Budgeteers to the Rescue

Can accountants save the Pentagon?

Will the fiscal cliff turn into a mere step off the curb for the Pentagon? It may depend on the definition that the administration's accountants use in applying the Budget Control Act to defense -- a definition about which there seems to be disagreement.

The Office of Management and Budget put out its sequester report ten days ago, saying it could not provide details on how the budget sequester would affect government "programs, projects, and activities (PPA)," the way last year's Budget Control Act requires, because Congress only gave the agency 30 days to complete the report. The number-crunchers just didn't have time to get their institutional arms around the definition of PPA and wrestle the details to the ground, according to OMB.

So their report only assessed the impact of sequestration at the level of "accounts," of which there are about 50 in the Pentagon budget -- Air Force aircraft procurement, Navy operations and maintenance, etc. Every one of these accounts has multiple programs tucked inside -- specific weapons systems, for example -- and OMB implied that each of those programs would be hit in a sequester with a 9.4 percent cut.

OMB is still working on exactly what PPA means across the government, but yesterday in an offhand comment Pentagon Comptroller Bob Hale was reported as saying that the OMB document "would give us more flexibility" because it might allow DOD "accounts" to be defined as the PPA.

If Hale's interpretation survives the day, DOD would have an early holiday present. And it would put out the firestorm being whipped up both by the secretary of defense and by such Republican stalwarts as John McCain, Lindsey Graham, and Buck McKeon, who have been running a high-volume mini-campaign about the fiscal cliff, warning about job losses, plant closures, and layoff notices -- all backed up by the Aerospace Industries Association's warning about a million defense jobs being lost in the event of sequestration.

Not reporting out data on specific programs ten days ago allowed the Obama administration to escape the politically-charged damage of identifying specific programs and locations that would be hit by the automatic cuts in the middle of the election campaign. That makes a smaller political target for defenders of the F-35, like Lockheed Martin, which integrates the plane, and whose CEO, Bob Stevens, has loudly warned that he will have to send layoff notices to his workers before the election because of the impact of the sequester.

But the Hale interpretation also breaks with past precedent. In the sequesters under the old Gramm Rudman Hollings Act of 1985 (incorporated into the Budget Control Act), OMB defined "PPA" as "program elements" in the defense budget, which means individual programs, like the F-35. This time around, that interpretation would lead to a 9.4 percent cut in resources for each and every specific program; a tough management task. (Though perhaps not that tough: As an Air Force program manager told me last week: "You're telling me I have to manage my program this year with 9.4 percent fewer dollars than I asked for. Heck, that's my job; I do it all the time inside my overall program account. I could do it with no harm to the program at all.")

For DOD, the "accounts as PPAs" interpretation would provide a gift if there is a sequester: flexibility. If a 9.4 percent budget cut hit "Air Force procurement," the Pentagon would have greater flexibility to find those dollars, trading off between various aircraft programs. Defense officials could reduce the funding for additional work on the troubled F-22; they could slow the buy of the new tanker; they could protect the F-35 from the cuts. The budget request for Air Force Aircraft Procurement is $11.3 billion, leaving lots of room for "in flight" budgetary maneuvers. Not so rigid, and good news for Pentagon managers looking for space to maneuver.

Hale's comment may be more wish than reality; it may not last for long. There is no sign from OMB that it agrees, and it is very easy (and probably right, I understand) to read the OMB report the other way. But it tells us the sequester "shadow play" is not over. Flexible or not, though, DOD is in for budget discipline it has not seen over the past decade, something I will be writing about in the coming weeks.

Tom Pennington/Getty Images

National Security

Off Course

Mullen and Gates get it wrong.

On Monday, former Chairman of the Joint Chiefs Adm. Mike Mullen and former Secretary of Defense Bob Gates participated in a panel at the Center for Strategic and International Studies on "Strengthening America: Our Children's Future." They delivered some wisdom on defense budgets -- a wisdom that is truly conventional, but also erroneous.

