Strategic Reform Can Help Offset Budget Impasse

Armageddon: noun, from Hebrew har megiddon, mountain district of Megiddo; definition: 1) Bible — the place where the last, decisive battle between the forces of good and evil is to be fought before Judgment Day; 2) descriptor frequently used by politicians to describe effect of budget sequestration deal that most of them voted for.

Facing the daunting prospect of sequestration, a funny thing is happening in defense politics.

Rather than focusing on reaching the very compromise of both tax and entitlement reform that the special congressional supercommittee was intended to force, policymakers have set their sights on a cross of two losing strategies: maximizing the level of hype and panic over what it might mean for the U.S. military, regularly throwing around cataclysmic words like “Armageddon” and deliberately not preparing for this very same contingency.

If this were Spinal Tap, the volume would set to 11 while Pentagon planners are told to just keep their hands over their ears.

Unfortunately, Operation Hysterical Ostrich, as I jokingly call it, may make for good politics and punditry, but it’s a poor way to approach a key national security issue.

First, the bad news. Regardless of what happens in sequestration, or even in this fall’s presidential election, there’s a bottom line truth when it comes to the finances that underlie the American military and the broader defense industry.

The defense budget is not the primary cause of the nation’s $16 trillion debt. But, like it or not (and to be clear, I don’t), it will be one of the victims. The issues being debated today won’t go away in the next few weeks, months or even years. We are seeing a changing long-term financial situation in this country and, perhaps more importantly, changing political alignments when it comes to defense spending.

The U.S. has a debt-to-gross-domestic-product ratio that’s more like that of Greece than a superpower. The Republican Party is deeply divided over whether defense strength or tax pledges should come first (with most ready to choose tax pledges). And generational shifts are shrinking the number of budget hawks on both sides of the congressional aisle.

Barring any “asteroid-like” events such a major war in the Persian Gulf or the Pacific that shakes up the current system, the defense budget is most likely to stay flat but actually shrink in real terms for the next several years.

While this trend very well could become a catastrophe, as it often is painted, it need not be. What matters most is not the amount but how the process is managed. We can fail to plan (and thus plan to fail). We can follow our usual pattern of “salami slicing,” where both the good and the bad, the innovative and the wasteful, are cut the very same. Or we can finally take action on the key deferred areas of strategic reform that have so far eluded change.

In typical budget drills, some troops and weapons programs are put on the chopping block. This happened in last year’s budget and looks like it will happen again. The problem is that we don’t fundamentally change the underlying factors that go into how much these people and weapons cost. Or, to be more specific, we don’t take action on why they are costing more and more, and thus eating up a greater percentage of that flattening defense budget.

Take personnel and compensation reform. This is one of the most problematic areas in defense today and yet is consistently treated as a political third rail by both Congress and the Pentagon, not to be touched (other than perhaps recommending a study commission, to be ignored later).

Despite the fact that cash is only about half of the compensation that a service member receives, Congress sees its role as to just raise military pay slightly above what the Pentagon requests each year, while the Pentagon plans to not be ready for that very same scenario, despite it happening nine out of the past 11 years.

The bigger problem, though, is that the other half of the actual compensation service members receive — the noncash benefits that include everything from housing allowances to day care — come from a system that’s wholly out of date, becoming more ineffective in its match to Millennial generation troops’ needs, and soaking up a greater percentage of the budget.

For example, roughly one-tenth of the entire defense budget is now spent on health care, with that amount set to double by 2030 if action isn’t taken to somehow rein it in. But this is not from the health costs of war in Iraq and Afghanistan.

As a recent Armed Forces Journal article explored, active service members were last in terms of per capita utilization rates and second to last in costs when it came to the Pentagon’s health care. Rather, the Pentagon budget was being eaten up by areas like the failure to update TRICARE and reform pharmaceutical processes. Drug costs, for example, have increased by more than 500 percent in the past decade, mainly from retirees using more costly retail outlets than military treatment facilities and mail order.

Similarly, the issue in acquisitions is not merely which weapons to cut, but rather can we change a system that continually drives us toward underperforming and overpriced programs? All the lessons of Economics 101 to the contrary, we regularly commit to major programs before we even have a single working prototype.

Thus, we limit — rather than expand — competition such that every major area in the industry now is either a monopoly or an oligopoly. And despite the fact that more than half of Pentagon purchasing is now for services — not goods — we have yet to pay that part of the system anywhere near the equivalent amount of attention or enact serious reforms to catch up to this reality. These could all be changed if the same leaders who now lament the budget showed the will to act.

When people talk about the certain “disaster” looming for national security, I look back to when the U.S. faced a truly dire financial situation.

In the 1930s, there was an actual Great Depression, rather than a not-so Great Recession. And yet the leaders then were able to spur remarkable military innovation and reform, from the Navy with aircraft carriers, the Marines with amphibious warfare, the Army Air Corps (what became the Air Force) with strategic bombing, and the Army with the Leavenworth movement and mechanization.

The current budget impasse likely will impose some painful choices on Congress and the Pentagon. The important thing, however, is to recognize that they are politically painful, not necessarily strategically costly.

Lean times don’t have to spell catastrophe. Rather, it’s how they’re faced that determines the outcome.