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February 14, 2012

Requirement for a Paradigm Shift (1): Fiscal Realities

by Mike M

One of the core arguments here has been that current plans and intentions in US strategy are unsustainable.  Existing models of global presence, regional contingency planning, force projection capabilities, deterrent threats, and so forth, are reaching a reckoning moment.  For an intersecting set of economic, strategic, and political reasons, the US role in the international system must be constrained in ambitions and scope in coming years.  The only question is what the new model looks like.

Problem is, the conventional wisdom tends to either deny this, or accept it at some unconscious level and then discard its implications.  Constraint means one less carrier battle group, or a hundred fewer F-35s in the buy.  Constraint means maybe not invading Yemen—just spending tens of billions on military aid, training, covert ops, and an endless drone war.

In fact, the required paradigm shift will be much more fundamental than that.  It will not demand “isolation,” and it won’t deprive the United States of a global leadership role.  But it will require a far more fundamental rewriting of US global posture than is assumed today in Conventional Washington.

In several posts over the next couple of weeks, I’ll lay out the foundational arguments for the need for this substantially constrained posture.  In each, I’ll define what appears to be the current conventional wisdom, and argue why it’s mistaken.  The first basis for changing course is financial:  We simply will not be able to afford the current approach to the US global role for very much longer.

The conventional wisdom here is simple:  We can afford to keep doing what we’re doing today, almost forever.  Defense consumes just over 4% of GDP; as recently as 1969, we were as high as 8.7%.  If we choose, we can easily afford gradual increases in baseline defense budgets.

This would be true is other aspects of our economic, social and political situation remotely matched that of 1969.  They do not.  We are entering a prolonged era of zero-sum austerity in which holding the line on defense spending, while theoretically possible, will be politically and socially infeasible.

Let’s start with broad budget realities.  Discretionary spending stood at 37.8% of federal spending in 2010, down from 67.5% in 1962.  Entitlement spending was 50.2%, up from 26%.  The trend is clear:  Entitlements are ballooning, squeezing out discretionary.  One estimate is that by 2025, federal revenue will only be able to afford entitlements and interest payments on the debt; all discretionary spending will come out of deficit spending.  The lurking risk is interest payments:  Because of a combination of rising debt and projected rising rates, the CBO projects that interest payments on the debt will explode from $146 billion in 2010 to over $800 billion 2020.  Higher rates could have catastrophic consequences; a single percentage point jump, if sustained for a decade, boosts US debt obligations by well over a trillion dollars.  This can’t go on forever, and the momentum for serious deficit control is already building; markets have already begun to make their impact felt, and deficit reduction will have to get serious over the next several years, if the US is to avoid very nasty scenarios.

Now in theory we could solve these problems with radical entitlement reform and cutting back on non-defense discretionary accounts, leaving defense largely untouched.  In practice this is highly unlikely, for two reasons.

One is that we confront this choice at the same time as we’re moving into yet another phase of the intensifying social competition sparked by integrated globalization; and into yet another stage of the globe’s worsening ecological situation.  Meaning:  Increasing demands for new investments—in infrastructure, innovative industries, education, clean energy, and other fields to make our nation and society competitive, safe, and sustainable; and persistent requirements for social safety nets.

The second reason is that the objective historical level of defense spending is high, at 4.7% of GDP (the 2010 rate).  The right comparison isn’t 1969, when we were fighting brushfire conflicts all over the world as part of a Cold War—it’s 2000, with the Cold War over and no major threats on the horizon, when we were at 3% of GDP.  In the last decade, the American middle class has become more vulnerable and besieged.  Now tell me:  What new threats justify a defense establishment hundreds of billions bigger than the one we had in 2000?  Given the urgent needs at home, it’s hard to see how defense wins that political argument, year on year.

As a Center for American Progress report has pointed out, previous American presidents managed to actually cut the defense budget when threats waned:  Nixon by 27%, Reagan by 12%, George H. W. Bush by 11%.  As the CAP concludes:

Total defense spending in real terms is now higher than at any time since the end of World War II, more than throughout the entire Cold War, and even 10 percent higher than the peak of the Reagan defense buildup.  The baseline defense budget has been growing in real terms for 13 straight years—the longest-ever period of sustained real growth in U.S. defense spending.  As a result, the portion of the world’s military expenditures the United States consumes compared to our potential adversaries has grown from 60 percent to 250 percent.

As Americans with stagnating paychecks get wind of those sorts of numbers, they’re going to check the box for “defense cuts.”  Check out, as well, the following chart, from a Center for New American Security report.  The relevant lines are the blue ones; they represent the baseline defense budgets, not including war funding.  Watch the blue line creep upward, year after year.  The political case for a re-set to numbers circa 2000 will be compelling, and it will put the defense budget in a political vise.

At the same time, a different set of pressures within the defense budget will put force structure and procurement in a vise within a vise.  Escalating health care and pension costs are eating the DoD budget alive.  Tony Cordesman, always a reliable source of devastating prognostications about DoD strategy-policy-budget mismatches, offers some of the details in a recent briefing:  The projections for Tricare, the military’s health care system, show a program rising from roughly $50 billion in total costs in 2010 to approaching $100 billion by 2030.  Then you have retirement pay, which now accounts for $50 billion in annual DoD costs and rising; a study from the Defense Business Board concluded recently that:

According to the OSD Office of the Actuary, annual military retirement payments are forecasted to increase from $52.2 billion in 2011 to $116.9 billion in 2035.  As of today, the total life cycle program costs will grow from $1.3 trillion, of which only $385 billion is presently funded, to $2.8 trillion by FY34.   Increases in inflation and life expectancy will further increase military retirement benefit costs.

So we’re on the road to a situation in 2030 in which we approach $200 billion annually in health care and retirement costs.  Of course this is unsustainable, and there will be reforms, but probably not reforms that will cut costs in half—meaning that the pressure on the defense budget will surely grow from within.

Arguably what has kept defense spending locked in so far has been a political calculus running in the opposite direction:  A Democratic administration unwilling to allow itself to be depicted as endangering national security.  That impulse will wane somewhat in a second term, especially if cuts can be depicted as the result of a general consensus.  The betting here is that Americans are tired of the old lines and are open to new arguments about what keeps them safe, and what roles they need to play.

Currently, Obama administration projections call for a 5 percent growth in baseline defense spending through 2015, when it will reach $670 billion.  Reductions in the topline number (part of a 2011 budget agreement) emerge only because of cuts in spending on Iraq and Afghanistan.  The bottom line of the preceding analysis is that such plans will fragment over time.  A major CSIS conference on “defense in an era of austerity” found, among the “general agreement” among conferencegoers, “current spending levels are unsunstainable” without tax increases or big tradeoffs with entitlements, and in fact “the defense drawdown has already begun,” whether we like it or not.  Yet the weight of conventional wisdom was also fully on display, with a point of “considerable agreement” being that any cuts beyond the $450 billion over 10 years already provided for—much of it mythical, most of it tied to war operations, little of it connected to any fundamental choices—would dangerously undermine existing US roles, missions and global posture.

Well, yes—but that’s precisely the point.  Cuts beyond existing plans are coming, as are changes to US roles, missions and posture.  And they are coming in part because spending on the guts of the US defense posture—force structure, weapons systems and operations and maintenance—is likely to decline in coming years under a set of intersecting pressures.  How much?  Everyone has their own option or proposal.  The betting here is that the portion of the US defense budget given over to these core functions gradually declines by between $80 billion and $120 billion over the coming decade.  The only question then is whether US strategy, policy and operations shift to match available resources.

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