09 January 2015

Why Ashton Carter Will Be a Caretaker on a Sinking Ship

[Note: this has been rewritten to remove typos and clarify language. CS]
Reader beware: This is a long blaster.
President Obama just named Ashton Carter to be his fourth defense secretary in six years.  If confirmed, Carter will face two huge, interconnected decision-making problems: 
  1. Fixing ever more costly, gold-plated military forces that may win tactical battles, but not wars at the operational, strategic, and grand strategic levels of conflict. (see this posting)
  2. Fixing the dysfunctional decision-making process — i.e., the Planning, Programming, and Budgeting System (PPBS) —  that is producing  an ever-tightening defense death spiral.    The central cause of this spiral is a ‘cost-plus’ political economy that rewards increasing technological complexity and cost growth.  This incentivizes a deep-seated economic gold-plating process for political reasons wherein the unit procurement and unit operating costs of increasingly complex weapons always rise  faster than overall defense budgets, even when those budgets increase sharply as they did after 1978 and 1998.  These asymmetrical growth rates create problems that increase political pressure for even larger defense budgets for reasons entirely unrelated to threats or strategies.
The interconnected problems of gold plating and dysfunctional decision making are seamlessly imbedded in the political-economic culture of the Military - Industrial - Congressional Complex or MICC.  Their effects have been worsening since the late 1960s, if not earlier.  Today, the incentive structure creating  these problems is  deeply entrenched in the power games practiced by the MICC’s highly politicized iron triangle.
 It is hard to imagine how Aston Carter, a consummate insider who has done absolutely nothing to reduce these problems in his earlier DoD positions, will be anything more than a caretaker on a sinking ship.  
My goal in this two-part posting is to explain why I say this.
Part I introduces and describes the nature of the defense death spiral (with links to specific studies that analyze it in detail), and Part II is a report by the Project on Government Oversight that shows that Mr. Carter has been an intimate part of the decision-making problems he will now be charged with correcting.
Part I: Introduction
The Defense Death Spiral
Why the Defense Budget is Always Underfunded
By Chuck Spinney (updated January 2014)
[The earlier and shorter version of this essay appeared in Time Magazine’s Battleland on July 19, 2011]
The courtiers in the Hall of Mirrors that is Versailles on the Potomac are always lining up to give a new Secretary of Defense advice on how to manage the Pentagon during the coming era of budget “constraints.”  Most of this wisdom takes the form of empty platitudes about how important it is to have a vision, a strategy, and to make the hard choices needed to budget for that strategy. 
One of my all time favorites is Dr. Daniel Goure’s 14 July 2011 admonition to incoming Defense Secretary Leon Panetta on the web page of the Lexington Institute, a pro-defense “think tank” funded in part by defense contractors.  Goure starts his advisory by saying:
“Let’s be honest. The current US defense program is underfunded, even at over $500 billion a year in the base budget and another $100 billion plus in contingency expenses.”
Goure then goes on to discuss the need for vision, particularly concerning controlling personnel and health costs and avoiding duplication by transferring work done in government facilities, and by the military, to contractors.  In other words, when times are tough, return to the old game of protecting industry at the expense of the soldier and the taxpayer.
Ironically, as the following chart shows, regardless of how you account for inflation, defense spending in 2011, when Goure was dispensing his advice, had reached the highest level since the end of WWII, far higher on an annual basis that the budgets to support the far larger, higher-tempo Korean and Vietnam Wars. 
Goure was correct about one thing, however.  The defense program is underfunded. In fact, it is ALWAYS underfunded — and that is no accident. So, before dispensing advice on how to shovel money to his buddies in the defense industry, Goure should have explained how and why the highest budget since the end of World War II could possibly end up underfunding the smallest force structure since 1950.  After all, the United States is engaged in a tough, but relatively small war on terror, with far smaller forces and minuscule operational tempos compared to those deployed to either Korea and Vietnam.
