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Raid Pentagon Spending Or Leverage It?

The debate about guns or butter hotted up last week, with Rep. Barney Frank (D-Mass.) calling for an enormous decline in defense spending of 25 percent and the head of the House Appropriations defense subcommittee, Rep. John Murtha (D-Penn.) saying money for weapons will have to come from spending originally slated to fund substantial increases in Army personnel. Below defense consultant Robbin Laird weighs in on the likely impacts of the financial crisis on defense spending.

The impact of the global financial crisis on US defense spending will strike in two ways, directly and indirectly. The impact will be substantial in terms of the ripple effect of operations in Afghanistan and Iraq upon the recapitalization budget.

Why? Throughout the Bush years, defense recapitalization has been overtaken to a large extent by the cost of military operations, and the re-definition, in effect, of recapitalization in terms of reset of equipment being used directly in those operations. At the same time, the wear and tear of capital equipment upon a number of infrastructural support elements, ranging from Air Force tankers, Air Force lift, sealift and related equipment means growing pressure to modernize those forces as well.

The major direct impacts of the financial crisis on the budget are three-fold and all lead to an inevitable downturn in the top line for the capital budget.

First, the new administration will be elected to deal with the financial crisis, not to recapitalize defense forces. This means that public spending to support the financial institutions plus injections of public monies in a number of civil industries or infrastructure replacement will compete directly for defense capitalization dollars.

Second, the cost of money for the federal government will go up as various public sectors compete for money to borrow for re-capitalization. Given the dependence of the US public sector on overseas borrowing, and given the increased cost of that borrowing, the result will be significant pressure to reduce new equipment acquisition simply in terms of the unit costs going up in terms of the cost of capital.

Third, the perceived need for the new administration to "borrow" from the defense budget to pay for other public sectors will go up. Because the financial crisis is as much a political legitimization as an economic crisis, defense will not get a free political ride. It will lose its privileged position as an investment priority.

This does not mean that there will be a radical downturn in overall defense spending UNTIL substantial reductions are made in overseas deployments; but pressure will increase to take the POLITICAL decision to reduce those deployments, save operational cash and NOT to turn that money into defense capital investments, but rather into investments in other sectors or for servicing the public debt.

There are a number of secondary impacts as well upon the defense capitalization effort associated with the global financial crisis.

First, a number of US defense companies are hoping that exports can make up for downturns in the capital budget. This is unlikely given the global nature of the downturn.

Second, the spirit of domestic investment in the US and abroad will strengthen protectionist elements here and abroad. This means that the competition, which US companies will find in overseas markets, can become tougher than ever before.

Third, core US global export programs, such as the F-35, will be severely strained in this context. On the one hand, narrow emphasis on the operational requirements of Afghan and Iraqi operations can lead to a “current war” only focus; this would reduce the amount of capital available to support power projection forces, and within this context, the F-35 could appear to be an attractive cash cow for other DoD capital reset requirements.

Any serious slip in the US commitment to the timeline of buying its own F-35s will have severe consequences for the cost to partners. The attractiveness of alternative systems, especially those with more attractive economic content, such as the Gripen, will go up and some F-35 partners could well leave. This could create a vicious cycle within which partner drop out coupled with the US Defense Department seriously moving their own F-35 acquisitions to the right will lead to cost escalations. In turn, cost escalations generated by capital underinvestment will in turn accelerate.

Fourth, if there is a political conjunction of commitment to "current" war with a political priority on the financial crisis (interpreted in terms of public investment in non-defense as a priority), then US power projection forces – US Navy and US Air Force – will continue their rapid downward trend. Given that most US allies are significantly underinvesting in power projection systems as well and overall significant downgrading of the ability of Asian, European and American allies to deal with global challenges is inevitable.

A reverse trend could be possible; investment in defense industry could be offered as an intelligent use of public monies to generate growth and development. Investment in a major global export program like the F-35 is central to US and allied power projection and economically benefit the entire range of partners. Repeats of Georgian type events, or resource conflicts, or terrorist incidents are as likely as ever and will require a response.

In other words, a focus on defense recapitalization to protect Western interests could be seen to be central to deal with the financial as well as global challenges. This will require leadership but is not impossible to imagine. And it is unlikely that the world will wait while Europe and the US gets their act together in creating a new financial order. The financial crisis will have to be managed in conjunction with political, resource, security and military challenges and crises. If it is not, the hollowing out of the US power projection system will be a reality a decade out.

Robbin Laird is an international defense consultant who served on the National Security Council staff of both the Reagan and Carter administrations.

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