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[Kirk Stark, guest-blogging, June 3, 2008 at 4:04pm] Trackbacks
Taxes and Defense Spending as a Percentage of GDP:

Many thanks to all those who have replied to my two earlier posts relating to our new War and Taxes book. Several people have commented on the issue of defense spending as a percentage of GDP. We thought it might be useful to provide some data on this point. It is of course the case that military spending as a percentage of GDP is nowhere near the levels of WWII and remains low as compared to levels in other wars. According to the historical tables released in connection with the administration's 2009 budget proposals, defense spending reached a high of 37.8 percent of GDP during World War II. During the final year of the Korean War, defense spending as a percentage of GDP topped out at 14.2 percent. It seems unlikely that we will ever see defense spending at those levels again.

Several of the replies to our earlier posts have remarked on the comparison between the war in Iraq and the war in Vietnam. Defense spending as a percentage of GDP during the war in Vietnam peaked at 9.5 percent, while only recently reaching the 4 percent mark during the war in Iraq. In constant 2000 dollars, absolute spending on national defense peaked at $421 billion during Vietnam (1968), while the same figure for the war in Iraq is $423 billion (2007). As for the larger budget picture, during Vietnam the federal budget deficit as a percentage of GDP peaked at 2.9 percent in 1968. In 2004, the federal budget deficit reached 3.6 percent of GDP. Again, these data all come from the president's historical budget tables.

I do not want to speak for my co-authors on this point, but in my view there is a strong parallel between Lyndon Johnson and George Bush with respect to the war financing question. As discussed at length in Chapter 5 of our book, Johnson refused to pursue a tax increase to help pay for the war in Vietnam in 1965 and 1966, despite the urging of his economic advisors, because he feared doing so would endanger political support for his cherished Great Society programs. Similarly, President Bush has no interest in paying for the war in Iraq out of new taxes because doing so would necessarily involve repudiating his own chief domestic priority -- the 2001 and 2003 tax cuts. Thus, in both cases, we see an administration seeking to preserve its own domestic policy agenda at the expense of future taxpayers. Eventually, of course, Johnson embraced a 10 percent surtax to help finance the Vietnam War, but only with extreme reluctance. I have little doubt that Johnson would've preferred to foist the entire expense on future generations if he had had the choice. It seems unlikely that President Bush will embrace new war taxes anytime in the next six months, thus leaving the question of how to pay for the war in Iraq to his successor(s).

Gaius Marius:
You hit the nail right on the head. President George W. Bush's presidency unfortunately mirrors President Lyndon B. Johnson's presidency.
6.3.2008 5:13pm
Mark F. (mail):
All government spending must ultimately be paid for either by taxes or inflation (hidden tax). No free lunch here. Paying for spending by debt just means that future taxpayers will have to pay off the bondholders.
6.3.2008 5:19pm
Oren:
Mark - exactly. That's why I move that, in the interest of linguistic fidelity, we strike the language "budget deficit" and replace it with "toddler tax".
6.3.2008 6:08pm
ithaqua (mail):
"It seems unlikely that President Bush will embrace new war taxes anytime in the next six months, thus leaving the question of how to pay for the war in Iraq to his successor(s)."

lol. The war in Iraq pays for itself.
6.3.2008 6:24pm
Gator:
Why on earth should we raise taxes when the budget is filled with pork, farm subsidies and other earmarks which could easily be eliminated?
6.3.2008 6:24pm
wfjag:
But we NEEEEEEEED an Office of Bombing Prevention, Daddy! H.R. 4749, National Bombing Prevention Act of 2008 (May 30, 2008) www.cbo.gov/ftpdocs/93xx/doc9327/hr4749.pdf
6.3.2008 6:32pm
EIDE_Interface (mail):
Tom Delay said there is no fat to trim from the $3 trillion budget. Every last cent is accounted for and is NEEDED!
6.3.2008 6:34pm
Oren:
Gator, farm subsidies are immensely popular (at least in the Senate, where IA votes like any other state).

Even still, discretionary non-military spending (including both agricultural subsidies and earmarks) comprises 15% of the budget. Even if you cut it 100%, you would only close 60% of the budget deficit (which was $600 billion).

Everyone claims they can balance the budget (all three candidates included) by cutting discretionary non-military spending despite the fact that it is absolutely mathematically impossible (let alone the political impossibility of it or the negative effects of cutting them all at once instead of ramping down slowly).

There are really only 3 ways to balance the budget -- cut military spending, cut entitlement spending (and god help you since old people vote) or raise revenue. Talk of anything else is disingenuous, at best.
6.3.2008 6:52pm
dirc:
Defense spending as a percent of GDP was 9.3 percent in 1960, a year that we were at peace. (See this table from the Economic report of the President.) The budget deficit that year was .1% of GDP.

