Kent Conrad and Fiscal Federalism
Senator Kent Conrad (D-ND) has a reputation for being a “deficit hawk.” But the bar is apparently so low in Washington that merely paying lip service to “fiscal responsibility” is enough to earn you the hawk title in the press. In reality, Conrad is a tax and spender as a story in today’s Wall Street Journal demonstrates.
These examples illustrate Sen. Deficit Hawk’s commitment to deficit reduction and fiscal responsibility:
- “Like many in Congress, he is conflicted. He boasts a 23-year record of looking after North Dakota voters with ample farm subsidies, aid for drought-hit ranchers, defense spending and scores of pet projects. He has done little to help rein in Medicare and Social Security expenses—the U.S.’s biggest budget busters.”
Five Decades of Federal Spending
The chart below shows federal spending in three component parts over the last five decades. It includes Obama’s proposed spending in 2011. Here are a few thoughts on the recent spending trends:
Defense: In the post-9/11 years, defense spending bumped up to a higher plateau of around 4 percent of GDP. But now we have jumped to an even higher level of around 4.9 percent of GDP.
Interest: The Federal Reserve’s easy money policies reduced federal interest payments in recent years. That is coming to an end. Obama’s budget shows that interest payments will start rising rapidly next year and hit 3 percent of GDP by 2015. And that’s an optimistic projection.
Nondefense: This category includes all other federal spending. After a steady decline during the Clinton years to 12.9 percent of GDP, President Bush pushed up nondefense spending to a higher plateau of around 14.5 percent. Then came the recession and financial crisis, and the Bush-Obama tag team hiked spending to an even higher level of around 19 percent of GDP. That level of nondefense spending is almost double the level in 1970 measured as a share of the economy.
Buying Boomers
Trident Launch
More hot defense news from InsideDefense — the Navy wants a bailout.
The Navy’s draft ship-building plan apparently warns of massive cuts in the size of its future fleet and consolidation of the ship-building industry unless Congress provides new funds for shipbuilding. It wants $80 billion extra over the fourteen years starting in 2019 to cover the cost of buying twelve new boomers (SSBN or ballistic missile submarines) to replace the fourteen Trident SSBNs slated for retirement starting in 2029. Without the extra cash, the Navy says it will have to buy less of everything else, shrinking the fleet to roughly 237 ships rather than the planned 324. The bulk of cuts will come from large surface combatants; we will wind up with 53 rather than the planned 96. The number of amphibious ships and attack submarines will also decrease. With so few ships coming into the fleet, the document implies, we’ll have to close some shipyards.
As the four people who read my recent book chapter on naval politics know, that is not going to happen, and Navy knows it. Defense production facilities are like hungry children that politicians feed by extracting work from the Pentagon. The six major and several minor shipyards that sell to the government in this country are largely jobs programs. They offer far more production capacity than the Navy and Coast Guard need. Even though General Dynamics and Northrop Grumman now own all six major yards, the firms have no interest in achieving economies of scale by closing yards. Politicians protect work for the yards as long as they stay open. Maintaining extra yards means that the Navy pays a large overhead premium for its ships, but doing so widens its base of Congressional support.
The Navy has been is playing a bit of chicken with the Office of the Secretary of Defense, leaving the cost of boomers out of its last shipbuilding plan in the hope that OSD would find the money elsewhere. OSD may do so yet, but in the meantime the Navy is trying to bring around Congress, taking “hostages” that powerful congressmen will have to free. Big surface combatants are made in Bath, Maine by General Dynamics and Pascagoula, Mississippi by Northrop. Susan Collins (R-ME) and Roger Wicker (R-MS) are on the Senate Armed Services Committee. Gene Taylor (R-MS) chairs the House Armed Services subcommittee that oversees the Navy. Chellie Pingree (R-ME) sits on it. By targeting surface combatants, the Navy is pushing those members to go find some money for it to save local jobs.
The most likely outcome here is that the Navy shipbuilding account will get a slight planned boost but far from what the service requests. Meanwhile the fleet will continue to shrink, because the ships’ complexity keeps their cost high. No shipyard will close, so each will get enough work to stay afloat, adding cost.
In a more austere and competitive budget environment, we would see more hard choices. The other services would start asking the White House whether it is worth aiming for a three hundred ship Navy with no obvious enemy to justify it. The Navy might tell the White House that carriers do what the Air Force’s fighters do, so cut their budget. Congressional leaders looking for savings might ask why we still need to deliver nuclear weapons three ways, by submarine-launched ballistic missile, intercontinental ballistic missile and bomber. A monad with twelve boomers is all the survivable nuclear deterrent we need.
