Loren Thompson - Eisenhower's 'Military-Industrial Complex' Shrinks To 1% Of Economy

The United States did not have a large defense industry for most of its history. Because threats were episodic rather than continuous, the traditional practice was to mobilize the commercial economy for war production when danger arose, and then demobilize when it had passed.

That all changed with the coming of the Cold War, because threats remained elevated for 40 years and policymakers decided the nation must be ready for war on short notice. So a sprawling defense sector dedicated to making advanced weapons came into being, which President Dwight Eisenhower memorably described in his farewell address on January 17, 1961, as the "military-industrial complex."

That phrase became the basis for endless conspiracy theories about the undue influence that arms merchants supposedly exercised over government decisions. The theories typically argue that senior military officers, industry executives and key members of Congress collude to drive up weapons spending and distort national priorities.

Despite his military background -- or perhaps because of it -- President Eisenhower worried about arms makers and their supporters in government exercising undue influence. Wikimedia 

Despite his military background -- or perhaps because of it -- President Eisenhower worried about arms makers and their supporters in government exercising undue influence. Wikimedia 

Having spent my entire adult life working with the industry, I can testify to the fact that the conspiracy theories are not groundless. However, they are almost always an exaggeration of reality, and that has become more true with time. Today, the notion that a military-industrial complex is calling the shots in Washington has become laughable.

The federal budget only claims 22% of the economy, and defense in turn represents a mere one in every seven federal dollars (14% of the federal budget). Do the math, and it turns out that all that money Washington spends on the military only amounts to about 3% of the economy.

Furthermore, most of the defense budget is not spent on weapons, it is spent on items like military pay and benefits, training, maintenance and the like. The amount of money set aside for developing and procuring military equipment in the budget agreement Congress reached last week is $197 billion -- a third of the $593 billion defense budget, and barely 1% of GDP (which stands at $19 trillion).

Granted, this may represent close to a tenth of all U.S. manufacturing, given the way so many industries have fled the U.S. for Mexico and Asia. But how much of a problem can the "military-industrial complex" be when it only represents 1% of the economy? Healthcare is 17%, but nobody refers the "healthcare-industrial complex."

President Eisenhower may have had a valid point when he warned, "we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex." The U.S. had never had a big peacetime defense industry before his administration, and military spending claimed 9% of the economy -- and 52% of the federal budget -- the year he made the remark.

That was pretty typical for the Eisenhower years, and Ike worried constantly about excessive military spending damaging the economy. Moreover, weapons spending was 44% of the defense budget in 1961, reflecting the fact that personnel costs were low thanks to conscription. But that changed with the coming of the All Volunteer Force in 1973, a Richard Nixon innovation fashioned at least in part to defuse opposition to Vietnam War policies.

After 1973, the military had to compete in the job market for skilled labor, and compensation increased accordingly. As the cost of military pay, healthcare and retirement benefits rose, the portion of the budget available for buying weapons declined. Ronald Reagan was the last big spender on military technology, with money for development and procurement totaling 46% of the defense budget at the height of his buildup in 1986.

That was nearly 3% of an economy that in inflation-adjusted terms was about half the size it is today. After Reagan, though, the Cold War ended and weapons spending went off a cliff. Secretary of Defense Dick Cheney killed a hundred major weapons programs between 1989 and 1992. So the "military-industrial complex" shrunk by two-thirds, and became a much smaller factor in the nation's economic life.

It has remained relatively small to this day, thanks to the fact that no matter which party controls the White House or Congress, military personnel and readiness always get funded ahead of weapons. With healthcare costs continuing to rise and military outlays capped by Congress since 2012, there just isn't much money for buying weapons. As I often point out, the amount of money the Army gets for weapons each year is a fraction of what Americans spend on beer or cigarettes.

This probably isn't going to change much under President Trump because he hasn't made any moves to recruit the eight Senate Democrats he needs for the super majority of 60 votes that repeal of budget caps would require. With proposed tax cuts likely to balloon deficits and infrastructure spending waiting in the wings, there won't be much funding in the defense budget for new weapons once personnel and readiness are covered.

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