The Biden administration’s National Defense Industrial Strategy will significantly impact taxpayers. Is the aim to strengthen US defense capabilities or put America on a permanent war footing? The NDIS contains contradictions, especially considering taxpayers will soon pay more each year to service the nation’s debt than on the military. Hit play to hear TCS National Security Analyst Gabe Murphy and host Steve Ellis explain the details and why Congress should scrutinize the NDIS and its potential impact on taxpayers.

Transcript

Announcer:

Welcome to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending and tax issues facing the nation. Cut through the partisan rhetoric and talking points for the facts about what’s being talked about, bandied about and pushed in Washington. Brought to you by Taxpayers For Common Sense. And now, the host of Budget Watchdog AF, TCS President, Steve Ellis.

Steve Ellis

Welcome to All American Taxpayers Seeking Common Sense. You’ve made it to the right place for 29 years. TCS that’s taxpayers for common sense, has served as an independent non-partisan budget watchdog group based in Washington DC We believe in fiscal policy for America that is based on facts. We believe in transparency and accountability because no matter where you are on the political spectrum, no one wants to see their tax dollars wasted. And today we’re talking once again with Gabe Murphy TCS policy analyst handling national security issues. Welcome to the podcast Gabe.

Gabe Murphy

Thanks Steve. Great to be back with you on the podcast.

Steve Ellis

Alright, budget watchdog. Faithful. Today we’re going to take a hard look at an under-reported new policy from the Biden administration that will have significant impact on taxpayers. On January 12th, the Department of Defense released its first ever National Defense Industrial strategy, an approach the DOD says to strengthen the US defense capabilities at a time when our nation’s stocks of munitions and military equipment have been strained in support of Ukraine’s defense against Russia’s invasion. But Gabe, you’ve actually read this, probably one of the few people here in Washington that has actually read the full document. And when you analyze this, it contains some alarming contradictions, especially when you consider that taxpayers will soon be paying more each year to service the nation’s debt than we do for military spending. So get us up to speed here.

Gabe Murphy

Sure, Steve. This new military industrial based strategy is essentially the strategic justification for a whole lot of money. The administration is asking for both in its most recent emergency supplemental requests in there, there’s about 60 billion of the 106 billion that would go directly to US military contractors. And it’s also money that they’re likely to be asking for in the fiscal year 25 budget request and beyond. So the strategy’s goal is essentially to aggressively expand and maintain excess production capacity throughout the military industrial base.

Steve Ellis

So is there some acknowledgement in here, Gabe, about what the cost of something like this would be?

Gabe Murphy

Yeah, absolutely. I mean, even the Pentagon, which is not known for its frugality by any stretch, seems concerned about how much this plan will cost. They actually acknowledge in the strategy itself that it’s going to require a public recognition of the associated burden to the taxpayer and the economy. So at TCS taxpayers for common sense, we get a little nervous when we hear warnings like that at the top of major strategy documents. And the details of this plan make us even more nervous.

Steve Ellis

That’s the warning sign, man. It’s like flashing red, especially if they’re saying that it’s going to be a burden to the taxpayer in the economy. So when I was looking at this strategy, and I know you’ve gone through it a little bit more in depth, but I noticed the Pentagon tried to assuage this concern by reminding readers that we’re spending less on defense now than we did in 1985, at least as a percentage of GDP. But is that really the whole picture?

Gabe Murphy

No, Steve, far from it. So in this strategy, the Pentagon, yes laments that its budget as a percentage for GDP shrank from 5.8% in 1985 to 3.2% in 2021. But it omits this key fact that GDP actually grew 430% in that time. So when taking the novel approach of looking at actual spending levels, we see that Pentagon spending has indeed been on the rise. And moreover, by using this GDP metric, the Pentagon is implying that spending should align with economic growth rather than national security needs. Somehow. I really doubt they would feel the same about cuts to its budget and a recession.

