A primer on US defense spending
As conflicts rise worldwide, the February 2024 Economics Insider takes an in-depth look at US defense spending. Just how much does the United States spend on defense and what areas are poised for growth?
The past few years have seen increasingly violent conflicts around the world. The Stockholm International Peace Research Institute estimates that 59 countries were at war in 2022, up from 32 in 2019.1 The headlines, of course, point to the Russian/Ukraine and Israel/Hamas conflicts, and there’s been concern about tensions between China and Taiwan as well.
Wars matter for the economy, even when they are fought by proxy. As the United States slowly begins to reassess whether its military spending is adequate, we’ll take a close look at it. A substantial portion of US federal spending is for the military; just what does the government buy, and what areas might see higher spending in a more conflict-ridden world?
How much spending?
In 2023, national defense spending accounted for more than half of all federal government purchases of goods and services.2 It’s a significant part of what the federal government does and a significant part of the US economy. US defense spending accounted for 3.6% of the United States’ gross domestic product in 2023. While the figure’s fallen from the level it reached at the height of the US intervention in Afghanistan and Iraq (5.5% in 2010) or during the Reagan-era defense buildup of the 1980s (7.7% in 1986–87), it’s still a large amount (figure 1).
There are other countries that devote a larger share of their economy to defense, but they are either at war or face an immediate threat of war. And they tend to be small economies. In absolute terms, US military spending is large, and possibly the largest in the world. By some measures, the United States outspends the rest of the world, accounting for about half of total global military spending. The country with the next largest defense budget (China) spends about one-quarter of the amount the United States spends.3 By other measures, China and the United States spend about the same amount, but both spend considerably more than any other country.4
What’s in the budget?
What is the US government buying when it lays out all that money? Figure 2 shows a breakdown of US government defense spending.5
Compensation accounts for almost two-fifths of US defense spending. About 60% of this is for military pay and benefits, and about 40% goes to civilian defense workers. That underestimates the US military’s labor costs, however. Spending on intermediate goods and services includes fuel costs, ammunition, and spare parts. But 70% of spending for intermediate goods and services actually goes to services—in other words, to the purchase of labor services that replaces directly hired military and civilian workers. For example, when the United States had a draft, the oversupply of people in the military led to soldiers being assigned tasks like mowing lawns. Today, the US Army hires civilian contractors to do this type of maintenance work. It also hires civilian contractors to maintain equipment, construct buildings, and even carry out military missions such as security.6
The increasing use of contractors is common in the federal government.7 It improves the flexibility of agencies and also allows the expansion of activity without expanding payrolls. For defense specifically, contractors save on scarce and increasingly highly skilled labor (making soldiers mow lawns would be considered a waste of time that could be spent on improving their training and combat-readiness).
The cost of supplies and equipment for current operations is surprisingly small. The total cost of ammunition consumed in 2022, for example, was just US$5 billion, and the cost of fuel was just US$11 billion. This doesn’t include transfers of ammunition to allies and reflects peacetime operations. But it also indicates that, from a cost point of view, the main limits on US military resources involve people, not supplies.
Investing in defense
US defense spending usually brings to mind hugely expensive equipment, like aircraft carriers, tanks, and fighter jets. Because this equipment is designed to last a long time, government statisticians classify it as an investment. Such investment accounted for about a quarter of defense spending in 2022, but that’s not the entire story. Capital equipment depreciates over time: It’s just as true for defense capital equipment (like aircraft carriers) as it is for capital equipment owned by non-government corporations. US statisticians estimate this depreciation—they call it “capital consumption.” It’s pretty large—and perhaps not surprising—since the value of the defense capital stock was US$2.2 trillion in 2022.8
Figure 3 shows net investment—that is, the value of additions to the stock of defense capital. Despite what seem like huge expenses on big-ticket items, the US defense capital stock has depreciated at times—for instance, before the 9/11 build-up and interventions in Afghanistan, and after the reduction of US presence in the Middle East in the 2000s. More recently, the US defense capital stock has been growing. The increasing threats to the United States and its allies will likely push this up further in the next few years.
For all that the term “defense spending” calls to mind—things like steel and aluminum, and factories churning out aircraft and tanks—actual US defense investment spending looks rather different. Figure 4 shows that almost half of US defense investment is in intellectual property. This includes software, but it’s mostly research and development. This is not a new phenomenon; in 1975, intellectual property accounted for almost half of defense investment. Some reflection suggests that this is not surprising: US forces have long depended on technological superiority over opponents that had larger militaries (by number of warriors, or sheer numbers of tanks or aircraft).9
Possible challenges for defense spending—and for the US economy
Spending on US defense resembles the broader US economy. Physical capital, being cheap, isn’t nearly as important as people and intellectual capital.
But that understates the importance of the physical capital—the equipment—itself. The technology is still carried on ships and tanks made of steel, and aircraft made of aluminum. The steel and aluminum are still vital, even if the real “value” (in this case, the lethality of the weapons system) is in the intellectual property embedded in the steel.
This creates potential problems for ramping up US defense spending in the event of more wars or wars by proxy. The country has already struggled to supply Ukraine with ammunition and certain supplies.10 What’s worse is that the complexity of the supply chains for hi-tech products like modern weapons means that, in the event of a significant conflict, key components might be unavailable. The United States can afford to buy more weapons, ammunition, even aircraft carriers, but might not be able to actually build these things without the steel, chips, and components they require.
That’s the key argument for a recent National Defense Industrial Strategy paper issued by the Defense Department.11 To be clear: This is economically inefficient and would slow peacetime growth. The growing drumbeats of conflict, however, argue that this is a price the country may need to pay.