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How much defense spending can we afford?

Murray Weidenbaum
At a time when international tensions and budget deficits are both increasing rapidly, many Americans are raising a perennial question: How much military spending can the United States afford? The truth is that the country can afford to devote a substantially larger share of its resources to military purposes than it now does. That simple conclusion, however, is only the beginning of serious analysis of the subject. A host of related questions quickly come to mind: What is the real cost of maintaining a large military establishment? Are there limits to the size of the military budget? How much military expenditure is enough? Does military spending stimulate or retard economic growth? What is the exact relation between spending on guns and on butter? Economic analysis can cast considerable light on these important issues and help us to formulate budget priorities, In the end, though, it is mainly political criteria that must determine how much of our resources we allocate to national defense, and a political question as to how much we are willing to spend.

The real costs

The costs of military spending are usually described in billions of dollars or as a percentage of the gross domestic product (GDP). These substantial costs, however, can more meaningfully be expressed in the number of men and women pulled away from civilian pursuits, tile technology diverted to military ends, the many barrels of oil pumped from tile earth, and the vast amount of space taken up by military equipment and debris. In short, the real costs of military activities are measured in human and natural resources and in the stocks of productive capital absorbed in producing, transporting, and maintaining weapons and other military equipment. It is in this broader sense of opportunities lost that military spending should be considered.

Not only do we lose the opportunity for civilian use of goods and services, but we also lose the potential economic growth that these resources might have brought about. For example, the production of a military capital asset such as a missile may entail the same amount of economic activity as the production of a civilian capital asset such as machinery for a truck factory. But while the former will eventually be exploded or buried, the latter would continue to enhance the nation's productive capacity over an extended period of time.

Thus the real cost to society of allocating productive resources to military programs is not the money spent but the fact that these resources are not available for other purposes. In general, more missiles and tanks mean fewer new cars, homes, and schools.

This trade-off occurs no matter how the military budget is financed. If the economy is near full employment and the military outlays are financed through taxation or through borrowing from the private sector, part of these expenditures will be undertaken at the expense of private investment and part from reduced current consumption. A portion of the individual incomes and corporate profits given up in the form of higher taxes would otherwise have been saved and invested in new capital facilities. If, instead, the deficit is financed through increases in the money supply, the same shift in resources is achieved by inflation as the Department of Defense bids resources away from other uses. Thus at least part of the burden of defense expenditures will be borne by future generations, since they are deprived of the returns on the curtailed private investment.

Yet in practice, not all resources used in military programs have been diverted from other uses. Some of these resources might not have been employed at all if it were not for the expansion of defense activities. Additionally, certain categories of defense activity, while absorbing resources that the civilian economy would use, replace similar goods and services that the civilian economy would otherwise have had to provide. The food, clothing, and shelter provided to members of the armed forces is a case in point. Even if we had no military establishment at all, a portion of the nation's output would still be devoted to feeding, clothing, and sheltering these people. Likewise, some of the military's research and development is part of the economy's investment in future growth and would probably be undertaken, at least in some form, in peacetime.

Guns or butter

Economists disagree as to whether increases in military spending come primarily out of resources that otherwise would be devoted to investment or to consumption. Because investment contributes far more directly to economic growth, the cost in terms of lost opportunities is higher when military spending is pulled from investment resources than when taken from money that would otherwise go toward current consumption--that is, for items that generate little or no future benefit.

The argument that military demands substantially crowd out private investment rests on the notion that a large and growing federal deficit forces the Treasury to expand its presence in capital markets. This puts upward pressure on interest rates. In turn, rising interest rates inhibit private capital formation. Intuitively, it would seem that the expanding deficits that so often accompany a military buildup contribute to rising interest rates. However, the empirical evidence on the causal relationship between budget deficits and interest rates is not very impressive. From 2001 to 2002, for example, military outlays and the budget deficit were both rising at a time when interest rates were declining or stable at a very low level. Clearly, nongovernmental factors were the main determinants of interest rate levels at the time.

During World War II, however, when the U.S. economy was pushing very hard against the limits of productive capacity, the rapid expansion of military demand had a strong negative effect on civilian investment. Nevertheless, studies of more recent time periods tend to show that, on the whole, defense spending has not drained investment funds from the civilian economy. The share of GDP devoted to nonmilitary investment has not suffered on account of a larger defense share; rather, it is primarily consumption that is affected. Bruce Russett of Yale University expressed these findings succinctly: "Private consumption has indeed been the largest alternative use of defense money. Guns do come partly at the expense of butter."

Evidence for that proposition is obtained by comparing the structure of the American economy of 1929 (as far back as reliable statistics are available) with that of the late 1990s. Two major changes took place during that 70-year period: a rise in military outlays from 1 percent to about 4 percent of the GDP (down from a peak of over 10 percent in 1960-62) and a decline in the size of personal consumption expenditures from 73 percent to 67 percent of GDP. To some extent, this pattern reflects the unwillingness of the public to pay for wars by curtailing civilian spending by government. Financing the resultant budget deficit requires pulling resources out of the private sector, the largest part of which is personal consumption.

