By now, you've probably seen this picture that's been floating around the Internet, and most recently floated onto "The Daily Show" with Jon Stewart:
Source: Data from Stockholm International Peace Research Institute, SIPRI Military Expenditure Database, 2013. Compiled by PGPF.
But is it true? Does America really spend more on defense than the next 13 nations combined? Well, yes and no.
Lies, damned lies, and Internet statistics
If America spends $711 billion on defense -- and if the actual defense spending of the next 13 biggest defense spenders in the world adds up to $695 billion -- then yes, America would be spending more than the next 13 nations combined. But there are two crucial caveats here.
First, America is not spending $711 billion.
And second, the other countries aren't spending $695 billion.
As you can see in the chart below, U.S. defense spending actually topped out at $691 billion in fiscal year 2010, with about 23% of that going to finance two wars.
Since then, defense spending has fallen off dramatically. U.S. combat troops left Iraq at the end of 2011 and are heading for the exits in Afghanistan today. This year's defense budget calls for $615 billion in spending (about $100 billion less than reflected in the Technicolor spending chart up above). Fiscal 2015 spending, now in negotiations, will probably be even lower, as operations in Afghanistan wind down.
And as for the base defense spending budget -- not counting Overseas Contingency Operations, or OCO -- it's held steady at about $520 billion and change for the past five years.
What about everybody else?
But what about the other part of the theory? That the "next 13 nations combined" supposedly spend only $695 billion?
Well, there's a bit less than 100% truth in that statement as well.
Take China, for example -- the second-biggest defense spender on the globe. In 2012, China's gross domestic product was $8.23 trillion. According to the CIA, about 1.99% of that GDP was budgeted for defense spending -- $163.8 billion. But in fact, China probably spent quite a bit more.
According to Time magazine, "China's military spending has tripled over the past decade, and is now roughly a third of what the U.S. military spends." (One third of America's latest defense budget would be $205 billion.)
Stars and Stripes backs up Time's math: "China's rising defense outlays might have topped $200 billion for the first time in 2012, even though its declared military spending was around half that much," writes the Pentagon's own newspaper. "Chinese defense spending may have reached as much as $215 billion [in 2013], representing an increase of nearly 20 percent from the Pentagon's upper-range estimate of $180 billion in the previous year's report."
So, any way you cut it, China is spending in the $200 billion-plus range -- and unlike the U.S., China's defense budget is growing. China is building a fleet of four new aircraft carriers, for one thing. That alone will add billions to its budget.
You can't invade Crimea on a shoestring budget
Russia, too, spends a lot on defense. The world's third-biggest spender laid out $90 billion for defense in 2012. Russia's defense ministry just announced a $9 billion spending program to build a force of "drone" aircraft. And the country is adding 40 new warships to its navy this year alone.
Between these two programs, and the cost of invading and occupying Crimea besides, there's a good chance the Kremlin will bust right through its $90 billion defense budget this year.
Pencils down!
So, as we review the facts, it appears to be true that in one single year, a few years ago, the U.S. arguably spent as much as "the next 13 nations combined" -- but that's clearly no longer the case today. Today, it would be more accurate to say that the U.S. spends about twice the $300 billion spent by the next two countries combined.
Don't get me wrong -- that's still a lot of money. But given that China just unilaterally annexed most of the airspace bordering Taiwan, Korea, and Japan, and Russia just invaded one of its neighbors, it may not be an unreasonable amount of money to spend. And in any case, despite America's sizable budget deficit, it does not appear that the Pentagon, or Congress, intends to undertake any significant spending cuts on defense -- not if the trend of the last five years is any indication.
Viewed from the perspective of an investor, though, it can't fail to be noticed that the steep increases in defense spending from 2001 through 2010 have pretty much trailed off. And the limited prospects for future increases in defense spending are reflected in today's modest, single-digit, projected-growth rates of many defense contractors: General Dynamics (GD +0.02%), Lockheed Martin (LMT 1.79%), and especially, Northrop Grumman (NOC 1.48%) -- pegged for just 1% annual profits growth over the next five years.
In short, if there are arguments to be made for maintaining defense spending at current levels -- the prospects for a repeat of the kind of rapid-fire growth we saw earlier in this millennium seem vanishingly small.
