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FEDERAL SPENDING FOR NATIONAL SECURITY David Novick, chief, Cost Analysis Department, the RAND Corp., Santa Monica, Calif. I propose first to list and then to discuss briefly seven factors which can be expected to influence current and future trends in Federal spending for national-security purposes. The list is illustrative rather than exhaustive, but it is sufficiently complete to show th at the level of expenditures is determined by a wide variety of causal factors. To trace their future consequences with all of the resulting interactions requires intensive and, in some respects, a novel type or analysis. I shall have a few things to say about studies which I believe are deserv ing of attention by this committee. Major elements examined a re : 1. External political, military, or economic pressures which can lead to either reduction in or expansion of the size of our military forces and affect the quality of their armament. 2. The possibility th at E ast and West may adopt a system of mutual inspection leading toward weapons control. Such a sys tem, if adopted, m ight initially cost more than the weapons it would at first displace. 3. Possible decisions to use international forces in place of national ones to deal with aggression and to maintain order among the countries of the world. 4. Changing technology which may result in more effective weapons or vehicles of war. These may be introduced in this country, a friendly country, or a potential enemy. Such innova tions are more likely to be expensive than cheap. 5. Domestic demands for economy in government or, more ap propriately, internal United States demands for lower levels of Federal expenditures. 6. Inflation or deflation in the price level in the United States or more specifically in prices paid for goods and services, con sumed in the national defense. 7. Impact of budget and procurement decisions made prior to June 1957, as they will affect actions th at can be taken in fiscal years 1959 and 1960. On the basis of an extensive analysis of these factors a generalized forecast will be undertaken and suggestions offered for subject areas meriting more intensive study. Before turning to a discussion of these points a brief summary of national-security expenditures in recent years may be of interest. R e c e n t D ollar T rends Although the past is not always a reliable indication of what we shall do in the future, it can provide a measure of the way in which we have responded to advances in technology and our changing role 542 543 ECONOMIC GROWTH AND STABILITY in world affairs. National-defense expenditures and gross national product for the years 1947-56 were: [In billions of dollars] C alendar year 1947............... 1948................. 1949................. I960 ............... 1961................. N ational defense expendi tures 1 Gross national p ro d u c t1 N ational defense ex penditures as percent of gross national product 232.2 257.3 257.3 285.1 328.2 5.3 4.5 5.3 5.0 10.5 12.3 11.6 13.6 14.3 33.9 C alendar year 1952................. 1953________ 1964___ ____ 1955________ 1956................. N ational defense expendi tures 1 46.4 49.3 41.2 39.1 40.4 Gross national p ro d u c t1 N ational defense ex penditures as percent of gross national product 345.4 363.2 361.2 391.7 414.7 13.4 13.6 11.4 10.0 9.7 1 Source: Survey of C u rren t Business, Ju ly 1957, pp. 8-9. Expenditures during 1954-56 were about three times the pre-Korea level but substantially below the heaviest annual outlays induced by that crisis. For fiscal year 1958, the combined actions of the Office of the Secre ta ry of Defense and the Bureau of the Budget will try to hold expendi tures to a level considerably below th at implied by the original force structure projections. The effect of these efforts will be to stretch •out existing procurement objectives, to slow up the rate of develop ment of new weapons systems, to reduce force size, and to lower the manning, equipping and activity rates of combat units. I t will reduce our flexibility in dealing with external political, m ilitary or economic pressure and ability to respond to changes in the technology of mili ta ry equipment. However, it will bring expenditures to something like the budget estimates previously made for fiscal year 1957 and fiscal year 1958. In this connection, it should be noted th at both the January 1956 and 1957 estimates of expenditures turned out to be substantial understatements; but even so drastic actions as those taken in M ay-July 1957, may not be sufficient to cut expenditures back to the level of the original estimates. Attention must be given to lia bilities the Government has under existing contracts which frequently mean that a cutback in quantity or spreading of deliveries does not automatically result in savings in payments commensurate to the cutback. E xternal P o l it ic a l P ressures There are continuing discussions between East and West on reduc tion in force and curtailment in the rate of improvement in future equipments. Against this are rumblings of Taiwan, continuing tu r moil in the Middle East, northwest Africa and southeast Asia. There also is