National defense spending: a review of appropriations and real purchases Essay

National Defense Spending: A Review of Appropriations and Real
Purchases



A NATIONAL defense buildup has been underway for nearly a decade.
It was undertaken in the context of increased international turbulence and a steady strengthening of Soviet nuclear and conventional forces,
and now spans three administrations. This article reviews the buildup
in terms of both budget appropriations and real purchases of goods and
services, a national income and product accounting (NIPA) measure.
Appropriations are reviewed because they are the form in which the
budgetary aspects of an administration’s defense policy are debated
and acted upon by Congress, and, thus, mirror many of the general
considerations–the balance of military power and sharply rising Federal
deficits–that affected the buildup. (The accompanying box traces the
budget process and defines some budget terms used in the article.)
However, factors other than appropriations also affected the realization
of the buildup. Some of these–for example, production stretchouts and
slowdowns–are discussed before reviewing the buildup as measured by
real purchases.



National Defense Appropriations



In his budget message in early 1975, President Ford announced that
his appropriation request for fiscal year 1976 would reverse the decline
in real national defense spending that had occurred over the preceding 7
years. Appropriations had declined in 2 years, and, in addition,
increases in costs of defense programs had been largely offset by
reductions in programs and strength. Presentation of a target in real
terms reflected the enhanced awareness of inflation and more clearly
focused debate on whether, and to what extent, to undertake a buildup.1
The administration targeted annual real increases of 4 percent for
fiscal years 1976-81. For 1976, an increase in the appropriation
request– such requests are in current dollars– of $17 billion, or 25
percent, to $103 billion, was designed to implement this target (table
1). The emphasis was on maintaining defense preparedness, modernization of strategic forces, and strengthening general purposes forces while
reducing support staff. Much of the proposed increase was accepted by
Congress; as enacted, the increase was 13 percent.


1. The real spending estimates that are included in the budget
documents are usually in terms of dollars of the current year, and thus
cannot be used to create a consistent time series.



President Carter, in the budget submitted in early 1978, sought to
continue real growth. He targeted 3-percent annual real increases for
the next several years, within an emphasis on increases consistent with
strengthening the North Atlantic Treaty Organization (NATO). The
appropriation request for fiscal year 1979 was $128 billion, up $10
billion, or 9 percent, from the preceding year. It was designed to
improve the readiness and sustainability of general purpose forces,
accelerate the rebuilding of the fleet, initiate development of a new
intercontinental ballistic missile, and otherwise continue the
modernization of the strategic forces.



Key members of Congress were skeptical that the appropriation
increases were staying ahead of inflation. This concern was evidenced
in a second budget resolution, adopted in September 1979, that included
a 5-percent real increase for fiscal years 1981 and 1982. Subsequently,
the administration accepted the higher rate in return for Senate
consideration– refused earlier in the wake of the Soviet Union’s
invasion of Afghanistan –of the strategic arms limitation treaty. The
hearings on the treaty, which was never ratified, reviewed in depth the
various elements of the balance of military power between the United
States and the Soviet Union. The emerging mood added support for
increased defense spending. However, by March 1980, a revised budget put
the rate back at 3 percent. This action reflected the broad context in
which the budget was being formulated: the forecasts of a weak economy
in 1980 and the beginnings of a drive toward budget balance.
Nonetheless, for the first time in 13 years, Congress significantly
increased appropriations beyond what the administration requested. For
fiscal year 1981, the administration requested $162 billion; $182
billion was finally appropriated. The $20 billion increase was largely
aimed at increasing production rates for most kinds of ships and combat
arcraft and at substantially increasing military pay and benefits.



In the last budget prepared by the Carter administration, it was
noted that the United States had exceeded the NATO allies’
commitment to increase real national defense spending by 3 percent a
year. Real appropriations were estimated to have increased more than 5
percent in fiscal years 1980 and 1981. The request for 1982, and the
5-year plan for 1982-86, continued that rate.


It was from this base that President Reagan announced, in 1981, a
program to accelerate the rate of increase in national defense spending.
To begin with, he requested substantial additions to spending in fiscal
years 1981 (of which 6 months remained) and 1982. The initial requested
appropriation for 1982 was $226 billion, $26 billion more than the
previous administration’s request. The increase from the preceding
year was by far the largest in peacetime appropriations history.
Relative to the previous administration’s budget, the increased
funding was for the gamut of military air, land, and sea equipment and
also higher military pay. Within a few months, the administration pared
this request because it became clear that production of equipment could
not be accelerated in line with appropriations and to help reduce the
sharply rising Federal deficit that was then in prospect.



