More Military Spending Could Actually Save The U.S. Money
I was in a meeting of the National Economic Council staff in the West Wing of the White House on Sept. 11, 2001, when the planes hit the World Trade Center. Not only did terrorists destroy the twin towers, damage the Pentagon and kill 3,000 people, but they also forced the U.S. to spend additional billions on defense, swelling the deficit.
In 2001, the federal budget had a $128 billion surplus, about 1% of gross domestic product. The National Economic Council could talk about how to use the surplus to benefit the economy, such as putting Social Security on a path to financial solvency, or lowering taxes. But a recession that began in March 2001 was exacerbated by the 9/11 attacks.
Fast forward to 2014, when our nation's debt is $18 trillion. Social Security and Medicare consume 40 cents of every dollar spent by the federal government, a proportion expected only to increase in the years ahead. Our fiscal situation looks dire now, but it will be worse if another 9/11 comes along and we must increase military spending to defend ourselves.
We are, shortsightedly, reducing military spending that can save lives, but we are not curbing major entitlement programs that are the main driver of our deficit. Nor are we streamlining regulations to encourage economic growth. Instead, we are satisfied with an economy that plods along at 2% GDP growth, and a labor force participation rate that has shrunk to 1978 levels.
In the six months following the attacks, employment fell by 1.3 million. The travel industry was severely affected because people did not feel confident about flying. American Airlines AAL, -0.01% stock dropped 39% on Sept. 17, the first day trading resumed. United Airlines UAL, +0.18% saw a 42% decline. Once the first week of trading was over, the Dow Jones Industrial Average had tumbled 14%. The market set records for both largest point losses in a week and in a single trading day, since broken in 2008.
The attacks forced the United States to increase defense spending. By 2004, the federal deficit was $412 billion, 3.4% of GDP, and defense spending had increased by almost 50%.
The Transportation Security Administration, authorized by Congress in November 2001, now has more than 55,600 full-time-equivalent employees, a substantial increase from the original goal of 15,000. Now there are 4,000 employees just at the D.C. headquarters. Its budget has grown to over $7 billion. About $2 billion of this comes from security fees charged to airlines and passengers.
Those measures have helped to prevent another attack of that magnitude on U.S. soil. With the anniversary of 9/11, we need to ask ourselves whether we are adequately prepared.
With new terrorist organizations such as ISIS and Libyan Dawn increasing in power, and ISIS murdering thousands of people and beheading journalists on video, we need to be prepared for new attacks. Last week James O'Keefe, founder of Project Veritas, issued a video showing how someone dressed as an ISIS terrorist and carrying packages of Ricin could come to the U.S. across Lake Erie from Canada without any questions.
In order to defeat ISIS, our military needs resources. Although America is responsible for a third of world military spending, three times that of the second-place China, our military budget is on a downward path. In real 2014 dollars, annual spending peaked at $751 billion in 2011, and is projected to be $594 this year. Then, in its latest budget report, CBO projects defense spending will continue to gradually decline in real terms (2014 dollars) to $571 billion in 2024. As a percent of GDP, military spending was 4.7% in 2010, its peak, 3.5% of GDP in 2014; and projected to drop to 2.7% of GDP in 2024.
To take a stand against ISIS, this trend has to be reversed, increasing the budget deficit. If defense spending were to stay at 2012 levels of $694 billion in real terms through 2024, the 2024 deficit would increase from 3.6% of GDP to 4.2%, unless Congress managed to make cuts elsewhere or put in policies to increase GDP growth.
In “Mayday: The Decline of American Naval Supremacy,” Hudson Institute senior fellow Seth Cropsey has written persuasively about the damage our declining defense budget has inflicted on the U.S. Navy. In a telephone conversation, he told me: “Getting rid of ISIS is not like cleaning up dust bunnies in a kitchen. It takes resources. The budget squeeze for sequestration is directly related to the administration's decision to reduce the carrier presence in the Persian Gulf from two to one.” If the administration were serious about taking on ISIS, the Navy would dispatch a second aircraft carrier to the region.
In addition, Cropsey said, the Navy's decision to reduce the attack submarine fleet from 55 to 41 by 2028 has substantial implications for whether we are going to remain a global power. The shrinkage is all the more inopportune because stealth is becoming a more valuable commodity.
In his address to the nation Wednesday night, President Obama did not mention increasing spending. He said he was sending another 475 service members to Iraq, working with allies, and chairing a meeting of the UN Security Council to mobilize international support. That is not enough to defeat ISIS.
Another attack would not only be costly from a military standpoint, but it would slow the economy and reduce consumer confidence.
Possibilities include a bioterrorism outbreak or other downed airliners. Islamic terrorists from a group called Libyan Dawn seized 11 passenger aircraft from the airport at Tripoli, and the U.K Daily Mail posted photographs of the terrorists in front of the aircraft. Military spending is an investment that could prevent another attack and another recession.
As we honor the memories of those who died on Sept. 11, 2001, we owe it to ourselves to prepare for future attacks. That means a strong defense and a budget that leaves us equipped for emergencies. Otherwise, another 9/11 could wreck the economy.
This piece originally appeared in WSJ's Marketwatch
This piece originally appeared in WSJ's MarketWatch