Reform the Pentagon

by Tim Kane
A freer military would allow future presidents to manage the force more nimbly.

A witty liberal could balance the federal budget in just four letters: N-A-V-Y. Unfortunately, that’s pretty much what the president was allowing to happen with the “sequester,” a brainchild of the Obama administration, according to that old scallywag Bob Woodward.

But suddenly, there’s hope for real Pentagon reform, thanks to the budget negotiations between Representative Paul Ryan (R., Wis.) and Senator Patty Murray (D., Wash.). Their proposal relieves by half the gouging of the defense budget in 2014 but, more important, introduces some unprecedented reforms.

Set aside the illogical squabbling over whether a budget compromise can ever be pure enough, and celebrate the tiny but real breakthrough achieved in dealing with federal pensions and military personnel. The final deal seems to give the Pentagon more flexibility in the timing of what were blind and dumb sequestration cuts. That paves the way for the military to radically reform itself as a Total Volunteer Force, a move that would improve morale, national security, and the bottom line.

Generals, admirals, and defense secretaries from both parties have been ringing the alarm for over a year, but the reality is that the U.S. military was the proverbial odd man out in a budgetary game of musical chairs. There are three players: revenues, entitlements, and discretionary spending. The first two are basically sitting pretty, even after the Ryan–Murray deal, though we all know their reckoning will come another day. What’s at issue is discretionary spending — notably, defense dollars.

As many analysts have noted, the Obama White House was planning a major drawdown of the Defense Department even before the ongoing fiscal stalemate between House Republicans and Senate Democrats. The sequester served as a convenient scapegoat for the equivalent of eliminating one of the major service branches.

The sequester, of course, is the set of the automatic cuts taking place under the Budget Control Act of 2011, half of which were designed to fall on defense spending, even though it makes up just one-fifth of federal outlays. Some conservatives correctly tut-tut that the sequester cuts barely made a dent in the federal budget. But the impact on national security was severe and will worsen over the coming years.

It may be true that the Pentagon is ripe for some belt-tightening in the aftermath of two hot wars, but Americans would be aghast if they knew how crudely defense dollars are being slashed. Especially given existing contracts, the BCA provides little flexibility for Pentagon leaders to manage their budgets in the coming decade, so the cuts are devastating to soft targets, like training and operations, or involve huge legal fees resulting from broken promises. Here’s Mackenzie Eaglen, of the American Enterprise Institute, on congressional testimony by the service chiefs on November 7:

Marine Corps Commandant James Amos noted that penalties arising from canceled aviation contracts resulting from the cuts will cost $6.5 billion alone. Chief of Naval Operations Jonathan Greenert further emphasized this point: “We are not saving costs, we are deferring costs . . . that are going to come home to roost.”

By the Numbers
This fall, the Bipartisan Policy Center (BPC) issued a devastating report, arguably the most insightful analysis to be found anywhere, on the full impact of the mindless havoc being done to the U.S. military as a result of Washington’s fiscal dysfunction.

Sequestration will slash nominal defense expenditures by $48 billion per year over the next ten years. But the cuts are front-loaded: Defense outlays dramatically decrease in FY2013 and FY2014, before nominal growth resumes afterward. While the 2013 impact didn’t seem too painful, recent testimony by the chiefs made clear that gimmicks deferring the impact are no longer available — 2014 is crunch time. The Ryan–Murray deal appears to provide relief and flexibility in 2014 while maintaining the hard line over the longer term. That’s a bargain worth taking.

The longer-run impact of DOD cuts is probably clearest in recent projections from the Congressional Budget Office, which said that the sequester will ultimately cut defense spending by one-third in terms of its size relative to GDP, from 4.3 percent in 2012 to 2.8 percent in 2023. For perspective, consider that 10 percent of GDP was spent on defense spending in the 1950s, down from 17 percent in the 1940s. That figure dropped to 9 percent in the 1960s and then to 6 percent in the 1970s and 1980s. For the past three decades, defense spending has held steady around 4 percent of GDP. It has never been below 3 percent. The opposite trend has been driving entitlement outlays. They eat up tax dollars at an unsustainable rate, putting America on a well-worn path of great-power decline. (For that story, see my recent book Balance, co-authored with Glenn Hubbard.)

But never mind all that history. It is a liberal fantasy that our budget problems can all be tidied up by clipping the Air Force’s wings.

The main objection defense experts have to sequestration is its inflexibility, not just the bottom-line numbers. Why force Pentagon leaders to allocate all of the cuts to only half of the DOD budget? Until the Ryan–Murray agreement, much if not most defense-related spending was off the table: pay, pensions, and most everything related to personnel. As my colleague at the Hoover Institution, Admiral Gary Roughhead (ret.), recently warned, spiraling personnel costs “threaten to transform it [the Pentagon] into an agency whose primary mission is administering benefit programs, not protecting the nation.”

Congress was listening. Murray–Ryan will curb the galloping inflation in military-retirement costs. It does not affect growth of benefits for retirees over age 62. Nor does it affect veterans who retired owing to disability or injury. Basically, you’re talking about healthy veterans who are almost all in second careers. The growth of their lifetime retirement checks will be scaled back to the cost of inflation minus 1 percent, but they go back to full cost-of-living adjustments when they reach age 62. This is a financially small, but symbolically huge, step for reform.

