Think You Know Where Defense Spending is Headed After Coronavirus? Guess Again
(Source: Lexington Institute; issued May 12, 2020)
As in other sectors of the economy, the coronavirus crisis has spawned uncertainty about the future in defense circles. Military planners, think tank analysts and media pundits are all speculating where Pentagon spending may be headed in the aftermath of the worst global pandemic in a century.

So far, the speculation is mostly negative. The Trump administration was already planning for flat military outlays during a second term, and now massive federal borrowing to shore up the economy may put even that possibility beyond reach. Or at least, so the thinking goes.

But pessimism is a reflex in times like these. As Josh Brown, CEO of Ritholtz Wealth Management and a CNBC regular, puts it, somehow the case for optimism always sounds “dopey” compared with the case for fear. Think of how scared people were after 9-11.

The reality is that we have no idea where defense spending will stand two or three years from now. What seems obvious today can quickly be overtaken by unforeseen developments, just as coronavirus suddenly materialized out of nowhere to dominate our current worldview.

I argued last month that near-term cuts to weapons spending would further damage an already staggered economy, and that for various reasons such cuts probably were not in the cards. More broadly, though, our ability to predict the level of military outlays even a few years into the future is very weak. The notion that there is some “natural” or steady-state level of defense spending is a fiction.

Coronavirus isn’t even the biggest source of uncertainty about the future—not when it comes to military preparations. Those sources lie in geopolitical developments, electoral trends, economic forces and technological breakthroughs. Here, to my way of thinking, are the five biggest factors undercutting our ability to predict future military outlays.

I have left the current pandemic for last because it is probably the least important factor.

Strategic shocks frequently shift the vector of defense. As the timeline I have assembled below indicates, big geopolitical surprises occur on average every 5-6 years. They aren’t always bad for our security—think of the Berlin Wall coming down—but they invariably lead to a reassessment of military spending plans. If the government of North Korea were to collapse, or China launched an amphibious assault against Taiwan, the direction of military spending plans would change quickly. We just don’t know what the next shock will be, or when it will occur.

Election outcomes change political priorities. The struggle for power in our national government is institutionalized in elections every two years. That is the proximate political duration of any defense spending plan, even without a geopolitical crisis. If partisan control of the White House or Congress changes, the willingness to fund defense at the expense of other priorities will likely change too. The national defense strategy that drives military spending isn’t just a reaction to concrete threats, it is also a subjective assessment of which threats matter and which responses are necessary. Those subjectivities vary between political factions, with Republicans generally favoring more military outlays than Democrats—as the following, notional graphic illustrates.

When you have a $25 trillion debt, rates are critical. In January of 2001, when George W. Bush was inaugurated, the accumulated federal debt stood at $5.7 trillion which was being financed at an average annual interest rate of 6.6%. Today the debt stands at $25.2 trillion, but the rate at which the debt is being carried averages 2.4%. Because the economy has grown during the intervening years while the interest rate has fallen, the cost of servicing the larger debt ($574 billion last year) seems manageable. However, if interest rates were to revert to the level of 2001, which was much closer to the historic mean than today’s rates, the federal budget would have to be drastically revised. Defense outlays would probably decrease, even if threats were increasing.

New technology can suddenly create dangers or opportunities. After the Soviet Union tested its first atomic weapon in 1949, a previously complacent U.S. government started pouring money into long-range bombers. When the Russians launched the Sputnik satellite in 1957, the perceived “bomber gap” became a “missile gap.” These instances demonstrate how new technology can rapidly change military requirements. One reason the Clinton Administration didn’t worry about taking a procurement “holiday” in the 1990s was that the U.S. had a monopoly in stealth and precision-guided munitions. That monopoly is now gone, and potential enemies are developing game-changing weapons like hypersonic glide vehicles. Such breakthroughs can profoundly impact military spending levels.

Duration of the present pandemic is unknown. The coronavirus crisis may prove to be a surprise of strategic proportions, but as of today nobody can say what its longevity or ultimate impact will be. There may be a preventive vaccine soon, or it may take years. The vaccine may be highly effective, or only marginally efficacious. Various therapies will appear, as will mutations of the baseline virus. Until we have a better grasp of how the pandemic affects our capacity or willingness to fund defense, predicting future levels of military outlays will be a fool’s errand. And that’s before we even get to how the pandemic affects other countries like China. There are too many variables at work to see the future clearly, and the variables all interact in complex ways.

So, here’s the bottom line: two years hence, U.S. defense spending will be higher, lower, or about the same as it is today. We can’t know which outcome will occur with the information currently in hand. If this seems unsettling, then you probably won’t be comforted to hear that we have always been in the dark about the future. We just sense it more sharply today.

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