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Budget Agreement Reached!

5 think tanks warn of things to come for the Pentagon.

The fiscal cliff is all the rage. The lame-duck Congress is back and the tidal wave of pressure for a budget agreement is almost overwhelming. The public discussion and the negotiations are about taxes and entitlements, as anyone could have predicted. And, despite a year of special interest lobbying, the defense budget is headed down further, as a byproduct of those talks.

We're not talking about sequester; that drama is almost over. We are talking about defense budgets that will go as much as another $500 billion below the 10-year forecast Secretary Panetta offered last February -- making the overall reduction, including his budget request, at least $1 trillion. Real defense cuts, not a budget that keeps up with inflation, the way Panetta wanted. And it is time to plan accordingly.

Think tanks are often the canary in the coal mine when it comes to change in Washington, and their perspective on defense has changed dramatically since the election. Over the past few weeks, think tanks right, left, and center have issued reports that lay out the road to a disciplined defense drawdown, in which they rethink strategy, military force, weapons buying, and management. The reports come from the Stimson Center/Peterson Foundation, the Center for American Progress, the Project on Defense Alternatives, the Center for Strategic and International Studies, and, interestingly, the RAND Corporation. They agree on a surprising number of things, and all of them suggest deep cuts are inevitable.

The Stimson report, endorsed by a wide range of analysts (disclaimer: with a dissent, I am one of them), carefully describes a series of budgetary options, including one that would increase defense spending (however unrealistic) and one with additional cuts ranging from $350 to $590 billion beyond Panetta's. The CAP report strongly advocates $1 trillion in defense reductions (including the Panetta reductions). The PDA report calls for an additional $560 billion in defense cuts. The CSIS report (disclaimer: I am also part of its working group) starts with the assumption that defense budgets (including war costs) will decline around 30 percent in constant dollars (consistent with past drawdowns). As CSIS working group leader (and former DOD official) Clark Murdock puts it: "DOD needs to accept the likely reality that it will absorb a deeper reduction in defense spending and plan accordingly." And the RAND study, while eschewing any support for defense cuts, says it is realistic to think that defense budgets will go down $300-$500 billion below the Panetta estimate.

I think these estimates are actually on the low side. The last defense drawdown, from 1985 to 1998, saw defense budgets fall 36 percent in constant dollars. If the FY 1985 defense budget had been allowed to grow with inflation over the same period, DOD would have had $1.6 trillion more in resources than it got. So there may still be a way to go and, frankly, we won't know until we get there how deep the drawdown will actually be. But when we look back, we will see it was very deep, indeed.

Readers can surf the reports at will. But there are a number of strikingly consistent options they propose:

  • All agree that the days of long-term stabilization operations, nation-building, and insurgent-chasing (read: Iraq and Afghanistan) are over. The Panetta strategy from January 2011 said this; all the reports endorse that view, and more. (Though RAND, to be fair, does provide an option that has the United States still chasing insurgents and instability in the Middle East through the next decade.)
  • All of them agree that shrinking U.S. ground forces (Army and Marines) is the easiest and most appropriate way to cope with the new national security challenges in light of fewer resources. Some would have the overall military shrink below 1 million troops, while others suggest 1.15-1.2 million (again, except RAND's Middle East option).
  • All of them would sharply reduce U.S. strategic nuclear forces, though none of them appears to endorse my favorite option: a submarine-based monad. This means, for many of them, between seven and nine nuclear-missile subs (down from the current 14), smaller ICBM forces, and an end to nuclear bombers and fighters.
  • All agree that a robust investment in defense research and development is a suitable hedge against the future.
  • None of them thinks China is a near-term military threat, which flies in the face of the Washington cottage industry that seeks to make China the next major enemy. For the most part, however, they hedge with a continued Pacific presence (RAND has a Western Pacific option).
  • All agree that terrorist organizations are not a strategic threat to the United States and do not necessitate a large military force. Some, particularly CAP, argue that non-military instruments -- diplomacy, law enforcement, training -- are key to dealing with terrorist organizations. But virtually all of them, left or right, endorse special operations forces (which the PDA proposal would grow) as the military arm of a counterterrorism strategy.
  • All say cyber threats present a strategic challenge. However, none of them analyzes this challenge in any depth, tells us why the military should lead the response, or looks for even a moment at the risk of a rapidly-growing U.S. cyber-offense capability.
  • Virtually all of them, from left to right, call for greater "burden-sharing" from U.S. allies as a way of reducing the U.S. load.

