23 March 2016

America’s Gravest Strategic Danger

Flush With Cash, Running on Empty (IV)
Chuck Spinney

[Reposted in Consortium News here.]
This the fourth in a series occasional essays describing the vacuous nature of the political debate over how much to spend on defense.
Pentagon spending has not really been an issue in the 2016 Presidential campaign.  With the exception of Ted Cruz, the positions of the remaining candidates have been vague about even the size of the defense budget.  As near as I can tell: (1) Clinton’s position on the size of the Pentagon’s budget is that she will establish a blue ribbon commission to review defense policy and spending levels; (2) Trump claims without detail he can make the military great again but cut the budget at the same time; (3) Cruz says he will copy President Reagan's spending spree by using tax cuts to stimulate the economy and ramping up defense spending to 4% of GDP (more on this plan in a subsequent blaster); and (4) Sanders seems to want to cut the Pentagon’s budget, but has not detailed how.  
No candidate appears to have noticed that President Obama has allowed the Pentagon to plant a defense budget time bomb in the form of modernization bow wave, although Obama's bow wave has been reported repeatedly in the defense circles, e.g., see 1, 2, 3, 4.  
Mr. Obama’s bow wave is similar to those planted during the exit from Viet Nam in the early and mid 1970s while Viet Nam was winding down and at the end of the Cold War in late 1980s thru the mid 1990s.  Each of those earlier budget time bombs blew up, the first  after 1978 and the second after 1997, albeit the latter explosion was masked over by the politics fear and budget gimmicks unleashed by 9-11.  The time bomb bequeathed by Mr. Obama is now being wired to explode during the next presidential administration, with ripple effects lasting perhaps to 2030.  
This essay introduces an early propagandistic aspect of the setting the fuse.  Job 1 is to set the foundation for budget future growth by building a psycho-political barrier to further budget reductions.  The Secretary of Defense’s recent testimony explaining President Obama’s defense budget to the Senate Armed Services Committee is a case in point. 
On 17 March 2016, President Obama’s fourth Secretary of Defense, Ashton Carter, appeared before the Senate Armed Services Committee (SASC) to defend the Pentagon’s share of Mr. Obama’s budget request to Congress.[1]  Obama’s wants Congress to appropriate for the Pentagon a total of $583 billion in new Budget Authority (BA) for Fiscal Year 2017, which begins next October.  That money would be divided into two parts: (1) the so-called Base Budget of $524 billion; and (2) a separate appropriation for the Overseas Contingency Operations fund, or OCO, amounting to $59 billion.  
The Base Budget is the nuts and bolts budget that is supposed to sustain our military forces in peace time.  The OCO budget is a special gimmicky appropriation to pay for war fighting in the ongoing Global War on Terror (GWOT).  The OCO was invented in 2001 in response to 9-11 to fund the wartime operations in the GWOT, and it is a bit squirrelly, to put it charitably.  Prior to 9-11, all of America’s wars — for example, WWI, WWII, Korea, Vietnam, the First Gulf War [2], Kosovo — were funded out of what we now call the Base Budget. 
It is important to understand that the request for Base Budget is the first year of a five year plan (see OMB Table 5.1). The four future years are supposed to account for the future consequences of appropriating the FY 2017 base budget.  The OCO, in contrast, is a one-year pay-as-you-go appropriation. There is no programmatic tail for OCO requests into the future years in the Pentagon’s plan.  Congress has no idea of the extent to which the OCO appropriation might imply any future spending commitments. This lack of planning transparency opens the door for all sorts budget hijinks. Even stalwart defenders of increased Pentagon spending, like Senator John McCain, have said the OCO is really a slush fund for hiding funding that would be more appropriately assigned to the Base Budget.
Defense Secretary Carter claims the Pentagon’s FY2017 base budget request has been tailored to meet the main threats facing  America, including  Russia, China, North Korea, Iran, and Global Terrorism (see slide #1 of the 9 February Pentagon’s budget rollout briefing).  Nevertheless, at the 17 March SASC hearing, Carter told Congress and the American people  that America’s gravest strategic danger stems from the domestic politics surrounding the Constitution’s assignment of the power of the purse to Congress, and I quote:
"If the bipartisan budget agreement were to fall apart, as everyone has said, that is our biggest strategic danger because that would affect in future years our ability to recover full-spectrum readiness," …
"That is the greatest risk to the Department of Defense -- the reversion to sequestration. We very much hope to avoid that,"
Let’s examine the implications of Carter’s rather bizarre threat analysis.
I did not attend the SASC hearing, so I have not seen any budget slides Carter might have used in defense of this threat analysis.  But if he used slides, they were likely to be versions of those the Pentagon Comptroller released to the press in the Dept. of Defense’s rollout briefing on 9 February 2016.  Figures 1 and 2 below are reproductions of slides #2 and #5 used in that briefing.
Figure 1 places Carter’s defense budget request for FY 2017 in a short-term historical perspective by comparing it to the stream of actual budgets since Fiscal Year 2001. 
Figure 1

