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Editor’s note: This article is the fifth in an 11-part series examining how the United States should organize, lead, and integrate economic statecraft into strategy, defense practice, and the broader national security ecosystem. This special series is brought to you by the Potomac Institute for Policy Studies and War on the Rocks. Prior installments can be found at the War by Other Ledgers page.
Debates over defense budgets and economic statecraft are not a distraction from warfighting. They reflect a basic reality: Military power does not exist in isolation. It is built, sustained, and ultimately limited by America’s economic capacity and the system that translates resources into capability.
The United States cannot compete with high-end adversaries if it cannot convert economic strength into fielded capability. That linkage — between resources, industry, and operational output — is what determines whether national power materializes in armed conflict.
America’s advantage lies in free markets and competition, not centralization. The military will outperform rivals by leveraging the dynamism of its own economy. That advantage depends on sending clear signals to both the force and industry about priorities and demand.
Improving outcomes is less about top-line increases or sweeping reform than about coherence. The Department of Defense’s budget process should communicate stable intent. Better guidance, more consistent engagement with industry, and stronger data inputs can help to reduce noise and sharpen those signals.
Why is a discussion of defense budgets part of a series on economic statecraft? While building better budgets does not inherently equate to better economic statecraft and vice versa, three factors increasingly link these efforts.
First, the sheer scale of defense spending relative to overall discretionary federal spending is substantial. For Fiscal Year 2024, the Congressional Budget Office reports that defense accounted for approximately 47 percent of discretionary spending. Defense supplementals and reconciliation authorizations will likely shift this proportion upward in future years. In other words, the Defense Department accounts for roughly half of the federal government’s available funding. Regarding the “promote authority” discussed in another article in this series, the defense budget is the largest single mechanism within the federal government to drive action. There is no way to effectively wield the incentives of federal spending without viewing the defense budget as a way to both achieve hard power results and drive national economic statecraft outcomes.
Second, the Pentagon is deeply dependent on industry and the broader economy to produce and sustain capability advantages over competitors and adversaries. While the military instrument of U.S. hard power is visible and tangible, the innovative and entrepreneurial capacity of the United States forms the foundation of national competitive advantage. If national security priorities are not translated into clear defense budgetary signals, industry and private capital will not align to solve key national security challenges, and America will fail to harness its innovative industrial ecosystem.
Finally, the process and behavioral changes required to use the defense budget as a tool of economic statecraft are nearly identical to the changes required to produce better military outcomes.
Understanding the connection between the defense budget and economic statecraft requires a brief explanation of the seemingly impenetrable Department of Defense budgeting system, known as Planning, Programming, Budgeting, and Execution. This is essentially a collection of interdependent processes that translate the president’s strategic guidance into the department’s annual budget submission. (To simplify, I use “budget process” to describe the overall process. Technically “budgeting” is a narrow comptroller function).
The budget process seeks to align resources to achieve objectives outlined in strategic guidance, such as the National Security Strategy and the National Defense Strategy. Derived from those documents, the Defense Planning Guidance underpins the budget process and translates policy objectives into specific priorities for each portion of the immense defense enterprise. This annual guidance sets the conditions and assumptions used to build and assess budget inputs. Unfortunately, the guidance tends to identify priorities far beyond realistic funding levels. Typically, this means that for every $10 billion of “priority” capabilities, there is less — usually far less — than $1 billion available to pay for them. This deficit effectively neuters the guidance and produces a nearly incomprehensible compilation of parochial budget priorities.
For example, consider the dilemma the Air Force faces as it simultaneously attempts to maintain current operations, increase readiness for future conflicts, and modernize its aging fleet. Like all the services, the Air Force’s budget essentially breaks down into three bins: manpower (paying military members and civilian employees), readiness (fuel, maintenance, training), and modernization (developing and buying systems). Consequently, a seemingly massive, approximately $200 billion annual budget rapidly closes in on itself. Historically, about one-third of the budget is aligned to modernization, encompassing research, development, test, evaluation, and procurement. Nuclear modernization and multi-year programs add further budgetary constraints. Combined with the fiscal disconnect of the Defense Planning Guidance, this results in an annual exercise of balancing near-term readiness and long-term modernization risk. Similar tradeoffs play out across each service and agency in the defense enterprise.
