GDP and defense: Who’s to blame

There is a flurry in the dovecote today about the decline in the GDP registered in the fourth quarter last year. Is defense spending decline the culprit, we are asked? Indeed defense consumption spending (buying things, not paying people) declined 22 percent in the fourth quarter of the year, the largest single element in an overall decline in federal consumption spending. And doesn't that say we shouldn't let sequester happen or, above all, cut the defense budget?

Not so fast. There may be less here than meets the eye. After all, there is an historical pattern here. Every third quarter of the calendar year (which is the last quarter of the federal fiscal year) defense consumption goes up. Obligating and spending resources at the end of a fiscal year is a way of ensuring the services can get them spent and that they can justify the next year's budget to Congress: we really needed that money; don't take it back or cut us next year.

Then, in the first quarter of the next fiscal year (which is the fourth quarter of the calendar year) defense spending slides from the leap upward in the previous quarter. Time to catch the Pentagon's breath, reset spending, and start again.

There is nothing new to this pattern. The Commerce Department data make it clear that this happens during the last two quarters of every fiscal year.

But this year it was a higher jump at the end of FY 2012 and a deeper slide at the start of FY 2013 than in previous years. Why? I believe the answer is partly that the Pentagon is anticipating a decline in resources (and so husbanding money) and partly that the defense draw-down has actually begun.

The concern about the budget this year is only partly about sequester, which everyone seems to think is going to happen March 1. The real focus now is on funding levels for FY 2013, which are currently set at FY 2012 levels in the Continuing Resolution. The military services are worried that this may end up being the budget level for the rest of the year, which is below their budget request. Congress has begun to mark up appropriations bills for defense that are actually $11 billion higher than the cap set in the 2011 Budget Control Act, but a negotiation is likely to bring that level down. It could be that DOD is slowing the spending train to protect resources that will be needed deeper into the year.

The defense draw-down may be playing a role, too. For the past three years the Overseas Contingency Operations account has been falling. It funded a lot of services contractors that provided everything from guards to maintenance to food in Iraq and Afghanistan. Those contractors are already noticing a decline in business, which is accelerating with the move out of Afghanistan.

And one of the foci of the "efficiencies" Secretary Gates pushed a couple of years ago was to deeply cut services contracting in general at the Pentagon. There have already been reductions in the rate at which the Pentagon hires people to sit at desks as if they were government employees, when they are actually employed by private contractors.

We have been seeing a draw-down at DOD for three budgets, now, and are down 10 percent in constant dollars below the FY 2010 peak. So it would not surprise me to see those cuts start to show up in the Commerce Department's data.

The argument about the GDP decline is a bigger one, with lots of explanations and answers. Clearly DOD spending plays a role in the economy, though it has been shrinking over the years. The ups and downs of the data will continue, as the draw down moves ahead. The worst answer, however, would be to spend unnecessarily on defense as a form of stimulus.

Mark Wilson/Getty Images

The Sheathed Sword

The question the Senate should ask Hagel

The Pentagon does it best. They are "best practice" in federal agency planning and budgeting. And they are world class in public relations. We are getting a bit of both these days. And it is striking that by-and-large, while the planning continues, as it should, the cries of pain are not getting much traction.

Planning first. I have said before that it is high time the Pentagon began to roll out its formidable capacity to plan and get down to work, not only about sequester, but about the underlying reality that we are in a defense draw-down. The five-sided building needs to forget the rhetoric about the Panetta plan and the $487 billion "already cut" (which was not a real cut, just a flattening of the budget so it is projected to grow with inflation), and start taking a good look at the options and choices we face over the next decade when the budget will actually be cut. I expect the budget to go somewhere between $500 billion and $1 trillion below the currently projected aggregate over the next decade; this would be consistent with prior draw-downs.

The Pentagon is not quite on board with this, in planning terms, but it is getting close. The new Quadrennial Defense Review is just starting to gear up. Incoming Secretary Hagel would do well to put a strategic red team together to draw up both budget options and an outline of questions for strategy, forces, procurement, and operations, for each of those budgetary options. Will he? That remains to be seen, because the services are too good at gaming such a set of options by putting the highest priorities on the table to be cut, which stops options in their tracks.

Meanwhile, the planners are stepping out on the near-term agenda. Every service chief has submitted a memo, following Deputy Secretary Ash Carter's memo of early January, as part of the effort to put together a plan, by the end of this week, about how they would manage if a sequester happens and/or if the budget this year stays at FY 2012 levels.

They are going to need those plans, even if there is no sequester, because the plans focus on the key part of the defense budget. Operations are the problem; they have always been a significant management problem for DOD. Nobody seems to be able to figure out exactly how the money is spent on operations and what we get for it.

So that's the right target. And the categories the chiefs worry about are the right ones in a draw-down. How fast do we repair equipment in military depots? What is the pace of travel and orders for the small stuff -- from pencils to computers? What is the intensity of the training cycle, now that the wars are ended/ending? How much priority should we put on support to the field? How many temporary contractor employees to we have, do we need, do we want? How many civil servants? How many bureaucrats in uniform running the back office?

Now, of course, the chiefs cannot resist what must seem to be an opportunity in this management dilemma -- an opportunity to stop sequester, spare defense, and reverse the tide. So the sensible planning is accompanied by painful cries. Rhetoric about a readiness crisis, being on the brink of hollowness, breaking the force, endangering our national security.

They don't need that; they don't need it because is it not true. We have never spent so much on defense. Our military readiness is at heights unreached at the start of any previous draw-down, in the active force and the reserves. Our operations budgets are unprecedentedly high, both in constant dollars and per soldier. The troops have never been as well trained, exercised, and experienced. U.S. global capabilities far surpass any other country.

Yes, there are many management issues at DOD; there are in every government agency. There are problems with the high costs for programs that were promised for less; problems with pay and benefits nobody can touch; health care costs that grow for defense as they do everywhere else, and problems holding down the growth of the Pentagon's large back office. And, yes, sequester is an ugly way to approach a budgetary draw-down, though DOD is better protected than most.

The challenge today is not to "save the defense budget." It is to "manage a draw down." On Thursday the Senate Armed Services Committee will grill the putative next secretary. The focus of that questioning should be less on such irrelevant issues as Israel, Iran, and gays. It should be on how Sen. Hagel intends to manage the department's adjustment to post-war budgetary realities and how he will focus the chiefs on the job they can and should do, without the rhetoric.