BUDGET DOUBLESPEAK: ANALYSTS CAST DOUBT ON NOTION OF “REVERSIBLE” CUTS *****
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Budget Doublespeak: Analysts Cast Doubt on Notion of ‘Reversible’ Cuts
The Defense Department will be slicing $487 billion from its $6 trillion budget over the next decade. Specifics on where the ax might fall within the budget are still unknown, but all funding decisions are being made on the assumption that cuts are “reversible.”
Reductions to the military’s budget, whether it’s people or equipment, can be commutated if circumstances warrant, according to the strategic guidance that President Obama unveiled last week.
The concept has been dubbed “reversibility” and it plays prominently in budget decisions, officials say. Reversibility is “not a small point” in the new defense strategy, says Pentagon spokesman Capt. John Kirby.
“It is inherent in this strategic guidance,” Kirby tells bloggers during a conference call. “We want the organization, the institution, itself, to be flexible enough that if we have to reverse any of these decisions … we need the ability to surge or regenerate” forces or equipment.
It sounds simple in theory. “Reversibility just means that as we make these momentous changes, these $487 billion worth of changes, they are causing us, of necessity, to have to stop certain things, pause certain things, slow down certain things. And in each case, we want to, to the extent we can do so, preserve the ability to change course,” says Deputy Defense Secretary Ashton Carter.
Cutbacks to ground forces, for instance, would be done in such a way that “We keep the midgrade officers that would be necessary to support a larger force in the future if we decided to reverse course,” Carter says. “We can’t afford to do that comprehensively, but we can afford to do some of that.” With the industrial base, he said, the same principle would apply.
“As we make program changes, we want to make sure that 10 years, 15 years from now, we still have an industrial base that supports our key weapon systems even if we’re not able to buy in those areas at the rates or in the volume that we had planned before we were handed this $487 billion cut,” Carter says. In science and technology programs, “we want to preserve options for the future.”
But experts point out that the notion that cutbacks can be reversed in a timely fashion to respond to a crisis is rather impractical in an institution like the Defense Department, where budget plans and weapon programs take years to develop and negotiate through the bureaucratic maze of defense agencies and congressional committees.
Reversibility strikes some defense industry analysts as a handy buzzword that provides political cover for what are expected to be controversial budget cuts to weapons systems. Anyone familiar with how military equipment is designed and built can easily conclude that once a major program is terminated, depending on the technology involved, regenerating it would involve significant time and expense.
“The concept of reversibility in the industrial base is well intended but it’s a bit of a myth,” says Rebecca Grant, president of IRIS Independent Research and director of the General William Mitchell Institute for Airpower Studies.
Clever sounding theories such as reversibility tend to accompany big strategy changes, but they don’t necessarily work in the real world, Grant says. “Twenty years ago, after the Cold War, we were talking about ‘reconstitution,’” she says. “That was mothballing and putting things in cold storage. None of that ever happened.”
Reversibility might work, but Pentagon officials are going to have to provide more details on how it would be implemented, she says. Manufacturing lines, for instance, could be put on pause, but the government still would have to commit funds for prototyping and equipment upgrades in order to sustain the engineering and technical work force, she says.
“I wonder what the real details are, and what investment profiles they expect for potential reversibility,” Grant says. “What is the timeframe until something is perishable? Does that mean opening up the C-17 line in five years if we find we need it?”
Reversing cuts is much more complex than most people realize, she says. “It takes a lot of money to develop systems. You want the research to be steady and ongoing. If you put advanced programs on the shelf, you can’t expect to take them down five years later, give them some fresh funding and expect them to go forward.”
The concept of reversibility only would work in sectors of the industry that have commercial customers to fall back on, says defense industry analyst Byron Callan, of Capital Alpha Partners LLC.
“It has to be done on a case by case basis,” he says. “In areas where you don’t have a viable commercial business in the United States — such as shipbuilding — the concept of reversibility won’t hold any water.”
Companies that supply military trucks such as Oshkosh and Navistar have commercial customers and potentially could temporarily shut down their military assembly lines and restart them at the Pentagon’s request, says Callan. Still, the Defense Department and suppliers all would be incurring significant risk as it is not easy for companies to move in and out of the market, he says. The Pentagon’s onerous procurement regulations also would make the reversibility strategy more difficult to execute. “If the goal is to bring companies in and out of the defense market, there has to be a concurrent look at acquisition regulations and oversight would make the transition a little easier in areas where DoD and industry think it’s appropriate,” says Callan.
The planned budgets cuts, reversible or otherwise, already have industry on edge, according to a recent survey of senior executives at manufacturing and service companies that support the U.S. military. A report released by a group of industry associations warns that funding cuts will “cripple certain defense sectors, resulting in an industrial base that is smaller, less innovative, and less responsive to urgent wartime needs.” Executives anticipate closing production lines and laying off skilled workers, “specialized manufacturing capacity and human capital that cannot be regenerated without great cost and significant time,” the survey says.
Callan says the Defense Department, notwithstanding Secretary Leon Panetta’s vow to protect the industrial base, has to be mindful of the potential risks. “If you’re building a strategy that rests on technical superiority, you’d better make sure that you have those building blocks in place,” he says. Ultimately, industry will go along with whatever strategy the government adopts. “Industry will support it if the alternative is nothing,” says Callan.
Pentagon officials who might expect the same industrial resilience that was seen after previous military spending downturns should realize that the environment is vastly different this time, he says. In the post Cold War drawdown, the defense industry had multiple suppliers for each product category. “That cushion that may have existed before and the manufacturing base of the United States doesn’t exist anymore,” he says. “We’re still the second largest manufacturing country but it’s integrated with the global economy.”
In the last downturn, there were many multi-sector companies that were both in defense and commercial markets, such as Texas Instruments, General Electric, IBM and Chrysler. “The resources DoD could tap were broader,” says Callan. In the 1990s, most of those companies that were in both the military and commercial sectors exited defense. A handful remains, including United Technologies, Honeywell and Textron, but that hardly makes for a resilient industrial base, says Callan.
A few clues are provided in the new strategy on where industry can expect to see the money flow: counterterrorism, special operations forces, irregular warfare, unmanned systems and cybersecurity.
It also calls for the United States to develop a new stealth long-range bomber. “That’s a huge plus for the industrial base in the combat aircraft sector,” says Grant. “That commitment is a positive sign … partly an outcome of wanting to keep that key American ability to design top of the line aircraft.”
Callan cautions that it might be too soon for companies to panic based on last week’s strategic guidance. He notes that the Pentagon’s strategies and investment plans tend to be overtaken by events.
In the mid-1950s, the United States elected to rely on nuclear weapons, strategic bombers and continental air defense to deter the Soviet Union but by the end of the decade the nation had found that this focus had left it ill equipped to deal with “wars of national liberation,” he says.
The 2001 Quadrennial Defense Review, which included notions of skipping a generation of weapons, making deep cuts to ground forces and investing in advanced research and development, was almost complete when the attacks of 9/11 upended these presumptions.
The United Kingdom’s strategic review that was completed in late 2010 favored ground forces and did not foresee the demand for naval vessels and aircraft that would be needed in NATO operations in Libya in spring of 2011, Callan says.
“Adversaries can and will find ways to challenge U.S. strategic plans. So, for example, if the U.S. intends to focus on Asia to thwart challenges from China, why wouldn’t China pursue a long range strategy to pose new challenges for the U.S. in areas that the U.S. implies are not that important?” Callan asks. “Just as in investing, analysts and investors should not shelve their contrarian instincts when thinking about defense over 2013-2017.”
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