Feb. 28 (Bloomberg) -- So we have reached the eve of sequestration, with the Pentagon facing a $43 billion, one-year budget hit called for in the 2011 debt-ceiling agreement. Don’t fret. Despite warnings from outgoing Defense Secretary Leon Panetta that sequestration is “a disaster for national defense,” B-2 bombers won’t fall from the sky and Canada won’t invade any time soon.
In defense terms, the real problem with these cuts is their lack of precision -- as decreed by Congress and the Office of Management and Budget, they must be made evenly across all programs and accounts (with the exception of personnel pay, which was exempted by President Barack Obama, and which we’ll return to later).
By now, everyone involved with what President Dwight D. Eisenhower called the military-industrial complex understands that sequestration-level spending is the long-term reality. Combined with cuts already enacted by the Obama administration, Pentagon spending will probably need to come down by nearly $1 trillion over the next decade from the so-called baseline prediction. (Yes, spending in actual dollars will rise slightly, but it will pale compared with the 35 percent inflation-adjusted increase of the last decade.)
As in any budget fight, people will look first at “harmless” cuts by eliminating waste. The Pentagon, famous as the home of the $600 hammer, is ripe. In an investigative series last week, Bloomberg News highlighted many of the military’s most over-budget, big-ticket programs and wasteful contracting practices, including the next-generation F-35 Lightning fighter jet, the Navy’s littoral combat ship and unwanted M-1 Abrams tanks. Yet such examples can be misleading: Cut the white elephants, they imply, and your budget pains are solved.
But this line of thinking is no less crude than the 10 percent-off-the-top approach of sequestration and ignores the way military procurement really works. First, companies such as Lockheed Martin Corp., producer of the F-35, are called contractors because they have contracts. In many cases, the government’s cost of escape will eat up projected savings, and the manufacturer may cover its shortfall by raising prices elsewhere. Many contracts involve not just the U.S.’s four services but our allies’ as well -- the U.K., with a $2.5 billion stake in the F-35, is one of nearly a dozen international partners.
Second, for any project you kill or curtail, you either need to replace it or diminish your military capacity. The left-leaning Center for American Progress, for example, proposes replacing the Navy’s version of the F-35 with 235 additional current-generation F/A-18E/Fs, which it says would save $16.6 billion over a decade. Maybe. The per-plane cost for the rest of the F-35 contract would likely rise, and the Air Force would have to prepare to use its F-35s and F-22 Raptors to carry out long-range missions now beyond the capability of the Navy.
Likewise, the free-market-loving Cato Institute suggests cutting littoral combat ship purchases to 10 vessels, down from a projected 52, to save $2 billion a year. The ship has been a production nightmare: The first two in the water have been marred by cracks and other defects. But a versatile shallow-water ship capable of patrols, mine clearance and humanitarian missions is vital to the military’s “pivot to Asia.”
The honest truth is that Pentagon procurement isn’t terrible -- by government standards or any other. (The $600 hammer, it turns out, had a reasonable explanation.) Initiatives of this size are always underbudgeted at first -- the Sydney Opera House, an icon of 20th-century big thinking, came in 10 years late and 14 times over budget; something as simple as the Capitol’s new visitor center ended up costing twice the estimate.
Military projects, particularly, are prone to rising costs as technology improves. The first F-35 contract was signed in 1996, when only one in five Americans had a mobile phone and the idea of a “drone war” was science fiction. This reality forces the Pentagon to operate under “concurrency” -- building weapons with blueprints that may change literally every day.
A last consideration is that military contracting practices have to keep the military-industrial complex -- or, as we now call it, the “defense industrial base” -- in good health. Eisenhower’s warnings were prescient, but this sort of quasi-corporate welfare state has its purposes. The government doesn’t want to build its own weapons, and no private entity can take on the research-and-development and production costs inherent in weaponry without getting money upfront from Washington. And, of course, there are those jobs.
The biggest procurement errors are made well before contracts are even signed: in misdiagnosing the most urgent needs of a decade or two hence. Occasionally those mistakes can be wiped out -- the Marines could save more than $1 billion a year by killing the troubled V-22 Osprey. But more often, the missteps can only be pared down at the tail end of their production; nobody truly expects the F-35 program to last until its scheduled demise in 2035.
We don’t consider any program sacrosanct: In addition to the Osprey, we have called for the Pentagon to build fewer Ford Class aircraft carriers, eliminate the Marine version of the F-35 (with its vertical takeoff and landing abilities, a luxury we don’t need) and pare the arsenal of strategic nuclear weapons. But even when you take a billion here and a billion there, it never becomes “real” money. A new study for the Hamilton Project by budgeting expert Cindy Williams, of the Massachusetts Institute of Technology, suggests canceling systems whose cost estimates increase by more than 10 percent over five years; even this hard-nosed approach would save no more than $6 billion annually.
That’s because the contracting debate misses a prime driver of military spending: personnel costs. Between 2001 and 2011, they rose nearly 90 percent. A huge part of this boom, as it did for the rest of us, came in health care. Obama’s decision to exempt personnel accounts from sequestration exemplified a longstanding failure to consider the one place to find large-scale savings. Bloomberg View will have specific proposals in a follow-up editorial.
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