Implications of Federal Debt on the National Security Industrial Base

On October 25, the National Security Industrial Base working group held a meeting on the implications of the federal debt and deficit on the national security industrial base, with Alice Rivlin (the first director of the Congressional Budget Office; former director of the White House’s Office of Management and Budget; and former vice chair of the Board of Governors at the Federal Reserve System) opening the discussion with a presentation on her own work and the ongoing efforts of several experts and bipartisan leaders panels.

The concerns are real that—as Admiral Mullen has argued, as well as Secretary Gates—the federal fiscal plight has become serious enough to have direct national security implications.  As such even defense hawks arguably need to think hard about whether it is possible to place some curbs on defense spending as part of a broader effort at fiscal discipline.

While the U.S. has long had deficit issues, the combination of the most recent recession and various recovery mechanisms of the last two years has driven up U.S. debt from about 40 percent of GDP to 60 percent, with the current set of conditions and policies potentially leading us to figures of 80 to 100 percent over the coming decade absent remedial action. The key is that long-term demographic shifts (especially in aging of population combined with high medical costs) are combining to make the debt grow faster than GDP. While a number of nations have experienced both short- and long-term crises from such a scenario of debt (which often culminates with a fast-moving currency crisis), we have never seen a major power go through this situation before. 

Various goals for the effort at fiscal discipline are possible and likely to be turned to as answers, either as part of a planned long-term transition or in the feared event of responding only after a crisis. One is to cap debt at roughly 60 percent of GDP and ensure that it does not exceed that figure thereafter (barring another major crisis such as a war). These figures may in fact be less important than establishing a process to force action, and keep long-term focus on debt reduction.

In looking for answers, it is clear that demographic change combined with federal entitlements—especially in the retirement and healthcare systems— and an inefficient tax system are the main drivers of this long-term fiscal challenge. But defense and domestic discretionary accounts are all sizeable parts of the budget, too, and as such would likely all have to be part of any realistic solution to the current predicament. The main lesson learned from other nations’ experiences, and most likely political compromise, is to “spread the pain” across a number of areas. What is clear is that some of the policy solutions of past eras, like pay as you go or “PAYGO,” won’t work when entitlements are the main challenge—or at least, such measures won’t be adequate. 

One can debate what level of defense spending reduction would be appropriate as DoD’s “fair share” of the deficit reduction effort and this debate should also be couched within a larger debate over the nation’s strategic goals. However, since it is between 1/5 and 1/6 of total federal spending, it follows that DoD’s contribution to the approach might be expected to be an ask of $50 billion or so in savings in the annual budget, relative to what would otherwise likely occur. This is one notional estimate that came out of the discussion, though of course it is possible to argue for smaller or larger cutbacks. A key question is how to weigh in any presumed savings from reducing wartime costs in the coming years.

It may be unlikely Congress could act to impose such measures as those suggested above, absent a major crisis such as a fleeing of foreign investment from the United States—a possibility that cannot be dismissed, and that can happen very fast once it begins. But the risks of being so beholden to foreign lenders are serious enough that the nation arguably should not be content to continue its current path, which it is generally agreed is unsustainable and incredibly risky not just to the broader economy, but to the long-term future of the industrial base. Given these trends, and especially the dangerous dependency upon other nations like China and other states buying American bonds, those interested in national security should be concerned about not only the raw size of the deficit, but also about the nation’s deep vulnerability now to the decisions made in both the U.S. and in foreign capitals.