Prior to the fiscal year 1982 budget, Congress had accepted the
administration’s broad allocation of the defense budget. However,
in the ensuing congressional debate, the allocation was questioned. In
particular, it was alleged that the purchase of complex weapons systems
at the expense of ammunition, spare parts, and training jeopardized the
“combat readiness’ of the armed forces. This issue faded, but
did not disappear. As enacted, the appropriation for fiscal year 1982
was $219 billion, less than the administration’s request, but up 20
percent from 1981 and 50 percent from 1980.



The prospect of large and increasing Federal budget deficits, even
with substantial cuts in nondefense spending, provided a serious
challenge to accelerated defense spending. The deficit issue had
surfaced with regard to the fiscal year 1982 appropriation, and came to
the fore a year later. As submitted in January 1982, the budget for
fiscal year 1983 requested an appropriation of $263 billion, up 20
percent–an estimated 13 percent in real terms–from the 1982
appropriation. The request for 1983 included funds for production of
several weapons systems: 7 B-1 bombers ($4 billion), 9 MX missiles
($1.5 billion), and 2 nuclear-powered aircraft carriers ($6.8 billion).
In May, in negotiations with Senate leaders centering on the deficit
issue, the administration agreed to reduce proposed defense spending
over 3 years by moderate amounts. Congress finally approved an
appropriation of $246 billion for 1983, $17 billion below the initial
administration request. Also, late in 1982, Congress refused to approve
production funds for the MX missile. This action was the first
congressional denial of the administration’s request for a major
weapon system.



As the fiscal year 1984 budget was submitted, the economy was
beginning to recover from the severe 1981-82 recession, but the Federal
deficit was rising sharply. The administration’s request for 1984
defense spending, although trimmed from its initial request for that
year, represented a 10-percent real increase. Sentiment in Congress was
for additional restraint, and the allocation of defnese funds was an
issue again. In trimming its proposal, the administration had
eliminated a military and civilian pay raise, but had not significantly
cut the funding of major weapons systems. This approach not only
rekindled the readiness issue, but it also carried implications for
future deficits. Unlike other appropriations (such as for pay) that are
spent in a single year, procurement funds are spent over a much longer
time–generally 5 years, with highest spending in the middle 3 years.
Thus, trimming appropriations for procurement would have had a larger
impact on future deficits than trimming those for other purposes.
Congress first endorsed a real spending increase in the range of 4 to 5
percent. By the time Congressional action was completed, the 1984
appropriation was $265 billion, down $15 billion from the initial
request. In real terms, it was an increase of 4 percent.



The reductions from initial requests for fiscal years 1982-84 did
not curtail the buildup in a substantial way. Several billion dollars
of the “reductions’ came from lower-than-expected fuel prices.
The remaining reductions affected forces, training, and readiness more
than they affected procurement of major weapons systems. Procurement of
these systems probably was not affected substantially for a number of
reasons. (1) In many cases, reductions were implemented by stretchouts
and slowdowns. A stretchout extends the procurement for a given number
of units over a longer time by reducing the rate of production. A
slowdown is a temporary reduction in the rate of production, which may
or may not extend the procurement. Neither stretchouts or slowdowns
result in lost spending; they only delay spending while the system is in
the pipeline. (2) The unit cost of some weapon systems was lowered.
For example, the unit cost of the F-18 fighter was lowered by
eliminating some electronic equipment. (3) The planned decommissioning of a number of aged ships was accelerated to save funds in the short
run, in order to obtain funds for a new ship.



The same factors that reduced appropriations in the short run will
cause future national defense appropriations to remain high. As noted,
stretchouts and slowdowns generally have not resulted in canceling any
weapon systems, but in delivery of systems over a longer period and,
reflecting the lower rate of production, at a higher unit cost.
Reductions in unit costs such as achieved by eliminating electronic
equipment from aircraft will only be temporary; at some point the extra
cost will have to be incurred if the system is to perform its mission
fully. Another indication that future appropriations will remain high
is the steady increase in the share of national defense spending
accounted for by prior-year contracts and obligations. Prior-year
contracts and obligations were 20 percent of national defense outlays in
fiscal year 1977; they increased to 32 percent in fiscal year 1983 and
are projected to increase to 43 percent in fiscal year 1989. To the
extent that the prioryear contracts, cover systems being stretched out
and slowed down, this development is part of the effect just noted.
However, a part is for systems, such as the B-1 bomber and the MX
missile, that have only recently entered into production and will
require annual appropriations. Further, it may well be that the
sophistication of the new generation of weapons will mean that the
training, spare parts, and ammunition needed to support them will be
expensive and require higher appropriations.