Gator is right: why raise taxes when the budget is loaded with so much unnecessary spending?
6.3.2008 7:00pm
ithaqua (mail):
"Even still, discretionary non-military spending (including both agricultural subsidies and earmarks) comprises 15% of the budget. Even if you cut it 100%, you would only close 60% of the budget deficit (which was $600 billion)."

"Discretionary" is one of the most idiotic liberal dodges in existence. As if Social Security, Medicare, and the rest of the criminal/illegal immigrant welfare programs were somehow sacrosanct. As much as I respect my elders, this is America: poverty is a *choice*, and if you can't afford your own living and medical expenses, that's a result of your own bad decisions, and we shouldn't beggar our troops - or raise taxes on productive members of society - to compensate you for your incompetence.
6.3.2008 7:10pm
Malthus:
Let the little bastards pay! I've been soaked for their public education, SS payments and medicaid all my life, making me some $2,000,000 poorer than if I'd invested the money in a 401K. If they won't pay, use 'em as cannon fodder.
6.3.2008 7:14pm
Oren:
ithaqua -- you know exactly what I mean when i say discretionary: money that Congress has not committed to spending. That said, attacking social security is a non-starter in an election (for people that need to voter's approval, anyway.
6.3.2008 7:28pm
jdd6y:
How exactly is 'war spending' determined? It seems to me that there are a lot of expenditures that come out of various budgets that are war costs, such as paying veterans benefits or certain homeland security costs. And who knows what else.

Governments have always financed their wars through borrowing and subsequent inflation. If people had to internalize the cost of the Iraq war, say, with a gas tax equal to ( projected yearly expenditures / number of gallons consumed in 2007)then I'm guessing the rally round the flag yahoos would be voting against the war, too.

The middle east meddling is nothing more than a big, fat gas subsidy from the unborn to the born.
6.3.2008 8:44pm
Duncan Frissell (mail):
future taxpayers will have to pay off the bondholders.

Since those future taxpayers will be vastly wealthier than we are (just as we are vastly wealthier than our grandfathers) let those squirts pay up.

Just kidding.

But they will be vastly wealthier than we are with replicators turning out all the goods that anyone could possibly desire.
6.3.2008 8:59pm
Duncan Frissell (mail):
Besides, if future taxpayers prefer not to pay, they can sell the continental shelves. We've got lots of those.
6.3.2008 9:01pm
Smokey:
This is like a fat person complaining how hard it is to lose weight. But every pound of fat came from one place: the mouth, and the food that went into it.

Same thing with the deficit. Every dollar owed came from overspending.

So how about this: set aside the military expenditures, court costs, and other items required by the Constitution. Then, slash spending on the remaining entitlements by whatever percentage balances the budget.

It's time we hard-bitten taxpayers -- the ones with no special interest -- were given an honest break for once.
6.3.2008 9:08pm
Smokey:
During the 1950's, Mom generally stayed at home, while Dad worked. On Dad's income, they bought a house, raised the kids, bought a car every few years, paid the doctor, and set money aside for old age.

But today, it generally requires two incomes to do the same thing less. The difference: government growth/spending, and the huge increases in government employees and mandates.

Take a look at this chart of the national increase in wealth. The country's GDP rose from under $1trillion in 1950, to almost $15 trillion today.

If government's size had remained at the same ratio to national income as it was in the 1950's, not only would Mom still not have to work -- but Dad would only have to work less than 2 months per year to maintain the family at the 1950's level. Conversely, if Mom and Dad both worked, like today, they would be about fourteen times wealthier than 1950's parents.

Look at that chart again. All of the increased wealth over the past 50+ years has been expropriated by federal, state and local governments. All of it.

Keep that in mind next time a politician tells you that we absolutely must pay for another tax increase.
6.3.2008 9:27pm
Malvolio:
During the 1950's, Mom generally stayed at home, while Dad worked. On Dad's income, they bought a house, raised the kids, bought a car every few years, paid the doctor, and set money aside for old age.

But today, it generally requires two incomes to do the same thing less.
You're kidding right.

They bought a tiny house, with no a/c and no forced-air heating, a monstrous, slow, uncomfortable car. No VCR, no microwave, no computer, terrible health care. Yadda-yadda-yadda.

Yes, we would be even better off if it weren't for various government stupidities, but we are really, really well off.
6.3.2008 9:41pm
Gator:
Oren's post above ("farm subsidies are popular...god help you if you cut entitlement spending") of course reflects current political realities, but also confirms the wisdom of Milton Friedman's belief that keeping taxes low limits the size of government to the total amount of revenue raised plus whatever-size deficit is politically acceptable.
6.3.2008 10:00pm
Lior:
Financing the war by future taxpayers actually achieves another political goal: because voters pay attention to taxes and to results of spending but not to deficits, the deficit spending means that Bush will get political credit for his tax cuts, while the succeeding administration (probably the Democrats) will get blamed for the higher taxes needed to pay for the war.
6.3.2008 10:08pm
TM Lutas (mail) (www):
To say that you can only cut unintelligently, by percentage, is just not true. There are great savings to be had if people were willing to pursue them.