Defending Obama…Again
I caught a lot of flack from my Republican friends for my post blaming the FY2009 deficit on Bush instead of Obama. Well, I must be a glutton for punishment because I can’t resist jumping (albeit reluctantly) to Obama’s defense again. I’m venting my spleen for two reason. First, FoxNews.com posted a story headlined “Obama Shatters Spending Record for First-Year Presidents” and noted that:
President Obama has shattered the budget record for first-year presidents — spending nearly double what his predecessor did when he came into office and far exceeding the first-year tabs for any other U.S. president in history. In fiscal 2009 the federal government spent $3.52 trillion …That fiscal year covered the last three-and-a-half months of George W. Bush’s term and the first eight-and-a-half months of Obama’s.
This story was featured on the Drudge Report, so it has received a lot of attention. Second, Bush’s former Senior Adviser wrote a column for the Wall Street Journal eviscerating Obama for big budget deficits. Given Bush’s track record, this took considerable chutzpah, but what really nauseated me was this passage:
When Mr. Obama was sworn into office the federal deficit for this year stood at $422 billion. At the end of October, it stood at $1.42 trillion.
I’m a big fan of criticizing Obama’s profligacy, but it is inaccurate and/or dishonest to blame him for Bush’s mistakes. At the risk of repeating my earlier post, the 2009 fiscal year began on October 1, 2008, and the vast majority of the spending for that year was the result of Bush Administration policies. Yes, Obama did add to the waste with the so-called stimulus, the omnibus appropriation, the CHIP bill, and the cash-for-clunkers nonsense, but as the chart illustrates, these boondoggles only amounted to just a tiny percentage of the FY2009 total — about $140 billion out of a $3.5 trillion budget.
There are some subjective aspects to this estimate, to be sure. Supplemental defense spending could boost Obama’s share by another $25 billion, but Bush surely would have asked for at least that much extra spending, so I didn’t count that money but individual readers can adjust the number if they wish. Also, Obama used some bailout money for the car companies, but I did not count that as a net increase in spending since the bailout funds were approved under Bush and I strongly suspect the previous Administration also would have funneled money to GM and Chrysler. In any event, I did not give Obama credit for the substantial amount of TARP funds that were repaid after January 20, so the net effect of all the judgment calls certainly is not to Bush’s disadvantage.
Let’s use an analogy. Obama’s FY2009 performance is like a relief pitcher who enters a game in the fourth inning trailing 19-0 and allows another run to score. The extra run is nothing to cheer about, of course, but fans should be far more angry with the starting pitcher. That having been said, Obama since that point has been serving up meatballs to the special interests in Washington, so his earned run average may actually wind up being worse than his predecessor’s. He promised change, but it appears that Obama wants to be Bush on steroids.
Filed under: Government and Politics; Tax and Budget Policy
The Week in Government Failure
Over at Downsizing Government, we focused on failures in the following departments this week:
- Commerce: corporate welfare in Ohio
- Defense: cost overruns in the Pentagon’s space programs
- Energy: central planners gamble with taxpayer money
- HUD: subsidizing private firms to operate public housing isn’t a solution
Also, dubious stimulus projects point to a need to return to fiscal federalism.
The FY 2010 Defense Authorization
Yesterday Congress passed the $680 billion FY 2010Defense Authorization Bill, which authorizes the largest such budget since the end of World War II. If, as is all but certain, President Obama signs the legislation, he will have failed to halt the inexorable growth in military spending, and he will signal to American taxpayers that they should expect more of the same. What’s worse, most of this money is not geared to defending America. Rather, it encourages other countries to free-ride on the United States instead of taking prudent steps to defend themselves.
The defense bill represents only part of our military spending. The appropriations bill moving through Congress governing veterans affairs, military construction and other agencies totals $133 billion, while the massive Department of Homeland Security budget weighs in at $42.8 billion. This comprises the visible balance of what Americans spend on our national security, loosely defined. Then there is the approximately $16 billion tucked away in the Energy Department’s budget, money dedicated to the care and maintenance of the country’s huge nuclear arsenal.
All told, every man, woman and child in the United States will spend more than $2,700 on these programs and agencies next year. By way of comparison, the average Japanese spends less than $330; the average German about $520; China’s per capita spending is less than $100.
