The inflation of the U.S. military budget is a complex issue, involving various political, economic, and institutional factors. The military inflation rate in 1940 was on an upward trajectory compared to the non-military government sector and the economy as a whole (Fordham, 2003). In this regard, attempting to determine the precise cost of military spending over time becomes exceedingly difficult. In the seminal work "The Political and Economic Sources of Inflation in the U.S. Military Budget" by author Benjamin O. Fordham, the reasons for this reality are outlined as follows: inflation in the public sector driven by labor intensity, the cyclical nature of military spending, and the Pentagon's influence on the contraction transaction chain. Thus, this article integrates Fordham's work and the relevant literature as a foundation for understanding inflation in the U.S. military budget.
Another more general explanation for rising inflation in the public sector is the relative inefficiency of labor-intensive government services compared to capital-intensive private sector services that achieve greater productivity gains. This process is often referred to as "Baumol's Disease," where private sector wages rise due to improved productivity. The public sector is compelled to follow suit to compete for workers, despite not seeing increases in productivity (Baumol, 1967). This has resulted in rising inflation rates in public sector services, such as education and law enforcement (Baumol and Bowen, 1966; Span, 1977).
However, Fordham 2003 argues that this explanation weakly applies to military inflation. Military goods and services are not necessarily labor-intensive, so the link to Baumol's Disease is limited. It is true that military wages have risen in the post-conscription era, especially since the 1980s, but the military has largely sidestepped the effects of Baumol's Disease by substituting labor with capital. For example, even with rising real military wages during the 1980s, the number of personnel sharply declined—a sharp decrease that corresponds with a shift to capital-intensive technologies, such as advanced weapon systems, to compensate for rising labor costs (Fordham, 2003). Fordham's study indicates that real wages for military personnel rose after the end of conscription, but this trend was subsequently reversed when the Pentagon shifted more resources to durable goods and capital equipment, making them less labor-intensive (Fordham, 2003).
Although Baumol's Disease may explain inflation in many government sectors, Fordham 2003 clarifies that it can only account for a part of the inflation linked to military spending. Instead, the cyclical pattern of military spending—predefined by political and economic factors—provides a more compelling explanation.
One of the main reasons for inflation in the military budget is its tendency to act cyclically, as often observed during wars. As Fordham (2003) puts it, "Rapid increases in military spending, which occur mainly due to wars, create inflationary pressures." This is always followed by a slower decline, meaning prices do not decrease after wars end. This implies higher long-term inflation, as suggested (Fordham, 2003). This appears to be the case when looking at the cycles of World War II, the Korean War, the Vietnam War, and military buildup during Reagan's era in the 1980s.
Fordham's study presents an average annual inflation rate for military spending from 1941 to 2001 of 4.92%, indicating a relatively higher rate compared to the 4.46% for non-military government spending and the overall economic inflation rate of 3.97% (Fordham, 2003). Historically, inflation levels always show a sudden spike during wartime and then gradually decline afterward; this explains why inflation levels continue to deviate. Political pressures occurring at the end of hostilities—such as the need to grant some wage increases to returning veterans or the need to support defense industries—hinder efforts to make sharp cuts in military spending and its equivalent prices, according to Fordham, 2003.
One distinctive feature of spiraling inflation is the relative inflexibility of supplies of military goods and services. Military equipment often relies on extremely rare and specific resources, including certain metals and advanced technology in electronic equipment. Consequently, rapidly expanding production is challenging. As military spending increases rapidly, or importantly, as a percentage of GDP, there is upward pressure on the costs of these goods, leading to inflationary bottlenecks; for instance, the U.S. government imposed controls on the prices of strategic goods like steel during World War II and the Korean War to curb inflationary trends. Nevertheless, military inflation remained high during those wars (Fordham, 2003).
Fordham (2003) continues to examine the role that the deflator chain plays when calculating real military spending and its impact on interpreting military inflation. The military price index differs significantly from price indices used by the government, such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). While both CPI and PPI use a fixed basket to measure changing price levels over time, the calculation formula for the military price index includes variable weights that are recalibrated each year to accurately reflect the relative structure of military expenditures (Boskin et al., 1998). This leaves room for flexibility regarding changes in resource allocation for defense spending. Typically, this reduces the actual pressures stemming from inflation since it does not fully consider the opportunity costs.
Concerningly, as noted by Fordham 2003, this method of calculating military inflation conceals the full increase in military goods and services prices. For example, if military prices in the U.S. had risen at the same rate as the rest of the government since 1940, it would have resulted in about $96 billion by 2003. One of these methods is the variable weight method used in defense budgeting and calculating military inflation. It has, at best, provided a very conservative measure of inflation, meaning that actual costs were likely much higher.
A third layer of complexity in measuring military inflation arises from technological development. Technological progress leads to the improvement of military equipment quality, which may make high spending an indicator of enhanced capabilities rather than inflation. For example, Fordham (2003) summarizes that the Bureau of Economic Analysis (BEA) controls the military price index to improve quality, suggesting that high spending reflecting superior capabilities is not, in fact, inflationary (BEA 1979). In other words, the BEA would account for the agility improvements shown by a new fighter jet in a single price increase, reducing the impact of productivity growth on the inflation rate.
Despite these changes, inflationary pressures from within the military sector remain high. This indicates that rising costs of military goods and services are not only a result of technical advancement; they also arise from internal structural problems within the defense procurement system itself (Fordham, 2003). Moreover, the costs of developing modern weapons have risen at a pace faster than the general inflation rate applied to military goods, exacerbating the overall inflation burden on the defense budget as a whole (Kennedy, 1983).
There is a final aspect that may contribute to inflation in the defense sector, according to Fordham, 2003, concerning the influence that the Department of Defense exerts on the deflation transaction chain. Specifically, according to Fordham, defense staff would have an incentive to report larger deflation rates, making the larger nominal increases in budget allocations appear more significant (Fordham, 2003). This source of distortion can be observed in the first deflation series of military spending for the years 1972-1977. Fordham's study shows that military inflation during this period exceeded model forecasts by an average of 2.2 percentage points annually (Fordham, 2003). This indicates that the focus on obtaining larger budgets has led to inflated estimates by the Pentagon regarding inflation during times of financial constraints.
However, as Fordham (2003) states, despite the difficulty of proving direct real political manipulation of the deflation transaction series, implicit biases by defense officials may have affected the data. Given these significant risks in the early 1970s under declining military budgets during a time of severe inflationary pressures: since defense officials provided most of the price data used in the Economic Analysis Bureau's deflation series, there may have been a significant relative price bias inadvertently introduced into the inflation figures reported by these officials (Fordham, 2003).
This is the dynamic of inflation in the U.S. Army budget, arising from the intricate interconnection between political, economic, and institutional factors. Baumol's Disease explains only a portion of inflation in the public sector, and its applicability is somewhat limited because the Pentagon substitutes labor with capital. Additionally, there is an extension of bias through cyclical military spending, particularly in times of war, where increases in prices are not fully compensated by post-war reductions. Finally, and perhaps most importantly, are the political motives and organizational agendas within the Pentagon that ensure the relentless continuation of inflation spirals in military goods and services. The variable weight deflator used to measure military pricing techniques tends to underestimate the actual extent of military inflation.
As military inflation in the United States continues to rise over the past decades, sources of military inflation remain an essential part of understanding for researchers and political analysts. From this perspective, Fordham's research area calls for more in-depth inquiries into the precise economic and political causes related to military inflation and its implications for future military spending/financial trade-offs.
This is an AI-generated English translation. The original text is in العربية
PhD Researcher in Defense Contracting and Cooperation Policies