Can the U.S. Cut Defense Spending?

“There’s only one way to [fix America’s long-term budget problems],” said President Obama’s fiscal commission co-chair Alan Simpson. “You dig into the big four, Medicare, Medicaid, Social Security, and defense.” In shying clear of Medicare, Medicaid, and Social Security in his 2012 budget proposal, the president took a bow to the formidable political challenge posed by the first three. But what about defense, which accounts for a whopping 22% of Federal expenditures? In spite of the ups and downs in the global peace index, history suggests that cuts in nominal defense spending are just as hard to achieve. As the yellow line in the top figure shows, nominal defense spending almost never falls. Declines in defense spending as a percentage of GDP have historically been accounted for by inflation or real GDP growth – not by spending cuts. The fiscal commission’s report called for $34 billion in nominal defense cuts between 2012 and 2013, a time-period during which the president’s budget calls for increases. But even the president’s much more modest brand of fiscal discipline looks oversold. His budget projects strong economic growth in the medium term, but if private growth forecasts are more accurate he will need to do the politically impossible – actually cut nominal spending - in order to achieve the real cuts implied by his budget.

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