The massive imbalance between what Americans spend on our military, and what others spend, flows directly from our foreign policy. Several decades ago, Washington opted to be the world’s policeman, and has ever since discouraged other countries from spending more on their own defense. President Obama has tacitly questioned this approach in the past, and has called on other countries to step forward and do more. But his actions will drown out his words.
The president has defended his support for continued bloated military spending, with additional monies going especially to a larger conventional army, as a way to reduce the strains on our troops and their families. This is a noble impulse. But a far better way to relieve the burdens on our overstretched force is to rethink all of our global military commitments, and align our strategy to our means. A new grand strategy, predicated on self-reliance and restraint, would relieve the burdens from the backs of our troops and from taxpayers. That new strategy would compel other countries to finally assume their rightful responsibilities in defending themselves and their respective regions.
The governing class in Washington has consistently resisted such a change. It is enamored of its ability to manage not just the rest of the country, but indeed the rest of the world, and sees no reason to change. Neither, it would seem, does President Obama. By embracing a military budget explicitly geared toward sustaining the status quo, the president virtually ensures that other countries will not share in the costs of keeping the world relatively prosperous and at peace.
When Stimulus Is No Stimulus
The Obama administration has been touting its wasteful “stimulus” package as the answer to the recession. Now that Uncle Sam has started his spending binge, John Cogan, John Taylor, and Volker Wieland assess the result. Their conclusion: for all of the money spent, the effort wasn’t much of a stimulus.
They write in the Wall Street Journal:
Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic not the fiscal stimulus program deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.
If policymakers really want to stimulate the economy, they will stop prodigiously wasting money, unfairly redistributing people’s earnings, making the tax system ever more complex, and imposing job-killing regulations. In other words, politicians will stop being politicians.
Filed under: Government and Politics; Tax and Budget Policy
Misinformation from Heritage
The Heritage Foundation has a chart up on its blog, showing defense spending as a percentage of gross domestic product and declaring that “Obama plan cuts defense spending to pre-9/11 levels.”
This is a standard rhetorical device for defense hawks (see the Wall Street Journal editorial page, Mitt Romney and lots of others) so it’s worth pointing out that it’s misleading. The unfortunate truth is that Obama is increasing non-war defense spending this year and seems likely to increase it at least by inflation in the near future.
It’s true that defense spending will probably decline as a percentage of GDP, assuming the economy recovers. But that’s because GDP grows. Ours is more than six times bigger than it was in 1950. Meanwhile, we spend more on defense in real, inflation adjusted terms, than we did then, at the height of the Cold War. The denoninator has grown faster than the numerator.
By saying that defense spending needs to grow with GDP to be “level,” you are arguing for an annual increase in defense spending without saying so directly. That’s the point, of course.
To be straight with readers, charts that show defense spending as a percentage of GDP should either show GDP growth over time or include a line that shows defense spending in real terms. Otherwise they fail to demonstrate that the decline in defense spending as a percentage of GDP is a consequence of growing GDP, not lower spending.
Here’s a chart from the Congressional Budget Office’s report, “The Long Term Implications of the Current Defense Plans,” that does this.
The assumption in analysis like Heritage’s is that defense spending should be a function of economic growth, not enemies and strategies for defending against them. It’s easy to point out that this is strategically and fiscally foolish. And it’s worth noting, as I have on many occasions, that we face a benign threat environment and can cut defense spending massively as a result.
But there is something weirder going on here that warrants mention. Arguing that wealth creation should drive defense spending is to attempt to divorce the military from its strategic rationale. That’s an implicit acknowledgement that defense spending is not for safety. High military spending in this worldview is either an end in itself or a partisan or cultural tool. That’s not much of a revelation, I guess.
O’Hanlon on Defense
Maybe you have wondered, is it possible to get an op-ed published in the Washington Post advocating increased US defense spending without any mention of the enemies the defense budget is meant to defend us against or the wars we might fight with them? Yes! Michael O’Hanlon proves it.
He says: 1. The Pentagon needs two percent annual growth above inflation to maintain its current plans. 2. Therefore the zero percent real growth the Obama administration plans for the next five years is unwise and we need to add $150 billion over that period.
The first part is reasonable, but why should the Pentagon maintain all its current programs? O’Hanlon doesn’t say. What the article amounts to is an argument for higher defense spending because defense spending is expensive. That is not persuasive.
Also omitted is that fact that O’Hanlon is repeating the Secretary of Defense’s view. Here’s what Robert Gates said on April 7.