Moreover, the United States no longer needs to spend a large part of the defense budget to maintain huge forward deployed conventional and nuclear forces to counter the threat posed by the Soviet Union and the Warsaw Pact.  Nevertheless, despite a defense budget that has almost doubled in inflation adjusted dollars since 1998, the new Secretary of Defense will be overseeing a defense program that is in the programmatic equivalent of a meltdown — replete with cost overruns, delays, and production stretch-outs to undermine the modernization program, while pressure is increasing to cutback combat readiness in the middle of a war to bail out the floundering modernization program.
If a new Defense Secretary wants to nurse the Pentagon into to health, he must come to grips with the underlying causes of the Defense Death Spiral — a problem I have been studying and writing about since the late 1970s.
The death spiral is the central management problem plaguing the Department of Defense — i.e. because it is causing the meltdown of the entire defense program.  It can be characterized in a general sense as being produced by the mutually reinforcing effects of — 

  • A Modernization Program that Cannot Modernize the Force: The MICC’s predilection for increasing high-tech ever-more complex weapons and supporting equipment (for domestic-political economic reasons) causes the unit costs of new weapons to always grow faster than overall defense budgets, even when those budgets increase sharply, as they did in the early 1980s and after 1998. Consequently, new weapons always cost far more than their predecessors, and cannot be produced at high enough rates to replace existing weapons on a one-for-one basis.  Decreasing replacement rates cause the average age of the weapons in the force structure increase over time, and eventually the ages of the oldest weapons reach a point where they must be retired without replacement.  The result is the well-documented, long-term trend toward smaller and older forces.  This evolution has been in place since the late 1950s.
  • The Rising Cost of Low Readiness: Notwithstanding promises to the contrary (i.e., of lower life cycle costs), the unit operating costs of increasingly complex (and aging) weapons have also risen considerably faster than overall budgets.  This asymmetry creates continual budgetary pressure to reduce readiness and to shrink force size, in part to contain growth in the operating budget itself, but also to free up the additional funds to finance the underfunded modernization program (known as robbing readiness to save modernization).
  • The Pentagon’s Bookkeeping Shambles: Corrupt and unauditable accounting, financial management, and program planning systems lubricate the degenerative process by making it impossible to assemble the decision-making information needed to sort out and correct the first two problems.
As long as these three relations remain in place, the defense budget will always be underfunded.  As I explained to Senator John Tower during testimony to Congress in March 1983, “Spending more money the same way actually makes matters worse.”  A near doubling of the defense budget since 1998 has shown again that statement to be correct.
This is the fundamental management dilemma facing any new Secretary of Defense.  
Resolving it won’t be easy, because this triad of structural problems is just one outward manifestation of deeper behavioral pathologies.  These pathologies built up insensibly, and without design, over during the 40 years of industrial mobilization for the Cold War.  They are now deeply embedded in the iron-triangle culture of the Pentagon, the defense industry, and Congress  — the Military - Industrial - Congressional Complex or MICC (depicted in the following graphic).  

One of the most important and oiliest lubricants keeping the money and power flowing smoothly throughout the MICC is the rotation of military officers and civilians through the notorious revolving door, depicted at the center of the triangle.  
Best known are military officers, especially generals (e.g.,see herehere, & here), who cash out to join defense contractors (or hanger-on outfits like consulting companies, defense oriented think-tanks, etc.) or defense-related congressional staffs.  Less well appreciated are civilian political appointees, like Daniel Goure (see bio) or incoming defense secretary Ashton Carter, who move back and forth among these poles, generally parlaying each move into a higher position on the well-oiled upward slope to more influence and wealth in the MICC. 
The pernicious aspects of the revolving door are deep and troubling.  It is a reflection of a comfortable club of shared interests that promotes the MICC’s own wellbeing at the expense of the nation's wellbeing; it encourages an elite culture of arrogant entitlement, particularly at the highest levels.  These entitlements are seen as rights to taxpayer dollars, even when the ‘entitlements’ generally stay within the confines of the Pentagon’s loose ethics laws (enacted over the years by compliant Congresses and Presidents).  