Consider shipbuilding, secure semiconductor sourcing, and space launch — all examples of defense-centric decisions with implications far beyond the Pentagon’s purview. The military services and defense agencies receive little to no direction on incorporating broader economic statecraft considerations into their budget calculus. Therefore, services spend years constructing budgets based on force structure, requirements, and policy assumptions that potentially fail to address broader national goals. Late-stage inclusion of new factors in the budget process — such as expanding the defense industrial base — invariably leads to fiscal disconnects between the services, across programs, and appropriations requests. This dynamic undermines the coherence of defense budgets and points to the need for improved initial guidance.
While defense spending accounts for an outsized portion of federal spending, it is still dwarfed by the investments across commercial industry — this presents challenges and opportunities. The current acceleration and democratization of manufacturing and innovation are paired with a reemergence of dual-use technologies that allow advanced militaries to leverage private capital. For example, Goldman Sachs estimates that AI companies may invest more than $500 billion in 2026. By comparison, the Trump administration’s 2025 budget request submitted to Congress was $310.7 billon in all defense investment accounts combined. While reconciliation and other congressional actions ultimately increased this figure, it remains far below private sector investments in a single sector.
In this environment, influencing small changes in the trajectory of private sector investments represents a de facto increase in defense spending. Importantly, this logic not only applies to the United States, but its allies, partners, and adversaries as well. The fundamental question going forward is how the U.S. defense establishment should navigate and optimize these opportunities to create relative capability gains.
The following examples highlight the linkages between defense budgets and economic statecraft.
Consider a case in which an individual military program has far-reaching national economic competitiveness implications. The Air Force provides global aerial refueling capacity with a fleet of approximately 465 tanker aircraft. Over three-quarters of that fleet is made up of the aging KC-135 aircraft, a Boeing 707 derivative, which first entered service in 1957. A steady state of global operations are straining the fleet, including nuclear deterrence, training, and homeland defense. In major conflict, aerial refueling is a force projection enabler but also an operational dependency. Recent events and reporting highlight the inherent risk of air refueling and forward basing, but also the difficulty of rapidly replacing this aging fleet.
The Air Force is slowly replacing its KC-135s on a one-for-one basis with the Boeing KC-46 Pegasus, a military derivative of the 767 airliner. The service received its 100th aircraft in Dec. 2025 and Boeing plans to deliver an additional 19 KC-46s in 2026. The KC-46 shares a production line with the 767 freighter, the last commercial variant of the airliner, which is not commercially viable without sustained tanker production. Therefore, the fate of a domestic dual-use heavy aircraft production line, a fleetingly rare national asset, is inextricably tied to year-to-year Department of Defense budget decisions which take little account of broader national economic impacts.
The KC-46 is just one example of the connection between domestic aircraft production and military capabilities. Global competitors in the commercial aircraft market put pressure on Boeing, one of the largest historical exporters and military suppliers in the United States. Meanwhile, the development of new dual-use domestic aircraft manufacturing capabilities, such as blended wing body designs, require coordinated policy action to incentivize investment, build manufacturing capacity, and accelerate certification. These issues span the Departments of Commerce, Transportation, and Defense, among others, but there is no clear coordination function for unified action. The largest federal fiscal signal remains the defense budget with no clear mechanism for consideration of these broader issues.
Nowhere is the mismatch between defense budget decision-making and battlefield reality more evident than in modern munitions. A recent Washington Post article highlighted the disparity between expenditure and production rates of weapons such as the Tomahawk Land Attack Missile and Patriot interceptor missiles. These two high-end systems represent a larger class of expensive weapons that are highly capable but rely on complex, bespoke, and overlapping supply chains. This is the result of many factors, including industry consolidation, accumulated annual budget decisions that drive down production rates, and requirements processes that privilege “exquisite” over “good enough” solutions. Regardless of cause, the result is using $3 million munitions to destroy $35,000 Iranian Shahed drones, with limited room for rapidly increasing production. This is simply unsustainable.
The rapid growth of the additive and distributed manufacturing ecosystem offers opportunities across the munitions portfolio. Not only can this new ecosystem accelerate fielding of systems at scale with reduced costs, but it also provides a manufacturing infrastructure capable of rapid adaptation. An influx of venture capital investment in defense technology is helping build a robust manufacturing ecosystem, but investors must continue to see a clear path to returns. The lack of a coherent and consistent demand signal from the Department of Defense risks undermining the perceived value of these investments and squandering a critical opportunity.