pressure from Japan, West Germany, Yugoslavia and many other countries for stronger national military forces based in part on economic aid from the United States. Probably most important is the breaking of Churchill’s “truce of terror” by nuclear develop ments among the previous have-not countries. For the moment this seems to be producing a major change in both our foreign policy and ideas about m ilitary power. These pressures are likely to continue. There is and will continue to be widespread debate in this country both on the kind of actions we should take and on the size and composition of military forces 544 ECONOMIC GROWTH AND STABILITY which the United States should have as a result of following one or another policy. W ithout in any way dealing with the question of what we should do, it is this writer's belief that over the next 5 years—■ barring a new crisis—this debate will result in decisions which will tend to lower national security expenditures. The result will not be based so much on facts brought out by objective analyses of these issues as it will be on the pressures within the United States for lower taxes and for redutcion in the Federal debt. Since as a practical m atter substantial reductions can be obtained only by cutting national secu rity expenditures, and because there will be widespread uncertainty as to what we should do about our own armament and the arming of our allies, it will be in these areas the reductions will be made. Such a cutback by the United States can only result in a net reduc tion in the total military capability o f the free world. A lthough there is every reason to assume that the Government w ill interpret external political pressures so as to justify our reducing national security expenditures, intensive and objective study o f the problem also should be made. W e should examine all possible lines o f action and try to avoid taking steps which might result in our ultimate inter national embarrassment. M u t u a l I n s p e c t io n The possibility of agreement on plans for mutual inspection by air is attractive for a variety of reasons. I will not try to summarize or analyze the basic proposals but will limit myself to the probable impact on national security expenditures. The objective is a reduced probability of war, lesser likelihood of surprise attack and surprise developments in lethality of weapons. From this flows the possibility of smaller forces in being, lower ex penditures for new equipment, smaller outlays for development of future weapons and equipment, in short, lower national security ex penditures. That may be the final result. In the immediate future, let us say through 1960-62, the impact on defense expenditures would be de termined by the extent to which the inspection function is added to other security activities or made a substitute for them. I t seems rea sonable to assume that we will not sharply curtail or drop selected m ilitary and nuclear activities until we have some assurance that the inspection program will produce the desired results. That does not mean that some earlier proposals for expansions will not be eliminated or curtailed, but it seems unlikely that in the next few years such an agreement of itself will produce a net lower total expenditure. I f these assumptions are accepted, it means that the inspection re sponsibility w ill call fo r aditional expenditures not now in the budget. Vehicles w ill have to be built or modified to perform this function, larger quantities o f certain equipments will be needed, and additional men w ill be required in numerous specialties fo r which additional training w ill be needed. T o perform inspection from the air may require a substantially expanded flying hour program over the level now projected. Although some substitutions w ill be possible, this new responsibility will, at least initially, call fo r an increase in national security expenditures. 545 ECONOMIC GROWTH AND STABILITY P ossible S u b s t it u t io n of I n t e r n a t io n a l for N a t io n a l F orces International forces have been used on several occasions in recent years, notably in Korea and in Suez. In addition, the United States has entered into about 70 alliances providing fo r joint or bilateral m ilitary action. Our policy since 1945 has been to seek joint action at the multination level to maintain world order and preserve the status quo. It seems likely that, with uncertainties about the policy we should follow now that the nuclear technology barrier has been broken, and as a part o f our effort to reduce national security expendi tures, we w ill take actions which reduce the size o f our forces and the up-to-dateness in their armament. The reasoning which justifies these steps will include emphasis on the possibility o f preventing aggression and maintaining order through joint international action. E very effort should be made to safely pursue paths leading toward joint international action not only because they will permit lower Fed eral expenditures fo r national security, but more importantly because world peace may be attained through such actions. Nonetheless, idealism in itself is little protection against men and armor. For