Real National Defense Purchases



National defense purchases is the final point in the spending
process: Appropriations lead to obligations and then to outlays;
outlays, in turn, are followed by purchases.2 Purchases are measured on
a delivery basis, that is, when goods and services are delivered to the
military. They include compensation of military and civilian employees
as well as purchases of goods and services–such as aircraft, missiles,
research and development, and depot maintenance–from the business
sector. Real–that is, constant-dollar –national defense purchases are
prepared using detailed information on purchases and prices paid by the
Department of Defense. They are only available for the period beginning
in 1972 (table 2). (See the November 1982 SURVEY OF CURRENT BUSINESS
for a discussion of the development of estimates of real national
defense purchases, and table 2 page 9 of this issue for current
quarterly estimates.)



2. For a reconciliation of outlays for national defense, a
functional category in the unified budget, to national defense
purchases, see table 9 in Joseph C. Wakefield and Richard C. Ziemer,
“Federal Fiscal Programs,’ SURVEY 64 (February 1984): 17.
The main conceptual difference is that outlays include, and purchases do
not, spending for military retirement; in the NIPA’s, military
retirement pay is a transfer payment.



This section begins by discussing some of the factors other than
appropriations that, working through production rates, affect the
pattern of real purchases. After providing historical perspective, it
reviews the calendar-year changes in real national defense purchases and
the shifts in their composition since 1976. First it provides an
overview. Then it highlights purchases of military equipment, which is
where the buildup has been concentrated.



Production rates



As mentioned earlier, a number of factors other than increases in
appropriations affected the pattern of growth of real national defense
purchases. These include “buy sizes’, competition, cost
overruns, stretchouts, slowdowns, and management decisions. All of them
work through production rates, which affect both costs and prices and,
real purchases. A major way that production rates affect costs and
prices is through the allocation of fixed costs. Production of weapon
systems involves large fixed costs, such as for research and development
and for tooling. As production rates increase with larger buy sizes,
these fixed costs can be allocated over more units, resulting in lower
unit prices. Although it is not possible to quantify the effect of
these factors some illustrations are suggestive.



Efforts to get production rates up and prices down have been
countered by budget constraints and by the large number of different
weapon systems in production. Two ways in which budget constraints have
been brought to bear are reductions in the buy size–that is, the number
of units to be purchased in a year–and stretchouts. for example, the
Army was mandated in the 1984 Defense Authorization Act to reduce its
buy size of light armored vehicles. The fixed costs will now be spread
over 751 units, as opposed to 1,501 units, for the combined purchases of
the Army and Marine Corps. As a result, the estimated unit cost of the
vehicles is to increase 50 percent. This reduction in the buy size of a
weapon system resulted in a moderate savings in current-dollar spending
but a far larger reduction in real purchases; at the higher unit price,
the appropriation bought fewer vehicles.



Stretchouts have been used to reduce spending in a particular year
without cancelling a program. Recently, the purchase of 32 AH-64
helicopters was deferred to achieve a shortrun budget savings in 1984.
As in the case of the reduction in buy size, real purchases were reduced
in the year. If the helicopters are delivered in a future period, unit
costs will be higher. According to a special study by the Congressional
Budget Office, the administration’s changes to the fiscal year 1985
defense budget indicate that unit prices of many weapon systems will
increase because of stretchouts.3



3. Congressional Budget Office, U.S. Congress, “A Review of
the Department of Defense December 31, 1983 Selected Acquisition Report
(SAR),’ Special Study (July 1984).



