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).