This pattern does not always hold. Although consumers bore the economic brunt of the Vietnam War, consumption was hardly affected by the Korean conflict. And while state and local government purchases declined relatively during World War II and the Korean War, they gained some ground during the Vietnam War. At times, the military effort may actually generate additional private investment to support the war production effort.

Such aggregate comparisons, however, obscure important qualitative differences. Many resources devoted to military programs are very specialized and not quickly transferable to or from civilian uses. Compared to the modest ratio of military spending to GDP, the military establishment accounts for far larger shares of the nation's capital formation, research and development, and high-tech production. A large reduction in, say, procurement of supersonic aircraft will not necessarily be offset--even after a reasonable adjustment period--by a comparable expansion in production of civilian high-tech goods and services.

The sectors of the economy producing equipment for the armed services are surely important but also quite narrow. The fundamental civilian orientation of this nation's economic activity can best be judged by examining the reactions that occur in that basic barometer of capitalism, the stock market. Marxist economists--who believe that military spending is necessary for the viability of the capitalistic system--might find the way in which the financial community reacted to recent wars very puzzling. As the Financial Times put it during the Vietnam War, "There is no greater nest of doves, outside the campuses, than Wall Street." Contrary to supposed precedent, stock prices rose on the mere rumor of peace: "Peace Reports Ignite Brisk Market Spurt," stated the headline of an article in the Christian Science Monitor. The article went on to report that hopes of peace in Vietnam had triggered a two-day buying spree in which the Dow Jones average rose in heavy trading.

More recent experience confirms this tendency. The poor performance of the stock market in the fall of 2002 was blamed, at least in part, on investor worries about a possible war with Iraq. On balance, military buildups may generate some positive response in financial markets, but the prospect of war itself does not.

Politics not economics

There is no simple or generally agreed upon method of measuring the "burden" of military programs on the economy, nor is there any convenient indication of what, if any, economic ceiling exists for such programs. With certain qualifications related to the costs of lost opportunity in civilian production, available economic research tends to support the view that the United States can "afford" whatever level of military outlays it believes is necessary. This conclusion is the result of studies begun in the 1950s and 1960s on the economics of disarmament, when military spending was a much larger share of the GDP than it is today. In 1958, the Committee for Economic development concluded that the risk that military outlays of 15 percent or more of the GDP "will ruin the American way of life is slight indeed." Later analyses have also found that if necessary the American economy can sustain a higher level of such spending than was experienced during the Gold War. And a comprehensive review of a variety of econome tric studies of the relationship between military spending and economic growth led Todd Sandier and Keith Hartley, authors of a comprehensive compendium on the economics of defense, to conclude that the net impact on growth is negligible.

Political factors are also important in weighing the economic effects of military spending. According to Harvard political scientist Samuel Huntington, "Arguments that significant increases or decreases in defense spending were economically feasible rested on the assumption that there would be widespread public support for such changes." During the Vietnam War, it appeared at times that this nation was testing the outer limits of public support--at least for that type of military venture. The late Edward Mason, an economist at Harvard University, has also argued that the effective limit on defense spending is political, concluding that "there is not much doubt that in the face of deepening emergency even higher expenditures would be accepted." As a practical matter, it seems that Mason is right.

Thus the pertinent question in current debates on military spending is not the ability of the U.S. economy to produce the goods and services required by the armed forces but the willingness of the public to devote a substantial share of its resources to that purpose.

Military-industrial complex?

The same studies that show that the American economy can sustain higher levels of military spending also indicate that economic growth and prosperity do not require the current level of national security expenditure. The President's Committee on the Economic Impact of Defense and Disarmament, chaired by Gardner Ackley, reported in 1965 that "experience testifies to the ability of the American economy to adjust successfully to major reductions in defense expenditures." The Ackley Committee drew on the adjustment experiences following World War II and the Korean War. The post-Vietnam adjustment furnished another case in point. In its report in 1969, the Cabinet Coordinating Committee on Economic Planning for the End of Vietnam Hostilities concluded that "prosperity has not depended on the defense buildup and will not need high military spending to support it in peacetime."

In a variety of econometric simulations performed since then, scholars have estimated that a short transition would occur after a large cutback in spending for national security programs. Temporarily, unemployment would rise as the economy's growth rate slowed down. Subsequently, however, the peacetime economy would follow a more rapid long-run growth path. Analyses by the economic consulting firm DRI have yielded similar conclusions about a potential reduction of $180 billion in the military budget over five years, concluding that "the national economy can cope with this transition without major problems."

Indeed, that has been the experience in the recent past. Following an initial adjustment period--with its attendant pain and uncertainty--many localities end up with a stronger economy after a substantial defense cut. A study of one hundred former military bases reported that, during the period from 1981 to 1986, 128,000 new civilian jobs replaced the 93,000 military jobs that were lost. The 7 percent average annual increase in employment at these sites compares favorably to the 2 percent average annual increase in employment nationally during the same period. Three-fourths of the closed bases became industrial or office parks; colleges and vocational-technical schools occupied most of the remaining sites.

