Tag: Sequestration

The Defense Lobby, Americans for Tax Reform, and the Texas Chainsaw Massacre

Bloomberg’s Roxana Tiron reports that Congress is nearing a deal to postpone some of the most contentious provisions of last year’s Budget Control Act (BCA) until March 2013, or later. This is good news for the Aerospace Industries Association (AIA), which has been lobbying since late last year to undo at least that portion of the BCA that pertained to the Pentagon’s budget (i.e. that portion that threatens to cut most deeply into its members’ profits).

Although the mechanics of sequestration’s across-the-board cuts are problematic, the scale of the Pentagon build-down would be modest by historical standards. And yet, the mere suggestion that sequestration might actually occur has sent the industry into apoplexy. The AIA’s campaign has included the release of a new report claiming that the BCA cuts could result in over 1 million lost jobs, and warnings that hundreds of thousands of workers would be receiving pink slips just a few days before the November elections.

In short, sequestration is a horror show, a Texas Chainsaw Massacre, and the AIA’s public relations effort is designed to scare the wits out of the audience. “Sequestration,” explains Della Williams, the chief executive of Fort Worth-based Williams-Pyro Inc., “is surgery with a chain saw.”

But just as some people aren’t easily scared by campy slasher flicks, there are still a few people in Washington—especially Grover Norquist, President of Americans for Tax Reform (ATR)—who are cheering for the guy with the chainsaw.

The two sides squared off in separate events last Thursday. At the Bloomberg Government Defense Conference, AIA President Marian Blakey, Reps. Norm Dicks (D-WA) and Randy Forbes (R-VA) and Sens. Carl Levin (D-MI) and John McCain (R-AZ) called for bipartisan compromise on taxes in order to fund further Pentagon spending increases. Judging from the number of times that speakers invoked his name, Norquist posed a greater threat to national security than China or Iran. Levin, in particular, scorned ATR’s famed taxpayers’ pledge, and suggested that it was largely responsible for the impending catastrophe.

Norquist is characteristically unfazed by all this special interest pleading for more money. While Blakey and her congressional friends were attempting to rally the troops and rustle up more money, Norquist was reaffirming his opposition to higher taxes—including the closing of tax loopholes that generate more revenue—at a meeting on Capitol Hill. There is no Pentagon budget escape hatch in ATR’s pledge. If the defense industry wants more, it will have to get it from elsewhere in the budget.

The fight over sequestration, taxes, and the defense budget reveals text book cases of two perennial public policy realities: the politics of concentrated benefits, diffuse costs; and the economics of the seen vs. the unseen.

With respect to the first case, the defense industry, broadly defined, benefits disproportionately from Pentagon spending. And that industry can count many interested parties within its coalition. In addition to the defense companies, including the executives and the shareholders, there are also the workers’ at these firms (often represented by a union). Then there are the mayors and local officials who represent communities that are home to defense firms.

Given what is at stake, it is understandable that all of these groups have amped up their lobbying efforts to fend off sequestration. To take just one example, a single F-35 will cost, on average, nearly $125 million ($112.5 million for the aircraft, plus another $22 million for the engine). Prime contractor Lockheed Martin spent $15 million on lobbying in 2011 and is expected to spend even more this year. Such expenses can easily be justified to investors and shareholders if they are seen as protecting the company’s cash cow.

Individual taxpayers, by contrast, have little incentive to organize, and even less incentive to pool their money to fight against the AIA. The cost of the F-35, spread around to every taxpayer, amounts to about a dollar (if we just count the 122 million people who paid federal income taxes). Generally speaking, people do not scrutinize where every tax dollar goes; indeed, payroll tax withholding causes Americans to ignore what they pay in monthly taxes.

A few groups, including Norquist’s ATR, try to offset this imbalance of interests, and they have been reasonably successful. But Norquist’s pledges would be worthless if voters didn’t agree with him. But many do. In this poll (.pdf), for example, half of all respondents were opposed to having their taxes go up in order to pay for higher Pentagon spending.

