3. The problem with the defense budget is not that it is too small. We spend more than we ever have. The problem the administration faces is that the parts of the budget that are out of control are, at best, only indirectly related to security needs. The fiscal discipline that is on the way will help focus attention on these major issues, which have been widely recognized for decades:
- No amount of "acquisition reform" has managed to keep defense programs from going well over budget. As the Government Accountability Office notes in its understated way: "For several decades, Congress and the Department of Defense (DOD) have explored ways to improve the acquisition of major weapon systems, yet program outcomes and their underlying causes have proven resistant to change." Services are incentivized to under-budget, lest the program not fit in the budget. Contractors are incentivized to under-bid, lest their program not fit into the budget. History suggests that the key ingredient to holding down cost growth is none other than firm, knowledgeable leadership and constant attention from the top of the Pentagon. David Packer, Nixon's deputy secretary of defense (and co-founder of Hewlett Packard), knew all about that and had a better record than most in stemming cost growth -- a record that has never been remotely matched.
- The military's overhead -- the "back office" -- is severely overweight, whale-like even. A 2010 McKinsey study concluded that the U.S. "tooth-to-tail" ratio was worse than 27 of the 28 other countries it surveyed, including China and Russia. A Defense Business Board study the same year concluded that 40 percent of DOD active duty forces were "never deployed." This back office has been as resistant to reform as the acquisition system. Secretary Gates tried to nibble at it before he left, but efficient management is not DOD's forte. Shrinking budgets may prove to be the most effective tool in streamlining and disciplining the back office, which plays, at best, an indirect role in the combat capabilities of the force.
- The third rail of defense spending, personnel policy, has become even more electric. Time and again, secretaries of defense have tried to halt the endless growth of military pay, health costs, and benefits. Here, Congress is at equal fault. It is too politically easy to boost the troops' pay. It is too easy to spread the military benefit net to cover more and more dependents, reservists, and retirees. And it is almost impossible to curtail a retirement system that deprives any soldier who has served less than 20 years ("cliff vesting") and then provide full benefits after 20 years, regardless of the age of the retiree. The military's Quadrennial Review of Military Compensation regularly reviews these rising costs, but its recommendations are frequently ignored. The usual tool for reducing personnel costs, as a result, is to reduce personnel (and that is happening). Leadership at the top, with the full support of the service chiefs, is the only formula that can lead to effective, long-term cost control.
4. National security will actually improve if the administration tackles these hard management problems. Controlling defense spending will accommodate the need for fiscal discipline while enabling us to better set priorities. Choices need to be made, but they are made in the most promising context imaginable: The United States faces no existential threat, and it possesses a global military capability that is second to none. In fact, it is the only military that has truly global capabilities; nobody else even tries. Budget reductions need not compromise any of that superiority, if disciplined management prevails. Then, policy-makers can wrangle over whether China is a military threat or a strategic competitor (there is a difference, and it has implications for defense spending). They can argue over whether the United States has a role as global stabilizer or police officer, or whether we have run the string on that option, given international resistance. They can sensibly address the U.S. role in counter-insurgency operations, making sure that a) there are such insurgents and b) they pose a danger to U.S. national security. Right now, we argue all these strategic issues, but only account for them at the margin of the defense budget; we just accept the whale as part of the costs of doing business. We pile on additional funds, rather than exert budget discipline, which only makes the management problem worse.
5. Sequester was set up to force a deal on taxes and entitlements, but that may not be possible before January 2, 2013. And there are at least some "cliff divers" who suggest that letting it happen might be a "not-so-bad" option. The White House might want to consider whether "embracing the sequester" could provide exactly the discipline the Department of Defense needs. Is it livable? I have already raised the question of a "fiscal slide" for defense. The collateral damage to other discretionary programs may be too great to make it worth the trip. But inside DOD, the sequester could force hardware choices the services have been avoiding and the cost control they need. It would put strong pressure on Operations and Maintenance funding, where much of the overhead is buried. And it might focus greater attention on personnel costs, particularly the problem of redundant health care establishment in each military service. Maybe taking a ride on the slide would help. Or, perhaps, as part of a bigger deal, a revised proposal that requires $50 billion in defense reductions over two years (rather than one) would incentivize the next secretary of defense to roll up his (or her) sleeves.
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