Bloated personnel costs have doubled since 2000, according to the BPC, even though the active-duty force is almost 10 percent smaller. When Ronald Reagan was president, the U.S. Army had 20 active divisions. Currently, it has ten, and it is on track to have only six during the next administration. Less is more? No, but less costs more — the opposite of efficiency. Think more broadly for a moment about what inflexibility is doing to military culture.

One Army officer and scholar commented to me that, in the past half decade, most congressional hearings about military personnel issues have neglected the Pentagon’s leadership-stifling bureaucracy. That problem, fingered by Defense Secretary Robert Gates as the “greatest challenge facing your Army, and frankly, my main worry,” during his final visit to West Point in that role, has received almost no attention from Congress or the Obama administration. Gates asked, “How can the Army break up the institutional concrete, its bureaucratic rigidity in its assignments and promotion processes, in order to retain, challenge, and inspire its best, brightest, and most battle-tested young officers to lead the service in the future?”

Instead, legislators on the personnel subcommittees have focused where the media have focused: gays and sex. Sure, there are countless stories about helping veterans find jobs after they leave the service, even more stories about post-traumatic stress. That’s all well and good, but it feeds into the narrative of the veteran as victim. What about the active force?

The issue of gays in the military has been more or less resolved with the repeal of “don’t ask, don’t tell.” The other issue, the handling of sexual harassment, is currently raging. Regardless of your feelings about both issues, neither is eroding morale and eating up cash the way dysfunctional personnel practices are. To the contrary, an argument can be made that both problems — intolerance of gays and tolerance of sexual predators — are made worse by the military’s top-down management system.

Here begins a modern lesson on central planning versus common sense.

The Pentagon’s central planners of 2013 are unlike military commanders in 1943, men by the name of Nimitz, Eisenhower, Marshall, and MacArthur. The military back then had an informal network of communication that enabled commanders to hire their own teams. That kind of flexibility allowed officers to root out bad eggs, the kind of people who are inevitable in any large organization. Today, sexual predators can hide in plain sight because performance evaluations in the military are so inflated, formal, and rigid — and the promotion process is so centralized. A commander may know that one of his soldiers is a creep, but the assignments and promotions boards don’t.

On Capitol Hill, what is imagined to be the main solution to the problem of the military’s sclerosis? Of all people, Senator Ted Cruz is teaming up with Democrats to take even more authority from local commanders in the matter of prosecuting sexual predators in the ranks. A better solution would be to give some power back to commanders — specifically, the freedom to hire their own subordinates. Such a process allows informal information about potential workers (soldiers) to be shared among commanders so that jobs and personnel can be optimally matched. The libertarian-minded Cruz is pushing the central-planner’s solution instead.

My wish for Christmas? Chuck Hagel applies the logic of flexible personnel management to the DOD budget, embraces the Ryan–Murray deal, and spends 2014 talking about institutional reform. Instead of taking personnel expenses off the table, as sequestration did, make them the main course. Consider the proposed FY2014 DOD budget, which totals $115,210,902,000 in personnel costs.  One hundred billion is for active-duty pay, but only half of that is basic pay. The other half consists of incentives, special pay, and assorted allowances. In addition, nearly $5 billion is spent on change-of-station costs.

The reform I propose is called the Total Volunteer Force, inspired by the 1973 reform that ended the draft. The military learned then that paying volunteer soldiers more than conscripts lowered fatalities and costs. It enhanced retention, thereby lowering training costs while improving troop quality. We could do it again.

First, decentralize military hiring. Second, free the troops. Third, restructure the 20-year pension.

What’s so bad about centralization? During the Cold War drawdown, the Air Force culled its officer corps by offering exit bonuses to anyone willing to retire early. It famously sucked the most entrepreneurial senior officers out of the ranks and left many risk-averse peers in place, to the chagrin of junior officers and enlistees. Crude force-shaping of this kind is routine because officers and enlistees in the U.S. military are treated like interchangeable inventory instead of unique talents to be managed.

That’s why freeing the troops is key. If all soldiers, sailors, airmen, and Marines had the choice to stay in their jobs if they wanted, rotation costs would fall dramatically. It seems a safe assumption that troops and their spouses who have been begging for more career control and stability would choose stability and specialization. Forgive the economist bias, but specialization generates rather large efficiencies.

In the current system, troops who neglect to play the box-checking game of frequent assignments are considered by the service’s centrally planned human-resources commands to be uncompetitive for promotion. But wait, aren’t promotions basically given out lockstep to every soldier who breathes? Yes, but no one has time to stop and question the merry-go-round, not even the top brass. By the time they notice the illogic of it all, it’s time for them to rotate into retirement.

As for retirement, the current 20-year cliff is the foundation of the coercion that remains in the military. All men and women in uniform feel forced to keep serving, whether or not it’s good for their careers or for the country. Much better to free resources on both sides of that equation by converting to a 401(k)-style retirement plan.

A freer military won’t be the answer to all the budgetary problems. But it would allow future presidents to manage the force more nimbly than is possible for Obama. More important, it would match the values of the nation it defends.

— Tim Kane is a research fellow at the Hoover Institution. He was a captain in the U.S. Air Force and is the author of Bleeding Talent.