We recently discussed the implications of Baumol’s cost disease for U.S. strategy. Basically, it is very expensive for a high-productivity country to sustain labor-intensive military engagements because domestic wages tend to be high. Peter Orszag, President Obama’s former OMB director, strengthens the case:
Before the most recent reductions were enacted, the Congressional Budget Office had estimated that the Defense Department’s plans would lead to $594 billion in defense spending in 2016. Acquisitions, including the cost of developing and buying expensive weapons systems, were estimated at $210 billion, or just over a third of the total. To save $50 billion to $100 billion a year — which is what’s needed to reach the promised 10-year targets — from this part of the budget alone is not plausible.
Most defense spending goes to personnel and operations costs, which are based on the number of troops we have. For 2016, the CBO projected these to cost more than $350 billion, or about $170,000 per active-duty military person. When it comes to cutting the defense budget, this is where the rubber hits the road.
The Panetta plan, according to reports, would reduce the number of troops in the Army from 570,000 to 490,000, and in the Marines from a bit over 200,000 to 175,000. Personnel levels for the Air Force and Navy would be held roughly steady. Michael O’Hanlon, a Brookings Institution scholar who is a leading expert on the U.S. defense budget, says such reductions are prudent, and would save about $150 billion over 10 years.
That’s only about a third to a sixth of the needed spending cuts, which raises questions about where the rest of the money will come from. But even these proposed force reductions are generating a furious backlash. Retired Major General Robert H. Scales wrote in the Washington Post that they show “a degree of a-historicism that exceeds that of any post-World War II administration.” [Emphasis added]
Note that the Republican presidential candidate Mitt Romney has been sharply critical of proposed force reductions. During the 2004 presidential election, it was the Democratic nominee, Sen. John Kerry, who proposed increasing the size of the U.S. armed forces whiles President Bush maintained (at the time) that it wasn’t necessary. Roles have reversed, at least for now, but one wonders if a Republican president could sustain his commitment to expanding the armed forces in a climate in which fiscal consolidation is considered a high priority.
Moreover, personnel costs are likely to increase, as more generous educational benefits for veterans may lead to a concomitant increase in reenlistment bonuses. I addressed this issue in May of 2008 in a Weekly Standard article.