BUDGET POLICY, DEFICITS, AND DEFENSE:

A FISCAL FRAMEWORK FOR DEFENSE PLANNING

Dennis S. Ippolito

June 2005

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FOREWORD

 The transformation of the U.S. military is entering a critical 

stage. The Department of Defense is initiating the most far-reaching 

changes in its worldwide bases and deployments since the 1950s. 

Parallel efforts to consolidate domestic bases and defense facilities 

are likely as well, now that the 2005 Base Realignment and Closure 

Commission has begun its work. And the Quadrennial Defense 

Review currently underway could have a profound impact on the 

size and shape of future forces.

 As defense planners grapple with the pace and direction of military 

transformation, the budgetary context of strategic decisionmaking is 

becoming much less favorable. In this monograph, Dennis S. Ippolito 

focuses on the spending policy, deficit and debt, and retirement 

and healthcare entitlement dynamics that will make it difficult, if 

not impossible, to fund current defense plans. Transformational 

strategies, he concludes, must be adjusted to accomodate lower 

and more volatile future spending levels. The most important 

adjustment is to shift spending priorities to readiness and traditional 

modernization needs that are more urgent in terms of capabilities 

than transformational technologies, as well as more predictable and 

controllable in terms of costs.

DOUGLAS C. LOVELACE, JR.

Director

Strategic Studies Institute 
iv

BIOGRAPHICAL SKETCH OF THE AUTHOR

DENNIS S. IPPOLITO is the Eugene McElvaney Professor of Political 

Science and Chairman of the Department of Political Science at 

Southern Methodist University (SMU). Prior to joining the faculty at 

SMU in 1982, he taught at the University of Virginia and at Emory 

University. Professor Ippolito’s recent books on the federal budget 

include Why Budgets Matter: Budget Policy and American Politics;Budget 

Policy and the Future of Defense; and Uncertain Legacies: Federal Budget 

Policy from Roosevelt through Reagan. He presented annual lectures at 

the U.S. Army War College from 1990-2003.
v

SUMMARY

 Since the war on terrorism began in earnest after September 11, 

2001, defense budgets have risen sharply. It would be reassuring to 

believe that the resources to fight this war will continue to be made 

available, regardless of its cost or duration, and that Congress and 

the President will at the same time maintain the broader military 

capabilities needed to protect the nation’s security interests. Fiscal 

realities, however, have often compromised military capabilities 

in the past and may do so again in the future. The short-term 

threat to defense is tied to deficit control. Reducing the very large 

deficits projected for the next several years will require cutbacks 

in discretionary spending. As a result, defense will be competing 

with domestic programs for a shrinking share of the budget, and 

the politics of this competition could prove highly unfavorable for 

defense.

 Over the longer term, the budget policy outlook is clearly 

negative. Like other advanced democracies, the United States must 

find a way to reform its social welfare system in response to an aging 

population. Unless retirement and healthcare entitlements for the 

elderly are retrenched significantly, these programs will generate 

enormous spending pressures, making it more and more difficult 

to support defense as well as other national needs. And since the 

defense commitments of the United States are unique, the fiscal 

challenge associated with welfare state modernization is especially 

pressing.

 The purpose of this monograph, then, is to present a fiscal 

policy framework that is likely to shape current and future defense 

funding levels. This framework is not immutable, but it does mean 

that defense planners need to take into account the ways in which 

domestic policy commitments, budget policy trends, and budgetary 

politics affect defense. In particular, current defense plans contain 

optimistic, and arguably unrealistic, assumptions about long-term 

funding for the core defense budget. Recent Future Years Defense 

Programs have projected real (inflation-adjusted) spending levels 

well above Cold War peaks and assumed that these levels, unlike 

the Cold War peaks, can be sustained indefinitely. However, with 
vi

unusually severe budgetary constraints in place for the foreseeable 

future, defense spending levels will likely be lower and more 

volatile than current planning envisions. The challenge for strategic 

planners, then, is to impose clear priorities on a defense budget 

that cannot accommodate all they deem desirable. These priorities 

must also be prudent, which in a wartime context means protecting 

funding for the urgent and the necessary―readiness and traditional 

modernization―against the highly uncertain potential benefits of 

transformational modernization.
1

BUDGET POLICY, DEFICITS, AND DEFENSE:

A FISCAL FRAMEWORK FOR DEFENSE PLANNING

As the duties of superintending the national defense and of securing the 

public peace against foreign or domestic violence involve a provision for 

casualties and dangers to which no possible limits can be assigned, the 

power of making that provision ought to know no other bounds than the 

exigencies of the nation and the resources of the community.

 Alexander Hamilton, Federalist No. 31

INTRODUCTION

 Annual congressional debates about the President’s defense 

program focus primarily on immediate military requirements, 

and this focus necessarily tightens during wartime and other 

emergencies. Many decisions about weapons systems, force levels 

and compensation, and other defense programs, however, have 

long-term implications with respect to the level of budgetary 

resources needed to support the nation’s military. The Department 

of Defense’s (DoD) Future Years Defense Program (FYDP) offers 

important guidance about these long-term effects by providing 5-6 

year cost estimates for future defense programs and priorities.

 Recent FYDPs have indicated that the core defense budget 

will require continued real increases over the next several years. 

Under the FY 2005 FYDP, for example, defense spending authority 

(excluding the supplemental appropriations that have been used 

to fund military operations in Iraq and Afghanistan) is projected to 

increase from $402 billion in 2005 to $455 in 2009.1

 According to the 

Congressional Budget Office (CBO), extended costs would be still 

higher, with constant-dollar spending averaging $485 billion from 

2010-22.2

 Defense spending levels would have to be substantially higher 

to accommodate what the CBO terms “cost risk”―future military 

commitments equivalent to the Afghanistan, Iraq, and global war on 

terror engagements along with less optimistic (and more historicallybased) cost assumptions about weapons programs. Total cost risk for 
2

2005-09 added to core defense budget estimates raises average annual 

spending to nearly $500 billion in constant dollars; the projection for 

2010-22 is more than $550 billion.3 Both the level and the duration 

of these defense spending commitments would be unprecedented 

historically and politically problematical.

 Moreover, fiscal realities will make it much more difficult to 

protect defense against competing political needs. Budget deficits 

over the past 3 years (FY 2002-04) have totaled nearly $950 billion; 

projected deficits for FY 2005-09 are approximately $1.4 trillion.4

Any serious effort to reduce these deficits requires tight control over 

discretionary spending, forcing defense to compete with domestic 

programs for a shrinking share of the budget. The long-term budget 

outlook is even more unfavorable, since entitlement financing 

pressures will further reduce discretionary spending margins and 

exacerbate the defense-domestic program competition.

 The strategic and policy challenges facing defense planners today 

cannot be divorced from fiscal considerations. It might be helpful, 

then, to complement their strategic and policy debates with some 

basic facts about the budget policy framework that determines, over 

time, the budgetary resources available for defense. In particular, 

long-term trends in budget policy have enormous implications for 

current and future defense budgets. This monograph will focus on 

several of these trends―namely, the changing level and composition 

of spending policy; the deficit and debt dynamic in recent fiscal 

policy; and the long-term fiscal impact of retirement and healthcare 

entitlement programs.

SPENDING POLICY: FROM DEFENSE TO SOCIAL WELFARE

 The spending side of the budget defines the size, roles, and 

priorities of the federal government, and the history of modern 

spending policy reveals important changes in the federal policy 

agenda. The New Deal and Cold War took the federal budget to an 

entirely new level in terms of relative size and set in motion what 

has become an ongoing competition between defense and domestic 

needs. During the 1920s, for example, federal spending accounted 

for only about 3 percent of gross domestic product (GDP).5

 With 

the New Deal, however, the size of government roughly tripled―
3

to approximately 10 percent of GDP by the late 1930s. World War 

II then generated the highest level of spending in U.S. history, 

with outlay-GDP levels above 40 percent from 1943-45. Although 

postwar spending plummeted from this peak, the renewed defense 

requirements created by the Cold War and the expanded domestic 

role established by the New Deal brought spending to the 20 percent 

(+/-) of GDP range where it has remained for more than 50 years (see 

Table 1). This relatively stable level of total spending, however, masks 

a major shift in composition from defense to domestic programs over 

the past 4 decades.

Fiscal Years Average Annual Level 

 1950-1959 17.6% 

 1960-1969 18.6 

 1970-1979 20.0 

 1980-1989 22.1 

 1990-1999 20.7 

 2000-2009 (est.)* 19.4 

*FY 2000-03 are actual; 2004-09 are estimates. 

Source: Historical Tables, Budget of the United States Government, 

Fiscal Year 2005, Washington, DC: U.S. Government Printing 

Office, 2004, pp. 23-24.

Table 1. Federal Outlays as a Percentage of GDP, 

Fiscal Years 1950-2009.

 During the Korean War, defense spending climbed to almost 

70 percent of total outlays and 14 percent of GDP. Postwar defense 

levels remained high, with peacetime defense budgets during the 

Eisenhower administration averaging more than 10 percent of 

GDP. When John F. Kennedy took office in 1961, defense was still 

more than half the total budget. Since the early 1960s, however, the 

defense budget share and GDP share have fallen dramatically, while 

domestic spending has moved steadily upward (see Figure 1). The 

upward shift in entitlement programs has been especially steep. 

Social Security, Medicare, and Medicaid are the largest and fastestgrowing of these entitlements, with their combined outlays having 
4

risen to more than 8 percent of GDP currently, and even higher 

levels are projected for future years. Taking all entitlement programs 

together, outlay-GDP levels have risen by 6 percentage points since 

the early 1960s. The corresponding decline in defense-GDP levels 

has been approximately the same.