One can clear snow from a street by using twig broom wielding union workers @$25/hr and take half a day or a snow plow in 15 minutes to achieve the same goal at a tenth the price. The snow gets cleared either way but only an irresponsible spendthrift would do it the former way. In area after area of government expenditure, we're taking the twig broom route by choice.

To give only one example, for decades, we distorted medical treatment in this country by choosing not to take advantage of the pharma revolution. Patients couldn't afford pills on their own so they ended up with more government paid for surgeries after their conditions deteriorated sufficiently that they qualified for the medicare/medicaid knife. We've undone that foolishness, at least partially, but there are a great many other distortions that are causing us to spend more money in medical care than otherwise necessary and for lousier patient outcomes to boot. The DEA and the legal profession both bear a good share of the blame.

It's not waste that doctors don't get patients appropriate pain meds, fobbing them off on pain clinics because they're terrified of the DEA hauling them off to jail. It's not fraud that primary care doctors won't risk their licenses to do the small surgeries and procedures @$65 an hour that they used to do when they were reimbursed @$125 and instead send them to a specialist who is doing the same thing @$175. These are just bad policies that mean more government spending for equal or poorer outcomes.

The level of poor policy is astounding and it costs us dearly. Were we to clean up our act, we could close the deficit to zero and still achieve the good that we've voted to have the government do. But until people start caring about competence, about actual outcomes, we're not going to fix things. Instead we'll be trapped in sterile conversations about how impossible it all is to fix.
6.3.2008 10:25pm
Oren:
Gator -- that of course implies that there is some limit to the size of the acceptable deficit.
6.3.2008 11:00pm
Smokey:
Malvolio: Question: Do you work for the government? Because a few examples like that does not destroy my premise.

TM Lutas: Great post, I agree. In fact, as I was writing the post you responded to, I was thinking: There's no way we can change the current giant clusterfuck [Viet Nam soldier's expression] by any logical debate. Because taxpayer money is at stake! No need to pretend that rational debate will change anything, or take the government's hands out of our pockets.
6.3.2008 11:15pm
Bart (mail):
Mr. Stark:

President Bush has no interest in paying for the war in Iraq out of new taxes because doing so would necessarily involve repudiating his own chief domestic priority -- the 2001 and 2003 tax cuts. Thus, in both cases, we see an administration seeking to preserve its own domestic policy agenda at the expense of future taxpayers.

You appear to be confusing marginal tax rates with actual tax revenues, which is common in static rather than dynamic economic scoring.

Under the higher marginal tax rates in effect in the beginning of the Bush term, tax revenues dropped from $2025.5 billion in 2000 to $1782.5 in 2003 (constant 2000 dollars).

However, after the Summer 2003 marginal tax rate reductions (the 2001 tax cut was primarily a rebate and did not implement marginal tax rate reductions), tax revenues soared from $1782.5 billion in 2003 to $2540.1 billion in 2007 (est) (constant 2000 dollars).

See Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits in Current Dollars, Constant (FY 2000) Dollars, and as Percentages of GDP: 1940--2012.

The increase of actual tax revenues brought about by reduction in marginal tax rates far more than paid for the wars in Iraq and Afghanistan.

To raise marginal tax rates back up as Dems have suggested would have slowed growth in tax revenues just as the Clinton marginal tax rate increases did in 1994 and beyond. The Clinton marginal tax rate increases only brought in roughly half of the revenues projected by CBO and OMB using static economic scoring. As a point of comparison, the Bush marginal tax rate reductions produced far more tax revenues than CBO amd OMB projected.

The comparison of Bush with LBJ is apt, but not in the way you suggest. Bush and LBJ both enacted marginal tax rate reductions and both reaped a large increase in tax revenues. They could have paid for much or all of their wars if they kept the remainder of the budget stable. However, both Presidents went on enormous domestic spending sprees and those sprees caused the deficits.
6.3.2008 11:19pm
Splunge:
Geez, I hope the book is a tad more honest than this post. Obviously the entirety of the military budget cannot honestly be attributed to either war. The bulk of the military budget in 1968, for example, was devoted to the costs of the Cold War. Duh.

The use of the military budget today is somewhat more problematic, since we don't have an adversary the size and power of the USSR. But we seem to have become the world's policeman, with small-scale commitments all over the damn place. I mean, why the heck are we still defending South Korea from the North? It's not like South Korea doesn't have the money to do so itself. And so on.