The AIA’s other line of attack—the claim that substantial cuts in military spending will have a devastating impact on the economy, resulting in a million or more lost jobs—reveals the age-old broken-window fallacy. The AIA wants people to focus on that which is seen—defense workers who are laid off—and to ignore any consideration of how the economy as a whole will be better off if the resources that had previously gone to building planes and rockets are allocated elsewhere in the economy. These transitions are certainly difficult and painful for the individuals and firms involved, but they can be expected, all other factors being equal, to have salutary aggregate effects, especially over the long term. I’ll have more to say on that point later this week, drawing on my previous study of San Diego in the late 1950s, the early 1990s and the early 2000s.

In the meantime, I encourage you to read a succinct explanation of the broken-window fallacy from Henry Hazlitt’s Economics in One Lesson. And, if you’re really motivated, consider reading a less succinct, but more colorful, discussion of the phenomenon by Hazlitt’s intellectual forefather, the French philosopher Frédéric Bastiat.

Cross-posted from the Skeptics at the National Interest.

More Skepticism on Romney’s Military Spending Promise

On Sunday, Defense News published a good article by Kate Brannen that looks into Mitt Romney’s plans for military spending. This is not the first examination of Romney’s lofty campaign promise to spend at least four percent of GDP on the Pentagon’s base budget. Since October 2011, when I first crunched the numbers on his plan, others have followed with their own estimates.

In my first analysis, his plan totaled $2.046 trillion above projected defense budgets based on CBO totals from FY 2012 to FY 2021. That total does not include war costs, nor does it take into account the possibility of military action toward Iran, which Romney has made clear is on the table, with or without Congressional approval. My number one question at the time—beyond the fact that GDP is not the proper guide for military spending—was: Where is this money going to come from?

In April, I recalculated Romney’s gimmick, adjusting my numbers with the help of my colleague Charles Zakaib, based on the Obama administration’s latest 10-year projections. We presented the data in the graph below:

The conclusion: Romney’s four percent gimmick would now necessitate $2.58 trillion in additional military spending above the new baseline. I tried to put this in context:

Romney’s Four Percent Gimmick would result in taxpayers spending more than twice as much on the Pentagon as in 2000 (111 percent higher, to be precise), and 45 percent more than in 1985, the height of the Reagan buildup. Over the next ten years, Romney’s annual spending (in constant dollars) for the Pentagon would average 64 percent higher than annual post-Cold War budgets (1990-2012), and 42 percent more than the average during the Reagan era (1981-1989).

Does Romney genuinely believe we have enemies that approach the Soviet Union’s might, let alone ones that are 42 percent more threatening? We would be wise to question his judgment if so.

Back in the realm of the reality, further cuts to military spending are fast approaching as sequestration looms. The debate in Washington is now largely focused on how much to cut from the defense budget and in what manner. This is consistent with what the majority of Americans favor and has sidelined those arguing for ever-greater military spending. And yet Mitt Romney remains committed to his Four Percent idea. In this instance, Romney should embrace his supposed conservatism and leave the spendthrift gimmicks to the opposition.

Much more in the podcast below:

To (Ironically) Avoid Sequestration, Congress Could Declare War

The Senate is back in session this week as the battle over military spending, and the prospect of sequestration, continues to sizzle. Last Friday the Office of Management and Budget concluded  that war funding—also known as Overseas Contingency Operations (OCO)—would not be exempted from sequestration, contradicting the Pentagon’s earlier claims. Predictably, this has angered the GOP and provided fodder for those who oppose military spending cuts on any grounds.

But war funding—$88.5 billion for FY 2013—should never have been considered separate from military spending. This is a practice, gradually accepted in the past 10-15 years, that distorts the size of the defense budget, making it appear smaller. It provides the illusion that Congress and the current administration are fiscally responsible.

The irony of current flap over OMB’s ruling is that Congress could undo sequestration if it simply declared war. In today’s Cato podcast, Benjamin Friedman, research fellow for defense and homeland security studies, explains that the federal code, going back to the 1980s, holds that a declaration of war will reverse sequestration. But Congress doesn’t declare war anymore; members routinely ignore their constitutionally mandated obligation. Those who are the most vocal opponents of sequestration—Rep. Howard “Buck” McKeon (R-CA) and others—have a tool at their disposal that they will never consider.

Listen to the podcast below to hear Friedman provide a primer on the battle over war funding (OCO), sequestration, and the defense budget bills.

The Pentagon’s Sequester Gamble

The 2013 Pentagon budget reflects the Obama Administration’s unwillingness to embrace strategic change that would allow far larger cuts. And by failing to propose such cuts, the Pentagon is refusing to avoid sequestration, the across-the-board cut of roughly ten percent from its accounts required under the Budget Control Act (BCA).

