The aerospace and defense industries are optimistic that President Donald Trump will follow through on his campaign promises to rebuild the U.S. military—the first sign of which was a modest defense spending increase in Trump’s first budget request. A sampling of recent industry headlines captures the mood: “Trump Victory Puts Rocket Under Global Defense Stocks”; “The Trump Effect: Tweets Aside, U.S. Defense Stocks Are Booming”; “Defense Stocks Soar Despite Tough Talk from Trump.” Combined with Trump’s unprecedented personal involvement in specific Pentagon acquisition programs, defense watchers are surely in for a wild four years. Yet peeling back the surface layer of tweets and canned speech lines reveals a more sobering outlook for the defense industry. Although Trump is new to Washington, the larger federal budget dynamics are still the same.
The current outlook for the U.S. defense budget is middling with a chance of disappointment. When Trump’s first budget is eventually signed into law, it will likely just be a more muscular version of the status quo, increasing defense spending only a few percentage points above last year’s enacted levels. The election of a Republican president and GOP control of Congress ostensibly provided a path to rescind the 2011 Budget Control Act (BCA), which places arbitrary limits on defense and domestic discretionary spending. Repealing the BCA would require 60 votes in the Senate, meaning that Republicans must convince eight Democrats to join them without also angering the Republican fiscal hawks in the House of Representatives. But without presidential leadership, this needle is impossible to thread. As a result, there is currently no talk of repealing the BCA. Instead, lawmakers are only considering a tweak similar to the mini-deals cut in 2013 and 2015, which marginally adjusted the spending caps. A grand bargain would entail changes to taxes and spending on entitlements such as Social Security and Medicare, the appetite for which still does not exist.
Given the more modest spending increases that are likely to materialize, the best hope for the U.S. defense industry is that this money will be spent primarily on military modernization rather than on readiness. Defense contractors generally prefer that the government either purchase equipment through existing modernization programs or, secondarily, that it grow the size of the military, which requires equipment purchases for new soldiers, sailors, airmen, and marines. Yet the spending priorities of the Trump administration, Congress, and much of the Pentagon focus instead on readiness programs, such as training and maintenance, as well as investing small sums in futuristic technology.
The current outlook for the U.S. defense budget is middling with a chance of disappointment.
This military investment plan can be thought of as a barbell strategy, which emphasizes the weights of the immediate present and the distant future, while ignoring the long bar of the interim wherein most strategic and military risk lies. The idea behind the barbell strategy is to spend new defense dollars on plugging the accumulated readiness shortfalls of the past five years in order to avoid a repeat of the “hollow force” of the 1970s, when lack of training and maintenance left the U.S. military dangerously unprepared to fight. Congress and the Pentagon also agree on the need to regain the U.S. military’s technological supremacy by pursuing developmental technologies such as artificial intelligence, rail guns, and lasers. While the defense industry does profit from increased maintenance and from these technology programs, it would much prefer the massive revenue potential of increased purchases of existing equipment and weapons systems.
DEATH BY A THOUSAND CUTS
Although President Trump vowed to increase defense spending, he also repeatedly pledged to avoid entitlement reform. This promise repeats the original sin of the BCA, which tried to balance the federal budget without touching the 70 percent of mandatory federal spending that goes to entitlement programs such as Social Security, Medicare, and health-care subsidies, as well as interest on the debt—an impossible task. The Congressional Budget Office now estimates that over 90 percent of the $9.5 trillion in new government debt on track to appear by 2027 results from growth in this same mandatory spending.
If Trump does not want to pursue significant changes to entitlements, then the clearest path toward BCA repeal and higher defense spending is blocked or at least hindered. This is despite the unique alignment of the stars in a GOP-controlled government, with several deficit hawks, such as Speaker of the House Paul Ryan, in leading positions. Absent such an effort, however, there are still three ways to achieve new defense spending.
The first option is to offset additional defense spending by cutting domestic discretionary programs such as Meals on Wheels in order to remain under the BCA spending caps, as the Trump administration has proposed in its 2018 budget. But such a proposal remains fantasy in the U.S. Senate, since no Democrats will vote for it, and many Republican members of Congress will also go to bat for domestic discretionary programs that benefit their constituents.
The second option is to pursue a bipartisan repeal of the BCA, which would include a negotiated increase in defense and domestic discretionary spending along with partial offsets. This plan would run into opposition from a select portion of House Republicans, who vociferously oppose even minor increases in the deficit. But if the White House undertook the Herculean effort to negotiate with both sides of the aisle, it could bring a plurality of votes in Congress around to supporting such a repeal. Both options one and two are made more difficult because Trump supports several domestic spending programs that Democrats consider poison pills, including the proposed southern border wall and increased funding for immigration enforcement.
