What price can be put on the security of freedom within the United States?

By DAVID MOON, Moon Capital Management
October 21, 2001

How much is a tank worth? What about a cruise missile or B2 bomber? Is there some value to paying undercover agents to infiltrate organizations at war with the United States?

Of course there is. Even the anti-everything protesters (who object to the use of military force in almost all circumstances) can safely protest as a result of the freedoms purchased in the name of national security. The value of our military spending is as difficult to quantify as is the value of our freedom; without one, we do not have the other.

But from an economic standpoint, defense spending is much more complicated. A single tomahawk missile costs $600,000, paid for by US taxpayers. That money is no longer in your pocket. You can't buy groceries with that money. You can no longer invest it. You can't give it to your church or favorite charity. You can't use it to hire new employees, buy computers or build a new production plant. Whether that missile is ever used or not, the money is forever gone.

Before I give the wrong impression, let me be clear: protecting our country is the single most important function of our federal government. Of the growing federal services and programs emanating from Washington, it is one of the few that is clearly constitutionally mandated. Defense spending ' whether homeland or overseas - is important and necessary.

But it also has a cost. We lost sight of that in the 1990s. For 30 years, we spent our resources and energy defending against an attack from the Soviet Union, an enemy that economically crumbled along with the Berlin Wall. For a very short period afterwards, money that was previously being spent on defense was diverted to other areas, including a federal budget surplus that lowered the cost of capital for everyone. From the 1950s through the 1980s, the federal government spent 6 to 8 percent of our entire economic output on defense spending. By 1997, that percentage had dropped below 3 percent. To return our current military budget to its comparable size during the 1980s would require us to double defense spending

Few observers believe our military spending should return to cold war levels. But even fewer believe our spending on defense is not about to increase. We are going to spend more money for guards in airports. We are going to stockpile vaccines for anthrax and smallpox. We are going to rebuild some very large office buildings. And we will drop more $600,000 bombs on the evildoers. The LA Times speculates the federal government will spend our additional $1.5 trillion over the next five years on homeland defense. Before September 11, some of those dollars would have been spent on something economically productive. But not now. We are about to experience a reverse peace dividend.

Think about this spending like an insurance policy. When you send in your homeowner's premiums, the insurance company and your agent make some money. But there is no relationship between the size of your premium and your quality of life. You either have adequate protection or you don't. If you cancel your policy, you will experience a short-term increase in your standard of living ' until your house burns down. That is what has happened in the US. We have neglected to pay the premiums and purchase the correct coverage. We enjoyed a false sense of security. This impending increase in our collective insurance premiums will not increase our economic output. It will, in fact, divert resources away from what would otherwise be productive or pleasurable activities. But the expense is necessary.

This is one way in which all Americans are about to make sacrifices.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website