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The Budget Control Act, signed into law on the 2nd of August 2011, aims to reign in the discretionary spending of the United States, which has grown by at least 40% since 2002 (heritage.org). A key reason as to why the Budget Control Act mainly targets discretionary spending is because it is viewed as being a more flexible fiscal tool than mandatory spending. Discretionary spending covers costs such as federal and military wages and salaries, the purchase and development of public assets, education programs, transportation maintenance and development, etc.

To summarize, the Budget Control Act establishes caps on discretionary spending through 2021, as an attempt to reduce the national deficit by more than $2.5 trillion. In 2011, Congress passed a law saying that if the parties cannot agree on methods to cut spending, about $1 trillion in automatic, arbitrary cuts would begin in 2013 (whitehouse.gov). The proposed cuts include a fixed 2% per year decrease of Medicare, cutting non-defense spending such as education by 7.8% in 2013 to 5.5% in 2021, and reducing defense spending to a total of $454 billion (Congressional Budget Office).

In FY 2013, military spending accounted for 56.94% of discretionary spending (City Data). That astoundingly large fraction, coupled with the current administration’s shift towards a more hands-off foreign policy, and a survey that shows that 37% of Americans think the government is spending too much on defense, has unsurprisingly steered the government towards attempting to reviewing national defense spending (Gallup). There are 2 notable sub-divisions within the Department of Defense’s spending. Firstly, there is the Discretionary Base Budget, which includes costs such as personnel and operation fees, research, weapons procurement, and family housing, Secondly, there is the Discretionary Cap Adjustment, which is meant to compensate for the funding of unforeseen or emergency events (Association of American Universities). One thing to note is that the Overseas Contingency Operation (OCO) is technically not considered by the BCA as being part of the total cost of military spending; hence, the cost of military operations in Afghanistan and Iraq do not contribute to the final amount to be evaluated based on the BCA. Based on this attribute, I have chosen to not look into the DoD’s potential reduction in OCO costs. However, as can be seen in the DoD’s budget projection for FY 2013, a large chunk of the budget is devoted to operation, maintenance, and military personnel (Association of American Universities). Referring to Defense Secretary Chuck Hagel’s remarks in on July 2013, it seems as if the sequester will mainly affect military personnel through a reduction in troop numbers and new recruits and compensation and pay raises. Regarding operation and maintenance, major headquarter budgets are set to be reduced by 20%, overseas cost-of-living compensation are set to be reduced as well, and more. Overall, all of the categories of the Discretionary Base Budget will be reduced, as the DoD is aiming towards running a leaner and more focused military.

Before deciding on these budget cuts, it is important to consider a number of factors so as to minimize the adverse effects of the budget cuts for military personnel. During the same press release, it was mentioned that pay and benefits for service members and defense civilians consumed almost half of the DoD budget. “Overall personnel costs have risen dramatically….The department cannot afford to sustain this growth,” Hagel added (Department of Defense). In my opinion, the only options available would either be to dial down the recruitment of new personnel, implement pay cuts, or reducing compensation and family benefits. If the DoD were to implement pay cuts, they would have to determine the right amount to cut so as to not disrupt labour supply. Naturally, it would have a minimally adverse effect on the number of new recruits, but the more pertinent question to ask is “How would it affect current labour supply?” To tie it back to the lecture, let us assume that the benefits received by current military personnel are similar to the TANF program. If the benefits were reduced, how much would military labour supply reduce? In other words, how many soldiers would remain in the military, even with the budget cuts? The challenge to obtaining this information is that it is impossible to figure out the preference curves and budget constraints of every military personnel; hence, it will be very difficult to accurately predict the effect of the cut on pay and benefits. Another challenge is that even in a situation where the DoD can deduce the preference curves of their personnel, it would be subject to constant change. In real life, people’s preference and budget curves change subject to various unforeseen circumstances; using the same information to calculate potential pay cuts for the whole year would be an incomplete approach.

In 2012, the DoD released a report entitled Defense Budget Priorities and Choices and in it, among other strategic recommendations, the DoD states that they aim for a “more disciplined use of defense dollars”. Taking into consideration current events, my first recommendation to Chuck Hagel would be to reconsider the strategy to train and arm moderate Syrian rebels for the purpose of battling the Islamic State (Reuters). Most of the time, it is not a good idea to train and arm rebels (the Taliban situation is a good example). Instead of helping a foreign country fight violence with violence, the US should use the money to strengthen their defense at home, especially considering that ISIS priorities is still grounded in the Middle East. My second recommendation would be to minimally raise the salaries of the personnel and the soldiers – while reducing the benefits at the same time. This is because salaries are a fixed cost that can be easily monitored and calculated whereas benefits such as medical compensations are more variable and hard to control.

References:

City Data. "Rachel Maddow Exposes The Defense Budget As The Most Wasteful Spending (Iran, enemies) - Politics and Other Controversies -Democrats, Republicans, Libertarians, Conservatives, Liberals, Third Parties, Left-Wing, Right-Wing, Congress, President - City-Data Forum." City Data. http://www.city-data.com/forum/politics-other-controversies/2013745-rachel-maddow-exposes-defense-budget-most.html (accessed September 18, 2014).

Congressional Budget Office. "CBO's Baseline Budget Projections, as of May 2013, With Percentages of GDP Updated to Reflect Recent Revisions by the Bureau of Economic Analysis." Congressional Budget Office. http://cbo.gov/publication/44574 (accessed September 19, 2014).

Congressional Budget Office. "Discretionary Spending Under the Budget Control Act 2011." http://www.heritage.org/~/media/images/reports/2012/10/sr121/srfedspendingnumbers2012p61chart6.ashx?w=600&h=546&as=1 (accessed September 18, 2014).

Newport, Frank. "Americans Remain Divided on Military Spending." Gallup. Feb 27 2014. http://www.gallup.com/poll/167648/americans-remain-divided-military-spending.aspx (accessed September 19, 2014).

Office of Management and Budget, Budget of the US Government, FY2013: Historical Tables, Table 8.7, February 2012, http://whitehouse.gov/omb/budget/Historicals (accessed September 19, 2014)

Parrish, Karen . "News Article: Pentagon Review Reveals Best, Worst Case, Hagel Says." Defense.gov . http://www.defense.gov/news/newsarticle.aspx?id=120559 (accessed September 18, 2014).

Plumer, Brad. "America’s Staggering Defense Budget, in Charts." Washington Post, 7 Jan 2013. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/07/everything-chuck-hagel-needs-to-know-about-the-defense-budget-in-charts/>. (accessed September 18, 2014).

The White House. "The Sequester - What is it." The White House. http://www.whitehouse.gov/issues/sequester (accessed September 19, 2014).

US Department of Defense. "Defense Budget Priorities and Choices." US Department of Defense. http://www.defense.gov/news/Defense_Budget_Priorities.pdf (accessed September 18, 2014).

US Department of Defense. "The Budget for Fiscal Year 2013." https://aau.edu/WorkArea/DownloadAsset.aspx?id=13038 (accessed August 18, 2014).

Zengerle, Patricia, and David Lawder. "U.S. Congress approves arming Syrian rebels, funding government." Reuters. http://www.reuters.com/article/2014/09/19/us-iraq-crisis-congress-vote-idUSKBN0HD2P820140919 (accessed September 19, 2014).