Avoiding a GM-Style Bailout for the Department of Defense October 20, 2009
Posted by Guest Blogger in Analysis.Tags: aquisitions, DOD, FY 2010 DOD Budget, personnel costs, Procurement Reform
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This is the eighth posting in a series of guest blogs that BFAD is featuring each Tuesday. This week features Todd Harrison, Fellow for Defense Budget Studies at the Center for Strategic and Budgetary Assessments (CSBA).
Avoiding a GM-Style Bailout for the Department of Defense
By Todd Harrison
Secretary Gates said recently: “If the Department of Defense can’t figure out a way to defend the United States on a budget of more than half a trillion dollars a year, then our problems are much bigger than anything that can be cured by buying a few more ships and planes. “ He has a point. The problems in the defense budget are much bigger than the recent debates over buying more F-22s, cancelling the Presidential Helicopter, or building an alternative engine for the F-35 Joint Strike Fighter. In fact, the Department of Defense’s (DoD) problems are eerily similar to the challenges General Motors faced a year ago.
First, consider the labor cost structure of both GM and DoD. Noncash and deferred compensation for GM employees, such as healthcare and retirement pensions, accounted for 46% of total compensation in 2006—far higher than the private sector average of just 29%, as reported by the Bureau of Labor Statistics. In comparison, noncash and deferred compensation for active-duty troops in the US military is 52% of total compensation, according to the Government Accountability Office—an even higher share than GM. Military healthcare alone, not including veterans’ healthcare, costs over $47 billion each year, nearly one tenth of the DoD base budget. At the current rate of growth, these costs will nearly double every ten years.
Another similarity between the two is that both organizations are in a period of disruptive change in the competitive environment. In GM’s case, its market share rapidly eroded as gas prices climbed higher, the economy slowed, and consumers turned to smaller, more fuel-efficient vehicles. GM found itself building a fleet of SUVs and trucks that consumers did not want and could not afford. Similarly, DoD now finds itself saddled with a number of weapon programs whose capabilities are ill-suited for the types of conflict the military currently faces and whose costs have risen beyond what the Department can afford. Many of the new weapons being funded today are optimized for middle-of-the-spectrum conflicts—that is, conventional, military-on-military conflicts such as Operation Desert Storm in 1991. But adversaries are well aware of the United States’ overwhelming advantage in the middle and are instead moving to either end of the spectrum: irregular warfare on one end and high-end, asymmetric warfare on the other. The challenge for DoD, as it was for GM, is that the competition is adapting faster than it can keep up.
A telling example is the Marine Corps’ Expeditionary Fighting Vehicle (EFV), an amphibious vehicle designed to move Marines from ship to shore and then, once on land, to serve as a ground combat vehicle. In a high-end conflict against a sophisticated adversary, the ships launching the EFV from sea would likely not be able to get the EFV within range of the shoreline because they would be vulnerable to attack by anti-ship missiles, rendering the EFV useless. On land, the vehicle’s flat bottom is vulnerable to roadside bombs, making it unsuitable for irregular warfare as well.
Moreover, just as the slowing economy complicated GM’s efforts to revitalize its business, the state of the overall federal budget will prevent DoD from spending its way out of these problems. Deficits are at record levels, and OMB projects that interest payments will rise at a real rate of 13% annually over the next ten years. If these trends continue, by 2018 interest payments on the national debt ($725 billion) will exceed total national defense spending ($698 billion) for the first time in modern history. President Obama’s plan for the base defense budget slows growth over the coming years, but it nevertheless puts him on track to spend more on defense in a single four-year term than any other president since World War II, adjusting for inflation. The combination of record deficits, soaring interest payments, and an already high level of defense spending makes any significant increase in the defense budget unlikely.
As a result, the Department of Defense must make some difficult decisions. If the overall defense budget remains relatively flat over the coming years, continued increases in personnel-related costs will crowd out funding for acquisitions. Rather than accept this as inevitable, DoD should begin taking steps to rein in personnel costs. For example, few employers today offer pensions (i.e. defined-benefit plans) and healthcare benefits for retirees—much less a package that becomes effective after only 20 years of service. But in the US military, people who enlist at 18 can retire and begin drawing a pension at only 38 years of age and have healthcare coverage for themselves and their dependents for life—while continuing to work full-time in a second career. Even GM’s much-derided labor contracts did not provide benefits this rich. While changes to these benefits, such as increasing the time-in-service required before retirement or increasing insurance premiums for retirees, would be politically difficult, more modest changes could also help begin to control costs. For example, once deployments to Iraq and Afghanistan begin to subside, the number of troops could be reduced to pre-war levels, rather than maintaining a larger standing military indefinitely at what the CBO estimates will cost $14 billion per year. DoD also spends $4 billion each year moving members of the military (and their families and possessions) between bases. Rather than uprooting families every couple of years, DoD could cut the number of moves in half and save $2 billion each year.
