Policies of Scale: Efficient Global Policy

The Income-Foreign Policy Disconnect: Why we think we can’t Afford Big Defense

As the 2015 budget war wages, the narrative of US foreign policy is at a crossroads as doubts about its usefulness grow. These doubts are troubling to many who fear that Americans have lost faith in robust foreign policy. But the answer to why this is the case, as it often is, is economic.


Why do many in the up-and-coming generation of American leaders – private and public sector – believe that prudent US foreign policy means a smaller global footprint and less assertive leadership? That question was posed to myself and a group of people considered to be part of that demographic recently by a former senator who is worried about what that perspective means for America’s future and who is actively engaged in trying to reverse it. A number of reasons were thrown out for discussion, but the one that everyone seemed to acknowledge made the most practical sense is that this country cannot afford to pay the costs of a robust foreign policy.

Who the senator was does not matter for this piece, but suffice it to say this member represented a school of thought nurtured during the Cold War and heavily influenced by 9/11 and the following Iraq and Afghanistan wars that argues that a robust US presence in the world – both militarily and through diplomatic and economic leadership – is actually less expensive in the long run. The premise supporting this argument says that the world without American leadership will through violent, social, and economic conflict pose catastrophic costs on America’s finances and its liberty if we were to reduce our role, our footprint, and our engagement.

I thought it would be interesting to explore this question with some economics. The main financial point – that we cannot afford the cost of funding a robust foreign policy – I worry obfuscates a more helpful way to understand America’s apprehension to spend big on foreign policy, which is to appreciate that a robust foreign policy has an opportunity cost. The more compelling economic consideration is that given the state of the country – high unemployment, growing inequality, political dysfunction, still-broken health care and financial services systems, an under-appreciated crisis of American capitalism, etc. – many believe we can get a greater return on investment if foreign policy appropriations are spent elsewhere. The preference of many of my generation of American leaders, I believe, as well as many Americans across my generation, is to spend the money on other things that are believed to more directly improve American quality of life.

Return on investment is the another side of the same opportunity cost coin in this context, but both are difficult to evaluate in the context of foreign policy because the argument supporting greater spending suffers from having to prove a negative: if we don’t go big now on defense, then X, Y, and Z bad things will happen. Hard to do. Alternatively, measuring the return on domestic spending is much easier, even if the results are interpreted in different ways; at least there are hard data to evaluate.

I believe proponents of a robust foreign policy must overcome an American consciousness focused on economic variables like basic income, savings, and investment, that is effectively disconnected from appreciations of what foreign policy can do for the well-being of the country unless the topic is international trade. In order to consider this preference to spend elsewhere, I want to establish the financial underpinnings of the American consciousness and quantify the defense budget a bit differently than it is normally presented, and then related the two through public opinion on spending priorities. The result is intuitive, but shows a sharper relationship between American incomes and defense spending that might be appreciated by many.

Perceived Purchasing Power

For most Americans the experience of the Great Recession has fallen somewhere between bad and devastating. Once the real estate bubble burst, America’s negative savings rate and decades-long median income decline came into full view and we realized that across our society improvements in living standards enjoyed in the 1980s-2000s had been financed by debt growth, not income growth. The recovery since then, if one wants to be that generous, has been marginal with 95% of the economic recovery going to the richest 1% of Americans between 2009 and 2012. The return on effort put towards earning income for the vast majority of Americans, then, has been effectively zero or worse. This makes arguing for big government expenditure financed by public debt difficult when that expenditure is isolated from so many Americans.

A look back at the last 11 years of complete income data (2001-2012) shows that the wealthier you are, the less of an impact the recession had on you. My analysis aims to establish the American conscious’s reference point today, so I adjusted purchasing power incomes from 2001-2007 and 2009 to 2012 to 2008 dollars on the basis that for many people 2008 was their last year of good income. Further, 2008 is the most recent year for which the recession did not totally throw off the numbers while inflation has fluctuated below historic norms since then, limiting its impact. I simplified my study to the lowest, third, and fifth income quintiles. The idea is to contextualize the feelings Americans are having about their incomes today so that we can appreciate where their fiscal position on defense spending begins.