In proposing a military budget about six billion dollars lower than last year’s, the Obama Administration has for the first time proposed a real cut in the non-war military budget, but much of that cut likely shifted to the war budget. The administration has also said that the Pentagon should spend less over the decade than previously planned, which would cause an eight percent cut to non-war spending—in the unlikely event that the plan holds. If we include war costs, the military budget has been falling since 2010 when war costs peaked. But keep in mind that the defense budget grew by over seventy percent in real terms since 1999, with the non-war portion roughly doubling.

As I wrote two weeks ago when the Pentagon released its budget guidance, even this minor spending restraint has heightened competition among defense programs, causing several sensible program cancellations that prior plans would have avoided. But it has triggered little strategic reevaluation, beyond a belated realization that the national disinclination to occupy more restive countries allows a partial reversal of the growth in the ground forces begun in 2007. The supposedly new strategy that the administration recently released is a muddled defense of the status quo. Rather than reconsider our military’s potential missions and the alliances that drive many of them, the administration appears to be shopping for other people’s conflicts that will keep our forces occupied. More cuts will produce more sensible choices.

The BCA requires a $54 billion cut to Pentagon spending in January 2013, applied across spending accounts, with the possible exception of personnel costs, which the president can elect to shield. That sequestration is a consequence of the super committee’s failure to produce a deficit reduction plan. After sequestration, Pentagon spending (leaving out the wars and other defense-related costs outside DoD but counted in the national defense budget function) would be $478 billion, about what it was in 2007 in real terms.

The text of the BCA suggests that sequestration occurs regardless of the size of the budget Congress passes. That would mean that the Pentagon cannot distribute the 2013 cuts according to a strategy and thus avoid sequestration. In the remaining eight years the law covers, by contrast, the Act imposes a Pentagon spending cap and sequesters appropriations above that level.

The BCA says, however, that the White House shall calculate and order sequestration under the procedures set forth in section 253f of the Gramm-Rudman-Hollings Act (the law the BCA amends). That section says that where Congress passes an appropriation act with an amount below the baseline (the prior year’s budget), you subtract the difference from the sequester. That appears to mean that a $478 billion budget would indeed avoid sequestration.

Even if the Office of Management and Budget, which the BCA makes the arbiter of these matters, reads the law differently, a legislative fix could accomplish the same thing. Todd Harrison of the Center for Strategic and Budgetary Assessments has proposed that the Pentagon design an alternative $478 billion budget that makes choices across accounts and then pads each by ten percent to sacrifice to sequestration. Congress might also change the BCA’s language to say clearly that appropriated savings commensurate with sequestration will prevent it. Or Congress could change the law to allow the Pentagon to avoid sequestration if the cuts are implemented gradually, rather than dropping suddenly in a year. Even large budget cuts usually take years to pay off. These options would achieve the deficit reduction that the BCA seeks while allowing the Pentagon to shape the cuts.

Presumably the Pentagon is aware that it can avoid sequestration but is unwilling to admit it. They believe that by presenting sequestration as the only way to get more savings, they can avoid any cuts. Thus, Pentagon leaders insist that they are not planning on sequestration and expect Congress to change the law.

That change would presumably come as part of a budget deal where the Congress agrees to let the Pentagon off the hook. The White House is using the threat of Pentagon cuts to get Republicans to let some of the Bush tax cuts expire. We probably won’t know if that bargaining tact works until late this year, with the presidential election decided and sequestration and the expiration of the tax cuts looming. The administration could possibly offer additional defense cuts as part that deal.

As the year goes on, Pentagon leaders will increasingly complain about what the Secretary of Defense calls the “goofy meat axe approach” of sequestration, which supposedly prevents them from making intelligent choices. Those hearing the complaints should be aware that while the BCA makes the size of the cuts inevitable, their manner is not fixed. The Pentagon could have smart cuts, but it prefers to push for none by pretending dumb cuts are the only alternative.

Cross-posted from the Skeptics at the National Interest.