(click to enlarge)
Figure 1 depicts defense budget authority in current dollars. It includes the effects of inflation. It shows the Pentagon’s total budget peaked in FY 2010 at $691 billion and that the base budget peaked a few years later in 2012. Therefore, if one includes the OCO, the FY2017 budget request represents a total budget reduction of $108 billion from that 2010 peak.  However most of that reduction has been in the OCO account and, theoretically, should not impact the base budget.  The 2017 Base Budget $524B request is only $6 billion or 1.1% less than the peak Base Budget of $530 billion in 2012.  So Carter’s 2017 Base Budget request represents only a small reduction from the peak Base Budget of five years ago. 
So, where is the “biggest strategic danger” facing the future of “full spectrum readiness”?  
This question logically relates to five-year plan for the base budget and its relation to “sequestration,” because the OCO slush fund is programmed on a year by year basis, and it is exempt from sequestration and only relates to the GWOT.
The threat of sequestration is shorthand for the budget reduction implied by the spending caps imposed by the Budget Control Act of 2011 (BCA).  This federal statute was passed by Congress and signed into law by President Obama on August 2, 2011. The caps were put into effect for 10 years, beginning with Fiscal Year 2012. The BCA is intended to control the federal deficit by limiting the discretionary spending in both social and national security programs. In theory, if spending exceeds these limits, brute force automatic across-the-board spending cutbacks would be triggered.  Such reductions are known as budget sequestrations. Let’s take a look at them.   
We can use Figure 2 (which replicates slide #5 of the 9 February Pentagon rollout briefing) to ascertain the strategic nature of Carter’s sequestration “threat.” 
Figure 2

(click to enlarge)

The dashed line in Figure 2 depicts how the Pentagon’s share of the original BCA spending caps relate to three past budget plans as well as the 2017 budget plan Mr. Carter briefed to the SASC on 17 March (i.e., the green line labeled PB 2017 — PB meaning President’s Budget).  The red line shows how, to date, the caps have been relieved by a pair of two-year bipartisan budget deals between Congress and President. The red line shows that, absent another budget deal, the caps will return to their original levels between FY 2018 and FY 2021.
The difference between the Pentagon’s three earlier budget plans and the caps reveals that the internal Pentagon planning process pretended the caps do not exist. It is also clear that Carter’s 2017 budget simply is simply another round of the Pentagon just saying NO to the budget caps.  (Note: Figure 2 shows PB’s 2013, 2015 and 2016, but 2014 is missing.  PB2014  did not violate this “just say no” pattern.)  
Figures 1 and 2 enable the reader to quantify the size of Defense Secretary Carter’s claim that the “biggest strategic danger” facing the United States is a “reversion to sequestration” — i.e. the magnitude of this “reversion” is simply measured by the vertical distance between the green line and the red line in Figure 2.
But note the axes of Figure 2; let’s put Carter’s “threat of reversion” into a better perspective to get a feel for the calibration of Carter’s threat meter.
The scales of the “x” and “y” axes of Figures 1 and 2 are constructed to magnify the impression of the size of the sequestration threat relative to past budgets and past budget plans.  Historically, Figure 2 only compares historical budgets from 2010 to 2016 to compare with those projected in PB2017 to 2021 and the vertical scale for defense budget is limited to between $470 billion and $590 billion, whereas the vertical scale of Figure 1 does start at “0” but the horizontal scale only goes back to 2001. 
Let's place the the current plan in a longer view.  Also, let’s take a cut at estimating how the effects of inflation might shape our view of Carter’s definition of “strategic danger.” 
I constructed Figure 3 to this end, by comparing the Pentagon’s base budget request to the Pentagon’s historical budgets, including the OCOs, dating back to the dawn of the Cold War in 1951. All this data comes from the March 2015 edition of the Pentagon Comptroller’s Greenbook updated with data from President Obama’s February 2016 budget submission Congress (OMB tables 5.1 and 10.1)
Figure 3

(click to enlarge)