Other examples of successful transitions have been reported in more recent periods (the conversion, of course, is far from instantaneous, taking three to five years on average). These positive results are not surprising when we consider the valuable assets that the military often leaves behind--land, buildings, airstrips, deepwater harbors, and rail lines, as well as water, sewer, gas, and electricity lines.

On balance, the belief generally held among economists--an idea not as universally accepted by policy makers--is that, given a reasonable period of adjustment, the American economy can attain prosperity with a greatly reduced military establishment. At a more microeconomic level, the people, occupations, and industries benefiting from the changes in sectoral demands will likely be different from those that participated most actively in the military buildup. This is a fact with more powerful political and social implications than purely economic data reveal. The costs of change may justify government-provided transitional assistance (such as special unemployment compensation and retraining allowances) for those who suffer initially from the shift in national priorities.

A political decision

Economic analysis thus does not suggest that a certain fixed share of GDP be allocated to defense. But it does provide a few facts that deserve a more prominent place in the ongoing debate over the right level of military outlays. However measured, the defense program is a relatively minor player in the American economy today--it accounts for one-twenty-fifth of the GDP and an even smaller proportion of the nation's work force. Moreover, the economic importance of this sector of the economy has been declining for many years. Economic activity in the United States marches to the beat of civilian drummers, both domestic and international. Our massive economy is neither propelled nor redirected by modest shifts in the relatively small share of national resources devoted to military purposes. Furthermore, the powers of adjustment in the American economy are substantial.

Any consideration of the possible policy responses to changes in defense spending should take account of the fact that the economy's ability to adjust to shifts in budget priorities is greater in the long run than in the short run. The sharp run-up in oil prices in the 1970s furnishes a good example. The initial responses--both in the public and private sectors--bordered on panic, as exemplified by long waiting lines at gasoline stations. A few decades after the initial shock, however, the United States has adjusted fairly well to much higher levels of energy prices, and in the process has become a less energy-intensive society.

The adjustments required by defense cutbacks are not different from the responses that occur regularly from shifts in consumer demand, from new products or technological changes that eliminate markets for older products, or from changes in the pattern of international trade. Major readjustments in the use of resources continually occur in the U.S. economy and, on the whole, do so fairly successfully. In any event, as we have seen, for the range of likely disagreements about the future size and composition of the military budget, economic constraints are not likely to be binding.

This is not an argument for adopting any particular level of military outlays. Rather, the amount of resources that the United States devotes to defense should be determined fundamentally through the political process, and on national security grounds--with due regard for the other demands on the public purse and the dictates of efficiency in the use of public resources.

The economics of war and peace

With a war in Iraq looming and the war on terror expanding in scope, it is a propitious time to review what we know about the impact of military activity on the American economy. We must discard notions based on World War II experience--that was a different age and few "lessons" from that time apply to the current situation.

At the start of World War II, the United States had a small and inadequate military establishment, and its defense industrial base was of similarly modest size. We were forced to create a new military-oriented production industry and to manufacture a wide array of armaments for the rapidly expanding armed forces. That burst of military demand--which was sustained until the end of World War II--was a key factor in ending the Great Depression.

The experiences of the period following the end of the Cold War provide a vivid contrast. The substantial reduction in military spending--the procurement of weapon systems was reduced more than one-half from the peak achieved in the mid 1980s--did not interfere with a prolonged economic boom.

In fact, the shift from military to civilian priorities contributed to the strength and duration of the economic upturn of the 1990s.

Meanwhile, the economic impact of the Gulf War and the war in Afghanistan was fundamentally different from our experience in World War II or even the Korean and Vietnam Wars. During the Gulf War and the war in Afghanistan, the United States experienced limited recessions, rather than war-induced prosperity. In both cases, but especially in the case of the war in Afghanistan, it was the successful conclusion of the military effort that gave the nation's economy a shot in the arm. In contrast, short and mild recessions followed the end of the Korean and Vietnam Wars.

Wars and defense spending in general can neither be justified nor simply rejected out of hand on economic grounds alone. The United States can afford to engage in military conflicts if it decides that this is in its best interests. It is perhaps fitting to give Adam Smith the last word: "The first duty of the sovereign, therefore, that of defending the society from the violence and injustice of other independent societies, grows gradually more and more expensive, as the society advances in civilization."

MURRAY WEIDENBAUM holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis and is author of Small Wars, Big Defense (Oxford University Press, 1992).

COPYRIGHT 2003 The National Affairs, Inc.
COPYRIGHT 2003 Gale Group

CHARLES V . PEÑA

A Reality Check on Military Spending

The United States can fight an effective war on terrorism while still substantially cutting defense spending.

For fiscal year (FY) 2005, military spending will be nearly $500 billion, which is greater in real terms than during any of the Reagan years and surpassed only by spending at the end of World War II in 1945 and 1946 and during the Korean War in 1952. The White House is asking for an FY 2006 Department of Defense (DOD) budget of $413.9 billion, which does not include funding for military operations in Iraq and Afghanistan.