But personnel costs are only one part of the equation. The Pentagon must also rethink the types of weapons it is buying and how it buys them. Over the past decade, DoD has attempted to develop new weapons that are more complex and costly than it can afford, leading to lower quantities procured and a backlog of systems now in need of replacement or upgrade. The ratio of funding for procurement versus research and development (R&D) in the base defense budget bears this out, having fallen from a high in 1983 of 3.5 dollars spent on procurement for every dollar spent on R&D to the current level of 1.4 to 1. The F-22 program is a good example of this: R&D costs rose by some 50% while the quantity procured fell from 750 to just 187. If DoD does not learn to control R&D costs—and its appetite for “exquisite” systems—programs like the F-35 Joint Strike Fighter may end up in a similar situation.
The challenges GM faced a year ago are instructive for DoD today. The Department is fundamentally on an unsustainable path, and a sharp change in direction is needed to correct its course. A massive infusion of funding in excess of the current defense plan—a DoD “bailout” of sorts—would only delay the inevitable day of reckoning, much like giving more loans to GM without restructuring the company. Instead, as the Defense Department finalizes its budget request for FY 2011, it must rethink both its personnel costs and weapons programs—and understand the tradeoffs between the two. While there are no easy solutions, the sooner these decisions are made the less painful they will be to carry out.
Budget Insight 
This is a great post! ‘…The United States’ overwhelming advantage in the middle and are instead moving to either end of the spectrum: irregular warfare on one end and high-end, asymmetric warfare on the other. The challenge for DoD, as it was for GM, is that the competition is adapting faster than it can keep up.’
The challenge to DOD and the American public in general is understanding how to gainfully employ the best and brightest minds, unlinking them from making weapons TO INSTEAD using the technology that exists and modifying it for peaceful applications to help make the world a better place.
Engaging people-to-people at the grassroots, say for example in Wajiristan, or Swat Valley in Pakistan would be money better spent. Take a look at the Fergana Valley in Uzbekistan and Kyrgystan, or In almost every corner outside of Kabul in Afghanistan or Tajikistan. No one wants to discuss western China or Saudi Arabia development…
As this article points out, defense spending ran amok for too many years now. It must be brought under control, and can be reduced by tens of BILLIONS without endangering US security.
The time has come to rethink the whole concept of 20 year retirement. DOD addressed this in an ass backwards manner by shortstopping and releasing people before retirement service requirements, merely adding onto training costs instead.
Personnel policies dealing with up or out are partly at fault, causing “employees” to look at promotion first and professionalism and professional satisfactions second. This applies to both the enlisted and the officer ranks.
The assignment of military functions to contracted firms masks the true costs of the military services. The ratio of combat forces to support forces (the so called division slice) is also out of whack. In Afghanistan, our present combat front, the number of sitters (at Bagram and elsewhere in and out of country) needed to support the number of fighters in the field reflects an abnormally high number of “camp followers.” The augmentation requested by Gen. McCrystal will add up to 40K of boots on the ground. How many of these are boots in the field?
Finally, we do improper accounting of the costs of asymmetric war making. As we plan for overseas combat the expected costs must include the embedded costs not only during the projected time of the action, but also tracked through the expected actuarial lives of the participants — including active duty and retired pay and health service costs. This would include the costs of rearming the expended equipment and the replacement of expected casualties. This is the number that needs to be approved by Congress and the President. This is the cost which will burden the future of the nation.
I guess, we have to stop paying our soldiers and then, on the saved money, buy bunch of “good new stuff” from the Defense Industry, fill up on several tons of congressional pork, and then ask the author of this article along with bunch of defense intellectuals, and congressional staffers to deploy and blow up on IEDs. I thought that only our banking industry was inept …
Is this an open forum where we can offer a different opinion about this issue, or you are peddling only one-sided views to promote opinions of your colleagues?
