Austerity Is Relative

Dec. 1, 1988

Washington, D. C.—When the new President takes office next month, he will inherit an important military advantage from the Reagan years. He is certain to have to hold down defense spending. But because of precedents set in Ronald Reagan’s tenure, future Pen­tagon austerity may well prove to be different from earlier periods of re­trenchment.

Few doubt that a budget crunch lies ahead. But President Reagan has re­written the rules of the game in mili­tary spending. One result is that forth­coming defense budgets, though cut far below original goals, could still reach relatively high levels, by post­war standards.

The reason is clear. The President’s support for a steady expansion of spending, pursued over several years, has pushed military budgets near peacetime highs—some forty percent higher in Fiscal Year ’89 than they were at the start of the decade, dis­counting inflation. Once set, this higher base has become the opening bid in new budget calculations.

The impact of this sustained up­ward shift will be seen in the Fiscal 1990-91 funding blueprint that the next President inherits. The two-year plan now being completed by De­fense Secretary Frank Carlucci has taken savage cuts from planned 1evels. Even so, if Carlucci holds to stated guidelines, Defense Depart­ment spending will be set at about $297 billion in 1990 and $302 billion for the next year, measured in today’s dollars. These would represent, re­spectively, the seventh and fifth larg­est Pentagon budgets, in real terms, since World War II.

The question, as always, is whether Congress will enact the Carlucci bud­gets as presented or take them as starting points for yet another round of cuts. Congressional leaders sug­gest that Pentagon authorizations probably will remain flat at the 1989 level of $291 billion. The 1989 budget comes in as number seven on the postwar list.

For all its undisputed cost, the Rea­gan defense era falls short of earlier periods in at least one important re­spect—in the relative burden that it has imposed on Americans. As our Staff Editor Colleen Nash points out on p. 18 of this issue, national de­fense spending in the Reagan years never consumed more than 6.5 per­cent of US Gross National Product, slightly more than in most of the 1970s but considerably less than at any time in the 1960s and 1950s. “The real growth” in US outlays, she notes, “has been in entitlements and other mandatory federal spending.” De­fense also consumes a significantly smaller fraction of the federal budget than has been the historic norm.

Whether the future level of funding will prove sufficient to maintain ade­quate defenses is another matter. Ser­vice leaders are unanimous in claim­ing that it will not, given the scale of Soviet military power. It will now be up to the new President and Congress to grapple once again with this funda­mental policy issue.

Budget figures tell only part of the story. Equally important are the un­derlying reasons that caused defense spending in the 1980s to reach levels that are high by historical standards.

Sources of the Reagan Program

Some expenses were unique to the Reagan years. Example: high pay­ments in military retirement benefits, a result of obligations made to service members by previous Presidents. Un­til recently, such payments remained small. Over the 1980s, however, as the retiree population grew, the Pentagon has shelled out the equivalent of $187.2 billion in 1989 dollars—reduc­ing its actual purchasing power by nearly $19 billion each year.

Of far greater significance, how­ever, was the pressure brought about by the perceived military need. The rationale provided by former Defense Secretary Caspar Weinberger in Feb­ruary 1982, at the threshold of the Reagan buildup, still stands as the most succinct justification offered by the Administration for its spending program. Three principal factors were advanced by Weinberger:

• The Decade of Neglect. While the Soviet Union engaged in a far-reach­ing military buildup in the 1970s, Washington’s investment in its own forces stagnated, meaning that the US had to “pay the bill for our collec­tive failure to preserve an adequate balance.”

• Strategic Parity. With the Kremlin having matched the US in nuclear arms, deterrence required a compen­satory buildup of expensive conven­tional forces. Pentagon leaders could not “in good conscience increase our reliance on the threat of nuclear weapons.”

• The Need for Readiness. With the nation having endured years of “hollow” military forces, the Reagan Administration would never again put up “a mere facade of security by de­ploying forces that lack the necessary materiel and training.”