The administration argues that increased military spending is a necessary part of the war on terrorism. But such logic assumes that the war on terrorism is primarily a military war to be fought by the Army, Navy, Air Force, and Marines. The reality is that large conventional military operations will be the exception rather than the rule in the war on terrorism. Instead, the military’s role will mainly involve special operations forces in discrete missions against specific targets, not conventional warfare aimed at overthrowing entire regimes. The rest of the war aimed at dismantling and degrading the al Qaeda terrorist network will require unprecedented international intelligence and law enforcement cooperation, not expensive new planes, helicopters, and warships.

Therefore, an increasingly large defense budget (DOD projects the budget to grow to more than $487 billion by FY 2009) is not necessary to fight the war on terrorism. Nor is a huge budget necessary to protect the United States from traditional nation-state military threats, because the United States has no major military rivals, is relatively secure from conventional military attack, and has a strong nuclear deterrent force. Major cuts in the defense budget would be possible if the United States substantially reduced the number of troops stationed abroad and embraced a “balancer-of-last-resort” strategy, in which it would intervene overseas only if its vital interests were threatened and in which countries in Europe, Asia, and elsewhere would take greater responsibility for their own regional security.

According to the International Institute for Strategic Studies (IISS), in 2003 (the last year for which there is comparative worldwide data) total U.S. defense expenditures were $404.9 billion. This amount exceeded the combined defense expenditures of the next 13 countries and was more than double the combined defense spending of the remaining 158 countries in the world (Figure 1). The countries closest to the United States in defense spending were Russia ($65.2 billion) and China ($55.9 billion). The next five countries—France, Japan, the United Kingdom, Germany, and Italy—were all U.S. allies. In fact, the United States outspent its North Atlantic Treaty Organization (NATO) allies by nearly 2 to 1 ($404.9 billion versus $221.1 billion) and had friendly relations with 12 of the 13 countries, which included another NATO ally, Turkey, as well as South Korea and Israel. Finally, the combined defense spending of the remaining “Axis of Evil” nations (North Korea and Iran) was about $8.5 billion, or 2 percent of U.S. defense expenditures.

Such lopsided U.S. defense spending needs to be put in perspective relative to the 21st-century threat environment. With the demise of the Soviet Union, the United States no longer faces a serious military challenger or global hegemonic threat. President Vladimir Putin has charted a course for Russia to move closer to the United States and the West, both politically and economically, so Russia is not the threat that the former Soviet Union was. Indeed, Russia now has observer status with NATO, a dramatic change given that the NATO alliance was created to contain the former Soviet Union. And in May 2002, Russia and the United States signed the Strategic Offensive Reductions Treaty (SORT) to reduce their strategic nuclear arsenals to between 1,700 and 2,200 warheads each by December 2012. According to IISS, “despite disagreement over the U.S.-led action in Iraq, the bilateral relationship between Washington and Moscow remains firm.”

Even if Russia were to change course and adopt a more hostile position, it is not in a position to challenge the United States, either economically or militarily. In 2003, Russia’s gross domestic product (GDP) was a little more than 1-10th of U.S. GDP ($1.3 trillion versus $10.9 trillion). Although a larger share of Russia’s GDP was devoted to defense expenditures (4.9 percent versus 3.7 percent), in absolute terms the United States outspent Russia by more than 6 to 1. To equal the United States, Russia would have to devote more than 20 percent of its GDP to defense, which would exceed what the Soviet Union spent at the height of the Cold War during the 1980s.

Certainly, Chinese military developments bear watching. Although many see China as the next great threat, even if China modernizes and expands its strategic nuclear force (as many military experts predict it will), the United States will retain a credible nuclear deterrent with an overwhelming advantage in warheads, launchers, and variety of delivery vehicles. According to a Council on Foreign Relations task force chaired by former Secretary of Defense Harold Brown, “The People’s Republic of China is pursuing a deliberate and focused course of military modernization but . . . it is at least two decades behind the United States in terms of military technology and capability. Moreover, if the United States continues to dedicate significant resources to improving its military forces, as expected, the balance between the United States and China, both globally and in Asia, is likely to remain decisively in America’s favor beyond the next twenty years.”

Like Russia, China may not have the wherewithal to compete with and challenge the United States. In 2003, U.S. GDP was almost eight times more than China’s ($10.9 trillion versus $1.4 trillion). China spent fractionally more of its GDP on defense than the United States (3.9 percent versus 3.7 percent), but in absolute terms the U.S. defense expenditures were seven times greater than China’s ($404.9 billion versus $55.9 billion). To equal the United States, China would have to devote one-quarter of its GDP to defense.

If the Russian and Chinese militaries are not serious threats to the United States, so-called rogue states, such as North Korea, Iran, Syria, and Cuba, are even less of a threat. Although these countries are unfriendly to the United States, none have any real military capability to threaten or challenge vital U.S. security interests. The GDP of these four countries was $590.3 billion in 2003, or less than 5.5 percent of U.S. GDP. Military spending is even more lopsided: $11.3 billion compared to $404.9 billion, or less than 3 percent of U.S. defense spending. Even if North Korea and Iran eventually acquire a long-range nuclear capability that could reach the United States, the U.S. strategic nuclear arsenal would continue to act as a powerful deterrent.

