FEATURES:
The Readiness Trap

By Cliff Sobel and Loren B. Thompson

The U.S. Military Is Failing to Prepare for the Next Big War

D uring the 1992 presidential race, the Fleetwood Mac song "Don't Stop Thinking About Tomorrow" became the official anthem of the Clinton campaign. Once in office, the new administration lost little time infusing every facet of its domestic agenda with concern about the future. But its defense agenda has been curiously immune to long-term thinking. Rather than planning for tomorrow, the administration's defense policies reflect a disturbing preoccupation with the concerns of the moment.

This is a dangerous flaw. The record of the 20th century suggests that the present period of diminished global tensions will not last, and that major new threats to national survival may emerge in the near future. However, the Clinton administration seems to assume that the end of the Cold War meant the end of history, at least as far as great- power threats to national security were concerned. The result is a U.S. defense budget that exhibits high levels of consumption and very low levels of investment.

Both in their rhetoric and in their resource allocations, senior Pentagon executives and many congressional Republicans have been preoccupied with "readiness"--the ability to fight effectively on short notice. Readiness is a notoriously nebulous concept, but in economic terms it translates into consumption: Money is spent to preserve and enhance current capabilities rather than prepare for the future.

Like other forms of consumption, readiness tends to be bought at the expense of procurement of new weapons. In inflation-adjusted terms, Pentagon procurement accounts now stand at the lowest levels since 1950, the year the Korean War began. The $39 billion requested by the Clinton Administration for weapons procurement in fiscal 1996 constitutes only 16 percent of a defense budget that itself has shrunk to a mere 15.5 percent of overall federal expenditures. In other words, the Pentagon's planned spending on all types of equipment for military services in fiscal 1996 adds up to only 2.5 percent of the federal budget--an amount of money equal to about four months' of sales by the Ford Motor Co.

The Clinton administration contends that this low level of investment is justified by a diminished threat and the huge inventory of weapons accumulated during the Cold War. It also claims that a planned increase in procurement will lead to "recapitalization" of the armed forces toward the end of the 1996-2001 Future Years Defense Plan. However, the Pentagon's current predictions for 2001 may not be any more reliable than those of science-fiction writer Arthur C. Clarke. It is possible that spending on procurement will remain depressed. If that occurs--while high levels of readiness are sustained--the armed forces will suffer continued depletion of their weapons inventories.

Lessons of the Past

Unfortunately, the depletion of capital stocks could coincide with the reemergence of threats abroad and a revolution in military technology, creating a situation not unlike that of the 1930s. The current debate over national-security needs presents a rather distressing spectacle in historical amnesia. The struggle with communism for the past two generations has so strongly influenced policymakers that they exhibit little apparent capacity for interpreting that experience in a broader context.

The Cold War was the third occasion in this century when the U.S. mobilized to prevent anti-democratic forces from dominating Eurasia. The century began with the challenge posed by German imperialism, and barely a generation later the U.S. was at war again, this time to defeat fascism. The outcome of WWII then set the stage for the anti- communist crusade of the post-war period.

Note that the same pattern repeated itself with each new danger. Regional powers gradually accumulated land and resources while the United States was distracted; early warnings that a great-power threat was emerging were greeted with widespread skepticism; when the threat became urgent, U.S. leaders discovered they were woefully unprepared and commenced a hasty mobilization; once the threat passed, the nation engaged in an equally hasty demobilization. After a period of relative tranquillity, the cycle has repeated itself.

It is remarkable that the political elite of a world power could experience three complete threat cycles in one century and still not grasp the basic lesson that a fourth such challenge is likely sometime relatively soon. As Colin Gray, a military theorist, has noted, "American policymaking in the national security area tends to be dominated by people with a poor sense of the value of history." Whatever the explanation, current U.S. defense policies reflect a startling lack of strategic vision.

