Romney’s Defense-Budget Growth Tops Cold War Pace: BGOV Insight

A 4% Solution for Defense
In one of his few specific proposals for defense spending, Mitt Romney has pledged to grow Navy shipbuilding from nine ships a year to 15. Source: U.S. Navy via Bloomberg

Governor Mitt Romney’s national security policies reflect the Oliver-Twistian mindset of the Republican establishment on defense issues. They want some more. How Romney obliges that impulse illustrates the dilemma of trying to satisfy a military-industrial complex whose business models and profit margins are based on fixed diets.

Candidate Romney has set a goal of a base Pentagon budget that’s equal to 4 percent of the nation’s gross domestic product. That’s about where defense spending will be in the coming year, assuming a decline in spending for the war in Afghanistan. Depending on how the economy behaves during the next four to eight years, a President Romney’s 4 percent solution may prove welcome to the party’s traditional defense hawks yet face real pushback from deficit hawks.

And if it should get to the point of working out the details, some of the defense hawks will be screaming for mercy, too.

Though the economy is struggling today, most forecasts from government and private-sector economists predict healthy GDP growth from 2014 into the next decade. Tying defense spending to the GDP would result in rapid growth that stretches well above historic averages and even above peak spending during the Cold War, adjusted for inflation.

In 1986, the peak year for the Pentagon under President Ronald Reagan, defense spending represented 6 percent of GDP. That was up from the 4.9 percent of GDP spent on defense in 1980, near the end of the Jimmy Carter administration. Many, including Reagan, deemed that too low.

Spending Mismatch

The problem with tying defense spending to economic performance is that GDP fluctuations don’t always line up with changes in threats or military requirements. If the economy is weak and threats are high, more spending might be justified. The opposite -- a strong economy in relative peacetime -- could also be true.

Romney estimates that under his policies GDP will grow by about 4 percent a year, a rate somewhat lower than many forecasts. Still, if the economy grows as he predicts and he gradually ramps up defense spending to his goal of 4 percent of GDP by the end of his first term, the nation would spend about $400 billion more on defense in Romney’s first term than Obama currently plans in his second.

That kind of growth rate raises difficult questions, not only on how to pay for it, but also on how to spend it. The questions cross multiple tracks, including strategy and risk tolerance, hedges against uncertainty, timing of procurement, operation and maintenance costs, and trade-offs between people and technology.

Contractors’ Livelihoods

Romney’s answers would affect the national security posture, the Pentagon’s inner workings and, not least, livelihoods of defense contractors.

For example, in one of his few specific proposals, Romney has pledged to grow Navy shipbuilding from 9 ships a year to 15. Will the extra money Romney plans be used to develop new ship-types or more of the same?

If ship types change, will new naval bases follow? What percentage of the new vessels will be based in the U.S. or overseas? Will they be permanently deployed with crews rotating in and out?

The answers to these and related questions matter to shipbuilders, electronic warfare companies, aircraft and missile manufacturers and service contractors supporting the Navy’s research-and-development efforts. Some will win while others will lose.

Aging Inventories

In other areas, Romney wants to modernize and replace the aging inventories of the Air Force, Army and Marines and increase troop strength by 100,000. Will that extend the services’ reliance on older systems while waiting for new ones?

And who will maintain them, at what cost -- contractors or defense personnel? Will that troop strength increase be paired with efforts to reduce rising personnel costs, such as medical care, which will have risen more than 138 percent since 2002?

Here again, more spending on defense won’t necessarily drive defense industry revenues evenly. A Romney administration would no doubt cut some programs while increasing others based on its assessment of the global strategic environment and his goal of reducing the Pentagon’s bureaucracy and waste.

A more robust posture in the Pacific, for instance, may lead to increases in Air Force and Navy programs at the expense of the Army and Marine Corps.

In other words, a rising tide won’t lift all boats. Whether the overall defense budget goes up or down is important, to be sure. Trade-offs the president and Congress make are what really matter.

(Robert Levinson is a defense analyst and Cameron Leuthy is a budget analyst for Bloomberg Government. The views expressed are their own.)

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