A stunning example of this sense of entitlement came to light in February 2009, when Ashton Carter was being vetted for the job of Undersecretary of Defense for Acquisition, Technology, and Logistics. Bill Gertz of the Washington Times reported that 
“Financial questions have been raised about Mr. Carter’s past activities, including government reimbursement for a taxi cab ride he took from Washington to his residence in Massachusetts, the officials said.” 
But there is a lot more to Mr. Carter’s revolving door gambits: Attached beneath this posting as Part II is a report just issued by the Project on Government Oversight describing these gambits.
The individual decision makers in the MICC also exhibit repetitive patterns of bureaucratic behaviour known as the defense power games (front loading and political engineering). These power games, which are in part incentivized by the prospects of moving throughout the revolving door (and cashing in on its culture of entitlement), create the modernization, readiness, and bookkeeping problems that effectively turn the decision-making and program planning processes inward on itself.  The propensity to focus on the MICC’s internal dynamics works to disconnect the entire decision-making and policy-formulation processes from the external reality those processes purport to cope with — i.e. the threats facing our forces, the strategy aimed at meeting those threats, and the force structures needed to execute the strategy.  The resulting self-referential decision making engine spins in on itself to produce the defense death spiral.  It is summarized by the following diagram.  

Simply repeating the same old empty platitudes about the need to have a strategy and to fit forces and then derive budgets for those forces goes nowhere when faced with this kind of behaviour.  Ironically, the decision process in the Pentagon that consumes millions of man hours each year to create this mess year after year — the Planning, Programming, and Budgeting System or PPBS — already is designed precisely to link threats to strategy to forces and then to budgets!  The real problem is why this seemingly logical approach fails to do so year after year.
The repetitive pattern of these decision-making pathologies and their effects has been well understood and documented since the early 1980s.  Moreover, the current programmatic meltdown in Defense Department was foreseen by the late 1980s and early 1990s.  Nevertheless, with a few lonely exceptions, notably Senator Charles Grassley (R-Iowa), no one in leadership positions in the Pentagon, Congress, or the White House has taken any interest in correcting the underlying problems shaping the MICC’s (the Pentagon’s) self destructive pattern of behavior.
By the end of the 1980s, it became quite clear that there would be no efforts to reform the decision making process in the immediate future.  Accordingly, I decided the only thing I could do was to document these problems for posterity.  My intent was to provide a contemporaneous track record showing how these problems were indeed foreseeable and how they could have been avoided, if the leaders in the Pentagon chose to make the effort. They did not — and today, the American public is reaping the Pentagon’s bitter harvest of shame — an underfunded defense program in chaos, even though is being funded by largest budgets since the end of World War II (after removing the effects of inflation).  
Those who blame the mess in the Pentagon on the war on terror and out of control personnel and medical costs are selling snake oil to grease a continuation of this destructive pattern of business as usual.
This link, for example, will take you some of my more important unclassified reports and papers describing these problems:  They explain why and how the Defense program has been in a continuous state of unraveling.  They predicted what would happen if these behavioral pathologies were left on unaddressed.  My June 2002 statement to Congress outlined a comprehensive plan for fixing these general decision-making problems.  I don’t know if that plan will work, but at least it was designed to address the real causes of the underfunding problem.
TACAIR Case Study
No mission area is more instructive for understanding the Pentagon’s behavioral pathologies than that of tactical fighter aviation or TACAIR.  
The pathologies came to a head as the Cold War was ending in the early 1990s.  Assuming the Cold War would continue unabated, the Air Force, Navy, and Marine Corps had been planning to embark on a new generation of high-cost, high-complexity fighter/attack aircraft (these evolved into the F-22, F/A-18E/F, and the F-35 Joint Strike Fighter). These fighters were all designed under the exaggerated threat assumptions that were in place during last decades of the Cold War.
To summarize: In 1991, just as the Cold War was ending, the AF front loaded the F-22 by pushing it prematurely though decision-making milestone II into what was then known as “concurrent engineering and manufacturing development” (EMD).  The EMD decision allowed the contractor (Lockheed Martin) to begin the construction of the F-22’s social safety net by spreading dollars, jobs, and profits to many congressional districts, a power game known as political engineering.  The games of front loading and political engineering are explained in my 1990 pamphlet Defense Power Games.  