To address these problems, Presi­dent Reagan, continuing the trend set by President Carter in his final two years, put Defense Department spend­ing on an even steeper upward trajec­tory. The result has been major in­creases in defense budgets in the 1980s. Compared to what would have been spent had budgets stayed at the 1979 level, allocations to the Pen­tagon have been $741.4 billion higher, in 1989 dollars, over this decade.

Where did this increment go? The greatest expenditure, according to an analysis of Pentagon documents, came in the weapons and other hard­ware accounts. The equivalent of more than $339 billion-45.7 percent of the additional funds—was used to procure new warships, fighters, tanks, artillery, rifles, and other items. Another $116.7 billion, or 15.8 per­cent of the increment, went to fund research and development programs. Taken together, these accounts con­sumed three-fifths of the total amount.

President Reagan’s determination to keep his existing forces supplied, trained, and ready to fight accounted for another huge portion of the extra expenditures—$193.8 billion, or 26.1 percent. The remaining 12.4 percent of the new money was allocated to better pay for active-duty and reserve personnel, additional military con­struction, provision of additional housing for military families, and mili­tary pensions.

Did any service forge ahead in the battle of the defense budget? All evi­dence suggests that the answer is no. Of that portion of the new funding actually allocated to the services in the 1980s, 36.3 percent went to the Navy/Marine Corps, 35.5 percent to the Air Force, and 28.2 percent to the Army. This is about the same as histor­ical service shares.

Making the Defense Program Fit

Whatever the pros and cons in the debate over the Reagan era, there can be no denying that the new national leadership faces a budget crunch. The ambitious funding profile set forth in the Five-Year Defense Pro­gram unveiled in early 1987 has col­lapsed. Pentagon leaders warn that there will not now be enough money to fund their program, as originally conceived, in its entirety. Something has to give.

What, and how much, is not clear. But Sen. Sam Nunn, the Georgia Democrat who heads the Armed Ser­vices Committee, predicted at a hear­ing last October 4 that the original 1987 program must be trimmed by some $200 to $250 billion to fit under new, scaled-down 1989-93 Pentagon budget ceilings. In Senator Nunn’s view, the challenge for the next ad­ministration will be to take on “the tough job of putting 100 pounds of fertilizer into a fifty-pound sack.” To­day, the question being asked is how the new President and Secretary of Defense will do it.

The statements of the two presi­dential candidates and their advisors in the national campaign just con­cluded provided a basic range of op­tions for tackling the problem. One specific type of solution was pro­posed by Democrat Michael Dukakis. Noting that he was unimpressed with the Peacekeeper and Midgetman strategic nuclear missiles and the Strategic Defense Initiative program, he made a case for canceling major programs to keep budgets within bounds.

Republican George Bush took a radically different position on how to keep arms spending in tune with the new “fiscal reality” of the 1990s. Rather than scrapping weapons programs on a wholesale basis to re­duce funding needs, Bush would at­tempt to achieve the same goal more safely by continuing the programs but stretching them out over a longer time. Even before the November 8 election, this approach was viewed by many as the likelier step.

William Schneider, a defense policy advisor to the Republican campaign, provided fuller details of the Vice President’s concepts at a meeting with defense writers in October. Schneider, a former associate direc­tor for defense programs in the Office of Management and Budget and for­mer Under Secretary of State for Se­curity Assistance, Science, and Tech­nology, also had headed the Presi­dent’s General Advisory Committee on Arms Control and Disarmament.

Schneider expressed optimism that the US will not necessarily be forced to sustain ever-higher defense bud­gets “as a way of life for the rest of history.” Flat or slower growth bud­gets can be sufficient, he maintained, if the US builds on the “relatively good condition” of today’s armed forces in smart ways. The overall cost of the defense program can be lowered in the short term, he maintained, by slowing the pace of modernization. “I agree,” he explained, “that we will have to cut back on some major pro­grams. What I am saying is that the technique [shouldn’t be] to zero the programs.”

