The American military budget inflation is a difficult question, involving diverse political, economic, and institutional factors. The rate of military inflation in 1940 was on an advancing track compared to the non-military governmental sector and with respect to the entire economy (Fordham, 2003). With such regard, trying to figure out the exact cost of military spending through time becomes fairly challenging. In the seminal work “The Political and Economic Sources of Inflation in the American Military Budget” by Benjamin O. Fordham, reasons for the existence of that reality are listed as follows: public sector inflation induced by labor intensity, the cyclic nature of military spending, and the effect of the Pentagon on deflator series. This article thus consolidates Fordham’s work and relevant literature to serve as a basis from which to understand inflation in the U.S. military budget.

Public-Sector Inflation and the Military: Baumol’s Disease

Another more general explanation for the rise of public-sector inflation is relative inefficiency within labor-intensive government services compared with the capital-intensive private sector having greater gains in productivity. This process is often referred to as “Baumol’s disease” wherein the private sector wages rise due to improvements in productivity. The public sector has to do so to compete for workers, even though productivity does not rise (Baumol, 1967). This has led to higher and higher inflation rates in public-sector services, such as education and law enforcement (Baumol & Bowen, 1966; Spann, 1977).

However, Fordham 2003 finds this explanation applies only weakly to military inflation. Military goods and services are not necessarily labor-intensive so the relevance of Baumol’s disease is limited. Military wages did go up in the post-draft era, especially from the 1980s onwards, but the military largely escaped the effects of Baumol’s disease through substitution of labour with capital. For example, even as military real wages rose during the 1980s, personnel numbers plummeted — sharp decline consistent with the substitution of capital-intensive technologies, such as advanced weapon systems, to compensate for increased labor costs (Fordham, 2003). In Fordham’s study, it points to the increase in real wages for the military after the abolition of the draft, but this trend was then reversed as the Pentagon moved more resources to durable goods and capital equipment, making it less labor-intensive (Fordham, 2003).

Even though Baumol’s disease could account for the inflation in many governmental sectors, Fordham 2003 shows that it can explain only part of the inflation around military spending. Instead, the cyclical pattern of military spending -pre-determined by political as well as economic factors- gives a more convincing explanation.

The Cyclical Nature of Military Spending and Its Inflationary Effects

One of the key reasons for inflation in the military budget is due to its tendency to behave cyclically, as has often been observed during wars. In the words of Fordham (2003), “rapid increases in military spending, largely prompted by war, create inflationary pressures.” These are invariably followed by a slower decline, which only translates into the fact that prices do not respond downward after wars are over. This, therefore means a high long-run inflation, as suggested (Fordham, 2003). Apparently, that is the case when one looks at the cycles of World War II, the Korean War, the Vietnam War, and the military build-up under Reagan in the 1980s.

From the Fordham study, it provides the average annual inflation rate for military spending in the period covering 1941 and 2001 at 4.92%, indicating a relative higher percentage compared to that of non-military government expenditure at 4.46 %, and the overall rate of economic inflation is at 3.97% (Fordham, 2003). According to experience, inflationary levels always register a sudden hike during wartime and then gradually subside afterwards; this explains why the inflationary levels have a sustained deviation level. Political pressures which often come about at the end of hostilities-for instance, the need to give some pay raises to returning veterans or the need to cushion the defense industries-often hamper efforts to make steep reductions in military spending and its equivalent prices, according to Fordham, 2003.

One of the identifying elements of spiral inflation is the relative inelasticity of the supplies of military goods and services. Military hardware frequently depends upon rare and very specific resources, including types of metals and high technology in electronic equipment. Thus production is hard to expand quickly. As military spending increases rapidly, or more importantly, as a percentage of the GDP, there is upward pressure on the costs of these goods, resulting in the creation of inflationary bottlenecks (DeGrasse, 1983). The government of the United States, for example, had imposed price controls on such strategic commodities as steel during World War II and the Korean War with the view to dampen inflationary tendencies. The military’s inflation nevertheless remained high during those wars (Fordham, 2003).

The Calculation of Military Price Indices and Deflator Series

Fordham (2003) goes on to consider the function that the deflator series performs when working out real military spending and its shaping the interpretation of military inflation. The military price index does differ greatly from the price indices the government has, for instance those of Consumer Price Index (CPI) and Producer Price Index (PPI). Though both the CPI and PPI use a fixed basket to measure changing price levels over time, in the case of the military price index the calculating formula incorporates variable weights which are recalibrated each year to reflect the relative structure of military outlays correctly (Boskin et al., 1998). This leaves room for flexibility regarding the changes in resource allocation for defense spending. It usually understates true pressures coming from inflation as it fails to take opportunity costs into account completely.