Less than a year later, the Navy pulled off the same kind of front loading stunt by prematurely rushing the F-18E/F into EMD for the same reason [discussed herehere, and here].  Both airplanes were high-cost legacies of Cold War thinking.  
The bureaucratic objective of the decision-making game in each case was to turn on the money spigot and to lock it open; in effect, the goal was to let the Cold-War cows out the Cold-War barn before its doors closed by gaming the MICC’s iron triangle.
It is important understand how the senior military and civilian decision makers in the Pentagon responsible for rushing these two decisions knowingly created a long term force-structure crisis.  They knew beforehand that the Pentagon’s contractors could not possibly produce new F-22s and F-18E/Fs quickly enough (even in the unlikely event where there were no delays due to cost overruns and technical problems) to replace the 3,000-plus fighter/attack aircraft then in the inventories on a timely basis.  Consequently, decision makers knew before the fact that the average age of the older airplanes remaining in those inventories would rapidly grow to unprecedented levels.  They also knew from past experience that increased aging would lead to unpredictable increases in future operating budgets.  Finally, the people approving these front-loaded decisions knew the only way to slow down the increased rate of aging would be to eventually make a decision to drastically reduce the size of those inventories by retiring the oldest airplanes without replacement.
But most importantly, the senior decision makers responsible for these front-loaded decisions also knew beforehand that the force-structure crisis created by their premature F-22/F-18E/F decisions would create irresistible pressure to approve the development a third fighter aircraft (then being conceived in stealthy secrecy) to paper over the long-term crisis they deliberately created.  
That decision came only two years later, with the approval of yet a third gold plated fighter/attack program — the problem-plagued F-35 Joint Strike Fighter, yet another Cold-War-inspired concoction of highly complex and costly technologies, but in this case it is one that metastasized into most expensive weapon acquisition program in history.
Put bluntly, the disastrous ramifications of decisions made in the early 1990s were understood before they were approved. 
I wrote several contemporaneous reports explaining what was happening and what would happen. They all can be found here in the subsection entitled “Specific Reports on Tactical Fighters.”  Together, with my March 1996 essay, Defense Budget Time Bomb, the case of tactical aviation provides the clearest evidence of how the Pentagon bureaucracy, with malice of forethought, deliberately created the modernization crisis that metastasized after 2000 and is now staring the Secretary of Defense in face.  
A more general, albeit more complex picture of the same pattern of decision making though out the Department of Defense can be found in my unclassified briefing, Defense Death Spiral.
That, in a nutshell, is the dirty story of why the defense budget is always underfunded. 
You won’t hear this story from courtiers now trying to ingratiate themselves with the new Secretary of Defense.  Given that political pressure is mounting to cut back non-defense programs like Social Security, Medicare, education, infrastructure, etc., to reduce deficit, I believe the time has come to rein in the Pentagon’s out of control budget, to discipline those responsible for the MICC’s reckless behavior, and to force the Pentagon to clean up its act.
Job 1 is to provide more reliable decision-making information to the Secretary of Defense, so he and his staff can figure out what is needed to pull the Pentagon out of its death spiral.  The only incentive to force this is to put the entire core budget at “risk,” say by placing the core (non-war related)  budget on a downward sloping glide path of 2 to 4% per year (in current as opposed to inflation-adjusted dollars) until the Pentagon can produce audit-able books. That would simply bring the Defense Department into compliance with Chief Financial Officers Act of 1990 and the Accountability and Appropriations Clauses of the Constitution. Given that every member of the Defense Department has taken a sacred oath to protect the Constitution, making the Pentagon conform to the requirements of the Constitution is hardly an onerous requirement.
Only with cleaner books can serious policy-making and strategic planning begin.  Readers interested in a short primer written by defense insiders, with over 400 years of collective experience, on how to think about defense and what kinds of changes can and should be made once we have reliable information are referred to The Pentagon Labyrinth: 10 Short Essays to Help You Through It.
Is Ashton Carter the man to fix the Pentagon?  Part II addresses this question.