Figure 1. Federal Outlays, FY 1962-2001 (as a percentage of GDP).

 The welfare shift, then, describes the changed composition of 

spending policy. The greatly increased weight of social welfare 

entitlements is a clear indication of the federal government’s longterm policy and political priorities. In addition, budgets dominated 

by entitlements are less flexible and controllable in the short term. The 

control points of the budget process are not well-suited for dealing 

with the “automatic” spending that funds entitlement programs, 

and the widespread political support for retirement and healthcare 

entitlements makes it even more difficult to control spending. As a 

result, the welfare shift has changed the way policymakers adjust 

budgets to fund defense buildups and wars.

Source: Long-Range Fiscal Policy Brief: A 125-Year Picture of the Federal 

Government’s Share of the Economy, 1950-2075, Washington, DC: U.S. 

Congressional Budget Office, 2002, p. 2.
5

Appropriations and Controllability.

 The budget process distinguishes between two broad categories 

of spending―discretionary spending and mandatory, or direct, 

spending―with the balance between them having changed 

significantly over time. Several decades ago, discretionary spending 

(primarily defense) accounted for two-thirds of total outlays (see 

Figure 2). By the late 1990s, this share had been cut almost in half. 

The mandatory portion of the budget, which includes entitlement 

programs and net interest outlays, has averaged well above 60 

percent since the early 1990s, with a ratio of programmatic outlays 

to net interest outlays of approximately 4:1.6

Source: Historical Tables, Budget of the United States Government, 

Fiscal Year 2005, Washington, DC: U.S. Government Printing 

Office, 2004, p. 127.

Figure 2. Discretionary vs. Mandatory Spending as a Percentage 

of Total Outlays, Fiscal Years 1962-2004.

 The change in discretionary vs. mandatory spending budget 

shares narrows the reach of the appropriations process in Congress, 

which is an effective control point only for discretionary programs. 

There are 13 regular appropriations bills that must be enacted each 

year (see Table 2), with two of these―Military Construction and DoD―
6

Agriculture, Rural Development, Food and Drug Administration, and 

 Related Agencies Appropriations Bill [$16.8]

 •Department of Agriculture

 •Department of Health and Human Services

Departments of Commerce, Justice, and State, the Judiciary, and Related 

 Agencies Appropriations Bill [$37.6]

 •Department of Commerce

 •Department of Justice

 •Department of State

 •The Judiciary

 •Small Business Administration

Department of Defense Appropriations Act [$366.4]

District of Columbia Appropriations Bill [$0.5]

Energy and Water Development Appropriations Act [$27.3]

 •Department of Energy

 •Corps of Engineers

 •Department of the Interior, Bureau of Reclamation

Foreign Operations, Export Financing, and Related Programs 

 Appropriations Bill [$17.5]

 •Department of Defense

 •Department of State

 •Agency for International Development

 •Department of Agriculture

Department of Homeland Security Appropriations Act [$29.2]

Department of the Interior and Related Agencies Appropriations Act [$19.5]

 •Department of the Interior, excluding of Bureau of Reclamation

 •Department of Agriculture

 •Department of Energy

 •Department of Education

 •Department of Health and Human Services

Departments of Labor, Health and Human Services, and Education and 

 Related Agencies Appropriations Bill [$139.0]

 •Department of Labor

 •Department of Health and Human Services

 •Department of Education

Legislative Branch Appropriations Act [$3.5]

Military Construction Appropriations Act [$9.3]

Departments of Transportation and Treasury, and Independent Agencies 

 Appropriations Bill [$28.4]

 •All departments, agencies, and corporations

Departments of Veterans Affairs, Housing and Urban Development, and 

 Independent Agencies [$90.8]

Source: Appropriations bill listing is from Budget of the United States 

Government, Fiscal Year 2005: Appendix, Washington, DC: U.S. Government 

Printing Office, 2004, pp. 3-4. FY 2004 enacted budget authority figures are 

from Congressional Quarterly Weekly Report, Vol. 62, June 5, 2004, p. 1324.

Table 2. Appropriations Bills for FY 2005, Principal Departments 

and Agencies,* and Enacted Budget Authority for FY 2004

(in billions of dollars)
7

* A document called the Budget Appendix provides the President’s proposals 

for various appropriations bills. The Appendix “includes the language proposed 

for enactment by Congress on each item that requires congressional action in an 

appropriations bill. It also contains the language proposed for the general provisions 

of appropriations acts that apply to entire agencies or groups of agencies.”

providing the bulk of defense spending authority. For defense, as 

well as the domestic and international programs funded through 

annual appropriations, Congress and the President must agree 

on all future spending. And for defense, most programs are also 

covered by annual authorizations; Congress and the President must 

act to authorize future spending and then to appropriate funds for 

programs and activities that have been authorized. For discretionary 

spending, and especially for its defense component, comprehensive 

control over spending is exercised through the appropriations 

process.

 For mandatory spending, the situation is quite different. 

Spending for mandatory programs, i.e., entitlements, is determined 

by the eligibility criteria and benefit levels set forth in entitlement 

authorizations and other authorizations of direct spending. With 

mandatory spending, some programs such as Social Security are 

funded by permanent, indefinite appropriations and bypass the 

annual appropriations process entirely. Others are funded through 

annual appropriations, but the amounts to be spent are controlled 

by authorization statutes. Unless these statutes are changed, 

appropriations must be provided to fund all of the benefits to which 

recipients are entitled by law. (Net interest outlays are principally 

determined by the size of the publicly-held debt, its composition in 

terms of maturities, and interest rates.7)

 It is more difficult to exercise spending control over mandatory 

programs than over discretionary programs for several reasons. 

First, the institutional leverage over mandatory programs is weaker. 

Majorities in the House and Senate must agree on funding levels for 

discretionary programs, and the President must agree as well. With 

mandatory programs, majorities must be put together to change 

existing law (and previous commitments), or spending will continue 

at predetermined levels. Deadlock on discretionary spending means 
8

no funding for disputed programs, whereas deadlock over an 

entitlement policy change means funding will continue indefinitely.

 A second distinction affecting controllability involves determinants of spending growth. Mandatory programs are directly 

affected by economic and demographic factors that can make 

spending growth volatile. Social Security, for example, serves a 

beneficiary population that is going to continue to grow rapidly for the 

foreseeable future. Moreover, the retirement benefits this beneficiary 

population receives are indexed by law to inflation rates through 

annual cost-of-living-adjustments (COLAs). Many entitlements have 

similar provisions to protect the real value of transfer payments and 

of in-kind benefits such as medical care. Medicare reimbursement 

rates are adjusted automatically for changes in healthcare costs, and 

federal payments to the states for Medicaid services are governed 

by a statutory formula under which the federal government’s costs 

rise when the states increase benefits in response to healthcare 

cost inflation. In addition, spending for these and other healthcare 

programs escalates as beneficiaries utilize more, and more costly, 

procedures on a per capita basis.

 With discretionary programs, policymakers have considerably 

greater leverage over spending growth. The President and Congress, 

for example, have kept civilian agency employment in the executive 

branch at approximately the same level for the past 3 decades.8

They have also shifted the balance between defense and domestic 

programs several times. During the 1970s, constant dollar spending 

for defense was cut by almost 30 percent, while real discretionary 

outlays for domestic programs were increased by more than 75 

percent. President Ronald W. Reagan’s defense buildup during 

the 1980s then boosted defense spending by nearly 50 percent in 

constant dollars, with discretionary domestic outlays dropping 

by approximately 15 percent. During the 1990s, constant dollar 

spending for all discretionary programs fell by 10 percent, but 

defense absorbed a much larger cut, making it possible for Congress 

and the Clinton administration to boost domestic spending. These 

shifts demonstrate how policymakers can use the fixed schedule of 

policy decisions each year to effect significant changes in the level 

and composition of discretionary spending.
9

Statutory Budget Controls.

 During the 1990s, multiyear budget controls were used to 

reduce deficits. These controls, which are now being proposed for 

the same purpose, reinforce the controllability differences between 

discretionary and mandatory spending. The statutory controls 

applied to discretionary programs are caps, or limits, on spending 

that Congress and the President cannot exceed. For mandatory 

programs, the control is termed PAYGO (or pay-as-you-go), which 

governs legislative actions that increase entitlement benefits but does 

not set actual spending levels.

 These controls were first used in the 1990 Omnibus Budget 

Reconciliation Act (OBRA 1990). Title XIII of this measure established 

discretionary spending limits for fiscal years 1991-95 and provided 

for across-the-board spending cuts (known as sequestration) if 

regular and supplemental appropriations bills for any of these 

fiscal years exceeded the spending cap.9 The PAYGO control, by 

comparison, covered any new legislation that increased entitlement 

benefits compared to existing law or decreased revenues compared 

to existing law. For each year covered by OBRA 1990, combined 

revenue and entitlement legislative changes had to be deficit-neutral; 

if not, sequestration was to be applied to entitlement programs.

 The enforcement of discretionary spending caps is relatively 

straightforward. The House and Senate Appropriations Committees 

receive an allocation of discretionary spending, which they 

then distribute among their appropriations subcommittees. The 

appropriations bills reported out by these subcommittees and then 

by the full committees cannot exceed these allocations; and total 

allocations, in turn, must be within the allowable cap. So unless 

Congress deliberately waives or circumvents the statutory limits on 

discretionary spending, appropriated amounts and actual spending 

will be within predetermined totals. With entitlement programs, the 

correspondence between budgeted amounts and actual spending 

can vary a great deal, since the PAYGO restriction only constrains 

policy changes that raise entitlement spending above baseline levels. 

