Room Rate Doesn’t Add Up
wanted the Defense Department to compile a list of programs more than 15% behind schedule or 15% over cost so they can be assessed for possible cancellation. At the same time, however, Trump
has been receptive to the complaints of lawmakers like Sen. Roger Wick- er, R-Miss., chairman of the Senate Armed Services Committee, who lamented in February that defense spending was “near record lows as a percentage of our gross domestic product, and all aspects of our military forces are now in dire need of repair or replacement.” Trump’s planned increase of the
military budget would go a long way to wiping out the $160 billion that DOGE claims it’s saved taxpayers with its government-wide cost cuts. The added resources don’t mean
the military is getting stronger or better at equipping its warfighters. It means there’s more bureaucracy to feed. In 2000, the Defense Department
spent roughly $150 billion on its active personnel, adjusted for inflation. Since then, that number has only inched
food stamps combined. Moreover, the Congressional Budget Office’s estimates assume that the bond market will not only tolerate a surge in spending, but become more relaxed about it with lower yields. Consider that if the yield
on the 10-year Treasury note stayed at today’s level of around 4.4% for the coming decade, the CRFB estimates it would add another $1.8 trillion in interest costs over that period. And what if yields surge
instead in a vicious cycle? JPMorgan chief Jamie Dimon warned of the consequences: “You are
S
oon after John Phelan was sworn in as Secretary of the Navy in
March, he reviewed the bill for a new set of barracks to house his sailors. Phelan, a longtime investment
executive without military experience, said he had trouble believing it.
“I see numbers on things that are
eye-opening to me,” Phelan said at an April 9 public appearance. The barracks cost $2.5 million a key (per room), he said. “My old firm, we built the finest
hotel in Hawaii for $800,000 a key, and that has some pretty nice marble and some pretty nice things in it, and I’m trying to understand how we can get to those numbers.”
upward, to $166 billion in 2024. Active forces made up just 21% of
the 2025 budget request. Most of the rest is eaten up by “operations and maintenance,” the conducting of day- to-day business, which has increased sharply. In 2000, the military spent roughly
$175 billion 2024 dollars on O&M. For 2025, the Pentagon requested $338 bil- lion, a 93% increase.
going to see a crack in the bond market, OK?” Yet the bond market isn’t
exactly collapsing, even if 30-year yields recently hit a postcrisis high. So, who are you going to believe, millions of fairly relaxed investors or some wealthy pundits? Another hedge fund
manager, Paul Tudor Jones, calls the paradox an economic “kayfabe,” a term from professional wrestling. Those who know that the numbers aren’t sustainable are happy to suspend disbelief while the show continues. Treasury Secretary Scott
Bessent has reiterated that the U.S. will never default
The Pentagon wrings its hands
over one of the roots of this predica- ment — the lack of competition for contract work — but it’s partly its own fault. In 1993, then-Defense Secretary
Les Aspin urged defense companies to merge with each other. In the after- glow of the Soviet Union’s collapse, it was thought the U.S. military would be spending less. What were 51 separate defense contractors during the Clinton admin- istration are now the “Big Five” — Lockheed Martin, Boeing, General Dynamics, Raytheon Technologies, and Northrop Grumman. Together, they account for 15% of
the Pentagon’s contract spending, which, defying experts of the early 1990s, has ballooned since the end of the Cold War. The companies’ exalted status
doesn’t mean they’ve skimped on PowerPoint presentations, wining and dining, and the occasional arm- twisting. Defense companies spent $70 million on lobbying in 2023, with the Big Five making up the bulk of that. — RealClearInvestigations
on its debt. But it doesn’t have to: Rapid inflation would accomplish the same thing if the Federal Reserve had to ride to the rescue through a measure called fiscal dominance. What is the tipping point
for the bond market to go from mild anxiety to the sort of concern that feeds on itself? Former International Monetary Fund chief economist Kenneth Rogoff, an authority on debt crises, explained in April that they “are never a matter of simple arithmetic.” “Almost every country
default — either through outright default or high inflation — occurs long
before debt calculus forces it to,” he said. Despite Dalio’s guesstimate, knowing when doomsayers will be proven right is impossible. Consider Stein’s law:
“If something cannot go on forever, it will stop.” (Contrary to urban legend, that line wasn’t uttered by Newsmax columnist Ben Stein, who played the boring economics teacher in Ferris Bueller’s Day Off, but by his father, Herb, an actual economist.) Life comes at you fast.
Spencer Jakab writes The Wall Street Journal’s Markets A.M. newsletter.
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