Linda Bilmes on the Federal Budget and the Costs of War

Interviewed by Doug Gavel on April 3, 2013

With the president and Congress entangled in a bitter battle over how best to address the federal budget crunch, many Americans are wondering how to separate fact from fiction in determining the best policy choices. Linda Bilmes, the Daniel Patrick Moynihan Senior Lecturer in Public Policy and the former Assistant Secretary and CFO at the US Department of Commerce, teaches budgeting, public finance and financial management. She also leads a program to assist local communities in public finance, using teams of student volunteers.

Q. How do you assess the current federal budget dilemma, and what would you advise policymakers to do to address it?

Bilmes: People are very frustrated with the budget situation at the moment because they realize that we’re spending trillions of dollars and some of it is just being wasted.

The frustration is very understandable, but unfortunately the federal budget is not constructed in a way that you can see where all the waste and overhead is. So the first thing we need to do is to change the structure of the budget to include cost accounting and capital budgeting. This would enable us to look at long term costs and to see indirect costs. This kind of structural budget reform would make government spending much more transparent – which is a necessary first step to help us get a grip on the situation.

The second problem is that the budget process itself has broken down: we are perpetually in a budget crisis and Congress is perpetually enacting stopgap budgets. Thousands of government officials spend most of the year preparing huge amounts of documentation for budget proposals that never get passed. Instead, we should move to a biannual budget and prepare one consolidated budget every second year. This has been done successfully in a number of states and countries. There’s a lot of research, including some by my Kennedy School colleague Jeff Liebman, which shows that a disproportionate amount of money gets allocated in the last two weeks of the year. The quality of what we’re spending it on goes way down. We could avoid some of these problems simply by putting together a budget less often.

We also need to change the way that we structure the budget process so we prohibit the use of emergency money – which is supposed to be for actual emergencies, like hurricanes – being spent for regular appropriated things. Nearly the entire wars in Iraq and Afghanistan have been paid for by emergency funding measures.

The third major thing to get back to a point of sanity on the budget is to change the way that the Congressional committees are organized. Right now there are dozens of committees that are fighting over turf. Authorizing committees control entitlement spending, and appropriations committees control discretionary spending. One of the reasons that we can’t manage the overall budget is because the two kinds of spending are managed separately – separate processes, separate allocations. The last time Congress reformed the budget process was 40 years ago and it badly needs fundamental reorganization.

None of this is a panacea, but the combination of changing the actual budget, reforming the timing and the mechanisms for budgeting, and overhauling the Congressional budget process would get us much closer to sanity in terms of budgeting.

Q.  Much of your recent work has focused on the long-term costs of U.S. engagement in Iraq and Afghanistan. Please discuss this research.

Bilmes: I began studying the costs of the Iraq and Afghanistan wars in 2005 when many people in the country were concerned about how much we were spending on these wars. There was general feeling that we were spending a lot of money, but people didn’t know what “a lot” actually meant. They didn’t have a number to attach to it. w When we counted up the total spending on the wars and the debts that we were accruing in long-term costs – for veterans medical care, veterans disability care, military depreciation, and financing costs – we found that it cost much more than we had realized: it would cost in the range of two to three trillion dollars. That research was encapsulated in the book that I wrote with Joe Stiglitz in 2008, “The Three Trillion Dollar War.” At that point, three trillion dollars was the absolute minimum cost if you looked at what we had already spent, the future promises we had made, and the economic impact of this spending.

At that time we had projected the long-term costs for veterans based on previous wars. But since then, the actual number of claims and the actual utilization of health care by veterans has been much higher than we anticipated. We have now incorporated the actual claims of more than 800,000 veterans who have returned from Iraq and Afghanistan and we’ve found that 56% of those who have served and been discharged have already been treated for something by the VA health care system and more than 50% have already claimed for long term disability benefits of which well over 95% are approved. So when you look at the costs that are already accrued but not yet paid, it adds trillions of dollars to the trillions of dollars that we have already spent.