When spending exceeds baseline levels because economic conditions 

or other nonlegislative factors automatically raise benefits, PAYGO 

controls do not apply.
10

 The discretionary caps and PAYGO controls established in 1990 

were extended for 5 years in 1993 and again in 1997. Between 1991 

and 1998, total discretionary spending increased by less than $20 

billion, to just over $550 billion. Over this same period, with PAYGO 

controls in place, spending for mandatory programs grew from $635 

billion to over $900 billion. While PAYGO had restrained entitlement 

policy changes, mandatory spending nevertheless had risen by more 

than 40 percent as a result of growing numbers of beneficiaries and 

higher benefits mandated by existing law.

 The composition of spending policy today makes it difficult 

for policymakers to control spending growth. The budget process 

does not require Congress and the President to make decisions each 

year on mandatory spending, and the factors that drive mandatory 

spending growth are not incorporated easily into multiyear budget 

controls. Budgets dominated by mandatory programs are less flexible, 

less predictable, and less controllable with respect to legislative 

procedures and processes, and the politics of entitlement programs 

adds an additional complication. Major retirement and healthcare 

entitlements have enormous constituencies, and there is a strong 

moral as well as legal claim on the benefits these programs provide. 

These political realities have made budgets even less flexible when 

tradeoffs from domestic programs to defense are required. Thus, one 

important implication of the welfare shift is the obstacle it presents 

to adjusting spending policy even during wartime.

Wartime Finance and Peace Dividends.

 During World War II and the Korean War, defense needs accounted 

for most of the growth in federal spending. In both cases, domestic 

spending, for social welfare entitlements as well as for discretionary 

programs, was tightly controlled (see Table 3). Afterward, defense 

budgets were scaled back, and domestic programs were expanded. 

This relationship between wartime finance and postwar peace 

dividends was the standard approach to budget policy, a “guns 

vs. butter” tradeoff that was feasible given the prevailing political 

consensus and low levels of mandatory spending during the 1940s 

and 1950s.
11

World War II

National Defense Payments for Individuals

 Constant Percentage Constant Percentage

Fiscal (FY 2000) Percentage of Total (FY 2000) Percentage of Total 

Year Dollars of GDP Outlays Dollars of GDP Outlays

1940 $19.9 1.7% 17.5% $17.8 1.7% 17.5% 

1941 64.7 5.6 47.1 18.0 1.5 12.7

1942 216.3 17.8 73.0 16.7 1.2 5.0

1943 526.0 37.0 84.9 14.1 0.9 2.1

1944 684.0 37.8 86.7 13.8 0.8 1.9

1945 774.6 37.5 89.5 16.8 1.0 2.4

1946 405.7 19.2 77.3 40.9 2.5 10.3

1947 112.6 5.5 37.1 60.6 3.9 26.2

1948 86.5 3.5 30.6 55.4 3.5 30.4

Korean War

National Defense Payments for Individuals

Constant Percentage Constant Percentage 

Fiscal (FY 2000) Percentage of Total (FY 2000) Percentage of Total 

Year Dollars of GDP Outlays Dollars of GDP Outlays

1950 $129.6 5.0% 32.2% $82.5 5.0% 32.1% 

1951 211.7 7.4 51.8 58.8 3.2 22.6

1952 396.6 13.2 68.1 59.8 3.1 16.0

1953 416.1 14.2 69.4 59.4 2.9 14.4

1954 381.9 13.1 69.5 67.5 3.3 17.8

1955 320.1 10.8 62.4 76.5 3.6 20.9 

Source: Historical Tables, Budget of the United States Government, Fiscal Year 

2005, Washington, DC: U.S. Government Printing Office, 2004, pp. 110-111.

Table 3. Wartime Finance, National Defense vs. Payments

for Individuals, World War II and the Korean War 

(in billions of dollars).

 The Vietnam War marked a turning point in wartime finance. 

Even during its early stage, domestic program spending, particularly 

for entitlements, rose at a rate nearly equal to defense. When real 

defense spending began to fall after 1969, domestic programs went 
12

up at a much faster rate (see Table 4). In FY 1965, when the war 

began, constant dollar spending for defense was nearly double social 

welfare spending. In FY 1973, when it ended, the latter was almost 

30 percent higher than defense.

National Defense Payments for Individuals

 Constant Percentage Constant Percentage 

Fiscal (FY 2000) Percentage of Total (FY 2000) Percentage of Total 

Year Dollars of GDP Outlays Dollars of GDP Outlays

1965 $291.8 7.4% 42.8% $149.9 4.8% 28.0% 

1966 322.8 7.7 43.2 164.9 4.9 27.6 

1967 383.3 8.8 45.4 187.2 5.3 27.4 

1968 420.1 9.4 46.0 209.5 5.7 28.0 

1969 400.1 8.7 44.9 230.6 6.0 31.2 

1970 375.1 8.1 41.8 249.1 6.4 33.1 

1971 340.8 7.3 37.5 296.3 7.5 38.3 

1972 310.4 6.7 34.3 329.6 7.9 40.3 

1973 278.6 5.8 31.2 357.3 8.0 42.6 

 

Source: Historical Tables, Budget of the United States Government, Fiscal Year 2005, 

Washington, DC: U.S. Government Printing Office, 2004, pp. 112-113.

Table 4. Wartime Finance, National Defense vs. Payments

for Individuals,Vietnam War (in billions of dollars).

 Discretionary Domestic 

National Defense and Mandatory Programmatic

 Constant Constant

 Fiscal (FY 2000) Percentage (FY 2000) Percentage

 Year Dollars of GDP Dollars of GDP

 1974 $272.1 5.6% $580.7 12.4%

 1975 266.1 5.6 672.5 14.6

 1976 253.4 5.2 722.8 15.1

 1977 251.3 4.9 738.2 14.6

 1978 251.5 4.7 783.4 14.7

 1979 258.4 4.7 783.2 14.1

 1980 268.3 4.9 825.1 15.0

Source: Historical Tables, Budget of the United States Government, Fiscal Year 2005, 

Washington, DC: U.S. Government Printing Office, 2004, pp. 126, 128.

Table 5. The Post-Vietnam Peace Dividend,

National Defense vs. Domestic Spending,

Fiscal Years 1974-80 (in billions of dollars).
13

 Nevertheless, Congress aggressively pushed postwar peace 

dividends, forcing further tradeoffs from defense to domestic 

programs. By FY 1980, defense had dropped to less than onequarter of total spending, the defense-GDP level was under 5 

percent, and constant-dollar defense outlays were well below preVietnam levels (see Table 5). Entitlement spending and discretionary 

domestic outlays, by comparison, climbed sharply during the 1970s, 

funded both by cuts in defense and by much higher levels of total 

spending.

 The Vietnam wartime finance model was mirrored to a 

considerable extent during the Reagan defense buildup and has been 

followed even more faithfully during the current war on terrorism. 

During the 1980s, for example, defense budgets more than doubled; 

in constant dollars, defense outlays went up by almost 50 percent (see 

Table 6). President Reagan managed to offset a portion of the defense 

buildup by forcing reductions in discretionary domestic programs, 

but efforts to retrench entitlements were largely unsuccessful. As a 

result, overall domestic spending increased by more than $100 billion 

in constant dollars between 1980 and 1989, and domestic spendingGDP levels remained relatively high.

 Discretionary Domestic 

 National Defense and Mandatory Programmatic

 Constant Constant 

 Fiscal (FY 2000) Percentage (FY 2000) Percentage 

 Year Dollars of GDP Dollars of GDP 

 1980 $268.3 4.9% $825.1 15.0% 

 1981 283.0 5.2 848.3 15.3 

 1982 308.0 5.8 833.3 15.1 

 1983 330.6 6.1 863.0 15.4 

 1984 334.9 5.9 828.9 13.7 

 1985 357.0 6.1 879.8 14.0 

 1986 381.4 6.2 880.2 13.5 

 1987 387.9 6.1 872.5 13.1 

 1988 393.9 5.8 897.2 12.9 

 1989 399.6 5.6 926.2 12.9

Source: Historical Tables, Budget of the United States Government, Fiscal Year 2005, 

Washington, DC: U.S. Government Printing Office, 2004, pp. 126, 128.

Table 6. The Reagan Defense Buildup, National Defense vs. 

Domestic Spending, Fiscal Years 1980-89 (in billions of dollars).
14

 With the war on terrorism, tradeoffs from domestic programs to 

defense have been virtually nonexistent. The defense-GDP level has 

risen from 3.0 percent to nearly 4 percent since 2000, and constantdollar defense outlays have risen by about $120 billion for the FY 

2000-04 period (see Table 7). The corresponding real growth in 

discretionary domestic programs has been about one-half of the 

defense increase, but social welfare spending has risen by over $225 

billion. Total domestic spending, as a result, has climbed to over 15 

percent of GDP, the highest level in more than 2 decades.

 Discretionary Domestic 

 National Defense and Mandatory Programmatic

 Constant Constant 

 Fiscal (FY 2000) Percentage (FY 2000) Percentage 

 Year Dollars of GDP Dollars of GDP 

 2000 $295.0 3.0% $1,292.2 13.3%

 2001 298.1 3.0 1,345.4 13.7

 2002 331.2 3.4 1,456.3 14.6

 2003 374.5 3.7 1,535.1 15.0

 2004 401.9 3.9 1,601.5 15.0

Source: Historical Tables, Budget of the United States Government, Fiscal Year 2006, 

Washington, DC: U.S. Government Printing Office, 2004, pp. 126, 128.

