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ECONOMICS: US PERSPECTIVES JAN 01.27.2017 NATIONAL DEFENSE: IS ANOTHER SPENDING BOOM ON THE HORIZON? + Joseph G. Carson, US Economist and Director—Global Economic Research, joe.carson@abglobal.com President Trump has promised to increase defense spending—and there’s support from key members of Congress. If a large multiyear plan is approved, it would represent a sharp reversal from what has been the weakest trend in defense spending in the past 50 years. And the timing and scale would have important implications for the outlook on growth and inflation. National Defense—The Trump Plan President Trump has promised to deliver an ambitious program to rebuild the US military. It would include modernizing US nuclear weapons systems, investing more in cybersecurity, enlarging the navy’s fleet and increasing the number of fighter aircraft for the air force. Trump’s plan also includes additional military personnel—well over 100,000, according to some estimates. The details of Trump’s first Pentagon budget will form part of the overall budget he’ll submit to Congress in late February or early March. The actual funding request for the current fiscal year (which ends September 30) must be completed by April 30—that’s when the current legislation funding the military budget is set to expire. More important, Trump’s blueprint for the Pentagon budget could set the baseline for defense spending for at least the next four years. It’s also worth noting that Trump’s military expenditures could be at the low end of what some in Congress are proposing. For example, Senator John McCain, who chairs the Senate Armed Services Committee, recently released a white paper on defense spending, Restoring American Power. McCain argues that the US has underinvested in the military for several years, and that it is now vital for the US to substantially increase funding for the Pentagon. His plan calls for a $640 billion defense budget for fiscal year 2018, which is $58 billion above the current budget baseline. Moreover, the McCain defense plan urges an additional $430 billion in military spending over the next five fiscal years. Defense Spending Patterns Are Unlike Other Federal Programs History shows that defense spending programs are unusual in that they’re neither cyclical nor countercyclical. Most often they are based on military and political strate- gies as well as ongoing readiness to respond to or engage in global encounters. Based on historical gross domestic product (GDP) data, there have been three large defense-spending programs in the past 50 years (Display 1). The first buildup Display 1 Defense Spending Comes in Big Waves Nominal Defense Spending Reagan Buildup 60 Vietnam Iraq War YoY % Change 64 72 81 90 98 OF 16 Through September 30, 2016 Four-year moving average Source: Bureau of Economic Analysis and Haver Analytics occurred in the mid- 1960s, during President Lyndon Johnson’s term, and ran for five years. That was tied to the military engagement in Southeast Asia. The second large defense-spending boom occurred during the first four years of the Reagan presidency. This buildup was part of Reagan’s political and military strategy to rebuild the military apparatus after what he saw as years of neglect. The third major increase started during the first term of President George W. Bush. This one was linked to events surrounding 9/11 and the following events in the Middle East. HOUSE_OVERSIGHT_033220