Friday, December 10, 2010

Defense v.s. Wall Street : A Cost Comparison

Being an avid documentary film fan, I recently re-watched an excellent one called "Why We Fight" by Eugene Jarecki. For those who haven't seen it, it tackles the topic of the military industrial complex in post WWII America.

While watching this film I had a sudden flashback to September 10, 2001, the day before the infamous and horrific attacks on the twin towers and the pentagon. The image that I saw was that of Secretary of Defense Donald Rumsfeld standing at a podium and telling the reporters in the press conference:

"According to some estimates we cannot track $2.3 trillion in transactions"

I instantly remembered how stunned I was at hearing the word trillion in an era before the financial crisis had made us desensitized to the enormity of the number. Back then a billion was a lot of money!

So I decided to do a quick cost comparison between the wall street induced cost burden to the US federal budget and those induced by the lost funds admitted to by Rumsfeld on that day. Considering the outrage directed at Wall Street in the post TARP era, I was very curious to see the results.

Note: This is simply a comparison of inefficiencies and/or possible foul play by wall street and the pentagon. This is not an indictment of either nor is it a discussion about the relative worth of the functions they serve.

Based on data publicly available from the website of the Office of Management & Budget  (OMB), I compiled the following chart of Defense spending from 1980 - 2010:

As you can see, defense spending has skyrocketed over the past 30 years in nominal terms. However, what interests us is the period leading up to Rumsfeld's announcement. The red colored trend line shows us the annual defense spending in 2001 dollars, which, after peaking in the late 80's, returned to levels near that of 1980 by the late 90's.

In nominal terms, the average (arithmetic mean) annual defense outlay from 1980 - 2001 is
$ 249.8 billion.

If we make the assumption that the $2.3 trillion in transactions that could not be tracked, in 2001, are a result of "losses" (for lack of a better term) accumulated over the 22 years from 1980 - 2001 (inclusive) then the average annual amount that could not be tracked, or was lost, would be $ 104.5 billion or 41.8 % of the Defense budget!!!

I find this a little bit hard to believe. The IRS regularly issues audits based on discrepancies of thousands of dollars, let alone billions. In addition to that the Congressional Appropriations Committees in the house and senate would have had to approve each year's budget while "not being able to track" 41.8 % of the prior year's budget. Hard to believe.

The amount of outstanding US federal debt in 2001 stood at $ 5.674 trillion. So the $ 2.3 trillion amount disclosed by Rumsfeld then constituted an unbelievable 40.5 % !!! Indeed it constitutes 16.9 % of the 2010 debt outstanding in nominal terms and 20.5 % in inflation adjusted terms (again using the GDP Deflator).

Note, the above scenario is extremely generous considering I spread the losses, arbitrarily, over a 22 year period.

Wall Street on the other hand, received a $ 700 billion dollar bailout in the form of TARP in 2008*. That constitutes 5.1 % of the 2010 debt outstanding in nominal terms and  5.2 % in inflation adjusted terms. That seems paltry in comparison.

I will go a step further. Let's blame the recession solely on Wall Street, as some do. Then let's take the total debt added to the US federal debt in '08-'09 and '09-'10 and assume the federal government wouldn't have spent it had Wall Street not imploded the economy.

The deficits in '08-'09 and '09-'10 are $ 1.412 trillion and 1.555 trillion respectively (source OMB). Using these numbers we can attribute 21.9 % of the 2010 federal debt to Wall Street!

Final Score:

Defense: 20.5%

Wall Street: 21.9%

*I am well aware of the various Federal Reserve programs and backstops that were also provided. However since we are comparing apples to apples, I will stick to the impact on the US federal debt outstanding. I would welcome any contributions that wish to expand the scope further.

1 comment:

Steve R. said...

i don't know what Rummy was talking aout and i doubt he does either lol kinda reminds you of Alexander Haig lol