For example, the 1993 Bottom-Up Review was conceived by the Clinton administration as a comprehensive assessment of military resources and requirements for the post-Cold War period. It prudently concluded that U.S. forces should be able to successfully prosecute "two major regional conflicts that occur nearly simultaneously." And yet nowhere in the document is the historical significance of regional conflicts clearly spelled out--that great-power threats to U.S. security typically originate in regional aggression not countered in a timely manner.

From this perspective, the real danger posed by Saddam Hussein in 1990-91 was not his violent annexation of Kuwait, for the invasion of Kuwait was no more significant than Japan's occupation of Manchuria in 1931 or Germany's remilitarization of the Rhineland in 1936. The danger lies in the bolder designs an aggressor might pursue if he encounters no resistance.

History thus provides a compelling reason for being ready to fight. But it also teaches that the emergence of aggressive great powers is characteristic of the geopolitical landscape, and that unless the United States continually invests in new defense capabilities, it may eventually be unable to avoid defeat at the hands of such a power.

Viewed against this backdrop, the fundamental defect of the Clinton administration's defense plan is all too evident: It purchases current readiness at the price of future preparedness. When procurement spending is inadequate, high levels of readiness inevitably use up weapons for which there are no replacements. Meanwhile, a drop in military contracts prompts the production base of the defense industry to atrophy. The U.S. thus gradually loses the military and industrial capacity to respond effectively to aggression.

The Clinton administration recognizes this problem and therefore has begun to plan for the "recapitalization" of the armed forces--an unfortunate appropriation of a term usually associated with the restructuring of bankrupt organizations. But the concept of bankruptcy may not be entirely misplaced, because administration plans make future procurement increases contingent on raising the overall defense budget and realizing substantial savings from base closures and acquisition reform. None of these sources can be counted on to generate enough money for a sustained surge in investment.

The "Procurement Holiday"

The Congressional Budget Office refers to the current slump in weapons purchases as a "procurement holiday." But like Franklin Roosevelt's "bank holiday" during the darkest days of the Great Depression, this is merely a pleasant way of describing a system on the verge of collapse. The real buying power of the Pentagon's procurement budget declined 67 percent between fiscal 1985--the peak year of President Reagan's defense buildup--and fiscal 1995. The administration proposes a procurement budget of only $39 billion in 1996, which would bring the total reduction from the peak in fiscal 1985 to 71 percent. Backlogs in defense contracts are expected to contract eventually by a similar amount, forcing many defense contractors to exit the business and reducing competition among those who remain.

No other part of the defense budget has experienced a comparable decline. The major categories of weapons-related expenditures correspond roughly with the key stages in the product life cycle: research and development, procurement, and operations and maintenance. The operations and maintenance budget includes most of the spending related to readiness, whereas R&D, together with procurement, constitutes most investment spending. All three accounts declined between fiscal 1990 (the year the Berlin Wall fell) and fiscal 1995. But procurement shrank from 28 percent of a relatively large budget to 17 percent of a much smaller budget. In constant 1995 dollars, procurement spending fell in just five years from $94 billion to $43 billion--a 54 percent cut.

The impact of declining procurement expenditures on the production of major weapon systems has been dramatic:

• In fiscal 1996, the Air Force does not plan to purchase a single fighter or bomber. In fact, it plans to purchase no new bombers throughout the 1996-2001 Future Years Defense Plan, even though nearly half of its long-range bombers are more than 30 years old, and the sole fighter program it has in development (the F-22) has been repeatedly cut back and delayed.
  
• The Navy plans to purchase seven ships in fiscal 1996, only a third as many as it purchased in 1990. Over the course of the Future Years Defense Plan, it will buy just one submarine every other year from its last remaining sub manufacturer, and many observers believe the recently authorized CVN-76 will be the last large-deck carrier the service procures.
  
• The Army has stopped purchasing main battle tanks, and has no plans to resume purchases any time in the next 15 years. It has been unable to find sufficient funding to support upgrades to its existing tanks at an economic rate.