This is an open forum. We look forward to an open, respectful dialog.
Thank you for the opportunity to express my opinion concerning this article. Secretary Gates very eloquently framed this problem in his speech to the Economic Club of Chicago on July 17, 2009. However, the author of this article completely missed his key points. The DOD’s budget is suffocating under the weight of congressional earmarks for dubious projects, aggressive defense industry lobby, and pressure from various self-serving interest groups. This is the real problem. However, this article does not want to address the real problem, because it is hard and utterly unprofitable for the business community. Instead, it is cleverly stalking the soldier’s pay because it is easy and has the potential to free some extra cash for nurturing the overindulging nature of the industry. Instead of trimming down the fat, this article recommends cutting off the muscles. What are they going to do after the money runs out again – sell the soldier’s blood? This is a parasitic approach to the problem and the author is attempting to rationalize it via pseudo-intellectual demagogy.
I found the article, “Avoiding a DOD Bailout” by Todd Harrison to be a shallow assessment of the challenges in funding the DOD. His arguments meet only one of your organization’s three missions of providing “timely, impartial and insightful analysis to senior decision-makers…”
Certainly personnel is a huge part of our defense budget, but it is unavoidably expensive to convince young men and women to risk their youth and potentially their lives in service to their country. It’s called “unlimited liability” in business terms and you need to have a hell of a pitch to sell unlimited liability.
Additionally, retirement benefits serve their purpose as incentive to keep high-quality First Sergeants, Captains and Majors in the military. Finally, it is a means to keep retired military personnel on retainer until they are clearly too old or infirm to serve.
In today’s business world, loyalty is often only temporarily bought with bonuses and perks. I’m not certain of the salary scale for strategic consulting positions in Washington D.C, but my guess is that it would take significant bonuses to convince the consultants on your staff to pick up a rucksack and weapon to patrol the Helmond River Valley. Yes, military retirement is generous when compared to other business sectors in America, but they are benefits earned under very difficult conditions and therefore should be generous.
Regarding the timeliness of the article, Harrison certainly could not have picked a worse time to propose cuts to the retirement system. Many of my students have been deployed to Iraq and Afghanistan two or three times and they understand that most of them will be going straight back after their year here at school. In an environment where only a small percentage of Americans can even find Afghanistan on a map, the sense among soldiers is that the public supports its soldiers, but most have little interest in doing anything of substance to support the military’s efforts. Last week I attended a funeral for a soldier killed by an Afghan National Policeman. As Sergeant Smith’s mother was handed a crisp, folded American flag the general said “on behalf of a grateful nation…” as part of his condolences. Debating military benefits while we simultaneously ask more from our soldiers, is not how a grateful nation behaves.
Finally, to compare the risks, sacrifices and efforts of our servicemen and women to a guy who built mediocre cars at General Motors does a disservice to all of us.
Harrison’s arguments are cynical. As we fly more soldiers to Afghanistan, it is also ill-timed.
Todd H. Guggisberg
Mr. Harrison,
I would like to make a few points respectfully about your article in which you propose cutting retirement benefits as a way to decrease defense spending.
First, you quoted Secretary Gates out of context. He was arguing against defense spending on technology such as Future Combat Systems, not people.
Second, it is disingenuous to compare the military with General Motors. The military is not created for profit, it is not private sector, and no one asks the assembly line worker to die for their company. When the worker leaves GM, they are likely still able-bodied and able-minded and able to find similar employment. A Soldier may not have acquired marketable skills, and may have acquired a permanent disability and be suffering from PTSD or TBI or other mental illness. They may be 38, but they are likely to be unable to work the same type of jobs the GM employee can.
Third, retirees aren’t paid as a thank you for their service. They are paid because they are on recall, and many have been recalled. They are on retainer for their military experience and expertise. This retainer in most cases is not sufficient to live on, but supplements additional employment they may find in the private sector.
It is very disappointing to hear a representative of a “think tank” attempt to solve problems in DOD by harming the only commodity in DOD that works well – the military member and the family supporting them. Personnel costs are the lion’s share of the budget, but it is not as high a price to pay as the lives that many have given to defend our freedoms.
