America’s Peace Dividend, by Ann Markusen (ed.)

 

Comments on Lawrence J. Korb's
"U.S. National Defense Policy in the Post-Cold War World"

David Mosher

 

I would like to make four points related to Larry Korb's paper, all having to do with defense budgets and the peace dividend. Taken together, those points lead to the conclusion that, absent a major change in strategy, defense budgets will have to rise to maintain the current force and our uses for it. How far Larry's proposals go to address that problem is a good topic for us to discuss later.

 

The Tyranny of Rising Operating Costs

First, I would like to discuss what I call the "Tyranny of Rising Operating Costs." More formally known as operation and maintenance (O&M), this category includes operating the forces, maintenance, depots, training in the field and schools, administrative and base support, and most of DoD's civilians. O&M does not include military pay and benefits. O&M is the largest portion of the defense budget, accounting for $105 billion in 2000, or 38 percent of the budget.

As Figure 1 shows, the costs of operating and maintaining the force (O&M) per active duty service member has been rising at an average annual rate of nearly 3 percent since 1975 in real terms, that is after adjusting for inflation. In fact, that trend goes back at least to 1954. Not only is it rising, but it rarely falls for more than a year or two at a time.

What explains this trend? No one really knows. Clearly rising healthcare costs play some role historically, but those costs have been relatively flat for DoD during the 1990s. The increasing cost of maintaining modern weapons may also play a role, as well as the extra training that is required of soldiers to operate them. Another factor is that infrastructure has changed much less since 1945 than the size of the active duty force, meaning that the cost of that infrastructure must be spread over fewer and fewer people.

The problem will be amplified over the next decade or so because the number of service members is not expected to fall further. DoD has tried to halt this trend over the past decade. It has closed a number of bases through four base closure rounds. It has also sought to outsource as many defense support functions as possible. Although it is too soon to tell how successful some of the efforts will be, Figure 1 suggests that little progress has been made in breaking the trend.

Against this historical backdrop, the Administration has assumed that it will be able to break the trend and hold per capita O&M spending at 2000 levels over the next five years. It has made similar assumptions for each of the past four years, usually crediting unspecified or unproven "efficiencies" with the turnaround. Although the pressure that the Administration feels to solve the problem is understandable, this optimistic planning has consequences for other parts of the program because money to make up the shortfall has to come from somewhere. The most serious consequence has been the repeated migration of money from the procurement and R&D accounts to O&M. This is what has made it so difficult for the Administration to reach its procurement spending targets.

 

The Need to Recapitalize the Force

One of the most pronounced manifestations of the peace dividend was the procurement holiday that the United States took throughout much of the 1990s. Flush with new equipment bought in the late 1970s and 1980s, the military could cut procurement significantly without having problems. Procurement fell 52 percent, from $96 billion in 1990 to a nadir of $45 billion in 1997 (in constant 2001 dollars). The drawdown allowed the Pentagon to shed its older equipment and keep the average ages of its stocks from rising.

But the holiday cannot continue because equipment is continuing to age. DoD must either buy new equipment to sustain the planned force or reduce the force structure. One way to illustrate this is to look at the average number of combat aircraft or ships that the military must buy each year to sustain the planned force. Figure 2 shows the sustaining, or steady state, quantities that DoD would have to purchase each year, on average, to keep the force from getting too old. The levels being bought today are far short of what would be needed to sustain the planned force. According to analysis by the Congressional Budget Office, the Pentagon would have to spend at least $90 billion a year, on average, buying equipment. After a five-year struggle, the Administration has finally managed to reach $60 billion in procurement in 2001 – $30 billion below the sustaining level. And this is in addition to probable O&M increases. Even worse, the Pentagon will have to spend more than $90 billion dollars a year on procurement by the end of this decade to compensate for the aging inventories resulting from the procurement holiday during the 1990s.

CBO's estimate assumes that the Pentagon would build the modern major weapons that it plans. If the Pentagon chose instead to buy more of its current generation of aircraft and ships, it would lower the price of sustaining the force, but not by enough to allow it to live on $60 billion a year in procurement.