The Pentagon’s New Budget

Despite the noise that will accompany today’s defense budget release, a few essential facts should be kept in mind. Pentagon spending will remain well above the post-Cold War norm. It has not been slashed, and it will not be, not even in the unlikely event that sequestration takes effect (for more on this, see Ben Friedman’s post this morning ). The military is not in danger of declining to second-class status. Indeed, if we took account of our still prodigious advantages over any conceivable combination of rivals, we could spend considerably less, and continue to enjoy a margin of security and safety that our ancestors would have envied.

The key areas that will face cuts include active-duty ground troops and possibly nuclear weapons. Unfortunately, tough decisions on major weapons programs—such as the F-35—have been kicked down the road. The looming military compensation crisis has not been resolved. And while another round of Base Realignment and Closure could begin, it is not clear that the administration is willing to use the political capital necessary to garner support in Congress.

In the end, this budget will largely confirm what we’ve learned about the Obama administration’s strategic direction and priorities since early last month. The direction is the same, it avoided hard choices, and total spending will decline only slightly in real terms.

The new wrinkle is the context provided by the non-defense portions of the budget. While the budget reduces projected military spending by $259 billion over the next five years, the administration wants to spend an additional $1 trillion elsewhere in discretionary spending. It seems the White House is intent on picking a fight with Republican hawks in Congress who are determined to fend off reductions in military spending. These hawks are sure to fix on the administration’s request for additional domestic spending as proof that the Pentagon’s budget need not be cut at all, and could even be expanded.

The administration deserves points for bowing to reality in a few key areas. For example, terrorism remains at the top of its list of concerns, but the country will fight this scourge through targeted operations, not open-ended nation-building missions. This shift allows for responsible reductions in the active-duty Army and Marine Corps, which will fall back to around 2005 levels. This is good news for the troops and their families who have suffered during a decade of unnecessary and counterproductive wars, and for taxpayers who have grown understandably tired of paying for such things.

The administration has signaled that additional savings could be realized in the nuclear weapons budget, pending completion of a review of the nation’s overall nuclear posture. Although Pentagon leaders profess their commitment to the Cold war-era nuclear triad—land-based ballistic missiles, manned bombers, and submarine-launched missiles—there is widespread speculation that one of the legs of the stool might finally be sawed off. Not content to wait and see, Congressman Ed Markey (D-MA) introduced legislation last week that could generate an additional $100 billion in savings for taxpayers over the next ten years by postponing development of several new nuclear weapons delivery platforms, including a new bomber, and a new ballistic missile submarine.

Significant changes to a few additional big-ticket items in the military’s budget have been kicked down the road, but could eventually materialize into savings for taxpayers—if some members of Congress are willing to take a tough stand now.

Military compensation: Excluding the wars in Iraq and Afghanistan, personnel costs within the Pentagon’s base budget rose by nearly 90 percent over the past decade, about 30 percent above the rate of inflation. During this period, the number of military personnel increased by just three percent. The administration opted for the politically safe course of containing cost growth in the personnel sector by cutting the size of the active-duty force. Compensation costs will continue to rise, although at a slower rate than previously projected. More can and should be done, else these expenses consume the rest of the military’s budget. The men and women who serve in the military enjoy overwhelming respect from the general public, and members of Congress are understandably loathe to tinker with their compensation. Still, structural reform of military pay and benefits is long overdue. These changes could be structured to have little or no impact on current active-duty personnel, but could be instituted for new recruits.

Base realignment and closure, beginning overseas: Participants in an online budget exercise at the New York Times ranked cutting the overseas troop presence as their top priority (85 percent). These findings are consistent with other polls showing that Americans have long grown tired of paying to defend other countries that can and should defend themselves. Last week, Rep. Mike Coffman (R-CO) called on Secretary Panetta to make much deeper cuts, especially in Europe, than are currently on offer. It is likely that other members will fall in behind Coffman’s lead. If they do, expect to see a push for base closures overseas before additional bases are shuttered in the States.

Troubled aircraft and shipbuilding programs: The administration is moving ahead with plans for another supercarrier, and more littoral combat ships. It has delayed purchases of some F-35 fighter aircraft, but remains committed to all three variants of the plane (the Air Force’s F-35A, the Marine Corps’ F-35B, and the Navy’s F-35C). Congress should revisit the strategic rationale for all three of these programs, and members should pay particular attention to the soaring costs. There are realistic alternatives, if only members are willing to challenge the entrenched interests who stand to benefit from the status quo.