Part II: Revolving Door Case Study
Ashton Carter Takes Revolving Door to Higher Level
Michael Smallberg, Investigator, POGO, January 6, 2015
[re-printed with permission]
Countless officials in Washington have traveled a familiar path through the revolving door, moving from the private sector to the government and back again. Ashton Carter, President Obama’s nominee for Secretary of Defense, is part of an elite crowd that has managed to keep a foot in both worlds at the same time.
Several reports have mentioned Carter’s work as a consultant to the defense industry between stints as a full-time official at the Department of Defense (DoD). But the Project On Government Oversight has found that Carter’s role, like that of many other members of Washington’s defense policy establishment, went deeper. While working in the private sector, he has held plum positions on government advisory boards that called for reforms with potential ramifications for his defense industry clients and other companies that receive DoD dollars.
Carter is hardly alone. Federal ethics laws allow scores of advisers at the Pentagon and other agencies to serve in these influential positions while keeping close ties to big businesses overseen by the government. Carter’s nomination serves to illustrate how the government allows members of the policy establishment to straddle both sides, and how it’s become a fixture of the military-industrial-congressional complex.
Carter’s dual roles as government and private adviser have overlapped the most in missile defense and U.S. space policy. These are programs with significant taxpayer dollars at stake: the federal government spends about $8 billion a year on missile defense alone. By virtue of his service on advisory panels, Carter has been in a position to influence government policies and gain an inside perspective on future programs while carrying on his outside roles related to missile defense.
As a member of the State Department’s International Security Advisory Board, he served on a task force that produced a 2007 report arguing that numerous U.S. allies measure the “strength of U.S. security assurances” in part by dollars spent on missile defense and theater missile defense programs. Another 2007 board report on U.S. space policy warned that “U.S. policy makers should resist efforts to prohibit space-based missile defenses as ‘weaponization of space,’” and said the State Department “should support the right of the United States to explore the potential of space-based defenses without international restrictions.”
As he was one of several board members, it’s unclear how much Carter himself shaped the contents of these advisory reports. He did not respond to POGO’s request for comment.
Like other advisers who serve as Special Government Employees, Carter was generally prohibited from taking action on particular matters affecting his financial interests (although it’s often unclear how well the government enforces this prohibition, which largely relies on employees to disclose and manage their own conflicts). Nonetheless, government actions and private interests occasionally intersected with Carter’s advisory work.
In 2008, while still serving on the board that advised the State Department on missile defense, Carter received $10,000 for providing technical advice to Raytheon, a giant defense contractor that has received substantial taxpayer funding to work on missile defense systems. He disclosed his work for Raytheon in 2009 when he became the Under Secretary of Defense for Acquisition, Technology, and Logistics. In a 2009 ethics letter, Carter agreed to wait one year before participating in DoD matters involving the company.
Over the past ten years, Raytheon has received more than $11 billion in contract obligations from the MDA alone. The Obama Administration has canceled some missile defense systems in recent years, but the program is still big business for Raytheon. In a 2010 Wall Street Journal op-ed, then-Under Secretary Carter wrote that an “essential element” of the program is the Standard Missile 3 (SM-3) interceptor, which is manufactured by Raytheon. The company also makes the Patriot missile defense system and the Exoatmospheric Kill Vehicle, a key component of intercontinental ballistic missile defense. In 2013, the MDA presented Carter with the Ronald Reagan Missile Defense Award. “Dr. Carter has been instrumental in defining the relationship between the Missile Defense Agency, the developer, and the Services,” according to a DoD press release.
Earlier in his career, Carter served on powerful panels that advised the Pentagon while he also consulted with clients investing in the defense industry.
