Thomas P.M. Barnett :: Weblog

I am taken to task by Newshog for noting the Economist piece saying that war is bad for defense firms.

This "Cernig" cites all these rising short-term profits associated with a rising defense budget since 9/11.

Cernig puts his ignorance of the defense budget on full display, but I walked into this criticism by assuming too much from the audience in terms of knowledge--a common problem for me, as I write basically for peers in my industry and assume everyone reading can catch up.

First, you need to understand that they are parts to the budget: big chunks go to acquisition (about $75b) and big chunks go to R&D (similar size). The money that goes into those accounts are what fuel the long-term positions of the big defense firms: win the contract, get all sorts of development money, get approval for the program of record, and then sit back and make money building them for years and then make more by servicing these big platforms and systems for years.

Then there is the rest of the budget, a huge chunk of which is operations (actually using the force), paying the personnel, paying the medical and other benefits, and then costs associated with facilities and housing, and then the pensions.

What happens when you wage war is that you have to spend a lot more on operations, and when you use lotsa ground forces (as you tend to in war), your personnnel costs go up. When it gets harder to recruit them or retain them, more personnel costs ensue.

If you look at the rise in defense spending since 9/11, you find that the big drivers are people costs and operations and delayed spending on infrastructure (especially related to the daily lives of military personnel). The war on terror has not led to a sharp rise in acquisition or R&D, the big signals for a healthy long-term outlook for defense.

What Newshog fails to understand is that not all spending is equal: short-term spending on operations is spending on the here and now, while spending on programs of record is investment in the future. The more you spend on today, the less you have to spend on tomorrow.

Sure, when you spend on today, the existing big defense firms will do just fine in that short-term environment, because you need to turn to them for a lot of that short-term spending. But if the result is you spend less on big-ticket items in the future, you're effectively eating your seed corn--and theirs too.

Moreover, the longer we stay in this position of waging war in the here and now instead of basically sitting back and building up force structure for the distant abstract future, the more that process feeds on itself. Pipelines for big expensive plaftorms aren't started or are scaled back, and buys of existing programs are nipped and tucked annually, so the planned buy of 200 aircraft become 190, then 170, then 150, triggering a ripple effect of a smaller fleet, plus smaller upkeep costs over the long haul.

It's true that Rummy has not made the big cuts in terms of eliminating entire programs, but look at the existing big-ticket programs of record: do you see per-year unit buys rising or falling? Do you see them being sped up or streeeeeeeeeetched out?

Also, the more you're using people in the here and now, the more people you need, and the bigger that pipeline becomes, with long-term costs in medical and pensions that are simply staggering. Try cutting back on those down the road (and have no doubt, that wil be tried), because it ain't easy (nor should it be). So that too cuts into the money you have left to buy stuff for the long term.

Furthermore, the more experience piles up in stuff like counter-insurgency and postwar stabilization and reconstruction ops, the more that experience informs your flag officers, who over time become increasingly populated with individuals who believe the future is more about this sort of fighting than buying huge platforms to fight the Chinese. As they move up the ranks, selling to them gets harder, because both they and the emerging warfighting doctrine that accompanies all this experience gets biased toward definitions of warfare that don't favor the few and the absurdly expensive.

Taken in sum, the longer the Long War goes, the worse-off the big defense firms' long-term futures become. They don't want to make their money cannibalizing the current force or working it to death. In truth, they'd prefer the force almost never be used, or if used, to be used in stunningly swift and decisive wars that prove the utility of their goods without creating long and expensive postwar obligations that drive up operational costs and thus limit their long-term propects for R&D and acquisition.

So it's sort of like a car dealer who wants you to drive your car for a while, but then he wants you to turn it in and buy a new one, capturing both your financing and your service. If you run your car for 250k miles, guess what? You're probably no longer going to the dealership, but, cheap bastard that you are, you either work the car yourself or go to some cheaper mechanic who keeps it running. Meanwhile, the car dealer does not sell you a car, does not capture your financing, and loses your service business.

When the Long War begets a new counter-insurgency doctrine that says future wins in COIN will be 20% kinetic (our stuff that blows up their stuff or people) and 80% will be non-kinetic, do you think Lockheed Martin gets jacked about the 80% non-kinetic? The nation-building, institutional-building, etc. stuff? Or do you think Blackwater gets jacked, since they're in the training and private security business stuff?

Moreover, with your head now firmly out of your ass, Newshog, and considering the long-term prospects for defense spending with a Boomer population heading into retirement and signficant investments clearly required in education and U.S. infrastructure, and the budget deficit back up to huge proportions, do you think the big defense firms, looking at all these internal defense budget trends relating to the Long War, look around the federal budget and feel positive about the USG being able to sustain current spending levels, much less increase them for recapitalization strategies, over the long term? Or would all this current-day activity, plus all those larger domestic trends, suggest that this defense-splurge of the past 5 years is sustained only by this administration's complete indifference to those long-term fiscal health considerations?

Acquisition is the life blood of the big defense firms. The longer the Long War drags on, the more the U.S. military will want tools appropriate to a world of small wars, small and distributed enemies, and that 80% non-kinetic definition of real victory. Can the big defense firms adjust to that change? They will certainly try. And they can certainly buy up rising small firms that are better suited for that environment, thus changing their portfolios over time.

But make no mistake, the war-postwar/peace equation is shifting to favor the latter far more than the former. And that does not favor big defense firms as currently configured.

Cernig's snarky put-down of my post, replete with acccusations of lying, shows what a bottom-feeding, no-talent pool so much of the blogosphere really is (those who can, do, and those who can only dream of doing, console themselves with blogs): shit loads of quasi-incompetents mouthing off in all directions, armed with factoids (strung together by their simple minds to reveal--surprise!--conspiracies and fools and lies everywhere!) and no significant career experience in subject matters about which they nonetheless vociferously opine (when you want expert opinion on the game, definitely turn first to the loudmouth sitting behind you in the stands). My advice to readers: eat shit, and your body suffers. Likewise, read shit, and your thinking suffers.

It all depends on whether you want to get smarter, or just madder.

Here endeth the remedial lesson...