These studies tell us that the drawdown is now inevitable; with less money, we need to do some serious thinking. But there is more road to travel here, and there are several issues the reports do not discuss in much depth that will be a critical part of the drawdown.

First, the national security world is still reluctant to think strategically in the broadest sense. What is America's role in the world in the next decade and what part of the U.S. government needs to implement that role? Most of these studies emerge from the defense stovepipe, not the diplomatic, intelligence, or foreign assistance worlds. As a result, their analysis is still locked into a military perspective on our national security challenges. Only the CAP study deliberately looks at what we should do with our civilian diplomatic and assistance capabilities. Halting nuclear and biological weapons proliferation and dealing with terrorists are not predominantly military missions.

Second, most of these reports ignore the relative decline of U.S. power and the impact of military operations on the country's reputation. Locked, as some are, in the defense universe, they are searching for ways to reassert U.S. leadership and to "shape" the security universe in a way that advances U.S. interests. Even if the money is not there to dominate, they do not question our capacity to be the world's hegemon. The default position is that our allies must share the defense burden more than they do, as measured by the share of GDP they spend on defense. This is a dodge, not a policy. There is no unanimity among U.S. allies on what the burdens are, nor agreement on whether military forces are the appropriate way to deal with those burdens. And the share of GDP dedicated to defense does not help anyone answer those questions.

Third, U.S. strategic analysts are still too fascinated with using the military to defend something they call the "global commons." We gotta be out there patrolling it, or who knows what terrible things will happen. But civilian international institutions and laws govern the use of air, sea, and space. And cyber is largely a private enterprise, not subject to military control and badly in need of international agreements like the other three. If you hear the phrase "global commons," reach for your gun...or perhaps your laptop.

Fourth, not all of the reports deal with the more basic management challenge at DOD. The reason we spend too much on defense doesn't have to do with capabilities; it has to do with DOD's failure to discipline its out-of-control acquisition system, a back office that is much larger than necessary, and a pay-and-benefits system that is eating the defense budget. The Stimson study is an exception. It provides options for between $200 and $400 billion in savings from management and personnel actions, which, it argues, could reduce the need for force structure and hardware reductions, but it does not provide much detail. The CSIS report also notes the possibilities for savings on the management side. And RAND, which has done good work in the past on compensation and benefits, gives lip service to the personnel issues. But, frankly, unless DOD and Congress are willing to reduce overhead and force savings, little will be accomplished; none of the reports calls for those kinds of cuts.

Fifth, the new mantra for coping with less is "building partner capacity." It is the default position for strategists who can see that large-scale U.S. military deployments overseas are counter-productive, producing a "blowback" that runs counter to U.S. interests. Most of these reports get right on board, calling for significant DOD support for training, equipping, advising, and strengthening the security forces and institutions of other countries.

The risk of expanding these programs is three-fold: the military does not do them well, as Iraq and Afghanistan testify, especially the farther the mission strays from pure military training and into governance issues. Second, giving DOD this "governance" mission further weakens the civilian tools in our national security toolkit. And, third, we have invested too much history in arguing that the militaries of other countries should stay in their barracks to now argue that they should be deeply entrenched in governance, development, and reconstruction. (For more on this, see the report I co-authored with Becky Williams for Stimson last year.)

Shortcomings are inevitable in such reports; they reflect the modus operandi and interests of the organizations that produce them. But they tell those whose heads are buried deep in the sand of "business as usual" that it is time to wake up and pay attention. As New York Times writer Bill Keller put it, we have "a historic opportunity to push the ‘Refresh' button on our national security." It is time to get down to the kind of planning the reports recommend, for the defense budget is most surely coming down.

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National Security

Fiscal Cliff Notes

The only things you need to know about the coming budget fight.