that reason, it is important that as we move toward arms reduction we should continue to make the most intensive study o f the risks involved in the steps required to implement such a policy. Unless and until the international police force has sufficient strength and freedom o f action to preserve peace and order, it is essential that we have adequate insurance in the form o f forces in being against possible failure o f the machinery on which we are planning to place our reliance. Since this will be a very delicate situation, it will re quire the most objective analysis o f all o f the possibilities in order to protect ourselves against unforeseen and potentially catastrophic risks. T e c h n o lo g ic a l C h a n g e s in M eans of W ar Improvements in the weapons, vehicles, and related equipments used in warfare have been so rapid in the past decade that it becomes very difficult to project future growth. Nonetheless, developments now in process indicate further changes just ahead. Some o f these w ill tend to reduce costs, but most o f them will mean substantially higher unit prices for future procurement. Probably equally im portant in an expenditure analysis is the likely sharp increase in out lays required fo r research and development. I will not attempt to cover even a major fraction o f the possibilities, but, instead, w ill rely upon an illustration. Improvements in the means o f propulsion now indicate the possibility o f very much faster airborne equipment— both manned and unmanned. Introduction o f these improvements will require basic changes in the materials used in the vehicles. Although there are numerous possibilities, the most likely ones seem to be a change from aluminum and magnesium to alloyed steels. Such a shift will mean not only an increase in cost per pound o f the material required but, more importantly, a tw ofold to fourfold increase in the material fabricating expenditures and the investment in fabricating equipment. That will mean substantially greater out lays per unit o f output. T o profit from these possibilities, substantial research and development is required, both in metallurgy and in f abri 546 ECONOMIC GROWTH AND STABILITY cation processes and equipment. The net effect is likely to be th a t we will have to choose between modernizing and maintaining the level of expenditures now being set for national security purposes. Although we can make a unilateral decision to do as much as pos sible within a prescribed budget, activity outside the United States may force us to review th at decision. Western Europe is rapidly ex panding its technology. Changes are taking place in Japan, India* Australia, South America, et cetera. In the last few years we have come to recognize how badly we had underestimated the scientific and technical capabilities of the U. S. S. R. The Government can hope to lead the world in invention and inno vation in the means of war and to do this within a fixed and relatively lower budget. However, if results in both friendly and potential enemy countries demonstrate this hope to be a false one, I assume that we will review and, if need be, change the previously established policy. Once again, careful evaluation is required to determine the precau tions required to avoid possible future embarrassment. The research and development lead time is even longer than that for manufacturing. I f the technological change is the product of a potential enemy, money may not be able to buy us the time required to catch up. We must, therefore, set a level of research and development which promises to keep us at least abreast of the rest of the world, and maintain both a manufacturing capacity and m ilitary capability which will permit us to introduce important interventions or innovations quickly. U n it e d S ta t e s D e m a n d s foe L ower F ederal E x pen d it u r e s F or many years a sizable and influential part of our citizenry has been very much concerned about the large portion of our national prod uct which goes into government spending. Some of their criticism has been aimed at the level of spending; in part, it is concerned with the kinds of taxes levied and their impact on individual and corporate incomes and 011 estates; and, to some extent, it has arisen from appre hension concerning the inflationary result of continuing government spending at high levels. Steady growth in gross national product and the lessening impact of government expenditures on disposable income has not reduced this dissatisfaction, and outspoken criticism continues. The Congress is exposed to continuous and almost irresistible pressures to curtail Federal spending, and there is no need to elaborate on th at p art of the issue. I feel, however, th at some cautionary notes are in order. We must be sure that our actions are based on more than just a demand for lower expenditures. To be sure, we must keep our Government fi nances in order, for a disorderly national economy is, of itself, a p ri mary threat to our security. B ut the other factors involved must be fully considered before we can say that the required expenditures are too high. Once again, painstaking analysis is required, first, to determine