The Little Budget Deal is a Big Deal

What's good for the country is even better for the Pentagon -- stability.

As night fell on Dec. 12, the U.S. House of Representatives passed the two-year budget deal carved out by Sen. Patty Murray and Rep. Paul Ryan -- but the fallout is not nearly over. It is rapidly changing the atmosphere in Washington, D.C. about budgeting. And it is a gift, of sorts, to the Pentagon, as they have quickly realized.

Sure, there are waves of disappointment from the congressional Tea Party advocates of shutting down the government and their moneyed supporters in the Club for Growth, Heritage Action for America, and others. And yes, there are still warnings that the budget negotiators had better not lose sight of the pressing need for long-term deficit reduction and debt control.

But, miracle of miracles, this agreement has passed the divided House and will get through the Senate, giving the appropriators a set of numbers to write actual appropriations for this fiscal year. Even more miraculous, it provides numbers for next year, too.

I'm not sure why so many folks are calling this an "interim" or "short-term" deal.

The advocates for the "long term" are disappointed because the Budget Control Act caps are not only retained in this agreement but extended for another two years, into 2023, and the Murray-Ryan agreement does not replace them with a long-term budget deal. .

The "long-termers" are living in a dream world. Haven't they been watching for the last three years? For a Congress that has been alternately limping and fighting from quarter to quarter, bickering about debt ceilings, shutdowns, and sequesters, two years is a very, very long-term deal.

In fact, this "little" deal is turning out to be a very big deal. Not because the details are so important; they are the classic representation of green eyeshade budget negotiating, not the Ten Commandments. But because it's upended the atmosphere for budget discussions and changed budgetary politics for several years to come -- precisely because it reflects the way Congress actually does business, as opposed to how some people want it to behave.

The fight for the long-term deal is over, at least for now. It is over because it was unachievable. And it is over because, don't tell anyone, the deficit is coming down, way down. The Congressional Budget Office (CBO) estimates that by 2015, the deficit will have fallen from a high of 10.1 percent of gross domestic product (GDP) to 2.1 percent, well within the sustainable range historically. For 2015, CBO estimates that the deficit will be under $400 billion, something that hasn't happened for seven years.

Of course, that doesn't change the reality that the federal debt continues be a high share of GDP and, as the baby boomers grasp at their Social Security and Medicare benefits, the federal deficits and the debt will continue to rise, posing problems 10 years from now. But, you see, that's the real long-term, which is not what Congress does.

What this little deal does, however, is get back toward getting back to business. It is a smack-down to the Tea Party, underlined by Speaker John Boehner, who finally found the guts to call the Tea Party funders "ridiculous," for criticizing the agreement. "They're using our members and they're using the American people for their own goals," he said. My colleague Stan Collender says it is equally a rejection of the deficit hawks, writ large: "not only was their position almost completely rejected, after years of being seen as the voice of angels, the deal makes them voices in the wilderness for some time to come."

The deal says to these "long termers": enough, already. We cannot get there the way you want us to. Budget plans, tax reform, mandatory reform are going to take time, baby steps, and gradual measures; there will be no big bang.

And in my bailiwick -- defense -- the little deal actually looks like it will be a big deal, as well. Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff welcomed it: "I support the legislative proposal, as I understand it, which provides relief to the immediate and urgent readiness problems we face. I hope this is the beginning of a conversation on the longer-term challenge to the capability and capacity of our force that is developing over time because of sequestration." Secretary of Defense Chuck Hagel hurriedly chimed in: "While this agreement doesn't solve every budget problem facing DoD, it will help address our military readiness challenge by restoring funding for training and procurement -- especially in fiscal year 2014."

The Pentagon has every reason to be happy. The deal does not provide budget growth, but it gives the Pentagon something it has been seeking for the last three years: budget stability. It is a flat budget for FY 2014 and 2015, which is a dose of reality, but it could have been worse. At least the numbers for the next two years are now clear.