Table 7. The War on Terrorism,

National Defense vs. Domestic Spending,

Fiscal Years 2000-04 (in billions of dollars).

 Spending policy today is very different than it was during the 

early stages of the Cold War. The budget is now dominated by 

mandatory spending programs, and their domination is likely 

to become even more pronounced in the years ahead. As a result, 

budgets are becoming less controllable and less flexible, the margins 

to support discretionary spending are becoming narrower, and 

the political disadvantages attached to defense are becoming more 

threatening.
15

DEFICITS AND DEBT: CAUSES AND CONSEQUENCES

 The programmatic base for modern spending policy was created 

during the 1930s and 1940s, as the federal government assumed 

greater domestic and national security responsibilities, and the 

domestic part of that base has made it more difficult to keep budgets 

limited and balanced. From 1789-1930, peacetime budgets were 

usually balanced. Since 1930, deficits have been the norm; over the 

past 75 years, budgets have been balanced only a dozen times. As a 

result, the size of the federal debt and its financing costs have grown 

substantially over time. Net interest outlays over the next 5 years are 

expected to nearly double―from approximately $160 billion in 2004 

to about $300 billion in 2009. Concerns about the costs and economic 

effects of rising debt levels create strong pressures to reduce deficits, 

but the politics of spending policy makes it virtually impossible to 

apportion the costs of deficit reduction uniformly across defense 

and domestic programs. Instead, deficit reduction is usually aimed 

at defense and, on the revenue side of the budget, individual income 

taxes.

Background: Wartime Deficits.

 For much of our early history, deficit and debt problems were 

chiefly tied to war. Starting with the Revolutionary War, heavy 

borrowing has been needed to finance most of the nation’s wars (see 

Figure 3). The national debt after the Revolutionary War was $40 

million, and, in 1789, the newly-established federal government also 

assumed responsibility for the wartime debts incurred by the states.10

The federal debt in 1790 has been calculated at approximately 30 

percent of GDP; slightly higher debt levels were in place after the 

Civil War and World War I.

 The costs of financing these wartime debts were substantial. 

Interest payments after the Civil War, for example, were more 

than double the size of the entire federal budget before the war.11

In addition, the prevailing theory of public finance during this 

period dictated that wartime debts should be “extinguished”; 

postwar budgets were kept in surplus so that maturing debt could 

be retired. By the mid-1830s, almost the entire federal debt had been
16

Source: The Long-Term Budget Outlook, Washington, DC: U.S. Congressional 

Budget Office, 2003, p. 16.

Figure 3. Federal Debt as a Percentage of GDP, 1790-2002.

eliminated―the officially reported principal had fallen to less than 

$40,000―and an optimistic Congress authorized a program for 

apportioning future surpluses among the states.12

 Ironically, the period during which the government was free 

of debt did not ensure economic prosperity and thus proved to be 

extremely brief. The “Panic of 1837” and ensuing economic collapse 

wiped out the hoped for surpluses, the Mexican War and periodic 

financial crises created new debt, and the nation entered the Civil 

War with a public debt of $65 million. Five years later, the debt was 

$2.7 billion, and, once again, debt reduction preoccupied Congress. 

A quarter-century of uninterrupted surpluses cut the Civil War debt 

by nearly two-thirds, and debt levels continued to fall until World 

War I. Despite the heavy individual income and corporation income 

taxes levied during that war, deficits in 1918 and 1919 totaled more 

than $22 billion. Total wartime borrowing brought the debt-GDP 

ratio to 40 percent, about the same relative level as the Civil War.
17

 During the 1920s, wartime revenue levels were reduced, but 

spending was tightly controlled, and annual surpluses averaged 

more than $750 million.13 When the Great Depression began, the 

World War I debt had been cut by about one-third. The budget 

moved into deficit in 1931, and additional deficits over the course of 

the decade raised the publicly-held debt to over $40 billion―almost 

45 percent of GDP―in 1940. World War II added $200 billion in new 

borrowing, and the publicly-held debt level in 1946 was by far the 

highest in history―just under 110 percent of GDP.

 Over the next 3 decades, the debt-GDP ratio fell steadily, 

despite the Korean and Vietnam wars and the permanent defense 

budgetary commitments arising from the Cold War. Between 1950 

and 1969, budgets were in deficit for 15 years. Average net deficits 

for this period averaged less than 1 percent of GDP (see Table 8). 

In the Korean War case, tax increases financed much of the defense 

buildup; the peak wartime deficit, in 1953, was only 1.7 percent of 

GDP. During Vietnam, the Johnson administration delayed a tax 

increase until 1968, and the deficit that year was 2.9 percent of GDP. 

A 1-year tax surcharge was then enacted that boosted revenues and 

brought the budget into surplus in FY 1969. At the midpoint of the 

Vietnam War, publicly-held debt was still under 30 percent of GDP.

 

Annual Average Deficits*

 Constant Dollars Percentage

 Fiscal Years Current Dollars (FY 2000) of GDP

 1950-59 (7) $1.8 $10.8 0.4%

 1960-69 (8) 5.7 28.7 0.8

 1970-79 (10) 35.1 99.0 2.1

*For each decade, these figures are average net deficits (i.e., deficits minus 

surpluses). The numbers in parentheses for each fiscal period are the annual 

deficits in each period.

Source: Historical Tables, Budget of the United States Government, Fiscal Year 

2005, Washington, DC: U.S. Government Printing Office, 2004, p. 25.

Table 8. Budget Deficits, 1950-79 (in billions of dollars).
18

Structural Deficits.

 During the 1970s, a different type of deficit began to emerge―

“structural” deficits caused by revenue and spending laws rather 

than wars or economic cycles.14 Defense budgets were cut sharply 

between 1970 and 1979, in terms of real spending levels, GDP shares, 

and budget shares. Total spending during the late 1970s, however, 

averaged almost 21 percent of GDP, the highest level since World 

War II.15 Congress was unwilling to raise taxes to cover the rapidly 

increasing domestic spending that was taking over the budget, and 

the average annual deficit for the 1970s was 2.1 percent of GDP, more 

than five times higher than the average level only 2 decades earlier. 

The public debt-GDP ratio, which had been declining steadily for 

nearly 3 decades, stopped falling in the mid-1970s. For FY 1975-79, 

the public debt-GDP ratio averaged approximately 27 percent, about 

the same level as 1970-74.

 During the 1980s, deficits exploded. The Reagan administration’s 

tax cuts and defense buildup obviously contributed to this 

phenomenon, but the fiscal picture was much more complex. 

Average revenue levels during Reagan’s tenure were, in fact, slightly 

above those of the preceding 3 decades (see Table 9). Moreover, the 

defense-GDP level under Reagan was well below the levels of the 

1950s and 1960s and on a par with the average for the 1970s. The 

average deficits for the 1980s, however, were almost four percent 

of GDP because of the extremely high spending growth for social 

welfare programs.

Annual Average Percentage of GDP

 Fiscal Years Revenues Defense

 1950-59 17.2% 10.4%

 1960-69 17.9 8.7

 1970-79 17.9 5.8

 1980-89 18.3 5.8

Source: Historical Tables, Budget of the United States Government, Fiscal Year 

2005, Washington, DC: U.S. Government Printing Office, 2004, pp. 23-24, 111-

115.

Table 9. Revenue and Defense Levels, 1950-89

(as a percentage of GDP).
19

 Emergency deficits caused by wartime spending are essentially 

self-correcting. The same is true for cyclical deficits resulting from 

economic downturns. Once the economy recovers, revenues rebound 

and spending for income assistance programs falls back to normal 

levels. With structural deficits, however, current policy must be 

changed in order to close the gap between revenue and spending. 

During the Reagan presidency, there were irreconcilable differences 

between the administration and Congress over spending and tax 

policy. Both sides wanted to reduce deficits, but there was a basic 

disagreement over the level of spending at which the budget should 

be balanced. Reagan was committed to returning domestic spendingGDP ratios for discretionary and social welfare programs to pre-Great 

Society levels, but Congress refused to allow retrenchments of this 

magnitude. Reagan, in turn, was unwilling to close the deficit gap 

by raising individual income tax levels. Although Reagan did sign 

tax increases in 1982 and 1983 affecting corporate income taxes and 

payroll taxes, his economic program was focused on lowering, not 

raising, marginal tax rates on individuals. In sum, the budget policy 

impasse of the Reagan years was rooted in Congress’ unwillingness 

to cut the largest component of federal spending―major retirement 

and healthcare entitlements―and Reagan’s refusal to increase the 

largest revenue source―individual income taxes.

From GRH to OBRA.

 Since Reagan and Congress could not agree on policy, balancedbudget advocates decided to experiment with “automatic” deficit 

reduction. The Balanced Budget and Emergency Deficit Control Act 

of 1985 (popularly known as Gramm-Rudman-Hollings [GRH] for 

its Senate sponsors) mandated that the budget be balanced over a 

6-year period. The mechanism for accomplishing this was a series 

of declining deficit ceilings; for each fiscal year, Congress and the 

President were required to enact spending and tax laws that complied 

with a specific deficit ceiling.16 If they failed to do so, GRH provided 

for automatic spending cuts, or sequesters, to reduce the deficit. 

These cuts were to be apportioned between defense and discretionary 

nondefense programs on a roughly equal basis. Major entitlements 

were exempted from sequestration totally (Social Security) or 
20

partially (Medicare and Medicaid); tax policy was entirely outside 

the purview of GRH.

