The United States is approaching a financial reckoning. People may disagree on the direction of budget decreases, but in the future, fiscal woes will likely force the government to tighten its belt. In these uncertain times, defense appropriations are a perennial target for reductions and, for some, a politically palatable alternative to reforming entitlements.
Admittedly, defense spending cannot be considered in isolation from our long-term picture of fiscal responsibility. At the same time, hasty or substantial decreases to defense research and procurement risk impairing America’s strategic capabilities. The “cost of freedom” may be high, but in a 21st century teeming with external threats, the U.S. must maintain a heightened sense of security.
The idea that major declines in defense are preferable to other spending cuts arises in large part from some common misperceptions. Chief among these is the notion that defense is especially rife with fraud. A dispassionate analysis suggests this view is misleading. There are miscalculations on behalf of firms that aid the federal government, but these minor excesses are dwarfed by those caused by structural problems inherent in the government procurement process itself. As one senior official dryly observed, blaming contractor abuse for high defense spending is akin to “arguing over nickels and dimes while billions go marching quietly out the door.”
The fundamental problems endemic to defense procurement are complex and due to a variety of factors, but often include changing contract specifications, micromanagement of the purchasing process, poorly defined performance goals, and “requirements creep,” a process in which the original goals of a system are continually expanded as it is further developed. In short, inefficiency is the primary culprit for cost overruns.
The history of defense procurement also demonstrates that focusing too heavily on cost rather than capability may drive up the former and reduce the latter. And this is not unique to America, as Britain’s ill-timed retirement of the Nimrod and Sentinel aircraft shows. In order to save relatively minor production costs, Britain cancelled its advanced surveillance airplane and ignored the substantial R&D funds it recently invested to finish designing the model.
“Silver bullet” approaches with names like ‘total system performance responsibility’ and ‘fixed cost contracting’ have tried to solve multiple problems with one blow. But ultimately, adding additional layers of government oversight or making minor alterations in how contracts are assessed is insufficient to address deep, structural problems in procurement practices. Extensive defense is of course an expensive proposition, but America can significantly reduce this cost by downsizing the excessive bureaucracy that stifles efficient defense procurement, as the drive by Defense Secretary Gates to eliminate $100 billion of overhead-spending demonstrates.
Serious analysts on both sides of the aisle agree that procurement reforms must be undertaken. Still, the critical issue is determining what defense capabilities are needed to support American national interests in the future, and how to develop such capabilities responsibly. As a nation, we must ask, “What defense capabilities do we need, and how can we pay for those within a stable long-term fiscal picture?” rather than a trite “How much can we cut from defense this year?” Again, no part of the budget should be sacrosanct, but as economists like Harvard’s Martin Feldstein also note, defense spending as a fraction-of-GDP has been dwindling over the past decades.
Moreover, defense spending normally enjoys broad bipartisan support and stimulates job growth in great states brimming with economic activity, from Texas to New Jersey and California to New Hampshire. As an added bonus, it also helps the US stock market grow and preserve its edge. Last year, Reuters reported that defense acquisition multiples and valuations increased and Deloitte predicted more activity in the sector. Pricewaterhouse Coopers also noted defense deal flow doubled. Even, or especially, in tight times, well capitalized defense companies continue to boost their assets by obtaining niche firms and divesting from enterprises not central to their portfolios. As capital markets unfreeze, defense IPO’s like that of BAH will also grow.
Financial institutions play an essential role in this; sell-side firms broker deals and buy-side entities identify targets. Undersecretary of Defense for Acquisitions, former Kennedy School Professor Ashton Carter, has thus far tried to strike a balance between consolidation and competition in the defense sphere. Regardless of budget directions in future years, this trend will likely continue for national security reasons, as well as efficiency purposes. Mergers and acquisitions keep the defense community effective and pioneering, and help firms stay on the cutting edge.
As an aside, the part that nontraditional defense has played in spurring M&A underscores its growing role. Firms that provide consulting services or budgetary analysis are an important component of the defense infrastructure and cater to cabinet-level departments like Treasury, HHS, Energy, and State, whose diplomatic efforts are critical. To be clear, conventional equipment is still mandatory to deter growing peer competitors, yet services like cybersecurity and intelligence collection are also now vital for asymmetric conflicts.
The U.S. defense industry has long worked with dedicated civil servants to help America sustain its safety and primacy and assist our brave men and women on the front lines. As the 21st century begins, it should and must continue to do so.
Nicholas Tatsis ’11 is a government concentrator in Winthrop House and Daniel Handlin ‘11 is an astrophysics concentrator in Winthrop House.