The Spend-Up

During the Reagan "buildup," our military arsenal has become more expensive but not larger.

THE BIGGEST SURPRISE about America's defense boom was how long it lasted. Between the end of the Second World War and the inauguration of Ronald Reagan, military spending had never gone up for more than three years in a row—despite the Korean War, despite Vietnam. But in the last two years of the Carter Administration and the first four years under Reagan, military spending rose by an average of eight percent a year, after allowing for inflation. In the late Carter years we were spending roughly $200 billion a year (in 1986 dollars) on the military; now we're spending almost $300 billion. (All dollar comparisons in this article are in constant dollars, to remove the effects of inflation.) By 1983 the annual defense budget had grown larger than it had been in 1968, the peak spending year for Vietnam. By last year it had passed the peak for the Korean War. From 1982 through 1985 the United States spent more money on the military than it had during any four years of the Vietnam or the Korean War. It even spent more to operate the forces, now much smaller, than it had from 1951 to 1954, or 1967 to 1970.

During those earlier periods, of course, the money was going into field hospitals, combat pay, jet fuel, R&R, bombs and bullets, convoys, translators, mortars, grenades, prostheses, induction centers, and all the other raw materials of war. During the past four years larger amounts of money have gone into ... what?

Few people contend that America's forces are, across the board, weaker or less ready than they were five years ago, when the Reagan Administration began its crash attempt to redress the "decade of neglect" in military spending. But after years of the largest military budgets in our peacetime history, it is hard to find an objective measure by which American forces have significantly improved. During a congressional hearing this spring one witness, a defense consultant named Pierre Sprey, refused to talk about the military "buildup." It should be called a "spendup," he said, because virtually no buildup had occurred. The gap between the spendup and a real buildup reflects the gamble on which modern military policy is based. Since the end of the Second World War the United States has moved steadily toward smaller, more expensive armed forces, based on morecomplex weapons that in principle can make up for numerical superiority on the other side. In the past five years that movement has become a stampede.

There is one significant exception to the rule that much has gone into the Pentagon but little has come out. By every standard the people who have joined the armed forces are more qualified and better motivated, and they are slightly more numerous, than recruits were only a few years ago. In 1980 barely half of the Army's recruits had finished high school, and half belonged to the lowest intelligence group, Category IV. But in the past few years the military has had more applicants than places, and it has been able to turn away nearly everyone who lacks a high school diploma. When I toured military bases in the late 1970s, officers would sigh and fret as they talked about the poorman's Army, made up of wellmeaning rejects, that they had been asked to lead. Now manpower is their greatest source of pride—although as the civilian economy has rebounded, the military has had trouble holding onto those in highskill specialties, notably pilots. Both the activeduty force and the reserves have grown slightly in the past five years (active duty from about two million to more than 2.1 million, reserves from about 800,000 to about one million). People can still argue about restoring the draft, but now the arguments are about principles: How should a democracy allot the burden of military service? Is it just and fair to leave the risk of dying to volunteers? The debates are no longer driven by concerns about the quality of the people who have volunteered.

But manpower, though historically the most important factor in military excellence, is not the only one—and certainly is not the principal force behind our increased spending. Pay has gone up (mostly through acrosstheboard raises, rather than bonuses to those with the scarcest skills) but not stupendously, and certainly not by as much as the quality of the force. From 1980 to 1985 personnel costs rose by less than 20 percent, and as a share of overall defense spending, pay and benefits fell. The improvement in the force, hard to quantify but more like 200 percent than 20, has been due partly to the severe recession of 1982, partly to a sense that the military is "decivilianizing" itself and restoring its standards and selfesteem, and partly to the general resurgence of nationalistic pride.

The big increases in military spending were for hardware, not people. The military's "investment" accounts—for developing new weapons and procuring those ready to be bought—rose by 96 percent between 1980 and 1985. So where is the new equipment?