With the November 6 election, the shadow play over the defense budget and the fiscal cliff has come to an end. For the past 15 months, we have been entertained by a drama scripted in the Budget Control Act that appears to threaten a fiscal cliff for discretionary spending in January 2013. Defense has played one of the lead roles.

President Obama has argued that if Congress wants to eliminate the threat of automatic spending cuts, Republicans need only put revenues on the table. In an election year? Unlikely. And, soon after agreeing to the fiscal cliff, the stalwart "defenders of defense" in the GOP came down with a sudden case of buyer's remorse, arguing that national security would be threatened unless defense were somehow exempted from the planned cuts.

Senators McCain, Ayotte, and Graham manufactured a circus big top that traveled to bases and defense factories, spreading "fiscal cliff fear" as far as they could. The defense industry, with a big stake in the defense budget, enthusiastically joined the chorus, threatening the loss of a million jobs. (That is, they went along until it was clear that their politicking might backfire, so they drew back.)

It was always a show, theater for the electorate. The need to "defend defense" was always exaggerated. The American military is far and away the strongest in the world. Moreover, in recent years the United States has been spending more on defense, in constant dollars, than at any time since 1945. While losing $50 billion through "sequester" from the planned defense budget this fiscal year would pose management challenges, it would be survivable.

But now that the entertainment portion of the program has ended, it's time to get real. Here are the five things about the defense budget the next administration has to deal with:

1. We are in a defense draw-down. Defense resources will shrink from their FY 2010 peak, the highest level of defense spending in constant dollars that we have seen since World War II. Current projections suggest that military spending will still keep pace with inflation, but in fact defense budgets will go into a real-dollar decline. They will shrink because we are out of one war and about to leave another. The public is focused on jobs, the economy, the deficit, and the debt, and it wants these things fixed. And they will shrink because any fix to the nation's fiscal situation demands that everything be on the table. It is the only way a deal is possible, both budgetarily and politically. So it is high time to start thinking about how to manage a serious draw-down, instead of pretending that it will not happen.

The Department of Defense, the military services, the White House, and Congress are not there yet; all are whistling through the graveyard pretending that there is no draw-down and that resources will continue to grow, at least at the rate of inflation. But already the defense budget has shrunk in real terms: the base defense budget for FY 2011 was the same as FY 2010; FY 2012 was below FY 2011; and FY 2013 will probably not keep up with inflation.

There are discussions underway outside government about how to manage a draw-down that could look like the ones we have been through before -- Korea, Vietnam, the Cold War. During each of those, defense budgets declined 30 percent in constant dollars over ten years. The Center for Strategic and International Studies has a working group looking at what kind of military force would result from a 30 percent budget cut. Nearly two years ago, on the basis of work we did for the Rivlin-Domenici Debt Task Force, my colleague Matt Leatherman and I took a look at the options for a significant draw-down. The CSIS group is still crafting the options; we found that a force of 1.25 million troops (versus the 1.4 million we have now) would be able to execute national strategy and maintain global superiority.

2. Defense budgets and defense strategy are inseparable. Those who insist that defense budgets should be based on strategy and threat, independent of resources, do not understand this fact. Every strategy is resource-constrained; every budget disciplines the choice of strategic priorities. Acceptable levels of risk mediate this relationship.

This has always been true: Ask Eisenhower about how he traded off ground forces against nuclear forces ("massive retaliation") as he sought to balance the federal budget. Ask Nixon about how he changed the military force planning algorithm from 2.5 wars to 1.5 wars and sought regional strategic partners (like the Shah of Iran) as the defense budget declined in the early 1970s. Ask George H.W. Bush and Colin Powell about how they constructed a new force-planning algorithm (2 Major Regional Contingencies) around which to build the "Base Force," as the defense budget declined in the face of major deficit reduction efforts from 1985 to 1990.

It is silly to pretend there is no connection between budget and strategy; there is a connection between them for every country in the world. Budgets are a great way to discipline endless expansion of strategic appetite. And strategy and missions are essential to writing budgets. So we need to stop claiming, as Secretary Panetta did in his interim strategic guidance, that his budget decisions were strategy-driven. There would have been no need for an interim strategy review between the 2010 and 2014 quadrennial defense reviews had the budget not begun to flatten from previous projections.

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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