The New Pentagon Budget: Better, but Not Great

The changes announced in the Pentagon’s new budget guidance are, from my perspective, mostly good news, but woefully insufficient. They show how even limited austerity encourages prioritization among weapons systems that suddenly have to compete. A few more budgets like this and we’ll be getting somewhere.

The White House has not yet released the actual budget, but the Pentagon yesterday released a new document that explains the minor cuts in line for its slice. The document, unlike all the other defense strategy and guidance documents that have come out in recent years, sticks to plain English, avoids geopolitical gobbledygook, and tells you the budgetary impacts of its assertions. For that alone the Pentagon deserves some credit.

The document claims to be a guide to savings of $487 billion over 10 years. But you only get that figure by counting against past White House budget requests and their associated spending trajectory. We are saving just $6 billion from fiscal year 2012 to 2013, or 3.2% adjusted for inflation. If we leave out falling war costs, we have essentially frozen defense spending for two fiscal years (2011 and 2012), letting it grow at about inflation and then slightly slower, respectively. The Pentagon expects defense spending to grow at the rate of inflation or faster starting in fiscal year 2014, although their estimates of inflation are self-serving.

The new spending trajectory would cut about 8 percent from the base budget by the end of the decade. That’s from a budget that doubled in real terms from 1998 until 2012. And some of those savings are not really saved; they have simply migrated into the war budget. Keep in mind also that those savings are just a plan, one that is unlikely to last, particularly as presidents and Congresses change.

The biggest change in this budget is the beginning in a reduction of ground forces. The document says we will cut 80,000 troops from the Army and 20,000 from the Marines. The rationale is solid: we are probably not going to be committing large numbers of troops to another occupation of a populous country in revolt any time soon. Yet the cut leaves both forces with more personnel than they had prior to the expansion of ground forces that began in 2008. A real strategic shift away from occupational warfare would entail a bigger drawdown of Army and Marine personnel.

The document also reaffirms the administration’s decision to remove two army brigades from Europe, roughly halving our combat presence there. That’s good news given the absence of threat there and our NATO allies’ free-riding on U.S. taxpayers. But it only amounts to recommitting to a Bush administration plan. And we are unfortunately adding troops in the Philippines and Australia, at best a useless gesture that may encourage China’s military buildup.

The budget also takes a useful step in reducing the amount of tactical Air Force squadrons by six. Given the precision-revolution in targeting that makes each aircraft far more destructive and the increased Navy capability to strike targets from carriers, far bigger cuts in these forces are possible. Oddly, this reduction comes without a planned reduction in the purchase of F-35 Joint Strike Fighters.

Even worse, the Pentagon here reaffirms its commitment to the F-35B—the short-take-off and vertical landing version—taking it off “probation.” That version is meant to fly on amphibious landing ships to support missions where Marines attack shorelines. It’s hard to imagine such a mission where helicopters are insufficient for air-support and there is no carrier-based aircraft available to help the Marines, especially now that the Pentagon is again planning on operating 11 carriers.

The new version of the Global Hawk unmanned aerial vehicle is evidence of austerity forcing choices. The Pentagon now wants to cancel it because it is at least as expensive as the U-2 manned aircraft, which accomplishes similar tasks. This budget also usefully endorses the early retirement of some of our airlift capacity and tries to kill a new Army ground combat vehicle.

Another positive development is the request for two new rounds of base closures. This process requires legislation from Congress to form a Base Closure and Realignment Commission (BRAC).

Still, the hard choices here are few. Many observers were hopeful that budget savings would include cutting our excessive means of delivering nuclear weapons. But while the proposal delays production of the new ballistic missile submarine and speaks vaguely of a “different” sort of nuclear arsenal, it supports the continuation of the triad. There is still hope on this front, however. The Air Force plans to build its next bomber initially without nuclear weapons delivery capability, adding it later in development. That amounts to dangling bait for budget cutters. Like the F-35B, the nuclear bomber has an unnecessary mission that a more austere budget would cause us to reconsider

So while the changes in this budget may be the first step toward a more restrained military posture, including perhaps a strategy of offshore balancing, they are a minor one. A true offshore balancing strategy would involve a greater shift of resources from the Army to the Navy. This budget, by contrast, seems unlikely to end the traditional budget split where each service gets roughly one-third of the base.

