The Pentagon’s Budget Time Bomb
EDITOR'S CHOICE | 29.03.2016

The Pentagon’s Budget Time Bomb

Chuck Spinney is a former military analyst for the Pentagon who was famous for the “Spinney Report,” which criticized the Pentagon’s wasteful pursuit of costly and complex weapons systems.

Pentagon spending has not really been an issue in the 2016 Presidential campaign. With the exception of Ted Cruz, the positions of the remaining candidates have been vague about even the size of the defense budget.

As near as I can tell: (1) Hillary Clinton’s position on the size of the Pentagon’s budget is that she will establish a blue-ribbon commission to review defense policy and spending levels; (2) Trump claims without detail he can make the military great again but cut the budget at the same time; (3) Cruz says he will copy President Ronald Reagan’s spending spree by using tax cuts to stimulate the economy and ramping up defense spending to 4 percent of GDP (more on this plan in a subsequent blaster); and (4) Bernie Sanders seems to want to cut the Pentagon’s budget, but has not detailed how.

U.S. Defense Secretary Ashton Carter.

U.S. Defense Secretary Ashton Carter.

No candidate appears to have noticed that President Obama has allowed the Pentagon to plant a defense budget time bomb in the form of modernization bow wave, although Obama’s bow wave has been reported repeatedly in the defense circles. [See 1234]

Mr. Obama’s bow wave is similar to those planted during the exit from Vietnam in the early and mid 1970s while Vietnam was winding down and at the end of the Cold War in late 1980s through the mid 1990s.  Each of those earlier budget time bombs blew up, the first after 1978 and the second after 1997, albeit the latter explosion was masked over by the politics of fear and budget gimmicks unleashed by 9/11.

The time bomb bequeathed by Mr. Obama is now being wired to explode during the next presidential administration, with ripple effects lasting perhaps to 2030.

This essay introduces an early propagandistic aspect of setting the fuse. Job 1 is to set the foundation for budget future growth by building a psycho-political barrier to further budget reductions. The Secretary of Defense’s recent testimony explaining President Obama’s defense budget to the Senate Armed Services Committee is a case in point.

On March 17, President Obama’s fourth Secretary of Defense, Ashton Carter, appeared before the Senate Armed Services Committee (SASC) to defend the Pentagon’s share of Mr. Obama’s budget request to Congress.

[The total national security budget (OMB budget category 050) includes the Pentagon’s budget, nuclear weapons programs in the Dept. of Energy and other programs in the State Dept., FBI, and elsewhere.  Carter’s testimony related only to the Pentagon’s share, technically known as budget category 051.  Another technicality is that Carter’s budget numbers are for discretionary New Budget Authority, or BA.  That does not include a small amount of non-discretionary budget authority carried over from previous years.  BA therefore represents the annual amount to be added to the Pentagon’s checkbook.  That money can be spent, or outlayed, over a number of future years.]

Obama’s budget wants Congress to appropriate for the Pentagon a total of $583 billion in new Budget Authority (BA) for Fiscal Year 2017, which begins next October. That money would be divided into two parts: (1) the so-called Base Budget of $524 billion; and (2) a separate appropriation for the Overseas Contingency Operations fund, or OCO, amounting to $59 billion.

The Base Budget is the nuts-and-bolts budget that is supposed to sustain our military forces in peace-time. The OCO budget is a special gimmicky appropriation to pay for war fighting in the ongoing Global War on Terror (GWOT). The OCO was invented in 2001 in response to 9/11 to fund the wartime operations in the GWOT, and it is a bit squirrelly, to put it charitably.

Prior to 9/11, all of America’s wars — for example, WWI, WWII, Korea, Vietnam, the First Gulf War [2], Kosovo — were funded out of what we now call the Base Budget. [The US share of funding for the First Gulf War was thru the Base Budget, but most of the funding for U.S. activities in that war was paid for by our allies, especially Saudi Arabia. The money was transferred into a unique account set up for that purpose.]

It is important to understand that the request for Base Budget is the first year of a five-year plan (see OMB Table 5.1). The four future years are supposed to account for the future consequences of appropriating the FY 2017 base budget. The Overseas Contingency Operations fund, in contrast, is a one-year pay-as-you-go appropriation. There is no programmatic tail for OCO requests into the future years in the Pentagon’s plan.

Congress has no idea of the extent to which the OCO appropriation might imply any future spending commitments. This lack of planning transparency opens the door for all sorts of budget hijinks. Even stalwart defenders of increased Pentagon spending, like Sen. John McCain, have said the OCO is really a slush fund for hiding funding that would be more appropriately assigned to the Base Budget.