I don’t think that the department can sustain the programs that we have with flat growth. And therefore I believe that we need at least 2 percent real growth going forward.
Here’s O’Hanlon:
For the Defense Department to merely tread water, a good rule of thumb is that its inflation-adjusted budget must grow about 2 percent a year (roughly $10 billion annually, each and every year)…we need roughly 2 percent real growth per year, while Obama offers zero.
The zero percent real growth in defense spending figure that O’Hanlon takes issue with is from budget charts prepared by OMB. Time will tell whether that, Gates’ view, or something else becomes policy. So it appears that O’Hanlon, knowingly, one hopes, is taking Gates’ view in an intramural Obama administration squabble. I’d say that’s worth knowing when you read this article.
Cooper vs. the Services
Congressman Jim Cooper (D-Tenn.) has a fairly radical proposal for reforming defense acquisition in Politico.
Cooper wants to put the military services’ acquisition staffs under the direct control of the Secretary of Defense. The idea is to liberate the staffs from the parochial perspectives that cause various pathologies in acquisition programs.
The oped implicitly blames large and consistent cost overruns in weapons programs on the services’ interests, which manifest in excessive requirements for platforms. For example, the Air Force’s religious attachment to the over-designed and thus wildly expensive F-22 has its origin in a peculiar self-image, one that sees the establishment of air superiority for strategic bombing as the Air Force’s main mission. You can tell a similar story about another contender in the Pentagon’s biggest white elephant sweepstakes: the Marine’s amphibious Expeditionary Fighting Vehicle.
Cooper is rejecting the more popular view that the trouble in acquisition is the lack of independent cost estimates and other failures in the contracting process. That technocratic view underlies the acquisition bill that just became law. Cooper is saying that the trouble is more what we want than how we buy it, and what we want is a consequence of the services’ power. To deal with that, you must either change the services’ conception of their interests (and note that such efforts are arguably underway, especially in the Air Force) or take power from them. He’s pushing for the latter.
The weakness in the oped is a failure to explain how moving the military’s acquisition personnel to OSD would change the incentives that cause officers to do their service’s bidding. They would still work for a service, after all, and face its promotion board. A more radical proposal would be to hand more power over acquisition to the civilians in OSD and remove redundant positions from the services.
Cooper also takes (another) shot at constant service shares — the tradition, dating to the Kennedy Administration, where the Army, Navy and Air Force all get consistent shares of the budget each year. That tradition stifles interservice competition and therefore innovation. Giving the lion’s share of defense spending to the ground forces would be a sensible outgrowth of our current defense strategy, which is manpower-intensive. The Navy and Air Force might then be forced to scramble for relevance, causing them to initiate many of the reforms to their procurement programs that Secretary Gates has proposed. (An even better tact would be to cut the defense budget massively but give more of it to the Navy, given that our current strategy encourages dumb wars).
Note that the suggestion to enhance service competition relies on decentralized institutions competing, whereas the main suggestion of the oped is to heighten the centralized authority of the Secretary. Whether these are contradictory ideas is academic, for now, because at least one is not going to happen soon. The service’s would go the mattresses to protect their control of their acquisition programs, and there is a no sign of a political constituency willing to pick that fight.
The GOP Is Not Serious about Cutting Down Spending
A month ago, President Obama issued a list of proposed spending cuts that I dismissed as “unserious” due to the fact that they were trivial when compared to his proposed spending and debt increases. Today, the House Republican leadership released a list of proposed spending cuts.
I’d love to say I’m impressed, but I can’t.
Both proposals indicate that neither side of the aisle grasps the severity of the country’s ugly fiscal situation, or at least has the guts to do anything concrete about it.
The GOP proposal claims savings of more than $375 billion over five years, the bulk of which ($317 billion) would come from holding non-defense discretionary spending increases to no more than inflation over the next five years.
First, it should be cut — period. Second, non-defense discretionary spending only amounts to about 17% of all the money the federal government spends in a year, so singling out this pot of money misses the bigger picture. At least, defense spending, which is almost entirely discretionary, should be included in any cap. But it has become an article of faith in the Republican Party that reining in defense spending is tantamount to putting a white flag in the Statue of Liberty’s hand.
The second biggest chunk of savings would come from directing $45 billion in repaid TARP funds to deficit reduction instead of allowing the money to be used for further bailing out. That’s a sound idea as far it goes, but I can’t help but point out that the signatories to the document, House Republican Leader John Boehner and Minority Whip Eric Cantor, voted for the original $700 billion TARP bailout. Proposing to rescind the Treasury’s power to release the remaining funds, about $300 billion I believe, should have been included.