The little deal gives the Pentagon something else. That little change from a looming sequester to an agreed budget number puts DoD planners back in a zone they would rather be in, where they can balance program A and readiness requirement B and actually do some trade-offs related to real choices, not arbitrary slices in the procurement and research budgets.

And when the Pentagon wants to scratch that readiness itch (it is overstated, but they love to scratch it), they will find a welcome tool in their holiday stocking. Although none of the media coverage of the budget agreement has mentioned it, the Pentagon asked for, and is likely to get, an additional $90 billion, give or take, in funding for what they call Overseas Contingency Operations (OCO) -- the war budget.

That $90 billion -- on top of the roughly $495 billion they can expect from the "little" deal -- isn't chicken feed, that's real dollars. It has been the Pentagon's secret fiscal escape hatch for more than a decade, even as we left Iraq and drew down in Afghanistan. For the last few years, the OCO budget has routinely had more funds in it than the military needs in the war zones.

And that $90 billion doesn't really go to a separate budget. It is money appropriated to the same accounts as the regular (they like to call it the "base") budget. Most of it is in the "operations and maintenance" accounts, where the Pentagon's readiness, and its "back office" live. Funds put there are very flexible -- they can move from activity to activity with little or no notification to the Congress or anybody else.

No wonder the Pentagon loves this deal; they should. Sequester is kicked away for two years. Congress, being devoted once again to the short-term, is now likely to be kicking this budgetary device off into the future forever. Nobody knows what will happen two years from now, but you can bet that sequester is deader than a doornail.

For the Pentagon, however, the budgets are flat, no inflation adjustments, and in the "long term" there is no correction upwards. That means all those plans they made for $500 billion more in funding over the next nine years have got to be trimmed, as my colleague Russell Rumbaugh has pointed out. Not as hard as you think. From 1985 to 1998, the Pentagon "lost" more than $1.5 trillion -- they lost it because budget growth went away and they did not even get increases for inflation. But the budgets they got were plenty healthy to keep the military sharp and ready, as the takedown of Saddam Hussein showed in 2003.

It will be all too tempting for the Pentagon to try to sit this one out and hope for sunny fiscal days somewhere out in the near future. Watch out for that illusion, too. Unless serious choices are made now, those gradually shrinking "real" dollars won't buy everything and they will be back to the squeeze they are in now.

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National Security

Six Ways to Manage the Five-Sided Building

How the Pentagon can get in shape now for the coming budget cuts.

The Pentagon budget is coming down. It kind of doesn't matter what the Capitol Hill shadow play does. They could play "let's pretend" and talk about short-term adjustments to the sequester. Or they can punt (in my view, more likely) and let sequestration kick in mid-January. But cuts are coming, deeper than the Pentagon currently realizes, over the next few years. (Beyond that, of course, we're looking at the future, and as someone -- Mark Twain, Yogi Berra, Niels Bohr -- said, "Prediction is difficult, especially about the future.")

So, it is management time in the five-sided building. It would be nice to say that Secretary of Defense Chuck Hagel has stepped up to this challenge. And, to some degree, he has, at least rhetorically. But even the priorities he provided on Nov. 5, talking to the Center for Strategic and International Studies, suggests the Pentagon is still shrinking, somewhat, from the challenge.

His remarks were pretty much the same "first draft" for management that he offered in July when he unveiled the Strategic Choices and Management Review, or "Scammer," as some call it out of earshot. But, let's say, for the sake of argument, that this review provides a check list for managing the Pentagon in a budgetary drawdown. Does it give him the right tools to do the job?

Wrestle the back office to the ground

I like this one. In my view, it is the first and most important place the secretary will find the money to put into what he really needs. The Pentagon's overhead is the beast eating the budget, and to his credit, the secretary put it first on his list. (Remember -- you read it here -- the Pentagon sometimes likes to say pay and benefits are eating the budget, but it is really the overhead.) The Defense Business Board (the DBB, which the Pentagon did not and does not like to listen to) said in 2010 that DOD overhead was 42 percent of the budget -- pretty big even for government work. That makes it the biggest "tail" to the combat "tooth" of the 29 militaries surveyed by McKinsey three years ago.