Defense Secretary Carter claims the Pentagon’s FY2017 base budget request has been tailored to meet the main threats facing America, including Russia, China, North Korea, Iran, and Global Terrorism. [See slide #1 of the Feb. 9 Pentagon’s budget rollout briefing.] Nevertheless, at the March 17 Senate Armed Services Committee hearing, Carter told Congress and the American people  that America’s gravest strategic danger stems from the domestic politics surrounding the Constitution’s assignment of the power of the purse to Congress, and I quote:

“If the bipartisan budget agreement were to fall apart, as everyone has said, that is our biggest strategic danger because that would affect in future years our ability to recover full-spectrum readiness. … That is the greatest risk to the Department of Defense — the reversion to sequestration. We very much hope to avoid that,”

Let’s examine the implications of Carter’s rather bizarre threat analysis.

I did not attend the Senate hearing, so I have not seen any budget slides Carter might have used in defense of this threat analysis. But if he used slides, they were likely to be versions of those the Pentagon Comptroller released to the press in the Department of Defense’s rollout briefing on Feb, 9. Figures 1 and 2 below are reproductions of slides #2 and #5 used in that briefing.

Figure 1 places Carter’s defense budget request for FY 2017 in a short-term historical perspective by comparing it to the stream of actual budgets since Fiscal Year 2001.

Figure 1

Pasted Graphic

Figure 1 depicts defense budget authority in current dollars. It includes the effects of inflation. It shows the Pentagon’s total budget peaked in FY 2010 at $691 billion and that the base budget peaked a few years later in 2013. Therefore, the FY2017 budget request represents a total budget reduction of $108 billion from that peak.

However, most of that reduction has been in the OCO account and, theoretically, should not impact the base budget. The 2017 Base Budget $524 billion request is only $6 billion or 1.1 percent less than the peak Base Budget of $530 billion in 2010.  So Carter’s 2017 Base Budget request represents only a small reduction from the peak Base Budget of five years ago.

So, where is the “biggest strategic danger” facing the future of “full spectrum readiness”? This question logically relates to the five-year plan for the base budget and its relation to “sequestration,” because the OCO slush fund is programmed on a year-by-year basis, and it is exempt from sequestration and only relates to the GWOT.

The threat of sequestration is shorthand for the budget reduction implied by the spending caps imposed by the Budget Control Act of 2011 (BCA). This federal statute was passed by Congress and signed into law by President Obama on Aug. 2, 2011. The caps were put into effect for 10 years, beginning with Fiscal Year 2012.

The BCA is intended to control the federal deficit by limiting the discretionary spending in both social and national security programs. In theory, if spending exceeds these limits, brute force automatic across-the-board spending cutbacks would be triggered. Such reductions are known as budget sequestrations. Let’s take a look at them.

We can use Figure 2 (which replicates slide #5 of the Feb. 9 Pentagon rollout briefing) to ascertain the strategic nature of Carter’s sequestration “threat.”

Figure 2

Pasted Graphic 2

The dashed line in Figure 2 depicts how the Pentagon’s share of the original BCA spending caps relate to three past budget plans as well as the 2017 budget plan Mr. Carter briefed to the Senate Armed Services Committee on March 17 (i.e., the green line labeled PB 2017 — PB meaning President’s Budget). The red line shows how, to date, the caps have been relieved by a pair of two-year bipartisan budget deals between Congress and President. The red line shows that, absent another budget deal, the caps will return to their original levels between FY 2018 and FY 2021.

The difference between the Pentagon’s three earlier budget plans and the caps reveals that the internal Pentagon planning process pretended the caps do not exist. It is also clear that Carter’s 2017 budget simply is another round of the Pentagon just saying NO to the budget caps. (Note: Figure 2 shows PB’s 2013, 2015 and 2016, but 2014 is missing. PB2014 did not violate this “just say no” pattern.)

Figures 1 and 2 enable the reader to quantify the size of Defense Secretary Carter’s claim that the “biggest strategic danger” facing the United States is a “reversion to sequestration” — i.e. the magnitude of this “reversion” is simply measured by the vertical distance between the green line and the red line in Figure 2.

But note the axes of Figure 2; let’s put Carter’s “threat of reversion” into a better perspective to get a feel for the calibration of Carter’s threat meter.

The scales of the “x” and “y” axes of Figures 1 and 2 are constructed to magnify the impression of the size of the sequestration threat relative to past budgets and past budget plans. Historically, Figure 2 only compares historical budgets from 2010 to 2016 to compare with those projected in PB2017 to 2021 and the vertical scale for defense budget is limited to between $470 billion and $590 billion, whereas the vertical scale of Figure 1 does start at “0” but the horizontal scale only goes back to 2001.

Let’s place the current plan in a longer view. Also, let’s take a cut at estimating how the effects of inflation might shape our view of Carter’s definition of “strategic danger.”

I constructed Figure 3 to this end, by comparing the Pentagon’s base budget request to the Pentagon’s historical budgets, including the OCOs, dating back to the dawn of the Cold War in 1951. All this data comes from the March 2015 edition of the Pentagon Comptroller’s Greenbook updated with data from President Obama’s February 2016 budget submission Congress (OMB tables 5.1 and 10.1)

Figure 3

Pasted Graphic 3

The left hand graphic in Figure 3 places current dollar number for PB 2017-21 (blue line) and the original BCA sequester levels. The yellow and purple bars depict the historical data for the Base Budget and the OCO respectively (similar to the Figure 1). The lines are the same as those in Figure 2.