 The supporters of GRH hoped that the threat of across-theboard cuts in essential programs would encourage policymakers 

to negotiate a more balanced and comprehensive deficit-reduction 

program. These hopes never were tested under Reagan, because 

GRH enforcement was blocked by the Supreme Court. Congress was 

forced to redraft GRH in 1987, and the 6-year timetable for balancing 

the budget was extended to 1993.17 The revised deficit ceilings for 

the last 2 years of Reagan’s presidency were sufficiently high to 

negate serious compliance problems. Under Reagan’s successor, 

however, the collision between deficit reduction and painful policy 

adjustments finally occurred.

 President George H. Bush had pledged to protect the Reagan tax 

program and to continue Reagan’s defense modernization program. 

(His famous “no new taxes” pledge was one of the rhetorical high 

points of his acceptance speech to the Republican national convention 

in 1988.) Bush also was strongly committed to deficit reduction, but 

he soon found it impossible to reconcile these different objectives. 

In 1989, Bush had professed optimism about working with the 

Democratic-controlled Congress on a bipartisan deficit-reduction 

program. After months of negotiation, however, very little was 

accomplished. Bush and congressional leaders had agreed on a $28 

billion deficit-reduction goal. Actual deficit savings from FY 1990 

appropriations, sequestration, and budget reconciliation yielded 

about $15 billion, primarily through defense cuts and minor revenue 

increases.

 The Bush administration’s second year was tumultuous. In 

January 1990, the FY 1991 budget was submitted to Congress, and 

the President stated that the $64 billion GRH deficit ceiling for 1991 

and the zero-deficit requirement for 1993 would be achieved without 

major policy adjustments, including tax increases.18 Over the next few 

months, however, the economic outlook deteriorated unexpectedly, 

and deficit projections steadily worsened. The March FY 1991 deficit 

projection was $130 billion, and, by June, the projection had risen 

to $230 billion.19 Under these circumstances, GRH compliance was 

simply not feasible. Neither defense nor nondefense programs could 

absorb the huge sequestration reductions needed to comply with 
21

the deficit ceilings for 1991-1993.20 On May 6, 1990, the President 

called on congressional leaders to negotiate a bipartisan deficitreduction alternative to GRH. Seven weeks later, the formal talks 

began, and a comprehensive 5-year plan was presented to Congress 

in September.

 This initial proposal was fairly balanced in terms of competing 

priorities. The administration accepted a variety of tax increases, but 

these did not affect marginal tax rates on individuals. The Democratic 

leadership agreed to retrenchments in healthcare entitlements 

as an offset to expanded discretionary domestic programs. The 

President’s defense program was reduced, but Democrats agreed to 

prohibit additional transfers from defense to domestic programs for 

at least 3 years. These compromises proved unacceptable, however, 

to conservative Republicans and liberal Democrats in the House, 

who teamed together to defeat the budget agreement when it was 

presented to Congress.

 With Iraq having invaded Kuwait in August, President Bush 

was faced with a serious foreign policy crisis, and he allowed 

congressional Democrats to take the lead on a new budget package. 

They did so, but the revised budget plan and reconciliation bill that 

the House and Senate then approved were very different from the 

original agreement. Of the estimated $480 billion in 5-year deficit 

reduction, nearly one-third was accounted for by revenue increases, 

including higher marginal rates and higher Medicare taxes, along 

with reduced exemptions and deductions aimed at high-income 

taxpayers. Spending cuts in discretionary programs were targeted 

entirely on defense, while major entitlement benefits were preserved 

largely intact. The administration’s budget enforcement initiatives―

discretionary spending caps, PAYGO restrictions on revenue and 

entitlement policy changes, and separate sequestration enforcement 

for violations of the spending caps and PAYGO limits―were included 

in Title XIII of the Omnibus Budget Enforcement Act of 1990 (OBRA 

1990), but congressional Democrats had won key policy victories on 

tax policy and defense.

 The political price that George Bush paid for abandoning his “no 

new taxes” pledge was magnified by the apparent lack of progress 

on deficit control. When Reagan left office, the deficit was just over 

$150 billion. Three years later, after enactment of the largest deficit-
22

reduction bill of the modern era, the deficit was more than $290 

billion. The doubling of the deficit was largely attributable to a very 

weak economy that had sharply lowered revenue levels, but this 

explanation was not terribly helpful to Bush. Nor was it possible to 

convince the electorate that deficits would have been even worse 

without the 1990 budget act. Bush had, in effect, sacrificed the 

Republican party’s long-standing advantage on defense and taxes 

for a goal that seemed more distant in 1992 than it had when he 

took office. If his foreign policy leadership had been stunningly 

successful, his budget and economic policy leadership had been the 

exact opposite.

Erasing the Deficit.

 Two major deficit-reduction programs were enacted during the 

Clinton presidency. The Omnibus Budget Reconciliation Act of 

1993 (OBRA 1993) was a $500 billion package of tax increases and 

spending cuts that was expected to reduce deficits by roughly onethird from FY 1994-98.21 The 1997 Balanced Budget Act and Taxpayer 

Relief Act were companion reconciliation bills designed to complete 

the deficit-reduction effort and to yield a balanced budget by 2002. 

Even as the latter were proceeding through Congress, however, the 

budget outlook was improving much more rapidly and dramatically 

than had been anticipated. After OBRA 1993 was passed, the FY 1998 

budget deficit had been projected at $200 billion.22 Instead, there 

was a $70 billion surplus in 1998, and 2 years later the surplus had 

climbed above $235 billion.

 OBRA 1993 was an enormously controversial measure that 

barely passed the House and Senate.23 Republicans in both chambers 

unanimously voted against it, and there were significant Democratic 

defections as well. Republican opposition and Democratic unease 

were particularly targeted on the tax increases contained in OBRA 

1993―$240 billion over 5 years, with most of the additional revenues 

drawn from upper-income taxpayers.24 Indeed, the single largest 

deficit-reduction provision in OBRA 1993 was the $115 billion 

increase in revenues from raising the top marginal rate on individual 

income from 31 percent to 39.6 percent.
23

 By contrast, OBRA 1993 made only minor changes in spending 

policy. The discretionary spending caps due to expire in 1995 

were extended through 1998, with estimated deficit savings of 

approximately $70 billion.25 Retirement and healthcare benefits were 

protected, with entitlement savings limited to reduced Medicare 

reimbursements for healthcare providers. Since the Clinton 

administration and the Democratic majorities in the House and 

Senate were intent on raising discretionary domestic spending, the 

prospects for defense under OBRA 1993 were dismal.

 These prospects improved only marginally when Republicans 

gained control of Congress in the 1994 midterm elections, because their 

priorities were deficit reduction and tax cuts. In 1995, congressional 

Republicans first attempted to pass a constitutional balanced-budget 

amendment. When this failed, Republicans pressed for policy changes 

that would actually balance the budget. The House and Senate passed 

a reconciliation bill that contained massive spending cuts in social 

welfare programs, along with cuts in individual and corporation 

taxes. President Clinton successfully vetoed the reconciliation bill, 

and he vetoed as well a number of domestic appropriations bills that 

Republicans had cut.

 The battle between Clinton and congressional Republicans over 

appropriations resulted in government shutdowns at the end of 

1995, the public response to which produced a full-scale Republican 

retreat. In 1996, the Republican leadership gave the Clinton 

administration most of what it had requested for domestic spending. 

The 1997 budget agreement that followed was decidedly modest, 

with Clinton and congressional Republicans agreeing to $200 billion 

in deficit reduction over 5 years. The savings included an extension of 

discretionary spending caps through 2002 and additional reductions 

in Medicare reimbursement rates. Republicans did manage to enact 

several tax cuts, including child tax credits and lower capital gains tax 

rates, but the OBRA 1993 tax increases on upper-income taxpayers 

remained largely intact.

 Republicans were also able to slow the transfer of defense cuts to 

domestic programs, but the burden of deficit reduction during the 

1990s still fell heavily on defense―and on upper-income taxpayers. 

The fiscal turnaround between 1990 and 2000 was enormous―$457 

billion or 6.3 percent of GDP (See Table 10). More than one-third 
24

of the GDP change was absorbed by defense. Another third was 

accounted for by the sharp increase in individual income tax levels. 

The revenue-GDP level in 2000 was 20.8 percent, the highest level 

since World War II. The individual income-GDP ratio of 10.3 percent 

was the highest ever recorded. The defense-GDP ratio in 2000 was 

distinctive as well―the lowest since 1940.

FY 1990 = - $221 FY 2000 = +$236

Revenues = 18.0% GDP Revenues = 20.8% GDP

Outlays = 21.8% Outlays = 18.4%

Deficit = -3.9% Surplus = +2.4%

FY 1990 FY 2000 Change

REVENUES 18.0% GDP 20.8% GDP 2.8% GDP

 Individual 8.1 10.3 (+2.2) 

 Corporation 1.6 2.1 (+0.5) 

 Payroll 6.6 6.7 (+0.1) 

 Other 1.6 1.6 (+0.0) 

OUTLAYS 21.8% 18.4% -3.4%

 Disc. Defense 5.2 3.0 (-2.2) 

 Disc. Non-Defense 3.5 3.3 (-0.2) 

 Mandatory Programmatic 9.9 10.6 (+0.7) 

 Deposit Insurance 1.0 0.0 (-1.0) 

 Net Interest 3.2 2.3 (-0.9)

22.8 19.1 -3.6

 Offsetting Receipts -1.0 -0.8 +0.2 

21.8 18.4 -3.4

Source: The Budget and Economic Outlook, Fiscal Years 2004-2013, Washington, 

DC: U.S. Congressional Budget Office, 2003, pp. 148-157.

Table 10. Components of Deficit Reduction, Fiscal Years 1990-

2000 (in billions of dollars and percentage of GDP).

The Politics of Surpluses.