Unsurprisingly, Defense Secretary Leon Panetta used his press conference yesterday to push Congress to amend the Budget Control Act to avoid sequestration, the across-the-board cuts in the Pentagon’s budget due next January, which would roughly double the cuts outlined here. I have argued that these pleas seem to play into Republicans’ hand in the coming budget negotiations. Readers should also know that the Pentagon could avoid the “meat-axe” nature of sequestration (to use Panetta’s language) by budgeting at the level sequestration would accomplish, roughly $492 billion, or about what non-war defense spending was in 2007. That would let the Pentagon choose how to make cuts. The strategic insights guiding these minor cuts could be exploited to make those larger ones.

Cross-posted from the Skeptics at the National Interest.

Too Much Ado about the Pentagon’s New Strategy

There’s more to the Pentagon’s new strategy than the emperor’s new clothes, but barely. It’s hardly new and not particularly strategic.

The document justifies a minor defense budget cut. The Obama administration wants to grow military spending at a pace slightly less than projected inflation for a decade. If we assume that plan stays in place—and we shouldn’t given that plans change, and we may soon have a new president—that new spending trajectory will cut non-war Pentagon spending by about eight percent compared to 2011 spending. You can come up with bigger numbers for the cut by comparing the new plans with past Pentagon spending plans or by including declining war costs. But however you slice it, these are small cuts compared to past drawdowns.

Conventional wisdom is that the cuts ought to be made strategically—that it is bad policy to let deficit concerns drive the size of the defense budget, so revised numbers require revised strategy. This new strategy document is a response to that conventional wisdom. It lets the president and Pentagon say that they have a strategic rationale for their budget.

Meanwhile, the Pentagon is desperate to avoid the sequestration mechanism required by the Budget Control Act, which would roughly double the size of those cuts, and would start in January 2013. That would return military spending to where it was in 2006, more or less. Pentagon leaders complain about the suddenness and broadness of sequestration—the cuts are distributed across programs and departments, which prevents prioritization.

One function of this new strategy document is to help avoid additional cuts. By making minor changes seem like a big deal, the Pentagon is pushing back against real strategic change, which could save far bigger sums without sacrificing safety.

In an op-ed published Friday in World Politics Review, Veronique de Rugy and I argue that the size of the coming defense cuts has been grossly exaggerated. Here’s a chart from the op-ed showing military spending in current dollars with and without sequestration:

We note in the op-ed that under the Budget Control Act, the Pentagon can avoid sequestration without Congressional action by budgeting at the levels it would achieve.  That would allow it to avoid the most onerous aspects of the sequester. The Pentagon has thus far refused to do that, probably figuring that offering sensible cuts would encourage Congress to allow them. But far larger cuts are possible with real strategic change. Big cuts would encourage that sort of change.

The current U.S. defense strategy is basically primacy or global military dominance. It requires policing the seas, maintaining or strengthening current alliances, and preparing for all manner of military contingencies. Both parties’ foreign policy elites basically embrace that strategy. The documents that purport to make strategy—Quadrennial Defense Reviews and so forth—are basically sales pitches for primacy. Their standard blueprint is to mix geopolitical gobbledygook about uncertainty with vague threat inflation, assert the importance of U.S. global leadership to U.S. security without any clear theory, then list things we want our military to do, without any attempt to separate big threats from small ones and large interests from hopes, or to translate their analysis into budgetary guidance. They have no obvious effect on budgets.

This strategy offers only minor change in form and content. It embraces the strategy we have with at best a few minor tweaks. Like those past strategy documents, this effort insists that the world is getting more complex but makes no effort to demonstrate that assertion. It lists ten objectives without prioritization, although it identifies certain goals as those that drive the size of the force. It suggests a few minor shifts but gives no budgetary guidance.

The document suggests that we might shift forces from Europe and perhaps add some in Asia. No details are given. It sensibly suggests we might get by with fewer nuclear weapons but again avoids details. The most relevant bit of the document is the argument that we are less likely to fight occupational wars and thus can cut the size of the ground forces. That is a sound idea, one that should be taken further, but a reflection of current policy rather than a change. If we are really to avoid such wars, far greater cuts in the ground forces are possible.

So what we have here is a largely inconsequential defense of the status quo. It offers incremental changes to stave off the real strategic change and savings that our geopolitical fortune allows.