Steve Ellis

Yeah, I mean we always talk about the debt as a percentage of GDP because that really shows what the nation can bear and everything. But when you look at individual agencies, it’s less critical because our economy has grown by a dramatic amount, doesn’t mean that our national security spending to defend that economy has to grow by a commensurate amount. It’s something that we ridiculed years ago from some of the hawks that wanted a 4% for freedom spending 4% of GDP on defense spending. And so it is a metric, but it’s not the appropriate metric and it certainly doesn’t tell the whole story. The pie is that much bigger, 430% bigger. So even a smaller slice of that pie is still as a percentage basis is still a lot of money. Alright, let’s get back into the strategy itself. What are some of the details about this that you’re concerned about?

Gabe Murphy

So the strategy is broken into four categories, resilience, supply chains, workforce readiness, flexible acquisition, and economic deterrence. Now these all sound great, but within these categories there are a lot of costly policies proposed in the name of bolstering, the defense industrial base, things like tax incentives, regulatory relief, longer term contracts, and my personal favorite, they actually say this word for word allocating additional funding for contracts. So as far as I can tell, that’s just paying more. So we’ll see how that one plays out. It’ll be interesting. But as an example of some more concrete proposals, let’s look at long-term contracts. These are known as multi-year procurement contracts. And these are a great deal for Pentagon contractors because they ensure consistent profits while mitigating accountability for cost overruns under performance and schedule delays, all of which happen regularly. So unfortunately it’s bad for the Pentagon and for taxpayers for all the same reasons.

Steve Ellis

But in theory, multi-year procurement contracts can save money similar to buying products on wholesale could be cheaper than buying them individually. There’s some other real downsides that has been documented. Right?

Gabe Murphy

That’s right, Steve. According to the government accountability office or GAO multi-year procurement contracts can also include substantial financial risk if a program is reduced or a contract is canceled early. So that creates challenges around budget flexibility for both the Pentagon and for Congress. For example, if the Pentagon decides that multi-year contracts stated it would buy, the Pentagon then has to cover the cancellation liability which is built into the contract. And this actually happened recently with the Navy Destroyer program. The Navy requested 33 million in FY 22 to pay for its cancellation liability after not requesting funds for procurement of a ship that it promised to buy in one of these multi-year contracts. Ultimately, Congress decided to fund the additional ship, but it might not have had it not been for these liability costs that are built into these multi-year contracts.

Steve Ellis

And there’s a question of whether the Navy really wanted needed that ship and then you’re just buying it because you said that you were originally going to buy it and so you’re being locked in and it sounds like having to pay a cancellation fee when you want to get out of your cell phone plan before the contract is up or you have to pay for that whole phone that you were getting paid for and allotment over that. But instead of the hundreds of dollars that you or I would be paying, we’re talking about tens of millions of dollars. Are all the devils in the details here or is this goal of this overall strategy, this industrial strategy itself worth scrutinizing?

Gabe Murphy

I think that’s the right question. I mean these details are definitely devilish, but beyond the specific policies outlined in the strategy, the fundamental question it raises is should taxpayers pay companies to maintain excess production capacity as a standard practice or should we simply pay to increase capacity as needed?

Steve Ellis

And does that mean are we just in an exceptional situation with Ukraine because I know that’s one of the things that’s driving this or is it going to be keeping us in this strategy for lockstep for a long time?

Gabe Murphy

I mean, the way it talks about it, it’s indefinite and it’s about preparing for the entire threat environment. I mean, I think the case of Ukraine is definitely driving some of this, and it’s actually helpful in answering this question because it offers a clear example of the industry’s ability to quickly scale production based on current needs and to do that without all of the incentives and extra investments called for in this strategy, for example. And the strategy actually highlights this example as the war drove increased demand for 155 millimeter artillery ammunition, expansions of existing manufacturing facilities. And the development of new facilities led to a 200% increase in production capacity over a two year period, which again, according to the strategy itself, demonstrates the defense industrial base’s ability to scale rapidly.