The back of my envelope says there are 1.8 million people in the Pentagon and around the world supporting the various military activities of 1.1 million in uniform. (How do I get there? There are 800,000 civil servants, 700,000 contractor personnel working directly for the Pentagon, and 340,000 men and women in uniform doing civilian or commercial, not military, jobs.)

Even if these numbers are slightly different today, they suggest a problem. And the remedy the secretary put forward is still pretty thin gruel -- a 20 percent reduction in headquarters budgets over five years. Low and slow, as an A-10 pilot might say.

The DBB says 70 percent of this overhead is buried in the services, not in the secretary's office. So come on, let's man up here and tackle this problem head-on -- set a higher bar and go faster. Contractors should be the first focus, followed by the inevitable shrinking of the civil service (we do it after every war). And take a tough, systematic, high-level look at the things the services do that they don't need to do, and the things several different offices do that one could do. This is where the money is.

Shrink and restructure the force

In every drawdown, the forces, especially the ground forces, get smaller. So let it be with this ground force. The secretary lines it up as the second priority, although he uses a euphemism -- "reevaluate our military's force planning construct." Let's go to the English language on this item.

The United States lives in an unusually secure world. Yes, that's what I said: "unusually secure." The media will focus on the terrible things that are happening and the fear mongers will spot massive terrorist operations just over the horizon, but the reality is that the United States faces no existential threat and has not fought a major land war since the first Gulf War (if that qualifies as "major" -- lots of troops, not much of an adversary). The rate of civil and international wars is the lowest in measured history, as Bruno Tertrais noted in CSIS's Washington Quarterly.

Now is clearly and safely the time to downsize the ground forces, well below the targets currently planned. And (pace Gen. Ray Odierno, Army chief of staff, who said we won't even be able to fight one war if the Army goes below 450,000 troops) the lesson of the most recent war is that when the Army wants to grow, it can actually do so pretty quickly -- those 100,000 additional soldiers and Marines we added for Iraq came down the pike faster that the Army had projected.

There is a lot of good thinking out there about the right size of the military, tied to a more modest, realistic, set of missions. It's time to make some choices. If we need the Navy for the long term, then "sailing we should go." To keep playing service politics at budget time by arguing for an equal role for the Army in the Pacific flies in the face of common sense. As former Defense Secretary Bob Gates said, "any future defense secretary who advises the president to again send a big American land army into Asia or into the Middle East or Africa should ‘have his head examined.'"

"Locked and loaded," but ready for what?

Readiness, the secretary said, is the third way to manage the Pentagon. But he says this as a warning -- already, he suggested, we have a readiness problem, courtesy of sequestration. And Gen. Odierno took this further (almost certainly too far), claiming he had only two ready brigade combat teams, out of more than 40.

Ah, yes, the "hollow Army" pitch. It came up in the 1970s, when Gen. Maxwell Thurman coined the phrase. And that may be the one time the phrase had some merit, as the U.S. military was restructuring after Vietnam, transitioning to a volunteer force, and dealing with a Congress that kept, darn them, cutting the budget. It didn't have a lot of merit then, and even less in the 1990s, when I had to deal with the political issue at the Office of Management and Budget.

The problem with readiness as a management tool is that it is a refuge for potential scoundrels. "Ready for what?" is the question people need to ask. Or, to put it another way, "What are your measures of readiness?" Regardless of prior experience, if the unit hasn't made a cookie-cutter cycle through the National Training Center in California, they may be deemed "not ready" for the kind of war they will really fight. It approaches absurdity to call the units deploying to, in, or returning from Afghanistan "not ready." Those may be the most ready units the Army has, based on their training and experience. And if we are not headed into a major conventional conflict any time soon, layering the degree of readiness (what the Army calls "tiered readiness") is a way to manage smartly and scoop up some resources at the same time.

So, let's set the brouhaha about readiness aside. The U.S. Army (as well as the Navy and the Air Force) are plenty ready, even after the sequester. What the secretary needs to do is bear down on redefining readiness to fit the conflicts we anticipate. Then he might get some savings through the "tiered readiness" he talked about.

