Romina Boccia and Dominik Lett
Congress is in the midst of debating the annual defense spending bill and chances for completion before the August recess look bleak. The multitrillion‐dollar increase in the debt limit, which Congress passed in early June following months of negotiations, established budget levels for defense and nondefense appropriations for the next two years. The parties remain divided on the details.
Spending debates that are contentious now will likely get worse in future years, as the current fiscal trajectory will place inevitable constraints on America’s military. Without reforms to health care and retirement benefits, other domestic and defense priorities will be increasingly squeezed. As debt levels and associated interest costs rise, economic growth will suffer. And as the share of the budget dedicated to autopilot entitlement spending expands, reduced fiscal capacity will further increase budgetary conflict over the shrinking portion of discretionary spending that Congress allocates each year.
Congress only debates 28 cents of every dollar it spends; the vast majority of federal spending goes out without congressional deliberation, primarily funding programs like Medicare, Medicaid, and Social Security, among other entitlements. A new mechanism is needed to reform entitlement spending and avoid a future fiscal crisis before it’s too late.
Erosion of economic power
According to the Congressional Budget Office’s (CBO’s) latest long‐term budget outlook, publicly held debt will grow from 98 percent of gross domestic product (GDP) to 181 percent of GDP by 2053. Most economic research finds that excessive public debt reduces economic growth, with dampening effects kicking in around debt reaching 78 percent of GDP.
There are many benefits of a robust economy including a higher standard of living. A strong domestic economy is also critical for supporting national security. Prominent national security leaders, including former Secretaries of State, Defense, Treasury, and Homeland Security across eight Republican and Democratic administrations, were recently gathered by the Peterson Foundation’s Coalition for Fiscal and National Security. They argue that:
“[L]ong-term debt is the single greatest threat to our national security…This debt burden would slow economic growth, reduce income levels, and harm our national security posture. It would inevitably constrain funding for a strong military and effective diplomacy, and draw resources away from the investments that are essential for our economic strength and leading role among nations.”
Delaying responsible fiscal reforms in the face of growing federal debt invites economic and national decline. High and rising U.S. federal debt leads to suppressed private investment, reduced incomes, and increased risk of a sudden fiscal crisis. A weaker economy and growing concerns by international bondholders of U.S. treasuries about the government’s ability and willingness to service its debt—without resorting to high inflation—will drive up interest costs and eventually impact America’s international standing negatively.
While investors continue to gobble up U.S. debt, which now exceeds $25 trillion, the $114 trillion in additional deficits CBO projects over the next 30 years pose serious questions about whether there will be enough appetite for markets to absorb such high levels of government debt. Troubling too is how much productivity‐enhancing private investments will suffer because of crowding out. The prudent choice is to restore fiscal sustainability during times of peace and economic strength, reversing America’s unsustainable debt crisis while it’s still possible.
National defense is a core responsibility of the federal government. To maximize Americans’ safety and prosperity, prudence should guide both strategy and the budget. A dire fiscal crisis would erode the economic foundation of America’s strength, limiting U.S. capacity to defend its vital interests at home and abroad.
Crowding out of defense spending as a budget priority
Entitlements are increasingly dominating the federal budget. Since 1962, Social Security, Medicare, Medicaid, and other income security programs such as food stamps have grown four times larger as a share of GDP and consume more than half of the federal budget. By comparison, defense spending declined by a factor of three as a share of GDP, from 9 percent of GDP in 1962 to 3 percent of GDP by 2022. Defense spending makes up less than one‐fifth of the budget, despite growing in real, inflation‐adjusted terms as entitlement spending has claimed an increasing share of the taxpayer burden. In real terms, annual defense spending has increased by nearly $200 billion between 1962 and 2022. Meanwhile, annual entitlement spending has grown by $3.3 trillion over the same timeframe. The graphic below shows how entitlements have grown to consume a greater share of total non‐interest spending over time.
As entitlements consume a larger share of the budget, this exerts downward pressure on other budget priorities. Former Principal Research Scientist for Massachusetts Institute of Technology’s Security Studies Program Cindy Williams explains,
“Absent significant reform or a major expansion of the total federal budget, the rising costs of Social Security, Medicare, and Medicaid will continue to crowd out defense spending. In the extreme, if federal budgets are held near today’s levels as a share of GDP, nondefense discretionary spending is not reduced significantly, and mandatory spending is not brought under control, there will soon be no money left for defense.”
Defense has also been a prime target for cuts across several congressional efforts to reduce government spending. The Manhattan Institute’s Brian Riedl examined 14 major deficit‐reduction negotiations since 1980. More than any other category, legislators tend to reduce defense spending during fiscal consolidation periods. Cuts to defense discretionary spending produced the largest savings in four of six deficit‐reduction deals. Despite entitlements primarily driving rising deficits, mandatory spending reforms in these deals were modest at best. It seems politically easier to keep targeting discretionary spending for cuts than to tackle the key driver of rising spending: entitlements.
For those in favor of restraining the scope of U.S. military engagement, a fiscally restrained government may have some upside. Cato’s Justin Logan and former Cato research fellow Ben Friedman argue that depressed economic growth and rising interest rates driven by high debt could make the defense budget an increasingly likely target for cuts. Logan and Friedman write,
“The U.S. military of the 2010s and 2020s will likely have a moderately less ambitious strategy and smaller budget than that of last decade. But the ambitions will still be hegemonic and the budget massive, hardly those of a normal country concerned chiefly with its own affairs. Unfortunately, the old Bolshevik saying, ‘‘the worse, the better’’ may apply for those seeking to rein in American military ambition. Ironically, we are left to push for military restraint while rooting against the conditions liable to produce it.”
In this way, a smaller U.S. defense budget would put real limits on unnecessary and self‐defeating American military activities overseas by, constraining American legislators. Paradoxically, some level of defense budget constraints could improve U.S. national security by reducing our involvement in military conflicts that are not in America’s national interest.
Apply a defense savings mechanism to the broader budget
The United States’ unsustainable fiscal trajectory is almost entirely driven by rising interest expenses and entitlement spending. Legislators must work together to reform the major entitlement programs to avoid a potential debt crisis, massive tax increases, and lagging economic growth. One idea gaining traction is a debt commission to assist legislators with adopting budget reforms to stabilize the growth in the debt.
The 1988 Base Realignment and Closure Act (BRAC) successfully addressed the politically thorny issue of closing military bases and can serve as a model for Congress’s debt commission. BRAC established an independent commission to select military bases for closures, with recommendations that were approved by the President being adopted by default in Congress unless legislators successfully passed a resolution of disapproval. BRAC successfully bypassed special interest politics and congressional gridlock to free up funding for more essential defense priorities. Congress should consider establishing a BRAC‐like, independent fiscal commission to recommend changes to stabilize the debt at no more than 100 percent of GDP over the next 10 years.
A well‐designed commission will be composed of a diverse group of experts, guided by clear goals established by Congress, and whose recommendations will be self‐executing after Presidential approval; benefitting from so‐called fast‐track authority. Asking members of Congress to affirmatively vote for entitlement reforms recommended by such a commission will most likely undermine the debt commission’s recommendations from becoming law. Few legislators are willing to stick their necks out in support of necessary and yet unpopular changes to Medicare and Social Security.
Unsustainable fiscal policy imperils American economic and military strength. By reforming entitlement programs and reducing spending, legislators can prevent high debt from undermining America’s prosperity and security. A well‐designed debt commission can help Congress to see this through.