Downsizing the U.S. military

According to DOD, before Operation Iraqi Freedom the total number of U.S. active-duty military personnel was more than 1.4 million troops, of which 237,473 were deployed in foreign countries. With an all-volunteer force, maintaining those deployments requires at least twice as many additional troops to be deployed in the United States so that the overseas force can be rotated at specified intervals. Thus, one way to measure the cost to the United States of maintaining a global military presence is the expense of supporting more than 700,000 active-duty troops along with their associated force structure. But without a great-power enemy that might justify an extended forward deployment of military forces, the United States could dramatically reduce its overseas commitments, and U.S. security against traditional nation-state military threats could be achieved at significantly lower costs.

If the United States adopted a balancer-of-last-resort strategy, most overseas military commitments could be eliminated and the defense budget substantially reduced.Instead of a Cold War-era extended defense perimeter and forward-deployed forces (intended to keep in check an expansionist Soviet Union), the very different 21st-century threat environment affords the United States the opportunity to adopt a balancer-of-last-resort strategy. Such a strategy would place greater emphasis on allowing countries to take responsibility for their own security and, if necessary, to build regional security arrangements, even in important areas such as Europe and East Asia. Instead of being a first responder to every crisis and conflict, the U.S. military would intervene only when truly vital security interests were at stake. This strategy would allow the United States to eliminate many permanent foreign bases and substantially reduce the large number of troops deployed at those bases.

Although it is counterintuitive, forward deployment does not significantly enhance the U.S. military’s ability to fight wars. The comparative advantage that the U.S. military possesses is airpower, which can be dispatched relatively quickly and at very long ranges. Indeed, during Operation Enduring Freedom in Afghanistan, the Air Force was able to fly missions from Whiteman Air Force Base in Missouri to Afghanistan and back. The ability to rapidly project power, if necessary, can also be made easier by pre-positioning supplies and equipment at strategic locations. Troops can be deployed faster if their equipment does not have to be deployed simultaneously.

If U.S. ground forces are needed to fight a major war, they could be deployed as necessary. It is worth noting that both Operation Enduring Freedom and Operation Iraqi Freedom were conducted without significant forces already deployed in either theater of operation. In the case of Operation Enduring Freedom, the military had neither troops nor bases adjacent to Afghanistan. Yet military operations commenced less than a month after the September 11 attacks. In the case of Operation Iraqi Freedom, even though the military had more than 6,000 troops (mostly Air Force) deployed in Saudi Arabia, the Saudi government denied the use of its bases to conduct military operations. Instead, the United States used Kuwait as the headquarters and the jumping-off point for military operations. Similarly, the Turkish government prevented the U.S. Army’s 4th Infantry Division from using bases in that country for military operations in northern Iraq, forcing some 30,000 troops to be transported via ship through the Suez Canal and Red Sea to the Persian Gulf, where they arrived too late to be part of the initial attack against Iraq. Despite these handicaps, U.S. forces swept away the Iraqi military in less than four weeks.

Consider also that in the case of South Korea, the 31,000 U.S. troops deployed there are insufficient to fight a war. Operation Iraqi Freedom, against a smaller and weaker military foe, required more than 100,000 ground troops to take Baghdad and topple Saddam Hussein (and more to occupy the country afterward). If the United States decided to engage in an offensive military operation against North Korea, the troops stationed in South Korea would have to be reinforced. This would take almost as much time as deploying the entire force from scratch. If North Korea (with a nearly one-million-man army) decided to invade South Korea, the defense of South Korea would rest primarily with that country’s 700,000-man military, not 31,000 U.S. troops. Nor does the U.S. military presence in South Korea alter the fact that North Korea is believed to have tens of thousands of artillery weapons that can hold the capital city of Seoul hostage. At best, U.S. forces are a tripwire for defending South Korea.

Not only does the post-Cold War threat environment give the United States the luxury of allowing countries to take responsibility for security in their own neighborhoods, but the economic strength of Europe and East Asia mean that friendly countries in those regions can afford to pay for their own defense rather than relying on the United States to underwrite their security. In 2003, U.S. GDP was $10.9 trillion and total defense expenditures were 3.7 percent of that. In contrast, the combined GDP of the 15 European Union countries in 2003 was $10.5 trillion, but defense spending was less than 2 percent of GDP. Without a Soviet threat to Europe, the United States does not need to subsidize European defense spending. The European countries have the economic wherewithal to increase their military spending, if necessary.

Likewise, U.S. allies in East Asia are capable of defending themselves. North Korea, one of the world’s last bastions of central planning, is an economic basket case. North Korea’s GDP in 2003 was $22 billion, compared to $605 billion for South Korea. South Korea also outspends North Korea on defense by nearly 3 to 1: $14.6 billion versus $5.5 billion. Japan’s GDP was $4.34 trillion (more than 195 times larger than North Korea’s) and defense spending was $42.8 billion (almost eight times that of North Korea). South Korea and Japan certainly have the economic resources to adequately defend themselves against North Korea. They even have the capacity to act as military balancers to China (if China is perceived as a threat). In 2003, China had a GDP of $1.43 trillion and spent $22.4 billion on defense.

