Defense spending as 'stimulus'?

Pentagon's generous budget is not likely to see cuts soon, even if Iraq war starts to wind down.

The Defense Department has enjoyed a long budgetary heyday, but the golden times may be nearing an end as the Iraq war, which has been eating up $10 billion a month, starts winding down and recession pressures force federal budgeteers to rein in spending.

That's the conventional wisdom, at least.

But defense spending won't drop anytime soon, experts predict. Even as the nation gasped over a $1.2 trillion federal budget for this fiscal year, estimated Tuesday by the Congressional Budget Office, President-elect Obama this week signaled his resolve to spend the country out of recession. In the short term, that probably means more money for defense.

It may be impractical, for several reasons, to cut defense spending for the first year or two of the Obama administration, experts say.

One is that a de-escalating war in Iraq won't immediately curtail expenditures needed to keep troops and equipment whole. Defense Secretary Robert Gates, in a New Year's Eve request to Congress, asked for an additional $70 billion to pay for war costs. At the same time, ramped-up military operations in Afghanistan under Mr. Obama will cost the US government more.

Perhaps the biggest reason defense spending won't fall anytime soon is that it would be too hard for congressional lawmakers to justify cuts to defense during a recession, and lawmakers will instead seek to retain and renew defense contracts – and keep thousands of people in their jobs.

"I would be very doubtful that Congress will cut any major procurement programs, because the Democrats would not want to be accused of putting anyone out of work as they put together an economic stimulus package," says Dov Zakheim, who served as the Pentagon's chief financial officer until 2004. Federal spending on defense could rise as much as 2 percent over the next couple years, says Mr. Zakheim, now a consultant in Washington.

Still, Obama made a point Wednesday of saying his administration would dedicate itself to rooting out inefficiencies in government and finding ways to streamline operations. The Pentagon budget, which accounts for almost 47 percent of all federal discretionary spending, would seem to be a prime place to start. This week, the Government Accountability Office reported that every year the military stashes $7.5 billion in unneeded parts in Navy warehouses.

The Pentagon's baseline budget for the current fiscal year is $514 billion, but with Secretary Gates's $70 billion request, war funding will top $136 billion in additional defense costs for 2009.

Other factors are also at play.

To pay for the wars in Iraq and Afghanistan, the Pentagon has used a controversial budgetary maneuver called "supplemental funding," in which costs for war operations are counted separately from the normal baseline budget.

As equipment such as trucks, planes, and other gear failed, these supplementals have been used to bankroll new weapons systems to replace the dilapidated gear. Supplemental funding has been like candy to a child, and lawmakers and the Pentagon itself would like to see the Pentagon be weaned off it. Senior Pentagon officials say the Defense Department's fiscal year 2010 budget, to be unveiled two weeks after Obama takes office, will reflect an increase of about $57 billion in money that is "migrated" from supplemental funding to the baseline budget – which will represent an annual increase of about 13 percent.

Boosting defense spending is the way to go in a recession anyway, argue many economists. The US government under Obama should go on a major spending spree to spur job growth and keep the economy from derailing, says Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan. He argues that Obama should increase the defense budget by 10 percent for procurement and research, a move that could potentially create about 300,000 additional jobs.

"A substantial short-term rise in spending on defense and intelligence would both stimulate our economy and strengthen our nation's security," Mr. Feldstein wrote in a recent op-ed in The Wall Street Journal.

Senior military officials, including Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, argue for maintaining a "floor" of defense spending commensurate with about 4 percent of US gross domestic product. The US now spends 4.2 percent of GDP on defense – about $700 billion (of which roughly $187 billion is supplemental funding for the two wars). Admiral Mullen and others would like to see defense spending stay at that level for several years.

It's a target that seems unlikely to many analysts.

"That is a proxy argument," says Robert Work, vice president for strategic studies at the Center for Strategic and Budgetary Assessments, a think tank here. The Pentagon simply wants to maintain the current level of funding – including war funding – even after the wars wind down.

The baseline defense budget will rise somewhat as it absorbs supplemental war costs, he says, but competing interests will force the Pentagon to decrease its overall spending in the longer term.