The middle graphic, which removes the effects of past and future inflation by assuming the rate of inflation for the Pentagon’s sub-economy, is the same as that for the general economy (using the official GDP deflators in OMB table 10.1). The rightmost graphic uses the Pentagon’s special deflators. The Pentagon’s deflators are clearly biased to make the earliest budgets look larger, thereby reducing the perception of long-term growth in the Pentagon’s budget.?Most defense think tanks and contractors like to use a variation of the data in the right hand chart, for obvious reasons.

Defense Secretary Carter’s measure of strategic risk is the tiny vertical difference between the “blue” and “purple” lines in Figure 3. By his own testimony to the Senate Armed Services Committee, Carter said this tiny difference is the greatest strategic threat facing the Pentagon!

Regardless of if or how one accounts for inflation, Carter’s assertion rests on a degree of precision that is obviously vanishingly small. In terms of annual variations in past budgets, it vanishes altogether, when one melds it with the uncertainties surrounding any predictions of future budgets. (I will address the question of predictive accuracy and the role the bow wave plays in the boom-bust nature of defense spending in a subsequent essay.)

This definition of strategic risk becomes wildly bizarre, when one adds the obvious fact that DoD’s accounting, finance, and program planning systems are a shambles that cannot be audited. (I described the nature and consequences this shambles as a witness in a congressional hearing in 2002.)

Annual audits are required by law in accordance with the Chief Financial Officers (CFO) Act of 1990. These audits are intended to put teeth into the Accountability and Appropriations Clauses of the Constitution. Every member of the federal government, including Mr. Carter and Senators take a sacred oath to uphold the Constitution.

The CFO Act requires the Inspector General of each executive agency to issue an annual audit of that agency’s bookkeeping systems. Yet the DoD has never passed an audit — in effect making a mockery of the Constitution everyone has sworn to uphold.

So each year, the DoD IG has been has been issuing a string of “disclaimers of opinion” since the mid-to-late 1990s. Moreover, deadlines for cleaning up the Pentagon’s books have been repeatedly shifted further into the future. The current deadline is 2017, or 27 years after the passage of CFO Act!

And that deadline is still a fantasy. A recent email to Sen. Charles Grassley’s office from a very knowledgeable ranking official the DoD’s Comptroller’s Office stated unequivocally that the 2017 deadline cannot be met, to wit:

“What I see and know tells me that the department is not on a fast track to meet the 2017 deadline. In fact, the goal seems unattainable. And current trends are not encouraging. I keep coming back to the same old root cause problem: the department does not have control at the transaction level. Transaction data is unreliable and incomplete. That is the problem that leads to persistent disclaimers.”

Yet, despite the wildly large uncertainties implicit in the auditing shambles, Carter asserted Congress that the tiny reductions caused by moving future budgets from moving blue line down to the BCA line in Figure 3 are the gravest strategic threat facing the United States.

And there is more to Carter’s weird claim. If the threat of a budget sequester is a grave strategic threat, it stands to reason that level of spending by our adversaries must also relate in some way to an appreciation of this strategic threat.

Figure 4 depicts total defense related spending for each of the top 25 countries in the world. In addition to the United States, it includes allies (green), adversaries (red) and neutral countries (yellow). (Total defense spending in the U.S. includes nuclear weapons programs in the Energy Department and a variety of defense related programs in the State Department, FBI, etc. By some estimates it could have been as high as $1 trillion per year in 2014-2015.)

In effect, The Secretary of Defense just told Congress that the tiny difference between the budget plan and the budget caps in Figure 3 erases any comparative advantage we and our allies might have from the fact that the U.S. and its allies are spending a far greater amount of dollars on our defenses than any of our potential adversaries or any potential combination of those adversaries.

Figure 4

World Military Spending

To be sure, the data in Figure 4 is two years old, but in a relative sense not much has changed since then. Note that North Korea, Iran and global terrorism did not even make the top 25.

So, while the difference between the PB 2017-21 and the current budget caps is a little like counting the fairies on the head of pin, Carter wants Congress and the American people to believe those fairies outweigh the effects of any dollar differences in Figure 4.

Or conversely, using Carter’s metric of choice — spending levels — Carter wants Americans to believe that each dollar of Russian and Chinese spending is far more efficiently spent than each dollar of the Pentagon’s spending — and therefore we need more that twice as many dollars to defend ourselves. Secretary Carter’s threat meter may be calibrated to count the number of fairies on the head of pin, but his bullshit meter is off the scale.

Given the contents of the debate over defense spending, one wonders if the defense members of the Armed Services Committees in Congress or any of the four remaining Presidential candidates have a clue about or an interest in what it will take to defuse the budget time bomb President Obama is bequeathing to his successor? To answer this question is to answer it.


Tags: Pentagon  US