By contrast, other factors–such as competition and management
decisions –may have reduced unit prices, allowing increased real
purchases. Competition generally plays only a limited role in the
production of major weapons systems. Although several firms may compete
for the initial contract to do the research and development, the field
usually has narrowed by the time the contract for production is to be
let, and purchases are usually from a single supplier. An attempt to
develop a multisupplier situation for the Dragon missile program
provides insight on the effects of competition. For that program, two
producers competed annually for the majority share of the planned
production for that year. The competition appears to have resulted in
significant price reduction for these missiles. In 1972, prior to
competition, the Dragon missile had a unit price of $6,542. In 1974,
two contractors were supplying the missile at unit prices of $6,473 and
$4,569. In the following year, the higher priced contractor had a unit
price of $2,633 and the other contractor, a unit price of $3,227. A
recent example of a private management decision was the sale by one firm
of its tank production facilities to another. Under the new management,
the unit price of the 1984 buy was reduced 13 percent. Subsequently,
Congress upped the buy size to utilize the “saving.’



Historical perspective



To provide historical perspective, a series on real national
defense purchases prior to 1972 was approximated by using the implicit
price deflator for total Federal Government purchases to deflate current-dollar national defense purchases. The broad pattern of
response to international crisis or perceived national interest is
clear. In 1941, real purchases increased significantly as the United
States entered World War II. Following the war, they declined for a
brief period before turning up in 1948 in response to the “cold
war’. A singnificant increase in 1951 reflected the outset of the
Korean conflict, and increases continued through 1953. Purchases
declined in 1954 and continued to do so through 1960, except in 1957,
when there was unrest in Eastern Europe and the Near East. They
increased in 1961-62 in response to a Berlin crisis and a general
strengthening of the military, but then declined through 1965. In 1966,
the Vietnam conflict pushed purchases up significantly, and they
continued to increase through 1968. Thereafter, purchases declined until
they showed a small increase in 1977.4



4. For the years 1972-77, when this approximation of real
purchases and the published real purchases series overlap, the
approximated series declined by about the same amount as the published
series and both increased in 1977 by the same amount.



In the 36 years from 1940 to 1976, real national defense purchases
increased in fewer years than they declined. The longest period of
increases was from 1948 through 1953; the longest period of declines was
from 1969 through 1976. It was this period of declining real
purchases–from a Vietnam peak of roughly $100 billion in 1968 to $65
billion in 1976–that, in part, set the background for the current
national defense buildup.



In the past, national defense purchases accounted for a much larger
share of Federal Government expenditures, and also of GNP, than in
recent years (chart 1). Earlier, both because of their large share and
the very sharp changes, increases and decreases in defense spending
impacted significantly on the changes in real GNP. For example, at the
end of World War II, real GNP declined 15 percent in 1946; excluding the
approximated real national defense purchases –which declined almost 80
percent –real GNP increased 30 percent. The national defense buildup
since 1977 has had a much smaller impact on the changes in real GNP
(chart 2). In 1977 and 1978, the percent increases in real national
defense purchases were less than in the remainder of GNP; GNP excluding
national defense purchases increased only 0.3 percentage point more than
total GNP. In 1979, national defense purchases and the remainder of GNP
increased at the same rate. Since then, the percent increases in real
national defense purchases were more than those in the remainder and GNP
excluding national defense purchases increased less or declined more
than total GNP, but never by more than one-half percentage point.



An overview



Real national defense purchases first registered the current
buildup with an increase in 1977. Since then, real purchases increased
each year and by 1983 were 30 percent higher than in 1976. The increases
averaged 4 percent a year, and accelerated over the period (table 3).
The increases in real national defense purchases excluding the
compensation of military and civilian employees were larger, especially
after the first 2 years. Through 1983, the average annual rate of
increase was 6 1/2 percent.



As indicated by the more rapid increase in real purchases excluding
compensation than in total purchases, the share of total purchases
allocated to compensation declined (table 4 and chart 3). In 1976,
compensation of military and civilian employees accounted for almost 50
percent of total purchases. Since then, the share declined steadily to
46 percent in 1980 and 41 percent in 1983. The decline occurred in both
military and civilian compensation, but was more pronounced in the
military share.



The share of compensation declined because the national defense
buildup has not involved any significant increase in the size of the
armed forces or in civilian personnel. From a Vietnam peak of 3.6
million (measured in full-time equivalents) in 1968, the size of the
armed forces declined steadily to 3.2 million in 1970 and 2.2 million in
1980. It increased 50,000 in 1981 and then by smaller amounts, reaching
2.3 million in 1983. Civilian employment declined from 1.1 million in
1968 to about 1.0 million in 1983. While the share of real purchases
allocated to compensation declined, the shares allocated to durable
goods and to other services–that is, noncompenation services–increased
and that allocated to nondurable goods changed very little. Since 1976,
the share of nondurable goods fluctuated around 3.5 percent. Within
nondurables, the share of total purchases allocated to ammunition
increased. The 1983 ammunition share–1.1 percent–equaled the 1975
share, but was considerably below that of the early 1970’s. The
share allocated to structures, which declined in the late 1970’s,
was 2.4 percent in 1983, about the same as in 1976.



