Much has been said, and much ink spilled, over President Donald Trump's proposed $54 billion increase in defense spending for 2018. But what would you say if I told you there's hidden spending in the defense budget already that's much bigger than the president's well-publicized increase?
Like... five times bigger.
Pulling the curtain on accounting quirks
Last month, IAC/InterActiveCorp website TheBalance.com published a report explaining how what most people think of as "defense spending" really reflects only a portion of what the U.S. actually spends on defense and security.
Ordinarily, when we talk about defense spending, we mean the Pentagon's base budget, which Trump wants to increase to $574 billion in fiscal 2018. To keep that number as low as possible, though, the Pentagon carves out spending on foreign wars into a separate category called "overseas contingency operations." This is because, in theory at least, wars are supposed to end at some point, and won't need to be funded year to year.
What you don't know can cost you
Theory notwithstanding, supplemental "OCO" spending has been funded to the tune of tens, and even hundreds of millions of dollars every year since 9/11. Although accounted for separately, the OCO budget constitutes a second integral part of how Congress funds our military -- and next year OCO are budgeted to consume another $64.6 billion worth of U.S. tax dollars.
Nor do we spend OCO funds only through the Pentagon. Turns out, $12 billion in additional overseas contingency operations funding is channeled through the State Department and Department of Homeland Security to finance their own anti-ISIS operations.
And even then we're not done. We find tens of billions more in "hidden military spending" buried on the balance sheets of other government agencies. Other sources of funds include:
- FBI and Cybersecurity activities within the Department of Justice: Funded to the tune of $9.5 billion
- The National Nuclear Security Administration within the Department of Energy: $13.9 billion
- The State Department: $27.1 billion
- The Department of Homeland Security: $44.1 billion
- The Department of Veterans Affairs: $78.9 billion
Add it up, and we spend more than $250 billion on defense and security programs, on top of the Pentagon's $574 billion base budget -- about 44% more than you may have thought we were spending.
What it means for investors
If you're like many investors, you may have been at least vaguely aware that the U.S. spends money on the VA, on nuclear weapons, and so on. But perhaps you assumed this spending was included in the base defense budget? That would be the logical place to account for these expenditures -- but it turns out that this is not what the government does.
Instead, many of the less visible aspects of the military-security-industrial complex have carved out their own individual channels of funding, which are found in the categories described above. And it's a bit surprising just how much money these corollary-to-defense activities consume: $250 billion! That's enough money to buy 20 brand-new Ford-class aircraft carriers every year -- a shockingly large sum.
But here's the thing: Just because Congress doesn't go out of its way to advertise how much America's wars are costing the taxpayer doesn't mean it's hiding the information, either.
The fact is, every day of the work week, the U.S. Department of Defense lists -- for public review -- every single contract of material size that it awards to its contractors, and how much those contracts are worth. Just last month, for example:
- A $260.5 million contract awarded to Johnson & Johnson (NYSE:JNJ) to supply the Defense Logistics Agency with "orthopedic products." Over the course of just one year, Johnson & Johnson will reap more than a quarter-billion dollars' worth of revenue from the DLA -- and Johnson & Johnson could receive "option" exercises extending this contract's duration for four more years.
- Three separate contracts awarded to FedEx (NYSE:FDX), UPS (NYSE:UPS), and Atlas Air Worldwide Holdings (NASDAQ:AAWW) to perform "express small package delivery services" for U.S. Transportation Command through Sept. 30, 2022. Over the course of these five years, FedEx and UPS can expect to reap a total of $2.35 billion in revenue -- each -- while Atlas Air stands to gain as much as $199 million.
- A State Department program aiming to supply the Kurdish Peshmerga infantry in Iraq with $295.6 million in small arms, trucks, and armored vehicles to assist its fight against ISIS in Iraq and Syria.
All of this is part and parcel of what The Balance calls the $250 billion in "hidden military spending" within the federal budget. But it never really was a secret. You just needed to know that it was out there to be found, and where to look for it.
And now you do.