The Clinton administration argues that reduced levels of procurement are an appropriate response to the end of the Cold War, and that the high procurement expenditures of the Reagan-Bush years have made it possible to adequately equip shrinking military forces without buying new weapons. Senior administration officials point out that R&D spending for new weapons technologies has declined only moderately, and that when recapitalization commences early in the next century, it will not be necessary to replace weapons on a one-for-one basis. They also claim that by the time it is necessary to increase procurement, acquisition reforms will make it possible to acquire some military systems more quickly and less expensively from commercial sources. Finally, they note that a 47 percent real increase in procurement is planned between fiscal 1996 and 2001.

If all of these assertions proved true, there would be little reason for concern. The U.S. would presumably be well-positioned for the challenges that might arise in the next century. However, the administration's positions obscure as much as they reveal, and are based on assumptions that may prove to be unreliable. For example, the same acquisition reforms that supposedly will enable the armed forces to buy advanced technologies more quickly and cheaply from commercial sources will also facilitate the transfer of those technologies to potential adversaries. As the acquisition system places increased emphasis on "dual-use" technologies with both military and commercial applications, it is inevitable that foreign nations will gain greater access to advanced military capabilities. Acquisition reform could thus hasten the emergence of new threats.

The contention that a smaller force structure can be adequately equipped from existing weapons inventories has some validity. For instance, the average age of ships in the Navy's active fleet is declining despite the low level of new procurement, because older ships are being retired in large numbers. However, the administration's own data demonstrate that many key military systems are approaching the mid-point of their projected lives, and will eventually require replacements. Furthermore, continuously depressed levels of new procurement will gradually erode the defense industry's capacity to produce those replacements. In the case of the submarine business, the Navy will soon be dependent on a single shipyard that is producing only one boat every two years. If even one submarine is removed from the production schedule, the supplier base will probably collapse.

The most misleading argument the administration advances is that it is cutting procurement while maintaining R&D specifically in order to prepare for future threats. That ignores what is being developed and what is actually being procured. In December, the administration announced that the Army's highest-priority acquisition program, the Comanche helicopter, would be kept in development and not moved forward to production. The Comanche is the only truly stealthy aircraft likely to enter the Army inventory in the next 20 years, so deferring its production means soldiers will have to face future threats in increasingly vulnerable conventional helicopters. Thus the benefits of a decade of development are being lost because of a decision not to procure.

Similarly, the administration is resisting congressional efforts to procure additional B-2 "stealth" bombers even though there is extensive evidence that the planned force of 20 B-2s and 200 older bombers cannot meet projected operational requirements. Opposing further purchases of the B-2 might make sense if a cheaper and equally survivable alternative were under development, but it isn't. Instead, the Air Force plans to rely on vulnerable B-1s and B-52s to carry out the bulk of future long-range bombing missions. Here again, the benefits of a $20-billion development effort are being squandered, with no long-term plan for recovery in sight.

Bad Trade

It is obvious that such decisions are not being driven by doctrinal or operational considerations. They are dictated by budgetary pressures. The Clinton administration apparently has concluded that unless there is a significant increase in defense spending, readiness can only be maintained by drastically limiting investment. This is a tradeoff that cannot be continued indefinitely because low levels of procurement eventually translate into low levels of preparedness. It is a tradeoff that is not only unacceptable, but unnecessary. To avoid this trap, the Pentagon must get serious about privatizing military support functions.

In recent years, many private companies have restructured their operations to focus on core competencies. By shedding activities that either are not central to the organization's mission or can be performed less expensively by others, companies are able to emphasize what they do well and thereby improve their efficiency. The Department of Defense is overdue for such a restructuring. Although the department has undergone considerable downsizing and there is much talk of "reinventing" what remains, there is little evidence of greater efficiency. The result is that even in the midst of a budget crisis, the Pentagon continues to waste huge amounts of money.

The defense department lacks market discipline, and exhibits many of the managerial defects of a top-down monopoly. That is hardly surprising, because the department was established to exercise a monopoly in the application of military power, and like the rest of the federal government it is not a product of economic forces. But it still can benefit from those forces.