According to the proposal, the rest of the cuts and savings comes out to around $25 billion over five years. Like the specific cuts in the president’s proposal, they’re all good cuts. But the president detailed $17 billion in cuts for one year and I generously called it “measly.” What am I to call the House Republican leadership specifying $5 billion a year in cuts?
Will the Military Industrial Complex Save American Foreign Policy?
Missing from most of the commentary on the Secretary of Defense’s big defense spending speech yesterday is the fact that the program cuts he proposed are largely a result of freezing the topline — keeping defense spending level (once you adjust for inflation) for the next decade.
For nearly a decade the country has really had two defense budgets – one for imagined conventional wars against states like China, another from nation-building, peacekeeping and counterinsurgency. The first budget requires a small ground force and lots of big platforms operated by the Air Force and Navy. The latter requires much larger ground forces, a few niche capabilities like intelligence, surveillance and reconnaissance aircraft, and less high technology wonders.
The current American love affair with counterinsurgency has resulted in a gradual shift of dollars from the conventional budget to the unconventional one. We are reversing the old idea that the American way of war is to replace labor with capital, or manpower with technology. We are becoming a land power first. We have been increasing manpower in the Army and Marines — adding 90,000 new troops — and paying them way more (compensation per service member is up by almost half since 1998). Personnel costs are taking more of the budget. And for more complex reasons, including health care costs, the operations and maintenance part of the budget – essentially the day to day cost of running the military — has also been growing fast when measured per service member. (For details on these issues, read this testimony by Stephen Daggett of the Congressional Research Service.)
That was bound to squeeze the other big parts of the defense budget — research, development and procurement of new weapons systems. There is too much future cost in the budget for everything to fit without topline growth, so something had to give. Big weapons programs are where the most give is, if you don’t want to cut manpower.
That conflict was delayed while the budget topline grew, but now that it is flat, it erupts. The manpower intensive military that follows from our current policies is eating into the conventional military that delivers manufactoring jobs across the country and the high-technology dreams of our military leaders.
What will be interesting to see is whether this shift encourages those leaders and their friends on the Hill to take up the arguments that people like me have been making for years: that small wars are mostly dumb wars. Preparation for these wars didn’t much hurt the military industrial complex before, now it does.
An additional note: Gates’ criticism of the acquisition process was on the mark. Rather than blaming out of control weapons costs on the kind of contracts we write or crafty contractors, as the President seems to, Gates noted correctly that the trouble is the requirements process — what we want, not how we buy it.
Filed under: Foreign Policy and National Security; Government and Politics
Pentagon 1, Obama 0
Planning for the 2010 federal budget began in 2008. The Office of Management and Budget instructed agencies to prepare documents for the incoming administration showing “current services baselines” and program estimates for the coming fiscal year. That means “just explain what you’re spending now and project it forward for next year.” The idea was to allow the Obama appointees to shape the budgets quickly when they came into office.
The Pentagon, however, went through its normal budgeting process. It produced a budget that defied existing plans and expectations that FY 2009 would be the last year of the massive defense buildup that began in the last years of the Clinton administration. It adds $60 billion to the defense baseline above FY 2009 levels and $450 billion in planned spending over five years.
Many observers saw this as an attempt at a bureaucratic fait accompli, a move to lock the Obama administration into higher defense spending. According to this week-old story from CongressDaily, it worked. Megan Scully writes:
President-elect Obama’s choice for the no. 2 civilian slot at the Pentagon Thursday said he does not plan to make sweeping changes to the Defense Department’s fiscal 2010 budget request, which has been drafted.
When Obama decided to keep Robert Gates as Secretary of Defense, I asked whether we were keeping this defense budget and suggested that doing so would show that Obama will let the military services (who largely control the drafting of their budgets) push him around. For some time, the position of Democrats has been to give the Pentagon what it wants, either for fear of opening a line of attack for Republicans or because of agreement on the virtue of massive defense budgets.
This story suggests that little has changed. The FY 2010 increase will make any future decrease harder to achieve for political and programmatic reasons. This is one more sign that Obama’s occasional talk of realism and restraint in foreign and defense policy should not be taken seriously.
Clearly, the idea of scrubbing the budget “line by line” does not apply to agencies run in Virginia.
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