Unfortunately, the errors are so widespread that it is almost impossible to penetrate the discussion with the correction. But our understanding about what happens to the defense budget (which is still the largest in our history in constant dollars and nearly as large as all the other defense budgets in the world, combined) is important to understanding where we go from here, especially after the election.

So here goes. Admiral Mullen said: "Already, the president has reduced the fiscal year '13 defense budget by almost a half a trillion dollars." He clearly meant to say the 10-year defense plan, but, in reality, there was no cut in that plan, at all. The "budget" he talks about was the Pentagon's own 10-year wish list, provided last year, laying out the funds it hoped to receive over the next decade. The wish list included a lot of projected real growth (that is, growth beyond inflation). Then, fiscal reality hit, and the budget the president sent up to Congress this year presented a different wish list for the decade, one that was a cumulative $487 billion lower than last year's.

What Mullen did not say is that this new 10-year projection still hoped for growth in defense funds, but only to keep up with inflation. By any budget analyst's definition, this is not a "cut." It is a more realistic projection. But it is still a "wish list," because the chances are there will be real cuts -- that is, less funding than in the previous year for several years to come. But reporters, politicians, and the admiral go right on spreading the notion that the defense budget has already been, somehow, "cut."

Second, Secretary Gates, and the "defenders of defense," continue to spread the notion that, somehow, defense budgets are smaller than they used to be, measuring the defense budget as a share of Gross Domestic Product. This is true, but meaningless. If we are interested in how big the defense budget is and what capabilities it buys, defense budgets today are higher in real, constant dollars than at any time since the Second World War.

Third, Secretary Gates continues to repeat the notion he once said to me in a small group briefing I attended in the summer of 2010: our budget problem is entitlements, not defense. And we do have an entitlements budget problem. But the Congressional Budget Office has taken a good look at the causes of the doubling of our national debt during the Bush years. And CBO's data show that if you look at the sources of the debt that Congress voted for, defense is responsible for nearly a quarter of the debt growth and the stimulus package for slightly less. (The biggest source is probably the deep recession, which reduced tax revenues and put more people on unemployment insurance.) So defense should be on the table, if we are going to fix the problem.

And, fourth, Secretary Gates insists on repeating his mantra that, when we draw down on defense after a war (we've done four times, starting with Korea), "we never get it right," because "America's adversaries will always have a vote." It's a strange view of history. Yes, Eisenhower "drew down" our conventional forces in the 1950s (and boosted spending on nuclear weapons). But if Gates thinks that meant we were not ready for Vietnam, he's got the history wrong. Ike got us into Vietnam, Kennedy got us in deeper, and LBJ went whole hog. It's not like we didn't choose the war but our adversaries forced it on us and the draw down left us unready. It was a choice, and a bad decision, badly executed, to boot. But it was not a surprise.

If Gates is talking about the draw-down after Vietnam, there is precious little evidence that the Soviets invaded Afghanistan because they thought we were weak. Moreover, we did not fight them directly. We chose to arm the mujahedin, not to send our own troops, and we succeeded. Moreover, the Reagan build-up of the 1980s created the force that carried out another war of choice -- the Gulf War -- which may be the only truly significant military victory U.S. forces have had since the Second World War. Hardly evidence that we got it wrong and were surprised.

And if Gates is talking about the 1990s, the force that was in place after the post-Cold War draw-down was the same force that used Saddam Hussein as a speed bump in a 2003 war that was, again, one we chose. No "getting it wrong" there because we had drawn down. That the force was not prepared for an insurgency is not a result of "getting the draw-down wrong." It was purely bad planning in Rumsfeld's Pentagon.

These erroneous notions thrive because otherwise intelligent policy-makers like Mullen and Gates perpetuate them. Otherwise, it would actually be possible to execute a draw-down and sensibly provide for our real security needs at significantly lower levels of spending.