The change from year to year on this basis shows 7 years of strong growth between 2001 and 2007, although positive growth was at its height in 2001 and declined annually through 2007, establishing a pre-recession experience of what I’m calling “perceived purchasing power” deterioration. The pre-Great Recession income spread between the 2001 and 2007 for the lowest quintile of -$327, $67 for the third quintile, and -$338 for the fifth quintile based on 2008 dollars.

Looking at the Great Recession and its out years, 2012 median incomes for the bottom, third, and fifth quintiles saw average annual decreases in the 6% range. In 2011 the decrease across the same quintiles was in the 4% range while 2010, the last year of income declines, was around 1.2%. In 2009 growth was barely in the positive. This works out to spreads between 2009 and 2012 incomes of -$881 for the lowest quintile, -$2139 for the third quintile, and -$872 for the fifth quintile.

This graph charts those spreads as a percentage of income on a year-on-year basis:

While this shows that roughly all Americans (minus the top-5%, especially the top-1%, and especially especially the top 1/10th-%) saw comparable declines in income, the aggregate measure misses the vital bits. So, I related these spreads to each quintile income to understand the relational impact growth had on incomes. In order to achieve this figure, I totaled the annual income loses and gains and then divided that number into the 2008 income figure to determine the hit to purchasing power perception based on the mindset of 2008’s incomes.

Here’s what I got:

I do not want to mislead the reader into thinking I’ve developed a scientific or even classically economic model; I have not. Rather, my intent is to try to quantify a perception of today’s incomes based on the last best perception we might have had. Based on this premise, the results show that the poorer you are compared to your fellow Americans, literally the poorer you are today (well, in 2012) than you were in 2008. And further, your recovery has been slower than the recovery of the people above you in the income strata. Put simply, these declines are more significant than the real numbers on income movement. Given the growing weakness of the rational actor model so central to economics, it would be foolish to dismiss perceptions.

I find this chart helpful as another way of thinking about this:

Taking the chained value of $36,500 for the middle of 2012, the most recent year for which complete income data is available, that’s about 339% of the lowest income quintile average, .76% of the third quintile, .21% of the fifth quintile, and 0.028% of the top 1%. This presents another way to understand the incomes people are working with.

The lower and middle income quintiles are experiencing an interesting dynamic. Low wage job creation is the biggest driver of job creation by a large margin, yet the cuts to federal and state budgets since the recession have impacted the lower income brackets the most because the cuts are often applied to programs that provide assistance to those with the lowest incomes. Because more people are moving to lower paying jobs, many of the unemployed moving into employment are more accurately described as underemployed. Those from the middle to middle-upper wage jobs who remain unemployed have experienced much of the long-term unemployment as the system set up to support them (long-term unemployment benefits) has been the subject of a big political fight that has not yet been flushed out.

Defense Spending

With the impact of the recession hitting so many people, there has been an appreciative gain in the awareness of the economic, political, and social underpinnings in this country. And as we’re increasingly aware, those underpinnings are weakening. Now that we have a slightly better understanding of the finances of our consciousness, let’s take a brief look at the defense budget, which I’m using as a marker for the umbrella of foreign policy because I believe that’s the association most Americans make.

This millennium has seen a major shift in the strategic purpose of the US military from defending the country to nation building abroad. In 2001, when nation building had yet to become thing the military did, the defense budget was a mere $287 billion out of a federal budget of $1.71 trillion, or about 17%. In 2011, by contrast, when the US was engaged in nation building in Iraq and Afghanistan, the DOD budget was $700 billion of the $3.6 trillion federal budget, or about 19.4%. It’s not a huge difference in this context, but it is a big one in the context of sustainability, a concept very much in vogue right now when discussing government expenditures and debt.

