Last week, the St. Louis Federal Reserve tweeted a graph depicting US military spending relative to other major powers. The graph’s y-axes were somewhat misleading, to put it mildly, and observers glancing at it quickly would have been excused for assuming that China had surpassed the United States in raw military spending around 2013. This is very far from the truth, and thus the graph deservedly received a fair amount of derision. Interestingly, however, the quote tweets dunking on the graph also evinced a profound ignorance regarding comparisons of military budgets and inverted the error of the original Fed tweet by grossly overestimating America’s relative spending advantage. Now, the American military clearly does not operate in a state of penury—despite the deliberately silly alliterative title I chose for this post—but neither does it outspend its major rivals as much as naïve commentators routinely assert. Indeed, despite many credulous claims that the US devotes more money to defense than the next eleven countries combined, American military expenditure is only moderately greater than that of China and only barely superior to Russia and China combined.
Part of the discrepancy between public perceptions and actual fact is due simply to most observers’ use of inappropriate currency conversion techniques when comparing budgets. But other problems, such as a failure to disaggregate defense spending by category, compound these errors. All of this might seem to be pedantic and totally academic, but it has serious implications for a range of policy debates both within the US and abroad. Casual observers are systematically overestimating America’s comparative advantage in military spending, leading to distorted debates around the optimal number of resources that the US should be dedicating to defense. To be clear, the American military still maintains many sizeable advantages over its likely adversaries, and this will remain the case for the foreseeable future. But it is important to realize that this is largely the result of factors other than sheer budgetary largess.
So what, exactly, does the conventional wisdom around American military spending get wrong? The root of the problem is a failure to account for variations in the purchasing power of currencies within domestic markets. To understand why this matters, consider nonfungible goods and services. Currently, energy prices in Europe are much higher than in North America for one simple reason: Europe tied its energy wagon to Russian gas while the US and Canada did not. Unlike oil, which is easily traded and highly fungible, gas transportation typically requires fixed infrastructure, such as LNG terminals or pipelines. Consequently, when the supplier at the origin of the pipeline decides to turn off the spigot, there is no easy way to quickly substitute new supplies because it takes a long time for new infrastructure to be established. Or consider services such as haircuts. In India, a haircut might cost several dollars tops, but in the United States they can cost upward of twenty or even thirty bucks (and this is if you’re a man; I suspect women have it much worse). The reason is that barriers to labor flows impede arbitrage. So whereas highly fungible manufactured goods converge on a global market prices, service sector prices and labor costs tend to vary greatly by region.
Simple market exchange rates just do not capture these differences. If I have 100 American dollars, it’s easy enough to convert them to euros or rupees. But 91.97 euros in Germany will buy me far fewer units of natural gas, and 8151.55 rupees in India will cover many more haircuts, than 100 dollars in the US would. This Balassa-Samuelson effect might seem more relevant for economic debates than military analysis, but it bears directly on evaluations of military spending by affecting how far each dollar equivalent of spending goes. This is most obvious in the context of labor pricing. Immigration restrictions, language barriers, and, in the military context, security considerations all impede the free flow of people from country to country. Consequently, labor costs vary tremendously, and Russian and Chinese soldiers command far lower wages than their American peers. In concrete terms, then, China has to spend far less than the US to maintain the same number of soldiers. In fact, a Chinese Brigadier General-equivalent commands a wage roughly similar to that of an American Marine E-2 (Private First Class) when one includes adjustments for things such as housing allowances. But this also has implications for national arms industries. If wages are lower in a particular country, then ceteris paribus so are the costs of production. This is why so much manufacturing capacity has shifted from Western Europe and North America to Eastern Europe, Latin America, and Asia.
Properly accounting for purchasing power parity in the military context is tricky, however, as most of the products purchased by national defense establishments are sui generis and not available on the open market. This introduces all sorts of distortions, such as monopsony pricing, and makes cross-country comparisons challenging. Still, scholars and defense analysts have constructed military-PPP exchange rates to generate approximate conversion factors. Naturally, these estimates should be interpreted with caution, but assuming they are at least roughly accurate then the US spends about the same as Russia, China, and India combined. This is certainly not insubstantial, but it is also hardly “more than the next 11 countries combined,” as so many commentators assert.
But budget comparisons suffer from more than just poor techniques for measuring purchasing power. They also fail to disaggregate types of spending. One notable example is healthcare. Unlike many countries, the United States does not have a universal, government provided healthcare option in the same way that many European states do. One of the perks of joining the American military, therefore, is access to the federal healthcare program known as TRICARE. This provides coverage to military personnel and retirees, as well as their dependents, and it costs the US government around $55 billion per annum (equivalent in size to the entire German defense budget). Because this is a program specific to military personnel and their families, it falls within the American defense budget. But most European healthcare spending (including for military dependents) counts as domestic welfare spending, even when it’s provided to those connected with the military. Thus, raw, unadjusted values do not represent an apples to apples comparison, even if one were to correctly account for differences in purchasing power.
Assessments of military spending also tend to suffer from a failure to account for strategic requirements. The United States has pledged to defend a truly enormous number of allies and is the security anchor for both Europe and the Western Pacific, as well as, arguably, the Middle East. But commentators who tout the scope of American military spending frequently forget to account for this when comparing defense outlays. This is a major oversight, as it would be like evaluating a firm’s strength by simply measuring revenue without accounting for expenses. Yes, China might spend less than the United States, but it also does not have world-spanning security obligations and can thus concentrate the vast majority of its military power in its own neighborhood. The US, by contrast, must disperse forces across the world to reassure friends and deter adversaries, meaning that each potential enemy must contend with only a fraction of total American military power.
Now, none of this is to suggest that the US is a military lightweight or is outclassed by Russia, China, or any other country. It is not. For one, generating military power means ensuring sustained investment over time - it requires playing the long game. Snapshots of military spending reveal little, therefore, as the real measure of military power is the area under the budgetary curve, not the value of the curve at a particular point in time. China may be spending at levels increasingly close to those of the United States, but it has been spending at these levels for far less time than the US has. Beijing simply does not have the depth or breadth of capabilities that the United States military has painstakingly assembled over decades, and its troops very likely lack the quality of their American peers. Moreover, the United States benefits from its immense web of capable allies, who both supplement American military power and allow the American armed forces to project power far from North America. This means the US is nearly always the away team, which can present challenges, but it also guarantees that the destruction of war is unlikely to visit the American homeland in a substantial way.
In conclusion, the US is still by far the most powerful security actor in the world, and it is not particularly close. It does not, however, have the unlimited resources that so many casual observers seem to assume. And thus while its resourcing levels are (at least for most purposes) comfortably above those of America’s likely adversaries, they are far from overwhelming.