a practicable level of m ilitary activities, and, second, to establish spend ing levels which are acceptable to the Nation and, therefore, can be expected to remain stable for a number of years. A t this point it should be noted th at nothing is more expensive and wasteful than 547 ECONOMIC GROWTH AND STABILITY changes in m ilitary plans. I t means closing bases at one time and a few years later reopening them or building new ones. I t means build ing factories, buying equipment, and training workers only to use them in an inefficient way. Probably most wasteful and harm ful is its effect upon the morale of defense personnel, both m ilitary and civilian. I f stability in resources available for national security can be estab lished, that m itself would go a long way toward increasing the secu rity that can be obtained for a given level of spending. However, stability does not assure adequacy, and it is essential th at the expendi ture amount be set with careful attention to both military requirements as well as acceptable levels of the economic burden. I n f l a t io n or D e f l a t io n Inflation has had a powerful effect on national-security expendi tures since 1950 through its impact on prices paid for goods and serv ices. The previous portions of this paper have not taken that factor into account. When an opinion has been expressed th at outlays would remain steady, increase, or decline, it was based on spending measured in 1957 dollars. To get a quantitative concept of the impact of inflation in the past decade, it may be appropriate at this point to restate national-defense expenditures since 1947 m terms of 1956 dollars: N ational-defense expenditures Calendar year 1947................. 1948................. 1949________ 1950................. 1951________ Price index (1956=100)1 77.0 77,5 80.5 83.1 92.3 A ctual In 1956 dollars Billions $12.3 11.6 13.6 14.3 33.9 Billions $16.0 15.0 16.9 17.2 37.7 C alendar year 1952................. 1953........... . . . 1954........... . 1955................. 1956________ Price index (1956=100)1 91.6 89.5 91.8 95.2 100.0 National-defense expenditures A ctual In 1956 dollars Billions $46.4 49.3 41.2 39.1 40.4 Billions $50.7 55.1 44.9 41.1 40.4 i T h e price index used is th a t for Federal G overnm ent purchases of goods and services. re n t Business, Ju ly 1957, pp. 24-25. Survey of C ur The recomputation of 1947-54 defense expenditures, using 1956 prices, shows that we would have had to spend an additional $3 bil lion to $4 billion in most years, and almost $6 billion more in 1953. Even so recent a year as 1955 would have required an additional $2 billion. These required additions would be even higher were we to consider these items in 1957 dollars. In most current economic reporting, it is taken for granted that prices will be higher in the rest of 1957 and 1958. The recent $6 per ton steel price increase of itself is viewed as a major factor. The continuing rise in the cost of living will result in higher wages through the escalator clause in most labor contracts. P artly balancing the foregoing are continuing low farm prices and the recent significant cuts in the prices of copper, lead, zinc, lumber, and a few other prim ary commodities. I f economic activity expands, prices for most primary metals will recover, and the steel price rise will be incorporated into higher prices for many finished products. If, however, the recent decline in production—3 percent since the De 548 ECONOMIC GROWTH AND STABILITY cember 1956 peak—should be accelerated, there will develop a price tug of war. Even at higher wage rates, shorter hours will reduce industrial-worker purchasing power. Unless housing, automobile, household appliance, and industrial equipment sales pick up, there is a strong possibility of shorter workweeks for a substantial number o f factory workers. The Department of Defense spring directive eliminated most defense-plant overtime, and its recent actions both will reduce the num ber of workers and the length of the workweek for many employees. As noted earlier, lower defense-factory payrolls do not automatically translate into lower prices and smaller national-security expenditures. However, a decline in these payrolls will affect the demand for goods and services and, hence, tend to have an impact on the general price level. I t is this w riter’s judgment that we have passed the peak of the postwar boom. In a paper completed in A pril 1957 I said : F or business in general, the 1956-57 problem of contain ing the boom will for 1957-58 become one of sustaining the boom. Although there will be a small upward movement in 1957-58, it will be in the form of price change rather than in expansion of real production. I f two of the major com ponents, housing and automobiles, do not improve, there is a threat of a real change in direction of the postwar trend. T hat opinion assumed no reduction in defense expenditures. Steps to reduce military outlays since A pril lead the writer to believe more strongly that the trend has changed and the direction of national economic activity will be downward. Prices, particularly prices of military goods, will continue upward for about 10 months. Unless