The left hand graphic in Figure 3 places current dollar number for PB 2017-21 (blue line) and the original BCA sequester levels. The yellow and purple bars depict the historical data for the Base Budget and the OCO respectively (similar to the Figure 1). The lines are the same as those in Figure 2. The middle graphic, removes the effects of past and future inflation by assuming the rate of inflation for the Pentagon’s sub-economy is the same as that for the general economy (using the official GDP deflators in OMB table 10.1).  The rightmost graphic uses the Pentagon’s special deflators.  The Pentagon's deflators are clearly biased to make the earliest budgets look larger, thereby reducing the perception of long-term growth in the Pentagon’s budget.[3]  Most defense think tanks and contractors like to use a variation of the data in the right hand chart, for obvious reasons.
Defense Secretary Carter’s measure of strategic risk is the tiny vertical difference between the “blue” and “purple” lines in Figure 3.  By his own testimony to the Senate Armed Services Committee, Carter said this tiny difference is the greatest strategic threat facing the Pentagon!   
Regardless of if or how one accounts for inflation,Carter’s assertion rests on a degree of precision that is obviously vanishingly small. In terms of annual variations in past budgets, it vanishes altogether, when one melds it with the uncertainties surrounding any predictions of future budgets. (I will address the question predictive accuracy and the role the bow wave plays in the boom-bust nature of defense spending in a subsequent essay.)
This definition of strategic risk becomes wildly bizarre, when one adds the obvious fact that DoD’s accounting, finance, and program planning systems are a shambles that cannot be audited.  (I described the nature and consequences this shambles as a witness in a congressional hearing in 2002.)  
Annual audits are required by law in accordance with the Chief Financial Officers (CFO) Act of 1990. These audits are intended to put teeth into the Accountability and Appropriations Clauses of the Constitution.  Every member of the federal government, including Mr. Carter and Senators take a sacred oath to uphold the Constitution. The CFO Act requires the Inspector General of each executive agency to issue an annual audit of that agencies bookkeeping systems.  Yet the DoD has never passed an audit — in effect making a mockery of the Constitution everyone has sworn to uphold.  So each year, the DoD IG has been has been issuing a string of “disclaimers of opinion” since the mid-to-late 1990s.  Moreover, deadlines for cleaning up the Pentagon’s books have been repeatedly shifted further into the future. The current deadline is 2017, or 27 years after the passage of CFO Act!  
And that deadline is still a fantasy. 
A recent email to Senator Charles Grassley’s office from a very knowledgeable ranking official the DoD’s Comptroller’s Office stated unequivocally that the 2017 deadline cannot be met, to wit:
“What I see and know tells me that the department is not on a fast track to meet the 2017 deadline. In fact, the goal seems unattainable.  And current trends are not encouraging. I keep coming back to the same old root cause problem: the department does not have control at the transaction level. Transaction data is unreliable and incomplete. That is the problem that leads to persistent disclaimers.”
Yet, despite the wildly large uncertainties implicit in the auditing shambles, Carter asserted Congress that the tiny reductions caused by moving future budgets from moving blue line down to the BCA line in Figure 3 are the gravest strategic threat facing the United States. 
And there is more to Carter’s weird claim.  
If the threat of a budget sequester is a grave strategic threat, it stands to reason that level of spending by our adversaries must also relate in some way to an appreciation of this strategic threat. 
Figure 4 depicts total defense related spending for each of the top 25 countries in the world. In addition to the United States, it includes allies (green), adversaries (red) and neutral countries (yellow).[4]  In effect, The Secretary of Defense just told Congress that the tiny difference between the budget plan and the budget caps in Figure 3 erases any comparative advantage we and our allies might have from the fact that the US and its allies are spending a far greater amount of dollars on our defenses than any of our potential adversaries or any potential combination of those adversaries.  

Figure 4

(click to enlarge)

To be sure, the data in Figure 4 is two years old, but in a relative sense not much has changed since then. Note that North Korea, Iran and global terrorism did not even make the top 25.  
So, while the difference between the PB 2017-21 and the current budget caps is a little like counting the fairies on the head of pin, Carter wants Congress and the American people to believe those fairies outweigh the effects of any dollar differences in Figure 4.   Or conversely, using Carter’s metric of choice — spending levels — Carter wants Americans to believe that each dollar of Russian and Chinese spending is far more efficiently spent than each dollar of the Pentagon’s spending -- and therefore we need more than twice as many dollars to defend ourselves.
Secretary Carter’s threat meter may be calibrated to count the number of fairies on the head of pin, but his bullshit meter is off the scale. 
Given the contents of the debate over defense spending, one wonders if the defense members of the Armed Services Committees in Congress or any of the four remaining Presidential candidates have a clue about or an interest in what it will take to defuse the budget time bomb President Obama is bequeathing to his successor?
To answer this question is to answer it.
 [1] The total national security budget (OMB budget category 050) includes the Pentagon’s budget, nuclear weapons programs in the Dept. of Energy and other programs in the State Dept., FBI, and elsewhere.  Carter’s testimony related only to the Pentagon’s share, technically known as budget category 051.  Another technicality is that Carter’s budget numbers are for discretionary New Budget Authority, or BA.  That does not include a small amount of non-discretionary budget authority carried over from previous years.  BA therefore represents the annual amount to be added to the Pentagon’s checkbook.  That money can be spent, or outlayed, over a number of future years.
[2] The US share of funding for the 1st Gulf War was thru the Base Budget, but most of the funding for US activities in that war was paid for by our allies, esp. Saudi Arabia. The money was transferred into a unique account set up for that purpose.
[3] Estimates of inflation are traditionally based on the idea of supply and demand driven price changes for a market basket of goods in a competitive economy of made up of thousands of buyers and thousands of sellers.  The Pentagon is a single buyer in planned economy where prices are negotiated. Moreover, the cost-plus negotiated nature of defense contracting (even in fixed price contracts) makes the idea of an objectively determined, market based inflation calculation absurd.  This is particularly true for budgets prior to 1976, which was the first year the Pentagon even incorporated inflation estimates into the entirety of its five-year plans.  So applying special defense deflators to defense spending before 1976 is completely meaningless.

[4] Total defense spending in the US includes nuclear weapons programs in the Dept. of Energy and a variety of defense related programs in the Dept of State, FBI, etc.  By some estimates it could have been as high as $1 trillion per year in 2014-2015