Rethinking Military Spending After Pentagon Caught Burying Evidence of Waste

The Washington Post reports that the "Pentagon buries evidence of $125 billion in bureaucratic waste," apparently suppressing the results of a study that points out back-office and other administrative inefficiencies that could be cut without changing mission scope. 

The study proposes what they call a "clear path" to cutting $125 billion in spending:

The plan would not have required layoffs of civil servants or reductions in military personnel. Instead, it would have streamlined the bureaucracy through attrition and early retirements, curtailed high-priced contractors and made better use of information technology.

Sounds reasonable, but 

Some Pentagon leaders said they fretted that by spotlighting so much waste, the study would undermine their repeated public assertions that years of budget austerity had left the armed forces starved of funds. 

So here we have a bit of a problem... 

The Budgeting Process Is Flawed

It's fairly easy to catch the flaw in the budgeting process, and the quote above is the clue: Every government agency or office has the incentive to declare that they are under-resourced and require more funding next fiscal year. This happens with nearly every office every year. 

For over a decade I worked in, and then with, the military and was part of plenty of budgeting exercises. You simply cannot ask for less than the prior year. Why? Because it's a signal to your boss(es) that you either erroneously asked for too much in prior years, and/or that you are incompetent at allocating your current budget. 

Then there's also the agency problem of your utility as a manager being maximized by managing a larger organization, versus, say, the utility of tax payers that is maximized by providing more services for less. 

Taken together, this is an imbalanced process that's extremely skewed towards growing without bound. And for anyone thinking that the "solution" is to simply redirect funds from the military to your own favorite bureaucracy, say the EPA, you can be assured that the problem is ubiquitous throughout government. 

Requirements vs. Inefficiency

We all know that the military spends a massive amount of money and we have troops all over the world. Over half the federal budget (~$600 billion, or 54%) is spent on the military, and as of 2010 this report counts the number of military bases as 662 in 38 foreign countries. 

There are really two questions we should be asking: 

1. Is the scope of military activities appropriate? 
2. Does the level of funding efficiently cover this scope? 

There's a big difference in advocating for a smaller military role around the world, and hence less of a need for capital, than arguing that things can be done more efficiently. And, of course, there are plenty who argue for both. What would be entirely wrong is to set a budget that's inappropriate for the scope of requirements; few want to see our young warriors sent to combat without the equipment or resources to do their jobs. 

Unfortunately, budgeting process flaws make it difficult to distinguish whether resources are appropriate for scope. The Pentagon will always say they need more funds, so how do we know when that's to adequately fit troops in combat, versus making a bureaucrat's resume look better because she controls a larger organization?

Skepticism About the Cuts

Deputy Defense Secretary Robert O. Work, the man who commissioned this study, is skeptical of its findings. As am I. 

In an interview with The Post, he [Work] did not dispute the board’s findings about the size or scope of the bureaucracy. But he dismissed the $125 billion savings proposal as “unrealistic” and said the business executives had failed to grasp basic obstacles to restructuring the public sector.

It's one thing to quantify things like the number of personnel and then to place two numbers side-by-side, like the number of personnel in administrative jobs versus active duty soldiers; declaring the ratio to be inefficient and correctable given current processes is a leap. 

For instance, there are set processes in the bureaucracy for how much and what type of paperwork are required to do anything. You want to build a new Armored Personnel Carrier (APC)? Great! Well, there's a legal process you have to follow to propose, plan, and then execute, field, and maintain that acquisition. This all requires administrative personnel. 

Another bogey in the report was the idea that the budget can be streamlined by replacing "high paid" contractors with government personnel. I am not convinced that public employees cost less than contractors. Government workers in the Depart of Defense earn competitive wages, especially when adjusted for time off and layoff risk (virtually non-existent), and they are awarded way-above-market defined benefit pensions inclusive of free healthcare for life...compensation equivalent to a multimillion dollar risk-free annuity.

Contractors get paid more up front, but have none of the generous long run benefits, so swapping one contractor for one government worker may make the current budget look better, but you're just stacking liabilities into the future. 

Real Savings Are in Cutting Requirements

Here's a nice infographic from the Cato Institute that gets to the heart of the requirements argument: 

The American people have thus far decided, even if by default or under not-so-great assumptions, to establish the largest military profile in the world, by a long shot. So far there doesn't seem to be much pressure to reduce scope, but real budget cuts require cuts to scope. The efficiency path to real cuts is wishful thinking without serious structural changes to how the government does business. 

The Path Forward

Is there a viable path forward? Sure. Every organization can become more efficient, it's just a matter of being realistic about how to do so. The budgeting process is flawed and should somehow be made more balanced by reducing agency problems.

The real debate should be focused on the role we want for our military in the world. There is an argument that "many of the current security issues in the world have resulted from America being too involved militarily." This makes negotiating requirements scope endogenous; more military intervention seems to drive more future requirements for interventions. 

There are plenty of people on either side of the debate, but it's one we should be having. 

What are your thoughts? 

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Rob Viglione is a PhD Candidate in Finance @UofSC with research interests in cryptofinance, asset pricing, and innovation. He is a former physicist, mercenary mathematician, and military officer with experience in satellite radar, space launch vehicles, and combat support intelligence. Currently a Principal at Key Force Consulting, LLC, a start-up consulting group in North Carolina, and Head of U.S. & Canada Ambassadors @BlockPay, Rob holds an MBA in Finance & Marketing and the PMP certification. He is a passionate libertarian who advocates peace, freedom, and respect for individual life.  

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Image source: http://www.usmessageboard.com/threads/is-it-possible-for-the-us-to-cut-military-spendings.413304/

Infographic source: https://www.cato.org/blog/truth-about-military-spending