The Looming Disappointment

Defense industry leaders are enthusiastic, to say the least, about the possibility of a major increase in defense spending, and what it will do for their work—and their bottom lines. In our conversations with industry, leaders view the Trump administration as a boom for defense. 

By Ajay Patel, J. David Patterson, and Gregory F. Treverton

NOTE: The views expressed here are those of the authors and do not necessarily represent or reflect the views of SMA, Inc.

Each of the major firms is expecting a period of growth and renewed positive relationships with the Department of Defense and other government officials. Defense industry investors, a good barometer for the industry sentiment, believe this as well. Charles Mahoney, professor of political science at California State University, Long Beach, in an article in Defense News explained, “Share prices of many military and intelligence contractors have risen sharply since the election of Donald Trump as the United States’ president. Investors are betting that an increase in defense spending will provide a windfall for these firms.”

However, some caution is in order. While of all Mr. Trump’s lavish promises, and this one looks the most doable—after all, his proposed budget does call for an increase of $54 billion in defense—there are many reasons why it may not happen. As Mark Twain said of the opening of the Washington Naval Conference in 1920, “The conference is off to a good start, yes, a good start, and nothing can stop it now but human nature!” Here, the nature is that of politics in the American system, such as it is.

The most obvious obstacle is simply the politics of the budget. The President is caught between a rock and a hard place. Congress, especially the House, is dominated by Paul Ryan and the deficit hawks, for whom deficit spending is more than sinful. To be sure, Trump is not exactly of that same faith; he seems to understand that while his constituents may not like it, they depend mightily on “domestic” spending, especially so called entitlements the hawks decry—from Social Security to Medicare to food stamps.

The math is unrelenting. In fiscal 2015, total federal spending was $3.8 trillion. Of that, about two thirds comprised mandatory spending, those entitlements like Social Security, plus interest on the debt, a much smaller slice. Of the remaining third, so called discretionary spending, more than half went to the military. Everything else—the places Trump intends to cut—account for less than fifteen percent of the total federal budget. Hence, the draconian cuts his budget calls for. To be fair and accurate, as the Director of the Office of Management and Budget, Mick Mulvaney, has repeatedly explained, the “cuts” are in fact reductions to the increases that the Congressional Budget Office assumes will occur year over year. Only in agenda-driven, political-speak are reductions to planned increases called “cuts.”

Nonetheless, President Trump’s budget already has been pronounced dead on arrival by Senate Republicans, never mind the Democrats. What is sure is that many of those cuts to domestic programs will be rolled back. With entitlements sacred, the only place to take up the slack is in defense. It may turn out the Republicans’ aversion to budget deficits comes to bear only if the deficits are those of a Democratic administration. However, the defense industry would be wise not to count on it.

Moreover, the most important obstacle to increased defense spending may be the not-so-delicate impli­cations of Congress’s continuing temptation to, apparently, circumvent those budget politics with Con­tinuing Resolutions. On April 28, Congress passed another such Resolution extending government funding until May 5. These Continuing Resolutions, or CRs, are generally passed at the eleventh hour before government funding runs out. They tend to be portrayed by the media and understood by most Americans as a herculean effort of congressional bipartisanship to work in the nation’s interest to avoid a government shutdown.

In fact, they are nothing of the kind. Steve Bell, a Bipartisan Policy Center fellow, quotes Army Chief of Staff General Mark Milley’s testimony before the House Armed Services Committee the second week in April: “Candidly, the failure to pass a budget, in my view as both an American citizen and the chief of staff of the United States Army, constitutes professional malpractice.^[1] Spot on General Milley. Unfortu­nately, the “malpractice” General Milley speaks of has become normal order for the Congress.

But why such a harsh characterization? Take a look at the record. Congress has passed the appropria­tions bill on time—that is before September 30 for the next fiscal year—only four times since 1977. Therefore, Congress has done its job just ten percent of the time since 1977, and this failure has conse­quences for all of the government agencies, but especially for defense.

John McCain, Senator from Arizona and the Chairman of the Senate Armed Services Committee, when faced with the prospect of year-long CR, said in an article for CNN Politics, “If that’s the only option. I will not vote for a CR no matter what the consequences because passing a CR destroys the ability of the military to defend the nation, and it puts the lives of the men and women in the military at risk…I can’t do that to them.”

However, that is effectively what has happened. As so often, the devil is in the details. Congress did avoid a year-long CR by passing the Consolidated Appropriations Act, 2017 in May, but the funding, in many cases, will not reach each line item at the program level until late June. Consequently, money that had been planned, programmed, and budgeted by the Defense Department for a full year of spending execution, must now be executed by program managers in three months. Getting programs on contract is a challenging process and most program managers will have a problem doing so. A perversity enters at this point. Money that was appropriated for programs that are un-executable because of the short time allotted, is now exposed to being rescinded by the vary Congress that created the execution problem.

Bell reported that the Joint Chiefs identified significant consequences of the uncertainty that attends the CR for FY2017. Some examples by service: the Air Force would be unable to achieve the end strength that was mandated by Congress, and as many as 300 projects that cannot be executed in the last quarter of 2017 will be cancelled. The Army cannot meet the demand for training, which will affect five Army Brigade Combat Teams, and the service will be hindered from closing critical capability and readiness gaps. Marine Corps flight training has been degraded and the construction of a Marine amphibious ship has been delayed. The Navy will end the purchase of new ships in FY2017 and delay innovation in addressing undersea warfare threats

To be sure, these problems created by the Continuing Resolutions can be managed. But the havoc wreaked on Pentagon management could be avoided by passing appropriations bills on time so that programs can be started with the planned and budgeted amount of funding. CRs waste time and money, create uncertainty, and jeopardize readiness at a time when the threats worldwide would suggest that readiness should be our primary concern.

Finally, while US defenses need to be recapitalized, that may not happen. After all, it is not as though the United States has been miserly with defense spending in the last decade. Rather, much of that spending has gone to operations, either through the O&M spending or through OCO (Overseas Con­tingency Operations), an add-on to the base budget. For 2015, that OCO funding was about 11 percent of almost $600 billion in total defense spending. By 2016, the United States had spent almost five trillion dollars on the wars in Iraq and Afghanistan. In 2015, the war in Afghanistan, plus aiding the Afghan government, was costing about $4 million per hour.

Predicting Trump’s behavior is a fool’s errand. He may resist the calls to up the ante in the fight in Syria or against ISIL. Still, it is hard to imagine that the costs of those operations will go down. And there will be crises elsewhere—North Korea comes immediately to mind. As a result, even if defense spending does rise, much of it will still go to fighting wars, not building new weapons.

Greg Treverton left the chairmanship of the National Intelligence Council in January 2017. He has written widely on strategy and intelligence, and served in government on the Hill and on the National Security Council staff. He is an SMA Executive Advisor.

Dave Patterson is an SMA Executive Advisor, and the former Principal Deputy Undersecretary of Defense, Comptroller in the Bush ’43 Administration.

Ajay Patel is President and CEO of SMA, Inc., and formerly Senior Partner at the Monitor Group for twelve years, where he created and led its global National Security practice.

[1] See his “Continuing Resolution Will Have a Negative Impact on Government Operations.”