An increase in spending is more sustainable if it is at least matched by an increase in revenues. In 2001, defense spending was about 18.4% of revenues. Comparatively, in 2011 it was about 38% of revenues. That’s a huge difference, especially for a country experiencing a deep economic crisis. During such a period financial considerations are especially heightened, so people are particularly interested in returns on their tax dollars.

Yet the biggest political fights since the recession have been over domestic spending programs and the debt ceiling, which are argued in the context of being existential threats to the future of the country. Meanwhile, the fight over defense spending has waged predominantly inside the Beltway, which is increasingly disconnected from the kind of people I’ve been talking about. Therefore, the fact the defense budget became the biggest victim of the sequester should not surprise given the past few years of heightened appreciation (or, perhaps, “fear” is a more appropriate term) for constituencies among the Republican caucus. Add to that growing caution over foreign involvement against the backdrop of 12 years of costly wars many do not believe succeeded, it is easy to see that while some believe that defense has been cut enough already, others feel it is still too big.

Public Opinion and the Link between Incomes and Foreign Policy Spending

The priority of most Americans is increasingly domestically focused. According to Pew, only 43% of Americans believe strengthening the military should be the top priority of the president and Congress while 80% believe the government should concentrate on domestic issues. What Americans are saying here is that while strengthening the military is important, it’s not important if it detracts from a domestic focus. This last number is the highest in a 10-year stretch in which that priority grew all but one year.

Another important number: a recent NBC/Wall Street Journal poll found that 57% of Americans believe the US is still in a recession. Putting aside the fact that the US has by definition been out of the recession since the middle of 2009, this number is significant because it reinforces the argument I’ve made about a decline in perceived purchasing power. Let’s consider the data I’ve laid out:

1. The vast majority of Americans have experienced significant personal financial deterioration since 2008, and using 2008 as a bench mark, improvements in income movement have been non-existent and perceived purchasing power has declined significantly.

2. Government revenues have declined as defense expenditures have increased, raising the percentage of people’s tax dollars going to defense, a destination they feel gives them unacceptable returns.

3. A large majority of Americans say they want the government to focus on domestic issues, while a majority believe the US is still in recession.

Many Americans, then, must be disappointed that so much of their tax dollars are going to fund defense, and likely would not support a return to defense spending growth. It’s a fairly simple conclusion, but it’s a significant barrier to maintaining the size of foreign policy we had in the 2000s even though historically the disconnect between public opinion on foreign policy and America’s actual foreign policy has been quite significant.

The current events in Ukraine, with Putin re-formulating the world into the Cold War divide that still makes many Americans fearful, have not convinced Americans to back more defense. Polling on Ukraine reflects the low ROI people think they get from defense spending: 46% of Americans say the US has no responsibility to intervene while those who aren’t sure outnumber those who support intervention two-to-one. And that’s really the fundamental element of the financial-based opposition to robust foreign policy: the money can be spent better elsewhere.

My suggestion, then, to those who want to drum up support for a robust foreign policy is to first pick the low hanging fruit: they must first win the foreign assistance argument. Appropriately called “the budget myth that just won’t die” by the Washington Post, as of November of last year a Kaiser Family Foundation poll found that on average Americans believe 28% of the budget gets spent on foreign aid. Beyond the obvious lesson to be learned from that number, the real story is this: when told what percentage of the budget is actually spent on aid, 30% still believe it’s too much and 31% say it’s about the right amount (28% think it’s too little, with the remainder not answering). That’s 61% who would not support or would need convincing for more foreign aid spending.

At a time of heightened awareness about economic issues that is reinforced by a broad experience of declining real incomes and perceived purchasing power, when the small chunk of federal expenditures on foreign aid is deemed too much or just about right, it is hard to imagine winning support for the huge chunk of federal dollars that is the defense budget. When such spending has come at a significant – and growing – cost to most Americans, they are disinclined to believe the argument that spending more on foreign policy is saving for the future.

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