It’s no longer headline news to say inflation is high. Prices for food and energy have steadily increased throughout the pandemic, with energy rising even more after Russia’s invasion of Ukraine. As a result, some members of Congress and Department of Defense officials are seizing the moment to call for increases in DOD’s budget. But assertions that the Pentagon’s spending should rise in line with economy-wide inflation are misguided. A Costs of War project issue brief published on May 3 details eight reasons why.
The Defense Department doesn’t experience inflation like the rest of the economy and doesn’t measure it that way. As reported in the news, “inflation” generally means consumer price inflation, as measured by the Bureau of Labor Statistics in their Consumer Price Index, which captures consumers’ prices of various kinds of purchases. But these purchases are quite different from what the department buys. For example, the Pentagon pays for employees — both military and civilians — and their medical expenses, buys fuel for its operations and installations around the world, and spends about half of its budget on the procurement of equipment and services from contractors. For many years, the department has budgeted for inflation using a weighted average price index for these expenses.
Just last month, Secretary of Defense Gen. Lloyd Austin testified that the Pentagon’s budget for FY2023, which is currently being discussed, was appropriately budgeted for inflation and was sufficient to meet operational needs. In the same hearing, DOD Comptroller Mike McCord expressed worry that they had underestimated inflation. Yet, just ten days prior he had testified that it was impossible to know what energy prices would be at the start of the next fiscal year, which begins on Oct. 1, 2022 — six months away. It will be even harder to predict energy prices at the end of the next fiscal year, 18 months from now. In other words, it’s difficult to estimate inflation.
THE CASE OF FLUCTUATING ENERGY PRICES
Energy prices fluctuate wildly, and much more dramatically than the price of labor, equipment, or medical costs. Yet, all of these follow an upward trajectory, and the Pentagon incorporates inflation for all of these in each year’s budget. Therefore, setting a budget based on energy costs at any point is inaccurate and short-sighted. Furthermore, to shield itself from energy price fluctuations, the Defense Logistics Agency, which manages all fuel purchases for the department, buys and stockpiles fuel well in advance of when it is needed. In other words, the agency ensures that it has the reserves — both financial and physical — to weather any price spikes without needing increased budgets.
The Defense Department already accounts for inflation in its budget and experiences it differently from the rest of the economy. So why are some calling for inflation-related increases in the next federal budget?
If energy costs are DOD’s primary concern, raising its spending limits is not the only potential response. For example, the Pentagon can abandon outdated platforms, saving $2.8 billion, as suggested in the Apr. 7 hearing, and it can reduce unnecessary operations, which account for 70% of their fuel use. This could include reducing US counterterrorism operations in the Middle East and Africa and reducing operations in Europe as NATO allies take on more of their defense. Operations reductions should, of course, be in line with the National Defense Strategy, which aims to link operational capabilities with strategic objectives.
The DOD is the world’s largest institutional consumer of petroleum and largest institutional emitter of greenhouse gas emissions. The Pentagon’s emissions and energy use are roughly equivalent to those of some medium countries, including Sweden, Portugal, and Denmark. Therefore, reducing its fuel use would also have the benefit of reducing global emissions. The military’s dependence on fuel is not only a threat to the planet but also to itself: Military fuel convoys are often attacked, resulting in troop casualties. Furthermore, since climate change contributes to inflation (mainly through higher food and energy costs), reducing fuel use would also help lower inflationary pressures on the department.
WHAT IS THE PENTAGON REALLY ASKING FOR?
The Defense Department already accounts for inflation in its budget, experiences it differently from the rest of the economy, and has various strategies and opportunities to deal with energy price spikes. So why are some calling for inflation-related increases in the next federal budget? Partly, there is a lack of information and understanding of the issue, which is why I wrote the brief. But also, since half of Pentagon spending goes to contractors, there are many companies who would earn even higher profits if defense spending increased.
DOD has always had a close relationship with its contractors, enhanced by lobbyists who pressure lawmakers to draft legislation favorable to the defense industry, as well as the “revolving door” through which individuals who work for DOD or other government offices then go work for major contracting firms, and vice versa. The “Big 5” — Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics, and Boeing — together spent $65 million on lobbying just in 2021, ensuring that they will make the tens of billions in profits from DOD contracts each year. As a result, these five firms would be the biggest beneficiaries of increased defense spending.
One final note on some basic math. The Biden budget already increased DOD spending to $773 billion, which is well beyond what it’s been during the past 20 years of war, more than $30 billion over FY2022 enacted levels, and 9.8% greater than in FY2021. The current worry over energy price increases is leading to some requests of $90 to $100 billion above that. Yet, the military spends about $8-11 billion per year on fuel ($8.15 billion in FY2021). So even a doubling of fuel prices wouldn’t get us anywhere near the new amounts being requested.
As Secretary Austin testified, this fiscal year’s budget is sufficient to meet operational needs and is in line with the National Defense Strategy. While inflation will affect us all, the DOD is already prepared with budgetary resources and fuel reserves. It does not need a budget above and beyond the president’s already-high request.
Heidi Peltier is a Senior Researcher at Brown University’s Watson Institute for International and Public Affairs and is the Director of Programs at the Costs of War Project. She is an economist with expertise in federal spending and employment and clean energy policy.