I must say that I agree with my collegues. I found this article very disturbing. I wonder how a so-called think tank, funded by DoD, could even contemplate, let alone recommend the cutting of benefits for service members. I am shocked that Mr. Harrison even attempts to draw a parallel between GM and DoD. One area to save lots of cash is to cut all the studies on how to save cash!
The shoddy work of taking Secretary Gates’ comments out of context has been addressed above. To recommend cutting benefits now, at a time when Congress is calling for adding personnel to the overstretched military is just plain silly. I understand that DoD is the big pig in the barrel when it comes to discretionary spending, but cutting the one resource that is most difficult to replace is extremely short-sighted. As a young second lieutenant, I was told by my commander that a unit can have all the equipment in the world, but if you don’t have butts to put in the seats or pull the triggers, all you have is a bunch of idle equipment.
As is stated above, I doubt many strategic consultants calling for the downsizing of the military would pick up a rifle, kiss the wife and kids goodbye and go to god knows where to fight for this country. Since this is likely the case I think it is a bad idea to take away the benefits of those who do.
This is a lesson that needs to be taken to heart. Unless we are talking terminator style thinking machines, this country is going to need flesh and blood service members to operate all that fancy technology. If we start calling for force reductions NOW while we are still fighting two wars, including the good war in Afghanistan we will be caught short again the next time the services are called upon to do the impossible.
President Obama and Secretary Gates have both expressed their intent to further support for the service members, even at the expense of those new high tech gizmo’s. While I do not advocate a total disregard for R&D, I think we need to consider that we are the most technologically advanced military in the world and will be for some time. I think that we can slow down the widget process before we cut personnel again.
With all due respect Mr. Harrison, I think you missed the boat on this one. The comparison with GM is a gimick. Your intent is to draw a passionate response but really you have no substance for the comparison. GM made bad cars that people did not buy. Employees at GM do not end up a broken shell of themselves after 20 years of service, they do not have bodies and joints that have suffered from years of abuse, they have not missed many christmases or birthdays or anniversaries and they most certainly did not go to work worried they might not come home.
I think you should rethink your opinion.
There are two fundamental issues civilians do not fully understand about the military. First, you cannot “grow” new Soldiers in a short period of time. It takes years to train and develop effective Soldiers to perform missions that civilians expect the military to do. Having a roller coaster policy towards the size of the military is detrimental. This causes a severe lack of experience and knowledge in the military, which in turn will reduce the military effectiveness in accomplishing its assigned mission. Secondly, it is not appropriate to essential give a Soldier a “pink slip” after they have put their life in jeopardy for their nation. The public cannot simply say the military should fight wars, and when the war is over that they should go away. National Defense cannot be a game of hide and go seek. It is not a fad that is only desirable when it is needed.
Mr. Harrison is old (and smart enough) enough to defend himself. Each of the critics, myself included want nothing more than an effective and efficient fighting forces. The problem is not with the soldiers, sailors and airmen we have. The problem is the metric we use to manage and evaluate them.
DOD has long been the plaything of the Congressional politicians and the civilian executive alike. The former look at the DOD budget as a way to get money spent in their Districts, and thus as an electioneering aid. The latter have come to use the military without considering wither the long term cost of mobilization for ill devised and ill planned adventures.
We are a Republic, damn it, and the use of our forces is to achieve quick and total victory. This is the constitutional bargain. The nation is not designed nor equipped to support the overseas political wars so beloved by the nations of Europe, who fought for trade advantage — control of raw materials and markets.
We are not politically or psychologically suited to overseas police beats. Every military death matters, in part because the fourth estate makes casualties known.
Circumstances except for the event at Pearl Harbor and most recently on 9/11/2001 have insulated us from direct attack. After both dates, emotional civilians thronged to recruiting stations to fight a war and sacrifice their lives for their buddies and their families. Ill organized at first to fought the war that faced them, they bargained with their political leaders to use their efforts, their lives to win obtain victory at all costs and as quickly as possible.
We are not now organized to do that. Nor were we permitted to do so in Korea and in Vietnam. We have always had the will to win quickly. Our leaders do not have the spunk to mobilize the country as we did in each of the 20th century world wars. Lyndon Johnson and every successor president and the supporting congress people wanted the country to have guns and butter, lest they be held politically accountable.
And there you have it. The country bailed out General Motors.. Who is to bail out the country?
The F-35 Joint Strike Fighter is already in that situation.