 

Tight Budgets Are a Reality

Despite what some defense hawks hope, defense budgets will not rise significantly over the next 5 to 10 years. The Joint Chiefs recently let it be known that they were going to break ranks with the Administration and, in a highly unusual move, tell the Congress that they need an additional $30 billion a year for defense over the next five years. (That figure includes more than just procurement). Likewise, both presidential candidates have promised that they would spend more on defense, although neither has committed to a specific budget figure.

But the budget math won't support such spending. The social security surplus will almost certainly be off the table because there is strong pressure in Washington to "save" the program. (The money will be used to finance the national debt.) Non-defense discretionary spending will probably keep pace with inflation because the Congress has failed to do so, despite repeated efforts by budget hawks to hold the line. The on-budget surplus would therefore total barely $150 billion over the next five years, according to CBO's annual report for this year.

This projected $150 billion surplus is just enough to fund the Chief's wish list (and not enough to really sustain the force). But defense will have to compete with three other budget priorities for the surplus. George W. Bush wants to cut taxes. Al Gore wants to increase spending on Medicare and other domestic programs. And deficit busters in the Congress want to pay off the debt more quickly. Given those competing interests, defense will be lucky to get $10 billion more a year.

 

The Nuclear Peace Dividend Has Been Spent

Let me return for a moment to the peace dividend that is the topic of this conference. Perhaps nothing symbolizes the peace dividend more than reductions in nuclear forces. Nuclear forces may not have fallen as fast or as far in the past decade as many would have liked, but the changes have still been dramatic: nuclear budgets fell more than 50 percent from 1990 to 2000, from $59 billion to $35 billion after accounting for inflation. The number of deployed warheads fell even further, from an estimated 20,000 in 1990 to fewer than 8,500 today. The Bush and Clinton Administration's were also able to scale back plans for strategic missile defenses. Over the past decade, the Pentagon was able to turn to nuclear forces for big savings. But those days are over: further cuts will have little effect on the budgets for deterrence forces. In fact, those budgets will probably rise in coming years.

The reasons for this are two-fold. First, arms control measures beyond START II won't save much more than $1 billion a year. The number of platforms under START II is already quite small and won't get much lower. The number of warheads may fall sharply, but the platforms will remain about the same. Moreover, deeper cuts and limitations on warheads and fissile materials will require new verification measures that could be very expensive. Finally, the stockpile stewardship concept for preserving nuclear weapons under a comprehensive test ban is highly insensitive to the size of the stockpile. New thinking could change some of this, but it is not evident in most quarters, Bush's comments to the National Press Club notwithstanding.

The second reason that the budgets for deterent forces are likely to rise is missile defense. The nation has embarked on a program to deploy a national missile defense, which will increase budgets by at least $2 billion to $3 billion a year for the Administration's modest plan. In addition, the Pentagon is developing six new theater missile defense systems. Not only will those programs experience higher-than-expected costs, but two of them are not even fully funded in the Administration's plan*Navy Theater Wide and MEADS. Those factors plus the urgency to deploy theater defenses to meet the existing threat means that costs for theater missile defenses will be $1 billion to $2 billion higher a year, on average, over the next decade.

 

Summary

Budgets will be tight over the next decade, despite the surplus. Within that constraint, the Pentagon must figure out a way to fund its strategy and the forces it believes are necessary to execute it. That task will be difficult, if not impossible. Rising O&M costs show no sign of abating, despite serious efforts by the Administration to break the trend. Shortfalls in procurement spending – at least $30 billion according to CBO – must also be addressed. Moreover, there is little extra cash left in areas such as deterrence forces that the Pentagon could rely on for funds over the next decade. Failure to solve the budget problem will mean that the Pentagon will have to cut forces and slow modernization. It is better to establish a new strategy now that will guide those cuts. Relying instead on the time-tested share-the-pain-equally approach will lead to a force that is just a smaller version of the force that Larry has accurately criticized as being a smaller version of the Cold War force.

 

America’s Peace Dividend