If you want to consider the costs of either war, you need to identify the additional military spending attributable to Vietnam and Iraq, respectively, which would not have been spent otherwise. In the case of 1968, that's not going to net you very much. It's not like the USAF would have purchased fewer F-4s, or cut back on the F-15 development program, had there been no MACV. It's not like the USN was buying $250 million nuclear attack submarines to fight North Vietnamese gunboats. Similarly, the big-ticket items in today's budgets, like the F-22 and F-35, or the Navy's new all-electric destroyer, are hardly designed to fight al-Qaeda nutjobs armed with AK-47s and knives. (Could be meant for China, however. Also, the big push in UAVs and other robotic systems turns out to be useful against the insurgents, too.)

I mean, for example, defense spending was 19.3% of the budget in Bill Clinton's second budget (1994) with neither a Cold War nor an Iraq War anywhere in sight. Last year (2007) it reached 20.2% of the budget, so the quick calculation is that the Iraq War is maybe responsible for bumping up defense spending from 19.3% to 20.2% of Federal expenditures. Big deal. There's no way such a small change by itself can force a big tax increase.

So far as I can tell, the way it works is that post-WWII America has simply decided that it needs to be the biggest and baddest military power on the planet, capable of beating up any plausible combination of other nations. That seems to require a constant 4-6% of GDP spending, rain or shine, war or peace. Things seem to have been a little higher in the late 1960s, but I doubt this has much relation to Vietnam. Far more likely is the fact that it was about the height of Cold War spending, when we added the other two legs of the nuclear "triad" (the Minuteman III ICBM fleet was deployed in 1969, and the first nuclear missile sub was launched in 1960). A useful proxy for US Cold War spending is the US nuclear arsenal, which reached a peak of maybe 30,000 warheads in about 1967.
6.3.2008 11:33pm
andy (mail) (www):
As a tax geek, I would have been interested in buying this book, but now seriously doubt the neutrality of the authors.


Similarly, President Bush has no interest in paying for the war in Iraq out of new taxes because doing so would necessarily involve repudiating his own chief domestic priority -- the 2001 and 2003 tax cuts. Thus, in both cases, we see an administration seeking to preserve its own domestic policy agenda at the expense of future taxpayers.


Didn't you just say that war spending was a smaller percentage of GDP than ever before? So why is pursuing domestic agendas (including tax cuts) inconsistent with paying for the Iraq war?

Stated another way (and to use extreme numbers), if wars have always cost $100 a year, and in prior years I only had $1500, but this year I have $50000, why is refusing to extracct more taxes from the citizenry's pockets somehow ignoble (which is what the tone of these guest posts undoubtedly suggests)?

All of that being said, I am very open to hearing that the tax cuts were irresponsible, and that this war has resulted in bloated spending. I was hoping to see an honest analysis of these matters in the War & Taxes book.

Unfortunately, it seems to me that this book will not offer a neutral assessment of the situation but will (as in the prior post) pick a bunch of NY Times snippets to support its pre-determined conclusions or (as in this post) misrepresent the basic economics of the situation. Mr. Stark, please correct me if I'm wrong - I am all ears if these posts aren't representative of the book's text.

Also, I'm still confused about why, if someone is interested in convincing another of a position, he won't stoke the neutral ground. I understand War/Taxes is a politically sensitive (and divisive!) topic, but the authors' guest posts leave me very discouraged. Is it really that hard to approach a very important topic in a neutral fashion? Seems like there are more than enough criticisms to make about this administration's policies without resorting to the coloring of the facts evident in the authors' posts. I think everyone agrees that very bad things (fiscally and strategically) have happened with the Iraq war; why those mistakes have to enjoy the academic's gloss as well is beyond me.

N.B. - I am no historian, and if the approach of War &Taxes is par for course for historical analyses, then I apologize.
6.4.2008 1:56am
fishbane (mail):
A lot of people seem to ignore the opportunity cost of debt. Sure, China is basically financing our adventure in Iraq, and we still have the Saudis, so far. I would encourage people who plan for the future to think about 3 years out, with a tanking dollar, and what it means when oil becomes denominated in Euros. I'm not sure our clever manipulation of smallish states will prop us up, after Iraq. cf, hammer, fly, or alternately, bull, china-shop.

This isn't a partisan issue - both parties have played this game for a long time. It just hasn't been played well recently.
6.4.2008 3:11am
Iolo:
I have little doubt that Johnson would've preferred to foist the entire expense on future generations if he had had the choice.

Incidentally, what is wrong with making "future generations" pay for a war? They benefit from the improved security that the war creates, why shouldn't they pay for it?
6.4.2008 10:55am