This kind of action would mark a reversal of President Reagan’s Pen­tagon position. It opposes “stretch-outs” on the grounds that they pro­vide the illusion of savings but cause inefficiencies that drive up the actual unit cost of weapons in the long run. The Bush advisor, however, main­tained that the Pentagon can com­pensate for the negative effects of stretchouts with liberal use of multi­year procurement practices.

“You may buy [fewer] widgets,” Schneider argued, “but if you buy them in a multiyear program, you can still retain economy of scale. . . . The problem that’s killed the [defense] in­dustry has been the annual appropri­ations cycle and the unpredictabil­ity. . . . What I’m suggesting is you can get to economic acquisition prac­tices, even at lower levels of acquisi­tion, if you procure in an efficient way.”

Congress would have to approve. And Schneider acknowledged that such a process would not be without pain. Big tactical arms programs just coming to maturity “are going to face some hard times.” What’s more, he said, “not every system in R&D is going to be procured” because stop­ping a program before it gets started “is where the [new] administration will have the most leverage.”

This budget-cutting approach would be controversial. William J. Per­ry, director of Pentagon research and engineering during the Carter Administration, recently told an electronics industry conference that arms stretchouts and research cutbacks would be “bad news—particularly for the long-term health of the de­fense industry.

The Pentagon evidently will not be permitted to attempt another possi­ble solution—pushing Congress to approve larger budgets. Even the more hawkish Republican candidate, said Schneider, already had con­ceded the need for “a higher order of consensus” between Congress and the White House. “We are not going to have a situation where [the Pentagon] sends up a budget that’s dead on ar­rival because it’s $40 billion higher than the Congress will appropriate.”

The Widening Impact

Shock waves from the Pentagon budget bust are reverberating far be­yond the confines of Washington. Tremors clearly have been picked up at USAF’s Aeronautical Systems Divi­sion (ASD) at Wright-Patterson AFB, Ohio, proving ground for new fight­ers, bombers, and other aeronautic weapon systems. There, the need to control the costs of weapon systems has contributed to what might prove to be fundamental change in the way the $10 billion-a-year organization plans and produces weapons.

The new ASD Commander, Lt. Gen. J. M. Loh, is pressing for a stream­lined, no-frills “total quality manage­ment” structure far more in tune with the demands of the 1990s. The Gener­al’s aim, outlined in a recent talk at his headquarters, boils down to this: Cut

out all of the wasted motion in weap­ons development and, in the process, realize huge savings on new systems. “Believe me,” he says, “I’m not being critical of ASD. ASD is a fine organiza­tion. But any organization can im­prove and can improve significantly —and must.”

One goal that the General seeks is to put weapons programs on a “could-cost” basis. By that, he means abandoning unnecessary activity that leads to the high prices that weapons “do cost” and therefore buying them for what they “could cost.” Robert Costello, Under Secretary of Defense for Acquisition and godfather of the “could-cost” philosophy, estimates that expenditures could be pared ten to fifteen percent by eliminating such factors as bureaucracy and outdated manufacturing procedures.

“I’m a firm believer in doing that,” reports General Loh. “We’re going to be doing that on the B-2 bomber, on the C-17 transport. I’ve just begun an exercise to do that on the F-16. We can still save millions of dollars on the F-16 program.”

He may be right. Rear Adm. Ken­neth C. Mally recently disclosed that the Navy has been able to trim $500 million from the cost of the Trident II SLBM by applying “could-cost” mea­sures to the program.

Attaining the “could-cost” level is but one of the objectives of General Loh’s broader push for “total quality management,” which he says will en­compass two major elements, equal in weight. The first entails shaping up the efficiency level of ASD itself. The second calls for achieving the same goal within industry.

For ASD’s part, General Loh has set in motion a far-reaching decentraliza­tion of authority and responsibility that he says amounts to nothing less than a “cultural change” in pursuit of productivity.