From 1991 to 1993, and then again from 1997 to 2001, Carter was a member of the Defense Science Board, which advises the Pentagon on the acquisition process and other “matters of special interest,” according to its charter. POGO has reviewed a board report, issued in December 1999, which proposed watering down certain procurement rules that were put in place to protect taxpayers from wasteful contract spending. Carter served on a task force that drafted the advisory board report, alongside ex-government officials and representatives of defense contractors such as United Technologies Corporation (UTC), Raytheon, and General Dynamics. The report said that the “sheer volume, complexity and fluidity” of government contracting rules “serve to discourage commercial firms, U.S. and foreign alike, from doing business with DoD.” It also expressed concern about “insufficient clarity in DoD policy on cross-border defense industrial mergers and acquisitions.” The board’s recommendations comported with a series of so-called “acquisition reforms” that had been spearheaded by the Clinton Administration under the banner of “Reinventing Government,” as detailed by POGO at the time.
Starting in 1998, while still advising the Pentagon, Carter also began working as a senior partner at Global Technology Partners. In a 1999 press release, the firm is described as a “specialized group of investment professionals” working to “acquire and invest in technology, defense, aerospace and related businesses worldwide.” At the time, Carter and his investment partners were acquiring a stake in Condor Systems, Inc., a “privately held defense electronics firm” that specialized in “signals intelligence, electronic support measures, and specialized electronic countermeasures systems for the electronic warfare industry.”
“[W]e believe that our association with Global Technology Partners…will assist us in identifying attractive acquisition candidates,” Condor wrote in a 2000 disclosure to investors. Condor’s business at the time included sole-source contracts on the Air Force’s B-52H bomber and the Navy’s Aegis class ships. The company also supplied prime contractors such as Lockheed Martin, Raytheon, and Boeing. Condor received nearly $50 million in obligated DoD contract dollars in fiscal years 2000 and 2001, during Carter’s tenure on the Defense Science Board.
In 2000, Global Technology Partners formed a “strategic alliance” with Rothschild, the global investment bank. “We believe the combination of Rothschild’s global relationships and Global Technology Partner’s access to and knowledge of the international defense and aerospace industry will create high level strategic advisory and investment opportunities,” a Rothschild executive stated in a press release.
“These opportunities will arise from the continued consolidation of second and third tier defense companies, the anticipated relationships that are forming among aerospace and defense companies on a cross border basis and GTP’s insight into defense markets and technologies,” the Rothschild executive said. These are some of the same issues that Carter and other members of the Defense Science Board tackled in their 1999 report on procurement.
Carter’s investment colleagues at Global Technology Partners included other former senior officials—such as former Secretary of Defense William Perry and former CIA Director John Deutch— who were serving simultaneously as advisers to DoD. Perry and Deutch also had close ties to giant defense contractors: Perry served on the boards of UTC and Boeing, while Deutch served on the board of Raytheon.
From 1997 to 2001, Carter also served as a member of the Defense Policy Board, another influential Pentagon committee that advises on “issues central to strategic Department of Defense (DoD) planning,” according to its charter. Unlike the Defense Science Board, the Defense Policy Board “does not publish separate reports,” according to a database of federal advisory committees, and it’s unclear what role Carter played in the panel’s work. Nonetheless, Carter’s industry clients stood to benefit from his role as a Pentagon advisor on both panels. (Another former member of the Defense Policy Board, Richard Perle, ended up resigning after a controversy erupted over his ties to companies that had business pending before the government.)
When President Obama nominated Carter last month, he praised Carter’s record as a “reformer who’s never been afraid to cancel old or inefficient weapons programs.” When Carter was the Pentagon’s top procurement official, he introduced a sweeping initiative, known as “Better Buying Power,” aimed at “delivering better value to the taxpayer and improving the way the Department does business.” He proposed several measures—such as leveraging competition, using proper contract types, strengthening the acquisition workforce, and mandating affordability—to help the Pentagon “do more without more.”
When it comes to holding contractors accountable, however, Carter’s views as a public official have aligned at times with the views espoused by the contracting industry. As POGO reported during Carter’s stint as the Pentagon’s chief weapons buyer, he warned the Commission on Wartime Contracting in 2011 that mandatory suspension of indicted contractors could have a “chilling effect on contractor cooperation in identifying and fixing real problems.”
Will Ashton Carter be able to stand up to defense contractors as Secretary of Defense? Or will he be more concerned with ensuring their cooperation? Given his tangled history as a public and private advisor, taxpayers may have good reason to be concerned.

Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.