One is worried, as Fordham 2003 pointed out, that this method of calculation in military inflation masks the full increase in price of military goods and services. For example, if military prices in the United States had increased at the same rate as the rest of government since 1940, it would have saved approximately $96 billion by 2003. One was the variable-weight method used for defense budgeting and accounting for military inflation. It gave, at best, a very conservative measure of inflation, implying that actual costs were likely much higher than this.

Technological Advancements and Military Inflation

Another third layer of complexity in military inflation measurement arises from technological development. Technological advance improves the quality of military equipment, which may make higher expenditures indicative of improved capabilities rather than of inflation. For example, Fordham (2003) summarizes that BEA controls its military price index for quality improvements-suggesting that higher spending reflecting superior capabilities is not, in fact, inflationary (BEA 1979). In other words, the BEA will accommodate an improved agility that a new fighter jet exhibits in one single price increase, which diminishes the effect of productivity growth on the inflation rate.

These changes notwithstanding, inflationary pressures from within the military sector remain high. This indicates that the rising costs of military goods and services are not only a product of technical advance; they also emerge from endogenous structural problems within the defense procurement system itself (Fordham, 2003). In addition to this, increasing costs for developing the newer weapons have risen more rapidly than the general inflation rate applied across military commodities, thereby exacerbating the overall inflationary burden on the defense budget as a whole (Kennedy, 1983).

Political Influence and the Pentagon’s Organizational Interests

One final aspect that can contribute to inflation in defense, provided by Fordham, 2003, relates to the influence that DoD has on the chain of deflators. Specifically, according to Fordham, defense personnel would have the incentive to report larger rates of deflation so that larger nominal increases in budgetary allocation look bigger Fordham, 2003. This source of distortion may be observed in the first chain of deflators for military spending for the years 1972–1977. Fordham’s study shows that military inflation over this period exceeded the model’s predictions by an average 2.2 percentage points per year (Fordham, 2003). This would suggest that focusing on acquiring higher budgets may have led to Pentagon estimates of inflation being overstated during times of fiscal constraint.

However, as Fordham (2003) says, although real direct political tampering with the deflator series is hard to establish, implicit biases by defense officials could have influenced the data. Given these high stakes for the period of the early 1970s in declining military budgets in a time of severe inflationary pressures:. Since defense officials provided much of the price data used in the Bureau of Economic Analysis’s deflator series, a high relative price bias may have been unintentionally introduced in the reported inflation numbers by these officials (Fordham, 2003).

Conclusion

This is an inflationary dynamic of the US military budget, arising from complex interrelation of political, economic, and institutional factors. Baumol’s disease explains only part of public sector inflation, and its applicability is rather limited since the Pentagon substitutes labor with capital. In addition, there is the extension of the bias through cyclical military spending, especially in war time, with price hikes not entirely neutralized by cuts after the war. Finally, but probably most importantly, is the political motives and organizational agendas within the Pentagon that make sure this military goods and service inflationary spiral goes on unabated. The variable-weight deflator used to measure techniques for calculating the prices for the military biases the result toward understating the actual extent of military-oriented inflation.

SOURCES As military inflation of the United States has continued to spiral for the past decades, the sources of military inflation remain an imperative portion of comprehension by scholars and policy analysts. It is from this that the Fordham research area calls for much more in-depth research on the exact economic and political causes relating to military inflation and implications on future military spending/fiscal trade-offs.

References

Baumol, W. (1967). Macroeconomics of unbalanced growth: The anatomy of urban crisis. The American Economic Review, 57(3), 415–426.

Baumol, W., & Bowen, W. (1966). Performing arts: The economic dilemma. Cambridge, MA: MIT Press.

Bureau of Economic Analysis (BEA). (1979). Price changes of defense purchases of the United States. Washington, DC: U.S. Department of Commerce.

Z., & Jorgenson, D. W. (1998). Consumer prices, the Consumer Price Index, and the cost of living. Journal of Economic Perspectives, 12(1), 3–26.

DeGrasse, R. W. (1983). Military expansion, economic decline. New York: Council on Economic Priorities.

Fordham, B. O. (2003). The political and economic sources of inflation in the American military budget. The Journal of Conflict Resolution, 47(5), 574–593.

Kennedy, G. (1983). Defense economics. New York: St. Martin’s Press.

Spann, R. M. (1977). Rates of productivity change and the growth of state and local governmental expenditures. In T. E. Borcherding (Ed.), Budgets and bureaucrats. Durham, NC: Duke University Press.