APolitical DoD Budget Blues – Part II

The folks at the Center for Strategic and Budgetary Assessments are hyperventilating about the contradictions in the 2015 defense budget submitted by the Administration.  At the center of their concerns is that the budget was modified at the last minute to propose an Army and Marine Corps end strength of 440-450,000 and 182,000 respectively, and Navy carrier levels at 11.

Instead, the Pentagon decided to propose $115 billion above the budget caps for DoD to support modernization programs with force levels at 420,000 and 175,000 for the Army and Marine Corps, with Navy carriers falling to 10.  This is the tradeoff that I highlighted in my last post on the budget–between the costs of sustainment for an aging standing force to meet immediate contingencies versus longer term investment to maintain the technological edge.  What bothers CSBA is the last minute change, which would need at least another $20 billion to fully fund.

Secretary Hagel has not explained the contradiction but what could it be that would cause the Pentagon to adjust its tradeoff at the last minute with an asterisk?  One word in my mind: Ukraine.  Perhaps several, including Chinese designs against Japanese territory, among other world issues that could destabilize national interests and lead to regional war–or worse.

Total discretionary (non-social insurance) spending is $1.014 trillion in FY 2015.  Of this, DoD spending is proposed to be $495.6 billion–about half.  Another $20 billion would represent 2% of the total discretionary budget.  So, given that the bill needs to be run through Congressional committee and the budget process, is it really necessary to go back to the drawing board when the CSBA suggests that the budget as it stands is probably DOA?  I think not.

Overall, for R&D programs, spending is up 1.7% above the previous fiscal year.  This is not a windfall by any means, nor does it restore things to pre-sequester levels.  But we are living through a period in American history of pretend penury.  The U.S. can more than afford to fund those needs to mitigate the effects of the great recession AND spend sufficient funds to protect the interests of itself and its allies today and into the future.  Even taking the growth projections of the Congressional Budget Office into account at 3% per year (given the CBO has been consistently wrong about such projections for almost a decade now), plus inflation of 2%, U.S. deficits in the range of 3 to 4% are sustainable well into the future.  If incomes were to keep pace with productivity gains, and with modest adjustments to revenues during periods of growth when full employment returns, the U.S. could easily begin to run budget surpluses as it did in the late 1990s.  We are still a very rich country.

I am not entirely convinced that comparing budget deficits and debt to a percent of GDP actually means anything.  If the frequent comparison to a household budget were to be equivalent to the spending patterns of Americans, U.S. deficit spending would be well above 100% of GDP, given the average mortgage, personal, and credit card debt held by private individuals.  With the debunking of Reinhart and Rogoff this tie, I believe, is even less valid.  Even if it did matter and R&R had not been so thoroughly proven wrong, much of what we project as debt is held by the public.  As Dean Baker has proposed, if there is a magic percent of GDP lurking out there that will suddenly cause our deficits to be unsustainable, Treasury could simply reduce the percentage through bond purchases.

Thus it appears that, if the Administration’s budget is at least used as a baseline, that there is much hope here that the U.S. maintains its technological edge while it attempts to figure out how to handle the next immediate crisis.  The risk to project management during the hearing process is that $20 billion will be carved out of R&D, which would negate the gains in the Administration’s proposal.  Thus, going into 2015, project managers will still need to be vigilant to find opportunities to substitute newer and less expensive technologies for old ones, and to aggressively use methods such as cost as an independent variable (CAIV) where they can.  Carry-over may once again be vital.

I’ll have more analysis as details emerge and the process works out.