 Once surpluses became available, the Clinton administration 

and Congress agreed to boost spending, while clashing repeatedly 
25

over tax cuts. Spending increases, however, were primarily directed 

toward domestic programs. Beginning in 1998, the administration 

and Congress repeatedly maneuvered around the discretionary 

spending caps and PAYGO entitlement limits.26 By 2001, discretionary 

outlays were more than $80 billion higher than the statutory cap 

and $100 billion above FY 1997 levels. Approximately two-thirds of 

these discretionary spending increases were for domestic programs. 

Entitlement programs were also expanded, with Medicare 

reimbursement rates raised by more than $50 billion in 1999 and 

2000, and additional spending was provided for children’s and 

military retirees’ healthcare and for veterans’ benefits.

 The low priority assigned defense was striking, given the strong 

evidence that defense had been seriously underfunded during the 

1990s. With the end of the Cold War, the first Bush administration 

had proposed a defense planning strategy focusing on regional 

wars. Its “Base Force” program, with approximately 1.63 million 

active-duty personnel and $1.4 trillion in defense outlays from 1994-

1998, had a primary capability of fighting two major regional wars 

simultaneously. When the Clinton administration took office in 

1993, it adopted the two regional war strategy but proceeded to cut 

force levels and funding to support that strategy.27 By the end of the 

decade, many defense experts were convinced that these cumulative 

cuts had compromised essential capabilities. In its analysis of the FY 

2000 defense budget, the CBO concluded that appropriations were 

more than $50 billion below what was needed to “keep defense forces 

in a ‘steady state’.”28 The shortfall in procurement was particularly 

glaring―an estimated $90 billion in required funding compared to 

actual appropriations of $53 billion.

 Surplus budgeting was more favorable to defense than deficit 

reduction had been, but defense was still at a disadvantage when 

competing with domestic programs. In 1995, congressional 

Republicans had shut down the government in a failed attempt to 

curb domestic spending. Three years later, they joined Clinton in 

expanding domestic spending commitments. The disappearance 

of deficits and the electoral imperative of maintaining control 

of Congress had defused the traditional Republican aversion to 

domestic spending. Surplus budgeting did reinforce the Republican 

commitment to large tax cuts, but they were unable to enact either 
26

across-the-board reductions for individuals or targeted cuts. The 

former were stymied by Clinton’s insistence that the large Social 

Security trust fund surpluses be used to reduce publicly-held debt 

until a Social Security reform package was enacted.29 With no reform 

remotely possible, this “Save Social Security First” strategy meant 

that only a small portion of current and projected surpluses could be 

used to finance tax cuts, and Clinton then vetoed smaller, targeted 

tax reductions on policy grounds.

 Despite the scandal and distraction of Clinton’s impeachment in 

1998, his budget program fared remarkably well. By the end of his 

second term, revenue levels were extremely high, domestic spending 

was growing rapidly, and surplus projections were becoming more 

and more favorable. This new era of surplus budgeting was not 

expected to last indefinitely. Within 2 or 3 decades, analysts warned, 

demographic trends would begin to “overwhelm the surplus and 

drive us back to escalating deficits and debt,” unless retirement and 

healthcare entitlements were retrenched.30 This long-term budget 

challenge was therefore an integral part of the emerging debate over 

the size and shape of the federal budget―how to allocate surpluses 

among debt reduction, tax cuts, and spending increases without 

exacerbating future entitlement financing problems.

The Deficit Problem Returns.

 The 2000 presidential election was, in large part, a contest about 

the future size of government. The contest of the 1990s had been 

whether to balance the budget at high or low revenue levels, and 

Clinton, along with congressional Democrats, had prevailed. The 

Democratic agenda after Clinton depended on maintaining these 

high revenue levels in order to expand discretionary domestic 

programs in the short term and to preserve Social Security and 

Medicare commitments over the long term. Al Gore’s fiscal program 

highlighted debt reduction and domestic program initiatives to use 

up projected surpluses. George W. Bush, however, called for massive, 

permanent tax cuts to lower revenue levels and reduce the margins 

available for new domestic spending. The Gore-Bush differences over 

tax cuts were directly related to social welfare policy. Gore wanted 

to maintain existing retirement and healthcare policies, while Bush 
27

favored Social Security and Medicare reforms that would reduce 

future spending and keep tax levels relatively low.

 Bush’s victory and continued, albeit temporary, Republican 

control of Congress in early 2001 settled the tax issue.31 The Economic 

Growth and Tax Relief Reconciliation Act of 2001 was the biggest tax 

cut in 2 decades, with a 10-year revenue cost of $1.35 trillion. The bulk 

of tax relief was directed toward individual taxpayers―marginal 

income tax rate cuts accounted for about two-thirds of the overall 

revenue reduction.32 As the tax bill was moving through Congress, 

the economy was weakening and surplus projections falling, but the 

administration never wavered from its tax-cut commitment. And in 

2002 and 2003, with deficits firmly in place, the Bush administration 

sponsored additional, if more limited, tax cuts.

 On the spending side, the FY 2002 budget called for reining in 

the “recent explosive growth in discretionary spending.”33 The 

administration proposed an increase of approximately $40 billion in 

discretionary outlays for FY 2002, roughly divided between defense 

and nondefense programs, but annual increases for 2003-2006 were 

reduced to about $20 billion. The FY 2002 budget’s defense numbers 

were “placeholders,” with the administration promising revised, 

and presumably larger, numbers once its strategy review had been 

completed. Nevertheless, the initial Bush budget program assumed 

that discretionary spending-GDP levels could be cut below 6 percent. 

It seemed highly unlikely that Congress would support such a 

sharp reduction and even less likely that defense budgets could 

be insulated from disproportionate cuts in the event that Congress 

did so. Moreover, the defense planning taking place early in 2001 

suggested that the strategy, force levels, and funding program 

inherited from the Clinton administration would be extended 

without major changes. Indeed, there were indications that the two 

regional war capability would be scaled back a bit in order to control 

force levels and spending.34

 In any case, discretionary spending has been on an entirely different 

trajectory since September 11, 2001. Defense outlays have increased 

by more than 50 percent in 3 years, while nondefense discretionary 

spending has risen by 30 percent. In addition, a weak economy and 

additional tax cuts in 2002 and 2003 have greatly reduced revenue 

levels. This combination of higher spending and lower revenues has 
28

pushed the budget back into deficit, and the budget outlook shows no 

quick or easy return to surpluses. The magnitude of the fiscal policy 

gap is presented in Table 11. In January 2001, the 10-year baseline 

projection for spending was $22.3 trillion. The January 2004 estimate 

for spending over the FY 2002-11 period is nearly $26 trillion, with 

about half of this increase in discretionary spending. Revenues have 

fallen by approximately $4.8 trillion due to tax cuts, as well as less 

favorable economic assumptions and technical estimates regarding 

taxable income, bringing the total surplus-deficit change to $8.5 

trillion.

Baseline Projections

 January 2001 January 2004 Change

 Revenues $27,887 $23,114 -$4,773

 Spending 22,276 25,991 +3,715

 Discretionary 7,759 9,458 +1,699

 Mandatory 13,897 14,174 +277

 Net Interest 620 2,359 +1,739

 Surplus (+)/Deficit (-) +5,610 - 2,877 8,487

Source: The January 2001 projections are from The Budget and Economic 

Outlook: Fiscal Years 2002-2011, Washington, DC: U.S. Congressional Budget 

Office, p. 4. The January 2004 data are from The Budget and Economic Outlook: 

Fiscal Years 2005-2014, Washington, DC: U.S. Congressional Budget Office, 

2004, p. 3.

Table 11. Components of Baseline Surplus-Deficit Change, Fiscal 

Years 2002-11 (in billions of dollars).

 The deficit projections now in place, like the earlier surplus 

projections, are subject to some uncertainty. Revenues are extremely 

difficult to estimate accurately, given the extreme sensitivity of 

tax levels to economic changes. From 1981-2001, for example, the 

average difference between 5th-year revenue projections and actual 

revenues for those years was more than 2 percent of GDP, even with 

adjustments for legislative changes.35 It is entirely possible, then, 

that revenues will increase more rapidly than expected if economic 
29

growth exceeds forecasts over the next few years, bringing about 

a corresponding reduction in deficits. There is uncertainty as well 

with estimates for some large spending programs, such as Medicare 

and Medicaid, that are affected by highly unpredictable cost factors. 

Spending for these and other volatile programs could be lower than 

expected, which would reduce deficits as well.

 There is little prospect, however, that deficits can be eliminated 

or even brought down to acceptable levels without significant policy 

changes―tax increases and spending cuts. This is especially true for 

so-called on-budget deficits, which include all federal spending and 

revenues except the Social Security trust funds.36 The Social Security 

trust funds are currently running large surpluses―an estimated $1.7 

trillion through 2011―while on-budget deficits total more than $4 

trillion over this same period. Since the Social Security surpluses are 

expected to disappear in about 15 years, the on-budget deficit problem 

needs to be addressed before it becomes more unmanageable.37

 The on-budget deficit gap, however, cannot be significantly 

reduced without extremely large increases in individual income 

tax revenues or extremely large cuts in discretionary programs. 

Excluding Social Security revenues and spending from budget totals 

means that individual income taxes account for 60 percent of current 

revenues and discretionary spending for nearly half of total outlays. 

It is simply not feasible to erase on-budget deficits without the high 

individual income tax-GDP levels and low discretionary spendingGDP levels of the late 1990s. And to the extent that individual income 

tax increases are postponed or proscribed, the weight of deficit 

reduction will fall even more heavily on discretionary programs.