Steve Ellis

And I think the thing is, and it’s hard not to mix this up with some of the other investments in US manufacturing that has been made in this current Biden administration in that we are spending additional money on chips basically trying to reduce reliance on Taiwan and other countries for semiconductors and for microchips. And certainly we’ve even as an organization distinguished between buy America, that basically says that you have to buy American supercomputers for basically security intelligence reasons, but why are we requiring that anchor chain has to be bought in America? And it same sort of question on these is like how much do we want to put the hand on the scale of the economy and driving it, or even in the case with some of the work dealing with Ukraine and we’ll get back to Ukraine, we were actually spending money building factories for building these munitions. It was taxpayer dollars that were going to that. So we talked about Ukraine and you mentioned that, but so how much of this is being fueled or driven or actually being along by Ukraine?

Gabe Murphy

Well, I think Ukraine is a major factor, Steve. We can understand that the administration has looked at the situation there, which has indeed put some strain on our stockpiles of ammunition and other equipment. And reasonably, I think thought maybe we need to do more to ensure we can continue army Ukraine while also keeping our own stockpiles stocked enough for our own national defense. Fair enough. I do think it’s worth noting though that the current lag in US support for Ukraine is driven a lot more by disagreements in Congress over aid to Ukraine than production capacity challenges. That said, this reasonable starting point was then merged with questions like, well, what if other US allies get into conflicts at the same time? Which not an unreasonable question, and what if we get into a war with China and Russia and what if all those happen at the same time? So I think that the same way our personal anxieties from time to time, from a variety of sources can have a compounding effect on our stress levels, which we don’t always respond to positively. We’re seeing that with this new strategy, which basically amounts to the administration saying, we want to be prepared to fight every potential conflict we can imagine simultaneously without any lag time for ramping up production.

Steve Ellis

So I mean putting our economy on kind of a permanent war footing, we definitely have had instances where I think of World War II where basically we took over the economy, general Motors stopped making cars and started making tanks and things along those lines. Hopefully those configurations don’t develop. We’re still churning out those munitions, we’re still churning out all of that equipment, which then we’re either stockpiling or we’re selling it. And so do we need to be on a permanent military footing. I can see that there are some lessons that you learn from Ukraine and about how to accelerate capacity and clearly they have. And so how to manage that. It doesn’t have to be all one way, right?

Gabe Murphy

That’s right, Steve. I mean certainly there are some things in this strategy that are worth pursuing. But as to the question of whether we need to keep the entire industrial base on this permanent war footing that this strategy calls for, I really don’t think so. I mean, in paying for that permanent war footing, we’d be emphasizing preparations for wars that may never take place. We hope they never take place, and we’d be putting those over other spending needs.

Steve Ellis

What are some of those other possible spending needs that we need to respond to

Gabe Murphy

Just in terms of national security? Not all of it comes from the military, right? The pandemic showed us that we should probably be spending more on pandemic preparedness as the impacts of climate change continue to grow. We’re seeing how spending decisions at the Pentagon and elsewhere can help reduce the risks to national security as well as the cost to taxpayers in the future. And of course, there’s the debt, Steve, which recently surpassed $34 trillion. That’s a huge amount of money. As you alluded to earlier, the congressional budget office has warned that within the next decade we’ll be spending more per year servicing our debt than on the military. That’s mind blowing. So paying that debt down, reducing those interest payments is going to free up funds for other national security needs. And when we’re talking about national security, these trade-offs should be part of the conversation.

Steve Ellis

Budget watchdog, faithful, I know you know this, but when we’re talking about servicing the debt, those are those interest payments Gabe was referring to, and I know it’s an imperfect comparison to talk about our nation’s credit card, but it is basically the interest that the country is paying for previous debt, which is going to be spiraling up to a trillion dollars by the end of this decade. And that’s like Gabe said, more than the CBO expects we’re going to spend on defense spending unless we carve in this military industrial base part. So in my reading of this policy prescription, this expanding production capacity is that they’re saying that it has to include increased flexibility and risk tolerances for overspending and for waste. I mean, does that mean that efficiency cost effectiveness, is transparency and accountability are doomed?