Consider, in very rough terms, what it would mean to adopt a balancer-of-last-resort strategy. Virtually all U.S. foreign military deployments and twice as many U.S.-based troops could be cut. Exceptions include Marine Corps personnel assigned to embassies. If the country also eliminated the troops maintained at home for rotation purposes, the result would be to reduce the total active-duty force by about half to 699,000, which would break down as follows:

Army: 189,000, a 61 percent reduction, which would result in a force strength of four active-duty divisions or their equivalent in a brigade force structure.

Navy: 266,600, a 31 percent reduction, which would result in an eight-carrier battle group force.

Marine Corps: 77,000, a 56 percent reduction, which would result in one active Marine Expeditionary Force and one Marine Expeditionary Brigade.

Air Force: 168,000, a 54 percent reduction, which would result in 11 active-duty tactical fighter wings and 93 heavy bombers.

Admittedly, this is a macro approach that assumes that the current active-duty force mix is appropriate. Interestingly enough, this top-down approach yields a force structure not markedly different from what the most recent DOD bottom-up review determined would be needed to fight a single major regional war: four to five Army divisions, four to five aircraft carriers, four to five Marine expeditionary brigades, and 10 Air Force tactical fighter wings and 100 heavy bombers. Therefore, it is a reasonable method for assessing how U.S. forces and force structure could be reduced by adopting a balancer-of-last-resort strategy. And as shown in Figure 2, the size of the defense budget correlates rather strongly with the number of U.S. troops deployed overseas.

According to DOD, the FY 2005 personnel budget for active-duty forces is $88.3 billion out of a total of $104.8 billion for military personnel. A 50 percent reduction in active-duty forces would translate into a FY 2005 active-duty military personnel budget of $44.1 billion and a total military personnel spending budget of $60.6 billion.

If U.S. active-duty forces were substantially reduced, it follows that the associated force structure could be similarly reduced, resulting in reduced operations and maintenance (O&M) costs. Using the same percentage reductions applied to active-duty forces, the O&M budget for the active Army force could be reduced from $26.1 billion to $12.8 billion, the active Navy force could be reduced from $29.8 billion to $20.6 billion, the active Marine Corps force could be reduced from $3.6 billion to $1.6 billion, and the active Air Force could be reduced from $28.5 billion to $13.1 billion. The total savings would be $39.9 billion, and the total spent on O&M would fall from $140.6 billion to $100.7 billion.

The combined savings in military personnel and O&M costs would total $84 billion, or about 21 percent of the total defense budget. Because military personnel and O&M are the two largest portions of the defense budget—26 percent and 35 percent, respectively—significant reductions in defense spending can be achieved only if these costs are reduced. And the only way to reduce these costs is to downsize active-duty military forces.

Unneeded weapon systems

Further savings could be realized by eliminating unneeded weapon systems, which would reduce the procurement budget ($74.9 billion) and the research, development, test, and evaluation (RDT&E) budget ($68.9 billion). The Pentagon has already canceled two major weapon systems: the Army’s Crusader artillery piece and Comanche attack helicopter, with program savings of $9 billion and more than $30 billion, respectively. But this is simply a good start. Other weapon systems that could be canceled include the F-22 Raptor, F/A-18 E/F Super Hornet, V-22 Osprey, and Virginia-class attack submarine.

The Air Force’s F/A-22 Raptor was originally designed for air superiority against Soviet tactical fighters that were never built. It is intended to replace the best fighter in the world today, the F-15 Eagle, which no current or prospective adversary can seriously challenge for air superiority. The Navy’s F/A-18E/F Super Hornet is another unneeded tactical fighter. The Marine Corps V-22 Osprey’s tilt-rotor technology is still unproven and is inherently more dangerous than helicopters that can perform the same missions at a fraction of the cost. The Navy’s Virginia-class submarine was designed to counter a Soviet nuclear submarine threat that no longer exists.

Canceling the F-22, F/A-18E/F, V-22, and Virginia-class attack submarines would save a total of $12.2 billion in procurement and RDT&E costs in the FY 2005 budget and a total of $170 billion in future program costs. Combined with the military personnel and O&M savings previously discussed, a revised FY 2005 defense budget would be $305.8 billion, a 21 percent reduction (figure 3). Of course, it is not realistic to say that the defense budget could be reduced immediately. But the budget could be reduced in increments to this proposed level during a five-year period.

Tools against terror

The defense budget can be reduced because the nation-state threat environment is markedly different than it was during the Cold War, and because a larger military is not necessary to combat the terrorist threat. It is important to remember that a large military with a forward-deployed global presence was not an effective defense against 19 hijackers. In addition, the shorthand phrase “war on terrorism” is misleading. First, as the National Commission on Terrorist Attacks upon the United States (also known as the 9/11 Commission) points out: “The enemy is not just ‘terrorism,’ some generic evil. This vagueness blurs the strategy. The catastrophic threat at this moment in history is more specific. It is the threat posed by Islamist terrorism—especially the al Qaeda network, its affiliates, and its ideology.” Second, the term “war” implies the use of military force as the primary policy instrument for waging the terrorism fight. But traditional military operations should be the exception in the conflict with al Qaeda, which is not an army with uniforms that operates in a specific geographic region but a loosely connected and decentralized network with cells and operatives in 60 countries. President Bush is right: “We’ll have to hunt them down one at a time.”