 The resurgence of large deficits, then, has direct implications for 

defense. Policymakers have agreed that deficits must be reduced 

significantly over the next several years in order to restrain upward 

pressures on interest rates and to accelerate economic growth. The 

Bush administration, for example, hopes to cut deficits in half by 

2009.

 The usual concerns about deficits, however, are being reinforced 

by uncertainties about foreign-held debt. During the 1970s and 

1980s, about 15 percent of publicly-held debt was owned by foreign 

central banks and foreign investors.38 These levels began to rise 

sharply during the late 1990s, and the current percentage is nearly 
30

40 percent. If interest rates must be raised in order to continue to 

attract foreign investment, the impact on debt service costs would 

be severe. A percentage point increase in interest rates, for example, 

would raise baseline interest costs by about $600 billion from 2005-

14.39 Higher interest costs, in turn, would reduce the margins available 

for discretionary spending.

 The connection between deficits and defense is straightforward. 

The politics of deficit reduction means that most entitlement programs 

(particularly Social Security and Medicare) are exempt from deficitreduction efforts; the spending savings needed to reduce deficits are 

invariably concentrated on discretionary programs, and defense is by 

far the largest and most visible of these programs. Moreover, unless 

deficits are cut, interest costs will begin to crowd out new spending 

for discretionary programs, with a potentially disproportionate 

impact on defense. Simply put, if short-term budgets were balanced 

or in surplus, it is conceivable that defense budgets could be raised 

to planned levels over the next several years. However, with the 

very different fiscal outlook the nation now faces, the prospects for 

defense are very different.

THE LONG-TERM OUTLOOK

 Finally, these fiscal problems are exacerbated by demographic 

trends that threaten to transform budget policy. As the baby-boom 

generation reaches retirement age, spending for Social Security, 

Medicare, and Medicaid will increase very rapidly. These programs 

now account for about 8.5 percent of GDP, but their combined 

spending-GDP level could double by 2050 under current policy 

projections (see Figure 4). Since all federal spending has averaged 

about 20 percent of GDP over the past 4 decades―and revenues have 

averaged slightly more than 18 percent―the projected growth of 

retirement and healthcare programs poses serious problems in terms 

of fiscal sustainability.

 In terms of revenue levels, for example, the GDP peaks of World 

War II and the late 1990s were just above 20 percent. Even these 

levels, however, could not accommodate the projected growth in 

entitlement commitments for the elderly along with the defense and 

domestic obligations the federal government has in place. Moreover,
31

Source: Long-Range Fiscal Policy Brief: A 125-Year Picture of the Federal 

Government’s Share of the Economy, 1950-2075, Washington, DC: U.S. 

Congressional Budget Office, 2002, p. 3.

Figure 4. Spending for Social Security, Medicare, and Medicaid, 

1950-2050 (as a percentage of GDP).

unless deficits are controlled over the short term, interest obligations 

will generate even higher spending levels. The consensus among 

budget policy experts is that revenues cannot be raised to the 25-30 

percent of GDP that might be necessary to finance federal spending 

if entitlement growth is left unchecked.40 The political checks on such 

unprecedented tax levels are obviously one consideration. Negative 

economic effects are another important concern, since high tax levels 

could reduce economic growth and make it even more difficult to 

stabilize government finances.

 These political and economic policy considerations have 

added weight in light of changing dependency ratios. The entitlement 

financing challenge is not simply a matter of more retirees, but 

rather an increase in the size of the retiree population relative to the 

working-age population. The dependency ratio is used to measure 

the fiscal impact of population aging by comparing the number of 

potential workers (usually the population aged 16-64) to the number 

of retirees (the population aged 65 and older). Large numbers of 

workers per retiree―about 5 to 1 in the United States in 1960, about 
32

4 to 1 today―provides an ample economic and tax base support for 

the elderly.41 The dependency ratio in the United States, however, is 

expected to change dramatically after 2010―a worker-to-beneficiary 

ratio of 2.5 to 1 in 2030 and perhaps 2 to 1 by 2060. Under these 

circumstances, the tax burdens needed to support retirees under 

current policy would likely be unacceptably high.

 The spending-control solution to retirement and healthcare 

entitlement financing―forcing all discretionary spending as well as 

all other entitlements into a narrower and narrower GDP margin―

is equally unrealistic, particularly since the relative size of these 

programs has already fallen sharply over time. The first stage of the 

welfare shift, for example, has cut the GDP share of discretionary 

spending nearly in half, but even larger cuts would be needed 

over the next 50 years to offset the growth in existing entitlement 

commitments. As the U.S. General Accounting Office summarized 

the problem, “Absent changes in the structure of Social Security and 

Medicare [and Medicaid], some time during the 2040s the federal 

government would do nothing but mail checks to the elderly and 

their healthcare providers.”42

 If structural entitlement policy reforms are indeed inevitable, the 

Social Security program is the easiest to deal with in terms of costs 

and policy options. Under current benefit formulas and retirement 

ages―normal retirement under Social Security will be increased, in 

phases, to 66 by 2009 and to 67 by 2027―the Social Security-GDP level 

would increase by about 2 percentage points over the next 50 years.43

Virtually all of this growth could be erased by straightforward policy 

changes―higher retirement ages, reduced COLAs, and less generous 

benefit formulas.

 The Medicare and Medicaid programs are, in fiscal terms, 

potentially much larger and, in policy terms, more intractable. The 

key issue for these programs is “excess cost growth”―the extent 

to which the costs per Medicare and Medicaid beneficiary exceed 

per capita GDP growth.44 Over the past several decades, excess 

cost growth in both programs has been quite high―about 3 percent 

annually for Medicare and about 2.7 percent for Medicaid.45

 Projected future spending for Medicare and Medicaid depends 

heavily on whether excess cost growth can be contained. No excess 

growth through 2050, for example, keeps the increase in Medicare 
33

and Medicaid outlays on a par with Social Security―from 4.1 

percent today to 6.4 percent in 2050.46 A 1.0 percent excess growth 

rate (the figure used by the Medicare program’s trustees in their 

financial forecasts) yields an 11.5 percent of GDP estimate for 2050. 

A continuation of past healthcare cost trends, however, dwarfs this 

latter estimate. The combined Medicare and Medicaid outlay-GDP 

level in 2050, assuming 2.5 percent excess cost growth annually, is 

21.3 percent.

 The necessity for cost controls is obvious, but definitive policy 

solutions are elusive. Increasing the eligibility age for Medicare to 70, 

for example, would have only a modest impact on costs. Reducing the 

government’s share of healthcare expenses could yield appreciable 

savings, but the added costs to beneficiaries or healthcare providers 

might restrict access to care. Controlling the cost per beneficiary, 

which is the real policy challenge, ultimately depends on largely 

untested strategies for making healthcare more efficient―improved 

care management and disease management, increased competition 

through private health plans in the Medicare system, and expanded 

use of lower-cost medical services.

CONCLUSION

 The fiscal obstacles confronting defense planners are formidable. 

Over the short term, politically potent demands for deficit reduction, 

permanent tax cuts, and domestic program expansions will make it 

difficult to maintain core defense budget needs at adequate levels. 

Over the long term, the spending margins available to support 

defense and other national commitments will be defined by the 

extent and timing of retirement and healthcare entitlement reforms.

 The Bush administration’s FY 2006 budget, for example, calls for 

reducing the deficit to approximately 1.3 percent of GDP by 2010. 

Under this deficit-reduction program, discretionary spendingGDP levels would fall sharply over the next several years.47 More 

important, the administration is proposing cutbacks in constant-dollar 

outlays for defense and nondefense programs. The proposed cuts in 

nondefense programs are larger than the defense reductions―from a 

total of $413 billion in FY 2005 to $364 billion in FY 2010 (measured in 

FY 2000 dollars).48 But the latter are appreciable. With supplementals 
34

excluded, constant-dollar outlays for defense would decline from 

over $400 billion in 2005 to less than $380 billion in 2010.49 The core 

defense budget, then, would have negative real growth over the next 

several years when measured in actual spending.

 Given this funding trajectory, the demands on the U.S. military 

are even more daunting―fighting a highly unpredictable global war 

on terrorism while implementing a largely undefined transformation 

in organization, equipment, and doctrine. Current defense budget 

projections ignore future costs of the former and understate the 

potential costs of the latter. But quite apart from these shortcomings, 

defense plans that assume steady increases in real spending levels 

are fiscally unrealistic and politically naïve. Instead, difficult 

choices are inescapable with regard to the major components of 

the defense budget―readiness, force levels, and procurement to 

support traditional and transformational modernization. The debate 

over Army end-strength illustrates the dilemma. Army Chief of 

Staff Peter Schoomaker recently stated that the temporary increase 

of 30,000 Army troops might have to be raised to 50,000 and made 

permanent.50 If this proves correct, offsetting procurement cutbacks 

will be needed to hold defense budgets within politically realistic 

limits.

 The procurement issue, moreover, will almost certainly intensify 

over time. There have already been stretch outs, reductions, and 

terminations in numerous procurement programs. The Army’s nextgeneration Comanche helicopter program has been cancelled, and the 

development phase for its Future Combat System program has been 

extended. The Navy’s DD(X) destroyer procurement schedule has 

been delayed by 1 year and its attack submarine program schedule 

by 2 years. The Air Force’s investment plans are being buffeted by 

rapidly increasing costs for its new fighter attack aircraft and related 

programs, making it difficult to maintain procurement schedules 

and procurement quantities. Even taking these into account, the 

investment programs that remain in place will require significant 

increases in aggregate real spending over the next several years. 

