This Time, It's Different

By Captain Richard M. Miller, U.S. Navy

Why Is It Different?

Defense budgets follow the rise and fall of security threats and political will. Since DOD’s creation following World War II, it has seen four major funding peaks and valleys; the Korean War, Vietnam War, Ronald Reagan–era defense buildup at the climax of the Cold War, and now the post 9/11 war on terrorism, just beginning the spending decline on this fourth period (see Figure 1). While many issues persist, five converging factors heading into this spending downturn highlight where historical comparisons are illuminating. These factors create significant challenges for DOD fiscal planners whether sequestration occurs or not.

Consumption, as Opposed to Investment Conflict. In the past three conflicts, (Korea, Vietnam, and Reagan–Cold War), the United States invested in developing the force as well as the current fight with overall funding favoring force structure and infrastructure. The lion’s share of funding was in the collective procurement, research and development (R&D), and military-construction appropriations. To be sure, increases in manpower and operations and maintence (O&M) occurred, but at a lesser percentage. This funding enabled the force to be built not only for the conflict at the time, but also created future readiness in force structure to be drawn upon in the years following the conflict. The risk of “procurement holidays” in the downturn years could be weathered in large part because of this remaining force structure from previous investments.

The recent war-on-terrorism buildup reversed this composition with combined manpower and O&M comprising the majority share of funding increases (see Figure 2). Procurement and R&D also increased, but at lesser percentages and often targeted to specific systems or hardware required in the current conflict. Compounding this, increased operational tempo (OPTEMPO) on legacy equipment from the Reagan buildup (already approaching the end of service life) has created increased demand for R&D and procurement to recapitalize this aging force at a time when those same accounts will be doubly squeezed by the planned spending drawdown and now sequestration. This is particularly relevant for the Air Force and Navy, whose equipment/capital-intensive force structure is built around platforms.

From an overall equipment standpoint, the war on terrorism has been a force-consumption rather than force-investment conflict. For the sake of comparison, Navy ship inventories increased by nearly 500 during the Korean War, and both the peak Vietnam War years and the Reagan buildup each added more 70 ships to the count. Those buildups replaced or modernized older ships and created a Fleet formidable enough to meet persistent mission demands when post-conflict force structure was decreased and budgets reduced.

However, following the Reagan peak, the Navy’s ship count began a steady decline in the post–Cold War years that the decade-plus war on terrorism spending did not reverse (the net decline in ships since 9/11 is more than 30). In addition, the war on terroism increased OPTEMPO, placing greater wear and tear on a smaller force and accelerating the depletion of useful service life. The same trends are evident for aircraft, the F/A-18s and P-3s being two examples, with wing fatigue and other problems requiring service-life extension programs, special high flight hour maintenance regimes, and even unplanned groundings. As much of the Navy force structure ages out or faces block obsolescence, it requires significant capital outlays not possible overlapping the spending reductions.

The Challenges

Rapid Funding Reduction and Readiness. Another challenge, particularly relevant for O&M, is the impending rapid loss of wartime supplemental or overseas contingency operations (OCO) funding. As Operation Iraqi Freedom ended and commitments decrease in Afghanistan, there is a growing call to reduce and eliminate OCO funds. While some post-9/11 funding increases have been in base budgets, significant wartime increases have come by way of supplemental/OCO appropriations. Contrary to some claims, this actually added transparency to the fiscal costs of war. But it was historically unique, since for the most part, war funding never transitioned into base budgets.

In contrast, President Reagan’s buildup was virtually all by way of base budgets. Vietnam War supplemental funding started significantly in Fiscal Year 1965, peaked in FY67–68, then mainly shifted to base budgets throughout final U.S. involvement. Korean War funding was a mix of both, with significant supplemental funding quickly dropping off. However, the resulting spending floor was not as low as otherwise expected because of the Cold War commitment to a containment strategy following acceptance of the NSC-68 document outlines, creating a subsequent elevated base level of DOD spending.

This is all particularly relevant to the current situation, because OCO funding not only paid for direct wartime operations in Iraq and Afghanistan, but over the past decade it also accounted for a greater portion of wartime deployment-training preparation and addressed readiness shortfalls. Where the services previously accepted increased risk in readiness for stateside forces before 9/11, they both migrated and mitigated that risk with OCO. That readiness delta must now transition from OCO to base budgets (difficult as O&M is doubly pressurized), or a willingness to accept greater risk in readiness reductions must be achieved. The combination of OCO disappearing, previously planned funding drawdowns, and sequestration further contracting available O&M dollars, results in the reduction slope in these accounts will likely be significantly steeper than experienced in past downturns. Without thoughtful consideration on how to accept risk, a slide down this slope will contribute to hollow forces.