Although the president is also correct in being skeptical about treating terrorism “as a crime, a problem to be solved mainly with law enforcement and indictments,” the reality is that the arduous task of dismantling and degrading the network will largely be the task of unprecedented international intelligence and law enforcement cooperation. The military aspects of the war on terrorism will largely be the work of special forces in discrete operations against specific targets rather than large-scale military operations. Instead of spending hundreds of billions of dollars to maintain the current size of the armed forces and buy unneeded weapons, the United States should invest in better intelligence gathering, unmanned aerial vehicles (UAVs), special operations forces, and language skills.

Intelligence gathering. Better intelligence gathering about the threat is critical to fighting the war on terrorism. Although the budgets for the 15 agencies with intelligence gathering and analysis responsibilities are veiled in secrecy, the best estimate is that the total spent on intelligence is about $40 billion. As with the defense budget, it is not necessarily a question of needing to spend more money on intelligence gathering and analysis, but how to best allocate spending and resources. About 85 percent of the estimated $40 billion spent on intelligence activities goes to DOD and only about 10 percent to the Central Intelligence Agency, with the remainder spread among the other intelligence agencies. If the war on terrorism is not primarily a military war, perhaps the intelligence budget could be reallocated between DOD and other intelligence agencies, with less emphasis on nation-state military threats and more on terrorist threats.

Questions about the right amount of intelligence spending and its allocation aside, the war on terrorism requires:

Less emphasis on spy satellites as a primary means of intelligence gathering. That does not mean abandoning the use of satellite imagery. Rather, it means recognizing that spy satellite images might have been an excellent way to monitor stationary targets such as missile silos or easily recognizable military equipment, such as tanks and aircraft, but might not be as capable in locating and tracking individual terrorists.

Recognizing the problems involved with electronic eavesdropping. According to Loren Thompson of the Lexington Institute, “The enemy has learned how to hide a lot of its transmissions from electronic eavesdropping satellites.” The problem of having trouble finding and successfully monitoring the right conversations is further compounded by being unable to sift through the sheer volume of terrorist chatter to determine what bits of information are useful.

Greater emphasis on human intelligence gathering. Spies on the ground are needed to supplement and sometimes confirm or refute what satellite images, electronic eavesdropping, interrogations of captured al Qaeda operatives, hard drives on confiscated computers, and other sources are indicating about the terrorist threat. Analysis and interpretation need to be backed up with as much inside information as possible. This is perhaps the most critical missing piece in the intelligence puzzle in terms of anticipating future terrorist attacks. Ideally, the United States needs “moles” inside al Qaeda, but it will be a difficult task (and likely take many years) to place someone inside al Qaeda who is a believable radical Islamic extremist and will be trusted with the kind of information U.S. intelligence needs. The task is made even more difficult because of the distributed and cellular structure of al Qaeda and the fact that the radical Islamic ideology that fuels the terrorist threat to the United States has expanded beyond the al Qaeda structure into the larger Muslim world.

Language skills. Directly related to intelligence gathering is having a cadre of experts to teach and analyze the relevant languages of the Muslim world: Arabic, Uzbek, Pashtu, Urdu, Farsi (Persian), Dari (the Afghan dialect of Farsi), and Malay, to name a few. But according to a Government Accountability Office (GAO) report, in FY 2001 only half of the Army’s 84 positions for Arabic translators and interpreters were filled, and there were 27 unfilled positions (out of a total of 40) for Farsi. Undersecretary of Defense for Personnel and Readiness David Chu admits that DOD is having a “very difficult time . . . training and keeping on active duty sufficient numbers of linguists.” As of March 2004, FBI Director Robert Mueller reported that the bureau had only 24 Arabic-speaking agents (out of more than 12,000 special agents). According to a congressionally mandated report, the State Department had only five linguists fluent enough to speak on Arab television (out of 9,000 Foreign Service and 6,500 civil service employees).

According to the GAO, the Pentagon estimates that it currently spends up to $250 million per year to meet its foreign language needs. The GAO did not indicate whether the $250 million (about six 100ths of 1 percent of the FY 2005 defense budget) was adequate. Whether DOD and other government agencies are spending enough, this much is certain: Language skills for the war on terrorism are in short supply. According to a 9/11 Commission staff report, “FBI shortages of linguists have resulted in thousands of hours of audiotapes and pages of written material not being reviewed or translated in a timely manner.” Increasing that supply will not be easily or quickly done, especially since two of the four most difficult languages for Americans to learn are Arabic and Farsi.