Finally, it is reasonable to assume that cost overruns will affect many 

of the new technologies and exotic weapons systems currently under 

development, complicating still further the investment projections 

now in place.
35

 Since the defense budgets likely to be in place over the next several 

years cannot accommodate higher force levels, improved readiness, 

traditional modernization, and transformational modernization, 

there must inevitably be painful tradeoffs. The key tradeoff, moreover, 

will likely involve the scale and pace of modernization initiatives, 

particularly for the transformational technologies, against the 

readiness requirements for attracting and retaining a highly-skilled 

military. Slowing the former to ensure adequate funding for the 

level and quality of forces is a prudent choice in terms of the tangible 

military capabilities currently needed to meet existing threats. It is 

also more predictable, more controllable, and more reversible in 

terms of costs. Given the fiscal outlook that defense planners face, 

these advantages are compelling.51

ENDNOTES

 1. The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal 

Year 2005, Washington, DC: U.S. Congressional Budget Office, September 2004, p. 

2.

 2. Ibid.

 3. Ibid., p. 3.

 4. These are baseline deficit estimates. See The Budget and Economic Outlook: 

Fiscal Years 2006-2015, Washington, DC: U.S. Congressional Budget Office, 2005, 

p. xiv.

 5. This spending-GDP relationship is the conventional benchmark for 

measuring the size of government. It is particularly useful for analyzing changes 

in the size of a nation’s government over time (i.e., historically) and for comparing 

the size of governments in different countries (i.e., cross-nationally).

 6. The actual costs of entitlement programs consist of program outlays minus 

certain offsetting receipts―“payments from the public or intragovernmental 

transactions that the federal government records as negative spending. . . .” The 

largest of these are premiums paid by Medicare beneficiaries for supplementary 

medical insurance (covering physician and outpatient services) and the payments 

by federal agencies into their employees’ retirements plans (military and civilian). 

The Budget and Economic Outlook: Fiscal Years 2005-2014, Washington, DC: U.S. 

Congressional Budget Office, 2004, pp. 63-65.
36

 7. The gross interest costs of the federal debt include payments to holders of 

“publicly-held debt” and to federal trust funds (such as the Social Security and 

civil service retirement trust funds) that hold government securities. Interest costs 

for the latter are treated as intragovernmental transactions and have no budgetary 

impact. Net interest outlays, which are a component of mandatory spending, 

essentially represent the costs of the debt held by nonfederal investors―i.e., 

publicly-held debt. Ibid., pp. 65, 68-69.

 8. Executive branch civilian employment (excluding the Postal Service) was 

over two million from 1966-95. The level has fallen since that time, to an average 

of 1.84 million. Historical Tables, Budget of the United States Government, Fiscal Year 

2005, Washington, DC: U.S. Government Printing Office, 2004, pp. 295-296. 

 9. For fiscal years 1991-93, separate caps were set for defense, domestic, 

and international programs. Congress could appropriate up to the cap for each 

category, but could not appropriate less for one category, such as defense, and 

transfer that savings to another category.

 10. The demise of the Articles of Confederation government during the 1780s 

was, in part, caused by its inability to manage the Revolutionary War debt. The 

framers of the Constitution remedied the fiscal defects of the Confederation 

by giving the national government broader powers to tax, spend, and borrow. 

Alexander Hamilton, the first Secretary of the Treasury, then designed the financial 

strategy for managing borrowing and debt. His “Report Relative to a Provision for 

the Support of Public Credit” is a landmark in the history of public finance.

 11. From 1850-60, total federal spending averaged less than $65 million 

annually. In 1870, interest costs were nearly $130 million, while total spending 

was over $300 million. See Dennis S. Ippolito, Why Budgets Matter: Budget Policy 

and American Politics, University Park: Pennsylvania State University Press, 2003, 

pp. 61, 80.

 12. Ibid., p. 55.

 13. Over this period, spending averaged approximately $3.5 billion annually. 

The large surpluses devoted to debt retirement acted as a brake on new spending 

and also required Congress to maintain income and corporation taxes at levels 

that would have been unimaginable prior to the war.

 14. A structural deficit measurement removes the influence of cyclical factors. 

It is an estimate of the deficit “that would occur under current law if the economy 

operated at potential GDP.” (Eliminating structural deficits therefore requires 

changes in current law―cutting spending, increasing revenues, or both.) The 

Budget and Economic Outlook: Fiscal Years 2005-2014, p. 159.

 15. Peak spending during the Korean War was 20.4 percent of GDP in FY 1953. 

The Vietnam peak was 20.5 percent in 1968.
37

 16. Deficit ceilings under GRH were: FY 1986 = $172 (billion); FY 1987 = $144; 

FY 1988 = $108; FY 1989 = $72; FY 1990 = $36; FY 1991 = $0.

 17. The revised ceilings were: FY 1988 = $144 (billion); FY 1989 = $136; FY 1990 

= $100; FY 1991 = $64; FY 1992 = $32; 1993 = $0.

 18. Budget of the United States Government, Fiscal Year 1991, Washington, DC: 

U.S. Government Printing Office, 1990, p. 3.

 19. An Analysis of the President’s Budgetary Proposals for Fiscal Year 1991, 

Washington, DC: U.S. Congressional Budget Office, 1990, p. 42; The Economic and 

Budget Outlook: An Update, Washington, DC: U.S. Congressional Budget Office, 

July 1990, p. xiii.

 20. The Economic and Budget Outlook: An Update, July 1990, p. xiii.

 21. The Economic and Budget Outlook: An Update, Washington, DC: U.S. 

Congressional Budget Office, September 1993, p. 36.

 22. Ibid.

 23. The margin in the House was 218-216. The Senate vote was 51-50, with 

Vice President Al Gore casting the tie-breaking vote.

 24. Approximately 70 percent of the revenue increase was directed toward 

upper-income taxpayers in the form of higher marginal rates, higher Medicare 

payroll taxes, and higher Social Security benefits taxes. Ippolito, p. 264.

 25. Ibid.

 26. On these various maneuvers, see Ibid., pp. 285-286.

 27. The administration’s 1993 defense plan reduced active-duty personnel by 

more than 200,000 and cut 1994-98 recommended outlays by $130 billion under the 

Bush program.

 28. Budgeting for Defense: Maintaining Today’s Forces, Washington, DC: U.S. 

Congressional Budget Office, September 2000, p. xi.

 29. On the competing reform proposals, see Ippolito, pp. 286-287.

 30. Long-Term Budget Issues: Moving from Balancing the Budget to Balancing Fiscal 

Risk, Washington, DC: U.S. General Accounting Office, 2001, p. 1.
38

 31. In May 2001, Vermont Senator James M. Jeffords switched his party 

designation from Republican to Independent. The 50-50 party division in the 

Senate, which had given Republicans control with Vice President Dick Cheney’s 

tie-breaking vote, changed to 50D-49R-1I, allowing the Democrats to organize the 

chamber.

 32. Ippolito, p. 298.

 33. Budget of the United States Government, Fiscal Year 2002, Washington, DC: 

U.S. Government Printing Office, 2001, p. 7.

 34. See Michael E. O’Hanlon, Defense Policy Choices for the Bush Administration, 

2d ed., Washington, DC: Brookings Institution, 2002, pp. 11-14.

 35. The Budget and Economic Outlook: Fiscal Years 2003-2012, Washington, DC: 

U.S. Congressional Budget Office, 2002, p. 92.

 36. The Old-Age and Survivors Insurance Trust Fund and the Disability 

Insurance Trust Fund, as well as transactions of the Postal Service, are by law 

treated as off-budget―they are not included in budget resolution totals or deficit 

calculations under the Deficit Control Act.

 37. The current estimate is that Social Security tax revenues will not be sufficient 

to cover benefits and other costs beginning in 2018. Reserves and interest on trust 

fund reserves, however, would cover shortfalls for another 25 years. Peter A. 

Diamond and Peter R. Orszag, Saving Social Security, Washington, DC: Brookings 

Institution, 2004, pp. 52-53.

 38. Analytical Perspectives, Budget of the United States Government, Fiscal Year 

2005, Washington, DC: U.S. Government Printing Office, 2004, p. 235.

 39. The Budget and Economic Outlook: Fiscal Years 2005-2014, pp. 104-105.

 40. Spending estimates of this type are of course speculative. For an analysis 

of various “spending paths,” see The Long-Term Budget Outlook, Washington, DC: 

U.S. Congressional Budget Office, 2003, pp. 6-12.

 41. Ippolito, pp. 308-309.

 42. Long-Term Budget Issues, p. 10.

 43. The Long-Term Budget Outlook, p. 23.

 44. Ibid., pp. 4-5.

 45. Ibid.
39

 46. Ibid., p. 28.

 47. Historical Tables, Budget of the United States Government, Fiscal Year 2006, 

Washington, DC: U.S. Government Printing Office, 2005, p. 128.

 48. Ibid., p. 126.

 49. Ibid.

 50. James Kitfield, “Changing and Fighting, Simultaneously,” National Journal, 

October 30, 2004, p. 3301.

 51. For a comprehensive and exceptionally detailed analysis of the 

modernization debate and these tradeoffs, see Stephen Biddle, Military Power, 

Princeton: Princeton University Press, 2004. With respect to budget priorities, 

Biddle concludes that: 

One should be wary . . . of proposals to protect modernization at the 

expense of readiness. . . . The issue is the relative pace of modernization, 

and the analysis above suggests that trading slower modernization for 

lesser cutbacks in training, schools, and quality-of-life accounts (i.e., those 

parts of the budget that help create and retain skilled personnel capable 

of implementing demanding modern-system force employment) would 

be a better choice than the reverse. At the margin, a less-skilled military 

is more dangerous than less-advanced technology (p. 203).