Persistent War on Terrorism and Other New Functions. There is also a “new normal” of baseline spending to support war on terrorism functions increased or added after 9/11, yet do not stop or decrease even when OCO funding is removed. This includes such things as higher-level force-protection requirements, new intelligence/surveillance/reconnaissance operations, continued special-operations missions, and other small but globally dispersed counterterrorism efforts. Other threats have also increased the Navy’s deployed OPTEMPO in ship steaming days and aircraft flying hours without a foreseeable reduction in these requirements. Migrating funding for these functions from OCO to base budgets creates another challenge, difficult in stable budget environments, but significantly harder faced with already contracted spending. Otherwise, funding will come at the expense of other existing missions and functions.

Military Personnel. All of this comes with a limited protection on military personnel accounts (the President exempted them in sequestration) that have already seen the steepest cost growth per capita in the past 15 years. The war on terrorism is the first extended conflict fought with an all-volunteer force (AVF) with both DOD and Congress working to compensate a highly professional force under stress. From pay-table reforms, pay raises, new special pays and bonuses, increased medical benefits, and other expanded benefits for active-duty, reserve, and retired military, there have been dramatic increases in personnel costs. This may be the price of professionalization and an AVF, but as the fastest growing costs in the defense budget are now protected from sequestration, this increases risk of both fiscal and strategic imbalance by crowding out other necessary investments.

Industrial Base. Starting today’s downturn, the industrial base across several technologies is thinner and more brittle than in past budget cycles. Take Navy shipbuilding, for example. The U.S. shipbuilding peak at the end of World War II saw more than 130 yards producing ships. By 9/11, the number was eight, with only the six biggest producing large ships for the Navy. Four years later, those six yards were owned by only two conglomerate corporations also supporting business sectors in aviation, weapon systems, and information technology. The six yards have reduced production and workforce capacity approximately 30 to 40 percent since the Reagan buildup.

While the Navy struggles to maintain a shipbuilding plan of ten ships per year, planned reductions plus sequestration make that goal less likely. Fewer ships’ production spread across these yards results in increased overhead costs, or potential closure of yards, that negatively impact the corporate balance sheets. Similar trends exist in the nuclear, aviation, and space-related industries as well. While new security challenges undoubtedly require new technologies and industries to respond, there are still valid requirements to replace the capital-intensive platforms the Navy requires. Rising costs and smaller budgets erode purchasing power with already expensive systems becoming unaffordable in the required numbers. Higher unit costs will crowd out other defense priorities, or make recapitalization of the Fleet unaffordable at the same time it is desperately needed.

Likewise, there is increased risk that some smaller vendors (second- and third-tier subcontractors) already at minimal sustainment rates of production to remain viable may go out of business. While it is not DOD’s primary function to ensure businesses are sustained, the department does have to concern itself when necessary production capability is no longer available. The result is either failure to produce required systems, or extraordinarily more expense in reconstituting the lacking industrial capability and capacity. Given extreme contractions in many defense business sectors over the past two decades, this is no longer a theoretical discussion as we head into this new downturn.

Where Are We Headed?

Regardless of the defense budget’s size, the primary question remains: Are resources provided to defense commensurate with the missions it is required to perform? If history is a lesson, DOD consistently under-forecast the magnitude of past downturns, always “over-programming” forces in the out-years. In the last downturn following the Cold War, it took a decade before future defense-budget projections came in line with future spending realities. Poor forecasting created unintended cost growth as programs were repeatedly rebaselined when future budget realities did not meet previous expectations. However, this enabled strategic decision-making and risk consideration to evolve slowly in a process that adapted to the changing security environment.

Budget-ceiling limits under the Budget Control Act may force adherence to a steeper downturn and limit over-programming, but that means the rationalization of risk and priorities must happen quickly and up front rather than in year-to-year adjustments. Sequestration compounds the complexity of this task, making unintended negative consequences even more likely.

Without another strategic inflection point or disruptive event (like 9/11), this downward spending trend will likely not change. While the overall magnitude of DOD’s fiscal cut may be at least similar to the past three major downturns (approximately 30 percent or more), the current spending composition, budget-cap mechanisms, and compounding nature of the challenges make it very different. The existing five challenges highlighted here are not new; building and apparent before sequestration entered the debate, but they do constrain the choices available to defense planners. In the absence of a national consensus on U.S. strategic vision (and associated defense policy), along with perceptions and requirements to prepare for multiple future threats and associated missions, rational DOD fiscal planning and programming is nearly impossible. Adding the full effect of sequestration over a decade results in a fiscally unbalanced defense program with an overall steeper, deeper, and longer relative decline in defense spending than that experienced in recent history. This will require a bold new look at what is actually achievable in our national-security and national-defense strategies. Otherwise, adversaries may simply read our policy papers, but will believe our budgets.

Captain Miller is a surface warfare officer with multiple tours as a defense resource manager and programmer. He is author of Funding Extended Conflicts: Korea, Vietnam, and the War on Terror (Praeger, 2007).



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