Give ‘em the best technology, but do it sensibly

The best technology as a mantra is not going to save money; in fact, it may waste cash on "state-of-the art" acquisitions the military doesn't really need. The secretary said he wants to "maintain a decisive technological edge," protecting programs in space, cyber, special operations forces, and what is called ISR (intelligence, surveillance, and reconnaissance). He said absolutely nothing about which systems and technologies have a lower priority. So where are the savings?

Acknowledging fiscal reality is important in the procurement world. What the secretary will actually do is stretch out big programs (buying Major Defense Acquisition Programs, or MDAPs, like the new F-35 fighter jet or the Virginia-class submarine over a longer period of time), while shrinking the quantity the Pentagon will buy overall. The unit price will go up, but the annual budgets will fall. Program cancellations may be desirable (like a version or two of that troubled aircraft and the new submarine), but they are politically unlikely. The secretary will need to be a constant gardener when it comes to weeding out programs that are not on the MDAP list and not as visible, but cost lots of money (60 percent of the Pentagon's acquisition budget) -- the trucks, front-end loaders, ammunition, etc. This is a good time to do it; the force is shrinking and the existing inventory is being driven or used less.

"Balance the force"

These are the secretary's words, not mine. It wouldn't occur to me as a category for Pentagon budget management. It is certainly redundant with force planning because he seems to mean: how big the active force is, where one parks forces in the reserves, whether we are planning for a conventional or unconventional battlefield, whether the forces are at home or abroad, whether they have new weapons or older ones, and so on. The secretary did not betray any decisions here, and, aside from shrinking the force as a result of this "balancing" (covered above), it is not clear where any budget savings come out of these choices.

Get those pay and benefits under control

This is the one the Pentagon keeps talking about. Payroll and benefit spending, per troop, has doubled over the past decade. Why? Because even when the Pentagon stopped asking for across-the-board pay raises above the rate of pay growth in the economy, Congress kept providing them. Year-by-year, the growth in the pay accounts has compounded rapidly, making the troops into a force paid, on average, better than all but 10 percent of comparable civilian workers. Add to that rising health care costs not even remotely covered by fees and deductibles and a (relatively young) retiree community that pays one-tenth the enrollment fees for a family of four compared to those paid by an average American family, and you have a big payroll problem. MIT's Cindy Williams, who once ran the Congressional Budget Office's national security division, has some of the answers here. (Full disclosure: We co-authored a book on national security budgeting, Buying National Security.) For all the reward the troops deserve for their service, something is out of whack here.

But the secretary has not offered answers. Presumably, he is deferring to the Commission on Military Compensation, whose work is just getting under way. But even as it does start making suggestions, we probably won't see much progress on this front. Hagel has a budget problem now, and the compensation options are not new. Moreover, the commission is only advisory; it is not like a base closure commission that can make its recommendations stick. Most important, pay and benefits are the political third rail of defense budgeting. These are the least likely -- and slowest -- savings the department will make.

The time is now

Come December, if and when the budget committee fails, and come January, when sequestration sets in again, there will be urgent choices to make. The secretary's speech is not quite in tune with his budget realities. He is still arguing that DOD might have to lose $500 billion in budget authority over the next 10 years, and $52 billion in January if the sequester goes through.

No, Mr. Secretary, those numbers are not relevant. They count what DOD would lose from its long-term "wish list" budgetary baseline, not from the budget reality the Pentagon now faces. And the $52 billion in cuts is from the fiscal year 2014 wish list budget that the president sent up last spring. That's not relevant, either. What is relevant is the post-sequester $498 billion budget you've got for fiscal year 2013. That's real; that's the baseline today. And if sequestration happens, you will have to find $20 billion to cut, not $52 billion -- that was from what is now an imaginary budget.

The bottom line is that the secretary needs to pare down the building's "back office," mostly in the services. It is time for the "hollow army" chant to cease, and for tough follow-through on the check list, directed from the very top of the building.

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