UAVs. The potential utility of UAVs for the war on terrorism has been demonstrated in Afghanistan and Yemen. In February 2002, a Predator UAV (armed with Hellfire missiles and operated by the CIA) in the Tora Bora region of eastern Afghanistan attacked a convoy and killed several people, including a suspected al Qaeda leader. In November 2002, a Predator UAV in Yemen destroyed a car containing six al Qaeda suspects, including Abu Ali al-Harithi, one of the suspected planners of the attack on the USS Cole in October 2000.

If parts of the war on terrorism are to be fought in places such as Yemen, Sudan, Somalia, and Pakistan, and especially if it is not possible for U.S. ground troops to operate in those countries, UAVs could be key assets for finding and targeting al Qaeda operatives because of their ability to cover large swaths of land for extended periods of time in search of targets. A Predator UAV has a combat radius of 400 nautical miles and can carry a maximum payload of 450 pounds for more than 24 hours. The Congressional Budget Office states that UAVs can provide their users with “sustained, nearly instantaneous video and radar images of an area without putting human lives at risk.”

Armed UAVs offer a cost-effective alternative to ground troops or the use of piloted aircraft to perform missions against identified terrorist targets. One can only wonder what might have happened if the spy Predator that took pictures of a tall man in white robes surrounded by a group of people—believed by many intelligence analysts to be Osama bin Laden— in the fall of 2000 had instead been an armed Predator capable of immediately striking the target.

In addition to their utility, UAVs are particularly attractive because of their relatively low cost, especially when compared to that of piloted aircraft. Developmental costs for UAVs are about the same as those for a similar piloted aircraft, but procurement costs are substantially less. In FY 2003, the government purchased 25 Predator UAVs for $139.2 million ($5.6 million each), and in FY year 2004, it purchased 16 Predators for $210.1 million ($13.1 million each). The FY 2005 budget includes the purchase of nine Predators for $146.6 million ($16.3 million each). (The increases in per-unit cost reflect the arming of more Predators with Hellfire missiles.) Although UAVs are unlikely to completely replace piloted aircraft, a Predator UAV costs a fraction of a tactical fighter aircraft such as an F-15 or F-22, with unit costs of $55 million and $257 million, respectively. O&M costs for UAVs are also expected to be less than for piloted aircraft.

Thus, the $10 billion in planned spending on UAVs in the next decade (compared to $3 billion in the 1990s) is a smart investment in the war on terrorism. Even doubling the budget to $2 billion a year on average over the next 10 years would make sense and would represent less than 1 percent of an annual defense budget based on a balancer-of-last-resort strategy. The bottom line is that UAVs are a very low-cost weapon that could yield an extremely high payoff in the war on terrorism.

Special operations forces. The al Qaeda terrorist network is a diffuse target with individuals and cells operating in 60 or more countries. U.S. special operations forces are ideally suited for counteracting this threat. Indeed, according to the Special Operations Forces posture statement, counterterrorism is the number one mission of these forces, and they are “specifically organized, trained, and equipped to conduct covert, clandestine, or discreet CT [counterterrorism] missions in hostile, denied, or politically sensitive environments,” including “intelligence operations, attacks against terrorist networks and infrastructures, hostage rescue, [and] recovery of sensitive material from terrorist organizations.”

Secretary of Defense Donald Rumsfeld has been a strong advocate of using special operations forces against terrorist targets. In August 2002, he issued a classified memo to the U.S. Special Operations Command (SOCOM) to capture or kill Osama bin Laden and other al Qaeda leadership. Rumsfeld has also proposed sending these forces into Somalia and Lebanon’s Bekaa Valley, because these lawless areas are thought to be places where terrorists can hide and be safe from U.S. intervention.

As with UAVs, the cost of special operations forces is relatively inexpensive. The FY 2005 budget request for SOCOM is $6.5 billion, or only about 1.6 percent of the total defense budget. As with UAVs, the budget for special operations forces could be significantly increased without adversely affecting the overall defense budget. Given the importance and unique capabilities of these forces relative to those of the regular military in the war on terrorism, it would make sense to increase funding for special forces, perhaps doubling SOCOM’s budget.

Ever-increasing defense spending is being justified as necessary to fight the war on terrorism. But the war on terrorism is not primarily a conventional military war to be fought with tanks, planes, and ships, and the military threat posed by nation states to the United States does not warrant maintaining a large, forward-deployed military presence around the world. Indeed, there is a relationship between U.S. troops deployed abroad and acts of terrorism against the United States, as the Bush administration has acknowledged. According to former Deputy Defense Secretary Paul Wolfowitz, U.S. forces stationed in Saudi Arabia after the 1991 Gulf War were “part of the containment policy [of Iraq] that has been Osama bin Laden’s principal recruiting device, even more than the other grievances he cites.”

Therefore, a better approach to national security policy would be for the United States to adopt a less interventionist policy abroad and pull back from the Cold War-era extended security perimeter (with its attendant military commitments overseas). Rather than being the balancer of power in disparate regions around the world, the United States should allow countries in those regions to establish their own balance-of-power arrangements. A balancer-of-last-resort strategy would help the United States distinguish between crises and conflicts vital to its interests and those that do not threaten U.S. national security.


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Charles V. Peña (cpena@cato.org) is director of defense policy studies at the Cato Institute in Washington, D.C.