“It’s the kind of thing that delegates authority and responsibility down to the lowest level,” he says. “It’s more a bottom-up management than a top-down, autocratic management style. It forces project teams to be account­able for what they’re doing, by setting goals, measuring progress, establish­ing rewards based on team effort rather than individual effort.”

Lengthy and confusing contracts, requests for proposals, and state­ments of work used by ASD are being trimmed. The source-selection pro­cess for weapons has been short­ened. The requirement for detailed, certified cost and price data, in many cases has been abandoned. The ASD structure has been changed to re­move extra layers of management and to provide the system program officer with sweeping authority.

Within industry, a few contractors are picking up on the “total quality” theme. The General notes that Pratt & Whitney engine-makers “are getting into it in a big way.” The contractor recently eliminated 2,650 of its 18,000 positions after determining that they added little or no value to the product but did add cost.

The General says that the Pentagon will have to do more to get contrac­tors to invest in equipment that en­hances productivity. “Part of what we’re talking about here is a real, sta­ble, multiyear procurement,” says the General. “Otherwise, the contractor is not going to take any risk.”

Convincing Congress to expand this type of contracting won’t be easy. Nor is everyone at ASD convinced of the need for change. General Loh concedes as much, pointing out that various ASD communities have built up safeguards for their “turf” for many years. “Some supervisors may have less authority,” he says. “That’s going to be difficult. That’s going to be painful.”

Holes in the Technology-Trade Net

While the Pentagon’s budgetary problems continue to hold center stage in Washington, fresh concerns also are emerging over its power to protect militarily sensitive US tech­nology.

Current evidence is that the Soviet Union, thwarted in recent years by stiffer trade controls, has redoubled its effort to lay hands on prohibited high-tech wares. This time, the thaw in Soviet-American relations and other changes in the international landscape may lead to a different out­come. Stopping the flow in the 1990s might not be possible in the absence of new, restrictive legislation.

That, in a nutshell, is the view of Stephen D. Bryen, until recently the Deputy Under Secretary of Defense for trade security policy and the Pen­tagon’s point man, since 1981, for technology security efforts. Bryen, hardest of hard-liners on trade, out­lined his concerns about the dangers of “Détente II” in a recent meeting with defense writers.

The essence of those concerns is that, as superpower relations im­prove, US-Soviet trade contacts will expand and Washington will come under enormous pressure to relax current restrictions. Bryen’s words: “As we open up relations with the Eastern bloc—and we are—there’ll be lots of folks seeing national and even private opportunities. For one reason or another, there is going to be pres­sure to let ’em go. In that circum­stance, I see it as quite difficult to maintain export controls that are vital to security.”

The problem of shaping effective technology export-controls, reports Bryen, was difficult enough in the 1980s, at a time of intense super­power hostility and virtually nonexis­tent trade. The problem is being made more vexatious by new factors:

• Joint Ventures. Soviet-American business combines, now few in number, are certain to become more common. They fall into a kind of legal limbo, where current US law may not apply. Unlike direct US exports to So­viet destinations, purchases by the joint venture do not require a license and thus are not subject to Pentagon review. But joint-venture offices in the US might well be staffed by Soviet workers, who would try to learn what­ever they could about available tech­nologies.

“The joint venture is a new field in many ways,” says Bryen, “one that is very difficult. What is a joint venture? Is it an American company? Is it a Soviet company? What is its legal place? How do you deal with that in terms of the existing export control laws? The export control laws we have honestly don’t address that issue.”

The best solution, says Bryen, would be to enact new laws that would compel those who sell re­stricted technology to a joint venture to get a license first.

• Scientific Exchanges. These ex­change programs—official and pri­vate—are on the rise. “During the 1980s, there weren’t very many ex­changes with the Soviets,” Bryen notes. “That’s changing, and chang­ing rapidly.” Current exchange activi­ties range up to cooperative efforts in space research. “When you get many of these programs, and the thing starts to proliferate, it becomes diffi­cult to be as careful.”