there are major reversals not now in sight, economic activity will move downward and general prices will reverse trend by mid-1958. I f this judgment should prove cor rect, national security expenditures will not be subject to further inflationary pressures after the first half of fiscal year 1959. I m pact of P r e -J u l y 1957 A c tio n s The budgeting and buying cycle for national security expenditures is a long one with the result that actions taken prior to July 1957 will continue to have a major effect for some years. This will influence current and future expenditures in quite different ways. Since the fiscal year 1958 cycle began in late 1955, and since legisla tive and administrative commitments from earlier fiscal years funds will continue to have an expenditure impact through 1959, the com bined effect will tend to make for a $40 billion spending level for the next few years. In contrast, recent cutting of force and equip ment objectives plus spreading of deliveries will make for lower ex penditures in the following years. Probably most im portant, since the reductions have been applied to research and development as well as current deliveries and force structure, it will not be easy to turn the trend upward again, when and if current thinking is reversed. A moment’s reflection on what happened at the time of the Korean crisis will illuminate th a t point. ECONOMIC GROWTH AND STABILITY 549 Fiscal years 1948-50 were a period o f reducing and holding down national security expenditures. W hen the events o f June 1950 called fo r a reversal o f this trend, although goals were raised immediately, only moderate expansion in armament was achieved in the next year. It really took more than 2 years to approach the expansion objectives. A s we go into the present economy period, we should keep that recent bit o f history in mind. Serious study should be given to the lead-time problem and steps should be taken to insure that the time required to build up forces and improve their armament is consistent with our appraisal o f our need for security. It is clear that previous years’ actions and the resulting expenditure commitments w ill not permit sharp cuts in military spending in the next year or two. Administrative lags o f this kind mean that the current reductions will make for sharply lower outlays in 1960 and the years immediately follow ing. In all o f this we must keep clearly in mind the implications o f the resulting smaller military capability if we should be forced to deal with a m ajor international crisis in the years when the cuts will become effective. C o n c l u sio n Consideration o f the m ajor factors likely to influence current and future trends in national security expenditures indicates that the m ajor effect o f current demands fo r lower outlays will be to hold secu rity outlays at or below the 1957 level through 1959. A major effect o f this leveling will be to reduce the expansion and inflation pressures in the national economy. B y mid-1958 this should minimize inflation as a factor making for higher national security expenditures. The demand for lower Federal expenditures will influence the preparation o f at least the fiscal year 1959 and 1960 budgets. Reduc tions will be made and a m ajor justification will be found in possible arms reduction and reliance on international action as a substitute fo r national action in conflicts between countries. I f these forecasts seem reasonable, then there is a greater need than ever before fo r objective analysis o f the impact o f defense expendi ture cuts on our ability to attain our announced political goals in the world. Only a short time ago a similar economy drive was follow ed by the Korean crisis. Aside from its military and international politi cal results, the economic effect o f that combination o f events— economy reversed by crisis— was inflation at a faster rate than that which occurred during W orld W ar II. Now that we seem bent on repeating this process, it might be wise to give consideration to taking out a little insurance. Since an ac tuarial basis is not now available, we will have to work out both the kind o f policy and amount o f national security expenditures that will best provide this protection. I hope my repeated references to studies that should be made are not translated as a suggestion that a long time should or need be consumed in evaluating what we are doing and in determining what we should do. Probably the most important point I am trying to make is the urgent need fo r review and that the study be made quickly so that i f we are on the wrong road we can change direction before it is too late. A m ajor part o f this argument is the basic proposal that we broaden our 550 ECONOMIC GROWTH AND STABILITY terms of reference to include at least the seven elements enumerated a t the beginning of my remarks. Also, th at we not treat them sepa rately or in twos or threes. A ll of the factors must be considered or we may formulate not just an incomplete but an inaccurate judgment. These forces have strong interactions and we must be sure th a t we sum up an accounting of all of them.
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