Canaries in the defense budget coal mine

The chattering class and the political voices are nattering on about the fiscal cliff. Meanwhile, the best canaries in the defense budget coal mine are the people keeping an eye on the long-term trends. With or without cliff diving, the defense budget is in a secular decline and they have known it for a while. And they know that this long-term decline will change the face of the industry.

The latest bit of evidence that the industry is working to get ahead of the game comes from a document called "2013 Defense Industry Perspective," provided yesterday by strategic consulting firm Booz and Company.

The six-page comment makes no mention of the fiscal cliff, but it does say "the defense sector is undergoing the kind of correction that happens once every 20 or 30 years." That is the right timeframe, and, as I have written before, procurement is always the first to go in a defense drawdown. In the defense drawdown of the 1980s and 90s, part of which I spent at OMB, DOD procurement spending fell 50 percent over ten years, while the overall budget was only going down 30 percent.

Booz and Co. point out that this process is already under way, and has been since Fiscal Year 2008. The budget for procurement and R&D has already fallen roughly 30 percent since that year and is projected to grow only minimally over the next five years. Moreover, if this drawdown is consistent with prior ones after Korea, Vietnam, and the end of the Cold War, a deeper reduction is likely. Falling off the fiscal cliff would reinforce that trend.

The Booz canary says something else interesting: the defense industry is changing, and will change even more as DOD spending goes down. The industry is no longer dominated by large companies that sell almost exclusively to the Pentagon; Booz points out that what they call "nontraditional companies" are succeeding in selling to DOD. Companies like Accenture, Airbus, Apple, Cisco, Dell, Eurocopter, and Pilatus. Setting aside Cold War systems, Booz says these kinds of commercial, high-technology firms account for nearly 40 percent of U.S. spending on defense acquisition.

As the budget goes down, the defense industry of the future is going to look like the U.S. and global economy. A company like Boeing, which straddles the commercial and defense markets (the new tanker is based on Boeing's commercial 767, and the P-8 patrol plane on the 737), is more nimble in this market. And the other players are not going to put up with an acquisition system that is riddled with paperwork and takes forever to make a decision.

The old defense industrial base is not the same; defense, like everyone else, now draws on the broader, deeper commercial technology base, both American and international. As the budget declines and such programs as cyberoffense and cyberdefense, communications, information technology, and unmanned aircraft grow, this trend can only grow with them.

Interesting to listen to the canaries, sometimes. They tell you when the explosion is coming and what it will be about, something to which the fiscal cliff chatter pays little attention.

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National Security

Lieberman gets it wrong

Over a long Senate career, Joe Lieberman has, like all elected officials, been right on some things and wrong on others. Speaking to the National Journal on December 6, he was wrong. It is worth saying this because he perpetuates a myth: the myth that the defense budget has been cut. What he said was, "Our defense budget has already taken, pursuant to the Budget Control Act last year, cuts of almost a half-trillion dollars -- which, in my opinion, already pose unacceptable risk [to] our national security."

Well, it's just not so. This is what I call the myth of the $487 billion cut. If you take the ten-year defense budget projection in Secretary Panetta's FY 2012 budget submission and compare it to the ten-year projection when he sent up the FY 2013 budget, the ten-year totals are certainly $487 billion apart. But if you look at the projected slope for the defense budget over those ten years, it basically keeps up with inflation.

What we have here is "lower expectations of growth," not a budget cut. It's kind of like your pay increase. If you were told you would get a cost of living pay adjustment and a merit increase in your pay, that would not only be good news, it would be real growth in your pay. If you were told you would only get a COLA, that's too bad, but it's not a pay cut. When you are told you will not keep up with inflation, that's a cut. And, worst of all, if you are told you will get less than you got last year in real dollars, that's a serious cut.

We are not in serious cut land in defense. Or, to be totally truthful, we have been in real cut land in the base defense budget (without the war costs) for the last two years, when Congress and the administration agreed that the FY 2011 would not get the COLA and in FY 2012 that it would get less than last year. But, frankly, the war budgets, even though they are falling, more than make up for those two cuts in the base budget.

So we are slowly getting to the reality I anticipate. The last three times we have done a defense drawdown, the budget has declined, in real dollars, by about 30 percent over ten years. We are only in the first two of those years and the Pentagon still projects that the curve will reverse course and it will keep up with inflation in the future.

Not likely; the sequester negotiations will probably drive the FY 2013 budget down below inflation or even below last year. And the agreement, when (not if) it comes, will probably be the first step toward projecting future defense budgets that decline in real dollars over ten years.

And that bit about "risks to our national security." Lieberman presents no details in the interview, but the last time we cut the defense budget 30 percent over ten years (actually 36 percent over 13 years, before it reversed course) in the 1990s, the forces left behind by the end of the decade (700,000 troops went away) used Saddam Hussein as a speed bump in 2003.

Our security is not endangered by a flat defense budget. Properly managed, it is not even endangered by real cuts. It's happened before; it will happen again, and the nation will remain safe.

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