budget. For perspective that is equal to the amount we spend on Education, Transportation, and scientific and medical research so not a small number at all and getting bigger with each yearly deficit and sure to go up when interest rates rise in the near future.

However the biggest issue is the entitelment programs that will grow in size and take up more and more of the federal budget.

(0.00 / 0)

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

F A Hayek

[ Parent ]

Thanks

by: KauclairSat Feb 20, 2010 at 07:15:20 AM CST

Thanks for your response!

As always insightful my dear.

I don't think I have any more questions right now, but if I come up with any I'll meet you back here lol.

Changed dynamic

by: Independent WFSat Feb 20, 2010 at 11:37:19 AM CST

I think one of the big problems we face is that when all of the entitlement programs came online corporations no longer needed to offer retirement. The dynamic of the doing of business changed for a lot of reasons: the assembly line, deregulation, and Wal-mart-style business practices among the ones I can think of off the top of my head. Trouble is, the corporations aren't going to take back responsibility for offering benefits like retirement. I haven't heard a lot of discussion of viable options to influence that dynamic.

My grandfather and father both retired from GM but that's no longer an option, my dad was the last person to retire from the place he worked with GM benefits because they split companies off so that they didn't have to offer such things. My relatives didn't work in the shop, my grandpa was a draftsman and my dad was an engineer, neither of which had the powerful GM union looking out for their best interests. Don't get me wrong, GM's union is a monster that got WAY out of control, but there's no denying that my grandpa wouldn't have lost his health care and a percentage of his benefits, and my dad wouldn't be facing having his retirement benefits halved if they'd been part of the union. It's ironic to me that college degrees got them less benefits instead of more. In my opinion (and many other people who lives there and watched GM screw itself over) there was no balance, the corporate interests had no sense of how to keep a healthy balance between paying a living wage and offering good benefits and the union only skewed things further. Couple that with a company who put their focus in the wrong place, selling status instead of an efficient quality vehicle, and it's a recipe for disaster. It's too bad those people who made terrible decisions can't be held accountable for doing so.

Anyway, sorry about the tangent :)

Knowing others is intelligence; knowing yourself is true wisdom. - Lao Tzu

"Peace is not the absence of conflict, but the presence of creative alternatives for responding to conflict." Dorothy Thompson

ok I'm with ya

by: faultguyFri Feb 19, 2010 at 21:21:50 PM CST

but I still have a question - how did we pay down that previously monstrous deficit?

I understand that medicare and medicaid didn't exist.

I understand that social security was in its infancy.

But still, the original article I linked to mentioned paying down that deficit. Well, how exactly were they able to do it. And don't forget, even though WWII was over, that didn't mark the end of "war-time America". Within 5 years we were involved in Korea. And then a decade later we were engaged in Vietnam.

I bring this up to say - it's not as if we could take the money that was no longer going to the war machine and use it to pay down the debt. We were engaged in one war or another for most of that time.

So, again, where'd the money come from to pay down the debt?

Like you, I worry about cuts in social programs. So perhaps we can learn from the past and try to do things in a similar manner that they did them.

I find it truly amazing how certain human beings aren't a PART of humanity as a whole.

How we did it before

by: sjwillis39Tue Feb 23, 2010 at 19:38:21 PM CST

Is that previously they debt was brought down by a large reduction in military spending while keeping other spending under control or by raising taxes to pay for it.

So yes there were still wars but they were not on the magnitude of World War two. The other things that the yearly deficits were kept fairly low, if the economy grew at faster rate than the deficit than the GDP to Debt ratio went down.

So I guess in a round about way I am saying that yearly deficits were kept under control. I say that this was due to decreased military spending (even in war times Korean war spiked to 70% of budget, Vietnam only around mid-50s) and actually paying for what the government provided service wise. When yearly deficits are kept low and the economy grows the debt issue goes down.

I would also this, the actual debt get going up yearly but as a ratio to GDP it went down due to the economy growing faster than the debt. So it is not like we were paying down debt we were just making more to afford to borrow more.

So there is some things that I am thinking.

that's what I would have guessed

by: faultguyTue Feb 23, 2010 at 21:36:07 PM CST

You are right that even though we were still fighting wars, they were in no way on the scale of WWII. So the spending on them wouldn't have been as great.

So if we lose these 2 wars [and the $100 billion a year to fight them (note, that figure might be off, too tired to look up the exact figure)], raise taxes [::gasp::], and get other spending under control, we might be able to start making a dent in our deficit.

It wouldn't be easy. Budgets at all levels seem to be absolutely wrecked these days.

However, I think if you went to the American public, were honest about the situation, they would make sacrifices. They would pay higher taxes as long as they were fair and across the board [meaning, all tax brackets]. They would probably even accept less in the way of entitlements from the Gov't. Unfortunately, it might doom health care. $1 trillion over 10 years would probably not be palpable anymore. So it would have to be scaled way back and toned down to a small, concise bill.

I guess I'm just trying to say that there are things we can do in this country, simple things really, that would go a long way to reducing our deficit. Granted, it would help if GDP went up at a greater clip than 2.5%. But that should come in time...assuming nothing catastrophic happens.

What if we had...

by: sjwillis39Tue Feb 23, 2010 at 22:46:49 PM CST

Only increased government spending at inflation plus population growth. The last decade would have been surplus city and even though we had have deficit now due to falling revenue it would be small. Only about 182 billion which could be paid for easily seeing we just had a decade full of surpluses. We could even do temporary spending comfortably without adding crazy debt of you belive that kind of thing helps.

We could keep that in mind in the future as a way of lowering the debt ratio. Hell I would support some tax increases in exchange for limits on growth in spending. It wouldn't even be cuts just growing no faster then population and inflation.

LefTake