After WWII, the department accumulated a vast array of support functions--such as supply management, equipment maintenance, dependent health care, data processing, accounting, and commissaries--that, while necessary to the effective exercise of military power, do not need to be performed by the government. One way of freeing up money for additional procurement is to gradually privatize those support functions that can be provided by private-sector sources.

The Office of Management and Budget has estimated that the federal government saves nearly $10,000 every time the functions of a worker are contracted out. On average, the government "outsourcing" saves 20 to 30 percent per contract. However, contracting out and privatization have been constrained by convention and by concern that critical services might not be available from private-sector providers in wartime. There is little empirical basis for this concern, and the cost of continuing to make policy as if it were valid is staggering. For example, studies of the $15-billion depot-maintenance system for conducting weapons repairs have found 25 to 50 percent of the system is unneeded capacity. Some outsourcing of depot maintenance already occurs, but complete privatization could probably save billions of dollars every year.

There are numerous other examples of defense support activities that could be privatized. About 48,000 civilian and military personnel are engaged in supply and distribution activities. Overhead costs for goods delivered by these personnel average 70 to 90 percent of the value of the goods themselves, a high figure by private-sector standards. The transportation, storage, and administrative costs associated with buying and distributing spare parts alone is roughly $5 billion per year, not counting the cost of the parts. Many private-sector companies have developed advanced inventory management and distribution systems that could substantially cut these costs.

Financial-information systems is another area that could benefit from privatization. The Pentagon reported in 1994 that of 28 major audits of its operations in the previous year, 26 were unfavorable. During the same year, the department was unable to match $19 billion in disbursements to specific contractual requirements, meaning the money may have been paid erroneously. The level of unmatched disbursements is all the more striking in view of the fact that it requires more than 100 separate transactions for the department to issue a single check. Despite all of these steps, many of which presumably exist to prevent mistakes, the chief of staff of the Air Force recently said that "it would be nice if we knew what actual costs were, but our accounting systems often do not perform this simple and reasonable service."

The Clinton administration is striving mightily to "reinvent" the Pentagon's financial management systems, but "deinvention" might make more sense. The private sector is full of data-management and accounting firms that long ago solved the challenge of tracking money within large organizations. Many large firms have turned over their day-to-day financial-support requirements to these firms. The Pentagon should seriously consider doing the same thing, just as it should consider turning over the post-exchange and commissary functions to Wal-Mart.

An example of how greater reliance on the marketplace could reduce defense support costs is provided by the General Services Administration's 1991 decision to transfer time-urgent delivery functions to FedEx Corp. The General Accounting Office estimates that relying on private-sector sources for overnight delivery reduced the government's costs by 76 percent. FedEx's performance was such an improvement that the Air Force is increasingly relying on private-sector providers for its own deliveries of critical spare parts.

Nobody really knows how much money the Department of Defense might save through the wholesale privatization of support functions. But the annual savings could eventually be sufficient to sustain higher levels of procurement without cutting readiness or force structure. In fact, privatization would have multiple benefits for the procurement budget: Not only would it free up funds for weapons purchases, but transferring weapons-support functions to the companies that make the systems could also help preserve critical industrial capabilities and reduce the overhead costs they charge on procurement contracts.

If there is a final lesson in all this, it is that there is no substitute for vision, whether strategic or managerial. We may not be able to know the future, but we certainly can have a reasonably clear idea of what the past tells us about the range of possibilities. In the case of defense spending, past experience warns against a prolonged drought in investment, particularly when high levels of readiness are gradually consuming existing capital equipment. In the case of defense management, past experience dictates that the marketplace is the most efficient provider of goods, and that continuing to perform support functions within the government reduces the military's capacity to accomplish its mission. These are easy lessons to grasp; the question is whether we will have the courage to act on them. Investing more in modern weapons while privatizing support functions would prove that, for once, we have learned from our past mistakes.