The air refueling and munitions examples highlight the need for coordinated action between government and the private sector. Ultimately, economic statecraft tools like federal and state tax incentives, intellectual property protections and public-private cost-sharing agreements are inseparable from defense policy and budget discussions.
William Norris’ article in this series addressed ways to improve national policy and interagency coordination mechanisms, but there are practical, near-term improvements the Department of Defense should implement now.
Improving ties between the defense budget and broader economic statecraft priorities requires improving the signal-to-noise ratio: increasing the signal internally with improved guidance and externally through better communication with industry, while reducing noise by removing unnecessary processes, increasing stability for investors and suppliers, and sharing a common view of capability and industrial impacts of decisions.
The following recommendations are designed to improve defense budget coherence and better integrate economic statecraft into Defense Department decision-making.
The department should incorporate economic statecraft considerations and assumptions in guidance provided to the military services through the Defense Planning Guidance. First, the guidance should consider fiscal constraints in its stated priorities for investment and risk acceptance and more robustly address costs beyond the current five-year window. Second, the guidance should provide clear priorities and assumptions related to industrial policy. Third, this guidance should include measurable and assessable criteria with specific emphasis on addressing the cost imbalance highlighted by the Shahed example. Ultimately, shifting funds is the most powerful bureaucratic incentive — organizations will respond to this guidance if it drives budget decisions.
Private capital now plays a decisive role in defense innovation, yet the Department’s demand signal remains fragmented and episodic. The Department should mandate that each service publish structured, problem-centric industry demand signals tied to Defense Planning Guidance priorities. This is not a substitute for requirements documentation, but it affords industry insight into resourcing intentions. Clear signals allow investors to allocate capital earlier, enable industry to build bridge markets across commercial and defense sectors, and help new entrants align designs with realistic production and sustainment assumptions. This recommendation is likely the easiest and most consequential action the Department of Defense can take to align economic statecraft efforts and the defense budget process.
To integrate economic statecraft considerations into defense planning, the Department of Defense should see itself clearly. Today, requirements, force design, acquisition, budgeting, sustainment, and industrial base assessments operate on overlapping but inconsistent taxonomies and data structures. Capability-focused methodologies help decision-makers understand the operational context and dependencies inherent in budget decisions. The Department should build on efforts like “mission engineering” analysis, which maps the programs and systems required to accomplish a mission. The Department should mandate “tagging” programs to missions, industrial dependencies, surge capacity, supply chain exposure, projected operating-to-acquisition cost ratios, and relevance to national economic priorities. This does not require a new billion-dollar system of record — simply publish and enforce data standards. Once visible, tradeoffs become clearer, and the complexity becomes governable.
The current annual budget process within the Defense Department paradoxically leads to less budget flexibility, insufficient analysis, and less stability for external stakeholders. Prior to the 2010 budget, the department provided an annual budget input Congress but internally performed a two-year cycle. This approach provides increased time for analysis and decisio- making, leading to better decisions, especially those impacting major modernization programs. While business rules can still allow annual changes to maximize opportunities, the increased analysis will improve stability for industry, supply chains, and Congress.
Leveraging private capital in defense technologies often requires relatively small, flexible increments of funding — tens of millions of dollars versus billions. The critical funding gap often is the one-to-three-year bridge between lab investments and longer-term program of record funding. Current technology transition accounts allow the services to become critical late-stage investors and spur additional private funding. To avoid the typical three-year service budget lag these funds are appropriated with spend plan level detail and updated as opportunities emerge. Modest funding increases to these accounts complement a two-year budget cycle by improving stability within established programs while also increasing flexibility for emerging capabilities.
To outpace its adversaries, the United States should harness its competitive strengths to generate economic power and translate it into enduring military advantage. Improving the signal-to-noise ratio in defense budgets offers a practical, near-term path to aligning innovation, industry, and investment with the demands of modern conflict.
Mark Mitchum is a retired U.S. Air Force major general and former commander of the Air Force’s provisional Integrated Capabilities Command, with deep experience in planning, programming, and requirements. He founded StratAero Advisory, where he advises clients on strategy, investment, and capital allocation.
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Image: Petty Officer 1st Class Alexander Kubitza via DVIDS.
