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The Independent Institute

Commentary
The Trillion-Dollar Defense Budget Is Already Here
March 15, 2007
Robert Higgs

When President George W. Bush presented his budget proposals recently for the
fiscal year 2008, he emphasized that the nation’s security is his highest priority,
and he backed up that declaration by proposing that the Pentagon’s outlays be
increased by more than 6 percent beyond its estimated outlays for fiscal 2007, to a
total of more than $583 billion. Although many Americans regard this enormous
sum as excessive, hardly anyone appreciates that the total amount of all defense-
related spending greatly exceeds the amount budgeted for the Department of
Defense. Indeed, it is roughly almost twice as large.

In the fiscal year 2006, which ended last September, the Pentagon spent $499.4
billion. Lodged elsewhere in the budget, however, other lines identify funding that
serves defense purposes just as surely as—sometimes even more surely than—the
money allocated to the Department of Defense. On occasion, commentators take
note of some of these additional defense-related budget items, such as the
Department of Energy’s nuclear-weapons programs, but many such items,
including some extremely large ones, remain generally unrecognized.

Since the creation of the Department of Homeland Security, many observers
probably would agree that its budget ought to be included in any complete
accounting of defense costs. After all, the homeland is what most of us want the
government to defend in the first place.

Other agencies also spend money in pursuit of homeland security. The Justice
Department, for example, includes the Federal Bureau of Investigation, which
devotes substantial resources to an anti-terrorist program. The Department of the
Treasury informs us that it has “worked closely with the Departments of State and
Justice and the intelligence community to disrupt targets related to al Qaeda,
Hizballah, Jemaah Islamiyah, as well as to disrupt state sponsorship of terror.”

Much, if not all, of the budget for the Department of State and for international
assistance programs ought to be classified as defense-related, too. In this case,
the money serves to buy off potential enemies and to reward friendly governments
who assist U.S. efforts to abate perceived threats. About $4.5 billion of annual U.S.
foreign aid currently takes the form of “foreign military financing,” and even funds
placed under the rubric of economic development may serve defense-related
purposes indirectly. Money is fungible, and the receipt of foreign assistance for
economic-development projects allows allied governments to divert other funds to
police, intelligence, and military purposes.

Two big budget items represent the current cost of defense goods and services
obtained in the past. The Department of Veterans Affairs, which is authorized to
spend more than $72 billion in the current fiscal year, falls in this category.
Likewise, a great deal of the government’s interest expense on publicly held debt
represents the current cost of defense outlays financed in the past by borrowing
from the public.

To estimate the size of the entire de facto defense budget, I gathered data for
fiscal 2006, the most recently completed fiscal year, for which data on actual
outlays are now available. In that year, the Department of Defense itself spent
$499.4 billion. Defense-related parts of the Department of Energy budget added
$16.6 billion. The Department of Homeland Security spent $69.1 billion. The
Department of State and international assistance programs laid out $25.3 billion for
activities arguably related to defense purposes either directly or indirectly. The
Department of Veterans Affairs had outlays of $69.8 billion. The Department of the
Treasury, which funds the lion’s share of military retirement costs through its
support of the little-known Military Retirement Fund, added $38.5 billion. A large
part of the National Aeronautics and Space Administration’s outlays ought to be
regarded as defense-related, if only indirectly so. When all of these other parts of
the budget are added to the budget for the Pentagon itself, they increase the fiscal
2006 total by nearly half again, to $728.2 billion.

To find out how much of the government’s net interest payments on publicly held
national debt ought to be attributed to past debt-funded defense spending
requires a considerable amount of calculation. I added up all past deficits (minus
surpluses) since 1916 (when the debt was nearly zero), prorated according to each
year’s ratio of narrowly defined national security spending—military, veterans, and
international affairs—to total federal spending, expressing everything in dollars of
constant purchasing power. This sum is equal to 91.2 percent of the value of the
national debt held by the public at the end of 2006. Therefore, I attribute that same
percentage of the government’s net interest outlays in that year to past debt-
financed defense spending. The total amount so attributed comes to $206.7 billion.

Adding this interest component to the previous all-agency total, the grand total
comes to $934.9 billion, which is more than 87 percent greater than the Pentagon’s
outlays alone.

If the additional elements of defense spending continue to maintain the same ratio
to the Pentagon’s amount—and we have every reason to suppose they will—then in
fiscal year 2007, through which we are now passing, the grand total spent for
defense will be $1.028 trillion. I confirmed the rough accuracy of this forecast by
adding up the government’s own estimates of fiscal 2007 outlays for the various
additional defense-related items, obtaining a total of $987 billion—an amount only 4
percent less than my ratio-based estimate. Future defense-related supplemental
appropriations for fiscal 2007, which would hardly be surprising, might easily bring
the lower estimate up the higher one.

Although I have arrived at my conclusions honestly and carefully, I may have left
out items that should have been included—the federal budget is a gargantuan,
complex, and confusing collection of documents. If I have done so, however, the
left-out items are not likely to be relatively large ones. (I have deliberately ignored
some minor items, such as the outlays of the Selective Service System and the
National Defense Stockpile and the Treasury’s program to block financial flows to
terrorists.) Therefore, I propose that in considering future defense budgetary
costs, a well-founded rule of thumb is to take the Pentagon’s (always well
publicized) basic budget total and double it. We may overstate the truth, but if so,
we’ll not do so by much.

For now, however, the conclusion seems inescapable: the government is currently
spending at the rate of approximately $1 trillion per year for all defense-related
purposes. Moreover, even if I have erred in my calculations and overstated the
correct amount somewhat, the total will certainly reach this astonishing sum very
soon, given all the plans and programs already set in motion.

National Security Outlays in Fiscal Year 2006                        (billions of dollars)
Department of Defense                                                           499.4
Department of Energy (nuclear weapons & environ. cleanup)         16.6
Department of State                                                                 25.3
Department of Veterans Affairs                                                  69.8
Department of Homeland Security                                               69.1
Department of Justice (1/3 of FBI)                                                 1.9
Department of the Treasury (for Military Retirement Fund)              38.5
National Aeronautics & Space Administration (1/2 of total)                7.6
Net interest attributable to past debt-financed defense outlays      206.7
                                                                                             -------
Total                                                                                         934.9

Source: Author’s classifications and calculations; basic data from U.S. Office of
Management and Budget, Budget of the United States Government, Fiscal Year
2008 and U.S. Bureau of the Census, Historical Statistics of the United States,
Colonial Times to 1970.

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Robert Higgs
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Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and
Editor of the Institute’s quarterly journal The Independent Review. He received his
Ph.D. in economics from Johns Hopkins University, and he has taught at the
University of Washington, Lafayette College, Seattle University, and the University
of Economics, Prague. He has been a visiting scholar at Oxford University and
Stanford University, and a fellow for the Hoover Institution and the National Science
Foundation. He is the author of many books, including Depression, War, and Cold
War.

Full Biography and Recent Publications
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New from Robert Higgs!
DEPRESSION, WAR, AND COLD WAR: Studies in Political Economy
Robert Higgs offers a powerful, solidly grounded interpretation of U.S. political
economy from the early-1930s to the end of the Cold War, and refutes many
popular ideas about the Great Depression and New Deal, the World War II
economy, and the postwar national-security state still so pervasive today. Learn
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