If Trump does not want to pursue significant changes to entitlements, then the clearest path toward BCA repeal and higher defense spending is blocked.
The third option is to use emergency or so-called war spending—otherwise known as Overseas Contingency Operations (OCO) funding—to increase the defense budget without modifying the BCA. Using OCO funding, as Congress has preferred to do since the passage of the BCA, does not count against the spending caps. Trump may make use the OCO option because the other two likely to be so difficult, but any increases through this channel will be modest, thanks to the bipartisan congressional distaste for such tactics, staunch opposition to spending increases from elements of the House GOP, and the ascension of anti-OCO crusader Mick Mulvaney to director of the White House’s budget office.
The second option is the most likely to be implemented. Congress will likely push for a new mini-deal that increases defense (as well as some non-defense) spending above legal caps, while also using OCO funding as a relief valve. Over the next two years, combined spending from these two sources could amount to somewhere between $15 billion to $25 billion over current plans—similar to the deals negotiated in 2013 and 2015.
But what would an actual rebuilding of the U.S. military cost? Trump’s proposed spending levels for 2018 are only around three percent higher than those proposed by former President Barack Obama. On the campaign trail, Trump set a fairly nebulous goal of growing the military to 350 navy ships, 540,000 active-duty army soldiers, 200,000 marines, and more than 1,200 combat-capable air force fighters. Such growth would cost an estimated $60 billion per year more than what Obama planned for in his five-year budget from 2017, or about $90 billion per year more than the levels prescribed by the BCA.
THE BARBELL STRATEGY
The modest increases in defense spending that are likely to occur, on the order of $15 billion to $25 billion, will be spent rapidly, but probably not on the programs preferred by the defense industry. Both Congress and the civilian leadership of the Pentagon agree that improving near-term readiness is a top priority. And budget guidance from Secretary of Defense James Mattis has only certified his laser-like focus on readiness, already in evidence during his confirmation hearing.
The scale of the military’s requirements for restoring readiness will soak up marginally increased defense spending like an endless sponge. Estimates from the navy, for instance, put its deferred near-term training and maintenance shortfall at $14 billion over five years. Given the reluctance of the military services to put forward the true scale of their readiness needs, the actual number is likely much higher. Multiply that across the services, and, as former Senator Everett Dirksen may or may not have said, pretty soon you’re talking about real money. To that sum one can add the tens of billions of dollars in deferred base sustainment and military construction and tens of billions more in funds to grow the belatedly train and recruit specialty personnel needed to staff current units, such as aircraft maintenance workers, pilots, electronic warfare soldiers, and nuclear airmen.
This focus on maximizing the efficacy of the current U.S. military is, to be sure, addressing a critical and overriding priority. The problem is the growing consensus among policymakers that this near-term readiness need only be combined with long-term research and development weapons programs. This preparation for the wars of today and the wars of the distant future overlooks the importance of the medium-term. Most of the U.S. military’s modernization projects involve investing in the next three to 15 years, including through building fleets of ships and vehicles, inventories of fixed- and rotary-wing aircraft, new nuclear and space assets, and hundreds of small upgrades. But the barbell strategy of investment ignores the need to accelerate purchases of these proven and existing weapons systems, instead opting to place small bets on speculative technologies. It’s a poor investment strategy in terms of military risk, and in the end, it means that the defense industry will not see significant increases in its major revenue sources: existing equipment and weapons systems.
At the end of the day, the increasingly polarized U.S. political environment, combined with the popularity of the barbell investment strategy among the relevant policymakers, bodes ill for the sort of buying bonanza that defense contractors had hoped for with Republican control of the White House and both chambers of Congress. With enough funding, however, hopeful signs exist in certain sectors of the branches and in the legislature. Congress’ final 2017 defense appropriations bill added procurement funding above levels requested by Mr. Obama. And Senator John McCain’s (R-Ariz.) plan to rebuild the military includes increases in medium-term modernization through active duty personnel increases and accelerated procurement, including of submarines, amphibious ships, and various upgraded aircraft. The army, which has not talked about modernization for years, published wish lists that focus heavily on buying existing equipment and weapons systems, and each service chief has publicly called for a balanced usage of any new defense spending.
Yet whatever their requests, it is unlikely that the branches will get to spend much on buying more proven weapons systems to deal with the long bar of military risk. That is, unless the political winds blow in an unanticipated direction.