The price tag for the two wars is now a minimum of four trillion dollars. But there are still additional costs. There are economic costs such as the increase in oil prices, and there are financial costs, because all the money that has been spent to date has been borrowed and of course we have the financing costs associated with that. We’ve already spent 260 billion dollars in interest on the funds we’ve borrowed for the wars. When you project out the financing costs of all the money we’ve borrowed for the wars, you start getting into “silly money.” You start getting into seven trillion dollars in financing costs, depending on assumptions about interest rates and the economy. So we haven’t even included those.

The bottom line is that the legacy of these war costs has a real effect on our national security budget and our national spending capacity. One of the biggest threats facing the military will arise not from anything external but from the fact that we have this huge accrued debt, which includes paying for decades of care for veterans and for active duty service members. The systems in the Pentagon, for example the Tricare system [providing civilian health benefits for military personnel and their dependents], have grown enormously over the past decade as they’ve expanded to include Guards and as we’ve made a number of decisions that have locked in long-term cost increases.

Q. In regards to the long-term health costs for veterans, how do the most recent wars compare with others in U.S. history?

Bilmes:  We know from previous wars that the costs of a war continue for many decades after the last shot is fired. The peak year for paying disability benefits for veterans of World War I was 1969, more than 50 years after Armistice. And the peak years for paying World War II veterans were in the 1980s. So we have seen this happen before. And we know that for Vietnam War veterans, we haven't even come close to reaching the peak year in paying disability benefits.

But in these wars – in the Iraq and Afghanistan wars – these same long-term costs that we have seen in previous wars are not only going to occur, but to a much higher extent because we have had much higher utilization of health care; we have had much higher claims; we have had much longer tours of duty; we have had far more approved claims and far different kinds of injuries with better survival rates that we have had in previous wars. So we have the same phenomenon but to a much greater extent. And that drives a lot of the long term costs of the war which we are not looking at, at the moment, but which will hit in 30, 40, 50 years from now.

Q. You have been involved in helping the city of Newton establish a veteran's health center. Please discuss the project.

Bilmes:  One of wonderful things about teaching at the Kennedy School is that we have such amazing students and any project that you come up with is going to attract fantastic students to participate in it. For eight years I have been running a program in the local community in which a number of our students help local cities and towns with operational, financial and budgetary projects. These include a wide range – from street lights to snow plowing to smart phone applications to developing community centers, public-private partnerships, financing of the Rose Kennedy Greenway, new ferry line development, all sorts of different things.

Last year in Newton, Newton Mayor Setti Warren, who is himself an Iraq war veteran, reached out to me to ask for our assistance in establishing a state of the art transition program for veterans coming back to Massachusetts. Many of these veterans are older; many are reservists and guards. Mayor Warren said he wanted to try and understand what was happening to veterans as they came back to Massachusetts and what Newton could do to help.

So I asked around to my students and immediately had a number of them express interest including an active duty Navy, an active duty Marine, an Army veteran and a medical doctor who works with veterans. We wanted to track how the funding flowed from all the different federal and state programs into the town; so the students literally tried to understand where every dollar began, which program did it come from in Washington, and where did it land. Who actually got the money? And how did the money get to Newton and nearby places in Massachusetts?

We found in that the vast majority of funding went to veterans who had already in some sense fallen through the cracks. They were veterans who had suffered from homelessness problems or were unemployed or were having difficulties with substance abuse or mental health problems or some other readjustment or medical condition. But the vast majority of the need was for veterans who didn't have any of these specific problems, but who had just come home and were in need of some assistance in order to transition back into civilian life. These were veterans who simply wanted to have the opportunity to meet and talk with others in similar circumstances, allowing them to integrate their military experiences back into their lives.

As a result of this research, Mayor Warren decided to create a center that would serve this purpose because there really was no such center anywhere. So working with our students he has set up a first in the nation transition assistance center which serves as a kind of "third place." It serves as a place where people can come and participate in social gatherings, sports or other things. They can also have access to a range of information about all the different programs that are available to veterans returning, but it's not set up to be for those in dire need of specific help. It is essentially set up as a place to prevent people from falling into the kinds of trouble that can happen to anyone in life if they come back from a very difficult experience and they don't have any help.

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