The increase in the shares of durable goods and other services
reflect earlier decisions to modernize and increase the size of the
inventory of military equipment. The increase in the share of other
services also reflected those decisions; much of the spending for these
services, particularly for research and development and for depot
maintenance, was directly related to weapon systems.



Real purchases of other services increased at an average annual
rate of 6 percent from 1976 to 1983, half again as fast as total
purchases. Research and development (R&D), the largest category,
declined steadily in the mid-1970’s as R;D appropriations were
cut back; they increased moderately in 1978-79 and at an average rate of
9 percent in 1980-83. Much of the R;D increase since 1980 was
associated with the cruise and MX missiles and the B-1 bomber. The
fastest and most sustained increase was for depot maintenance; purchases
of these services increased at an average rate of 12 percent since 1976.
Other increases were associated with reducing a backlog of maintenance
and with repair of equipment and facilities.



Military equipment



From 1976 to 1983, real purchases of military equipment increased
at an average rate of 8 percent. Increases, ranging from 3 1/2 percent
to over 15 percent, were registered every year except in 1978. By 1983,
equipment purchases were 70 percent higher than in 1976.



Each type of military equipment purchased increased faster than
total purchases. The slowest increase was for real purchases of
aircraft, which increased at an average annual rate of 5 percent. This
relatively slow rate reflected the fact that a shift to a new generation
of aircraft began in the early 1970’s, before the current national
defense buildup. For example, the Navy began to take deliveries of the
F-14 in 1972, and the Air Force began to take deliveries of the F-15 in
1974 and the E-3 in 1975. Since 1977, the buildup has consisted of
increased production rates for all types of aircraft as well as new
generations–the B-1 will replace the B-52 and the KC-10 replaces the
C-130. Aircraft deliveries prior to 1979 were erratic, reflecting
uneven production funding. Since 1979, when deliveries increased 14 1/2
percent, real growth has been continuous.



Real purchases of missiles increased at an average annual rate of 7
1/2 percent. Prior to the buildup, purchases of missiles declined
significantly in 1975 and 1976, as the production of various types of
missiles–such as Minuteman III, Poseidon, and Pershing –came to a
halt. The recent buildup has funded a new generation of missiles,
including the Patriot, Trident, MX, and cruise missiles. Since 1979,
purchases of missiles have increased at an accelerating pace, reaching
29 1/2 percent in 1983.



Real purchases of ships also increased at an average annual rate of
7 1/2 percent. A naval buildup was underway prior to 1977, but was
plagued by declining labor productivity, contract disputes, changes in
the number and types of ships to be built, and a number of other
problems. In the early 1980’s, many of these problems were
resolved, particularly in regard to submarines. Submarines were a major
contributor to large increases in 1982 and in 1983.



Real purchases of vehicles, dominated by tanks, recorded the
fastest average annual rate of increase–16 1/2 percent. The inventory
of M-60 tanks had been run down to resupply Israel in 1973. It was
rebuilt in 1976-79, when purchases of vehicles increased at a rate of
about 25 percent a year. The M-1, the replacement for the M-60, had
some early production problems, and, as a result, purchases declined in
1980 and 1981. When these production problems were resolved, M-1
deliveries surged in 1982 and 1983. Delivery of new Bradley fighting
vehicle systems and a variety of noncombat vehicles also contributed to
the recent large increases.



Table: 1.–National Defense Appropriations



Table: 2.–National Defense Purchases of Goods and Services,
1972-83



Table: 3.–Change in Constant-Dollar National Defense Purchases of
Goods and Services



Table: 4.–Composition of Constant-Dollar National Defense
Purchases of Goods and Services



Photo: CHART 1 Constant-Dollar GNP and National Defense Purchases
of Goods and Services: Percent Change From Preceding Year



Photo: CHART 2 National Defense Purchases of Goods and Services as
a Percent of Federal Government Expenditures, NIPA Basis



Photo: CHART 3 Composition of Constant-Dollar National Defense
Purchases of Goods and Services