Gabe Murphy

Well, I think doomed might be an overstatement. There’s always things you can do, but this strategy explicitly calls for deemphasizing efficiency, cost effectiveness, transparency and accountability, all in the name of enabling this more flexible and risk tolerant type of acquisition. So we can certainly expect those priorities to take a hit, but just as importantly, Steve, the pursuit of flexibility and risk tolerance in the name of speeding up production could actually backfire. We saw this with the F 35. The F 35 is projected to cost taxpayers $1.7 trillion over the course of its life. It’s been plagued by cost overruns, schedule delays, sustainment, challenges, and it has a mission capable rate, which is the percentage of time that it can fly and perform at least one of its missions of 55%. That’s as of March, 2023. So the full mission capable rate, the amount of time it can actually fly all of its missions, fly and perform all of its missions is even worse, somewhere around 35% for the fleet on average and closer to 20% for some of the variants.

Steve Ellis

So can you attribute these rates to blacks acquisition policies?

Gabe Murphy

Yes, absolutely. I mean, some of this came from, for example, building three different models for the different services in the name of flexibility all at the same time. Also concurrently developing, producing and fielding the F 35 aircraft. They did that all in the name of getting the F 30 fives promised capabilities sooner. But the result as we’ve seen is that more than 20 years after the first contract for this plane was signed, the most expensive weapon system ever built is quite literally still struggling to get off the ground.

Steve Ellis

Yeah, we’ve talked often about fly before. You buy that basically this whole concurrent development that while you’re trying to fix things as you go along, while it may, may take longer, you’re at least assured that you’re getting a better product and that you’re working out the wrinkles before you’re in large scale production and trying to fix all the different aircraft all at the same time. And we’re even seeing that with some of the issues with the engines on the F 35 and how we’re trying to adjust it for other advances and technology that could have possibly, I can’t say for sure, been answered if they had gone in a more deliberate fashion. And so a lot of times this whole idea of we want to do everything at the same time because it’ll be more efficient, can actually end up being less efficient and certainly more costly. Okay. Back to the plan. I know podcast listeners will talk about the F 35 again sometime in the near future and talk about some of the problems in the acquisition and maybe dedicate a whole podcast to that. But are there some good aspects to this plan?

Gabe Murphy

Sure, Steve. Absolutely. I mean, there are some potentially cost saving policies outlined in the strategy beyond just what it would do to increase the capability of the industrial base. One example is broadening platform standards and interoperability. Basically this means less customization of systems, which can lead to lower acquisition and sustainment costs. Similarly, increasing government access to intellectual property and data rights can reduce sustainment costs. Right now, for example, again back to the F 35, most of the maintenance for it, it has to be performed by contractors because the government maintenance workers don’t have the technical specs necessary to do the maintenance themselves. So that’s fueled some of these schedule delays and cost overruns. So addressing things like that through some of these policies is good, but overall, this plan is going to make the military industry a boatload of money and it’ll be taxpayers footing the bill for those profits. So Congress should be asking some tough questions at the administration both about some of the specifics in this strategy, and I think about the overall case it makes that we should be paying for the industrial base to maintain excess production capacity indefinitely and basically keep us on this permanent war footing.

Steve Ellis

Gabe Murphy, TCS policy analyst, thanks for the NDIS gut check.

Gabe Murphy

Thanks Steve. Really appreciate the opportunity to weigh in on this one.

Steve Ellis

Well, there you have at podcast listeners. Balancing the need for speed and scale with cost is the fiscal restraint taxpayers need right now. This is the frequency market on your dial, subscribe and share and know this taxpayers for common sense has your back America. We read the bills, monitor the earmarks, and highlight those wasteful programs that poorly spend our money and ship long-term risk to taxpayers. We’ll be back with a new episode soon. I hope you’ll meet us right here to learn more.