SEVERAL OUTSIDE STUDIES, which started to appear last fall, have shown that while America's military arsenal has been getting more expensive, it has not been getting larger or, on average, newer. For example, last October, Rudolph Penner, the director of the Congressional Budget Office, testified to the House Armed Services Committee about the inputoutput gap. During the four years of the Reagan buildup, he said, the United States had spent 150 percent more for tanks and armored vehicles than it had under Jimmy Carter, but had increased its purchases of tanks by only 30 percent. He said, "The number of missiles purchased increased only six percent despite a real increase of ninety percent in budget authority for this category. Aircraft purchases went up less than nine percent versus seventy-five percent growth in aircraft appropriations. Indeed, purchases of fixedwing combat aircraft were lower [from 1982 through 1985] than they were [from] 1977 through 1980."

Another congressional study, released by Republican Senators Charles GrassIey and Nancy Kassebaum and Representatives Denny Smith and Tom Tauke, described a similar pattern. The Reagan Administration bought 23 percent more ships in its first four years than the Carter Administration did, but it spent 48 percent more to buy them. Under Reagan the Army has bought 40 percent more helicopters—but paid over 150 percent more for them. Spending for Air Force and Navy airplanes rose by 75 percent, but the number of planes purchased fell by 12 percent.

Meanwhile, according to John Collins, of the Congressional Research Service, the Soviet Union was building more of practically everything faster, despite our "buildup." The United States had 16 percent more helicopter gunships in 1983 than in 1980; the Soviet Union had 64 percent more. The size of our fleet of surface ships increased by one percent during that period; theirs by five percent. Their antisubmarine aircraft fleet increased by 14 percent; ours decreased by six percent. The only important exception was attack submarines: ours increased by 20 percent while theirs fell by one percent.

Obviously, such numerical comparisons have their limits. For one thing, it takes a long time to build a ship, or even an airplane, so the full benefit of the buildup might not be obvious until later—the "outyears," as defense planners like to say. But as it turns out, many components of the American force are shrinking now and will keep on shrinking and aging even when the equipment we have paid for goes into service. One measure of how much new equipment we are getting, and of approximately how usable the equipment may be, is the machinery's average age. If we were matching past purchases, adding new planes and ships at the rate the old ones were moving into mothballs, the average age would remain constant. After a big buildup it would presumably decline, because of all the fresh new equipment on hand. Yet the average American ship, plane, or tank was older in 1985 than it was in 1980, but not so old as it will be in 1990. And, although they are getting older, the forces are not projected to get any larger than they are today.

The one exception is the Navy. Its Secretary, John Lehman, has staked his reputation and considerable ambition on rebuilding a 600ship Navy, and, in fact, the fleet should reach that level by the end of the decade. However, making the fleet larger will require not just building new ships but holding onto old ones longer. The average age of nuclear-powered attack submarines was 11.1 years in 1980, 13.5 years in 1985. In 1990, if the rebuilding plan is carried out, it will be 15.7 years. The average frigate was 9.7 years old in 1980 and will be 15.1 years old in 1990. The average aircraft carrier will move from 19.7 years old to 25.2—and all this after a buildup that has disproportionately emphasized Navy construction. The same pattern holds for airplanes, helicopters, and tanks. In 1976 the average Air Force fighter or attack plane was about nine years old; in 1988 it will be about eleven years old. The average strategic plane was fifteen years old in 1976 and will be twentyfour in 1988, after the B1 joins the fleet. Today's equipment is often more durable than yesterday's, and may often be modified to serve well at an advanced age. (B52s may be flying fifty years after they were originally designed.) Still, an aging force is an odd legacy of six years of intense spending—particularly after all those picturesque, prospending speeches by Ronald Reagan and Caspar Weinberger, who complained bitterly that American troops had to rely on equipment (especially B52s) often older than the soldiers were.

One other indication of the gap between spendup and buildup may be found in readiness and sustainability indices. Five years ago, when you got tired of worrying about military manpower problems, you could worry about readiness. Spending had been squeezed during the Ford and early Carter Administrations; weapons procurement, with its longterm contracts, couldn't be pared back quickly, so operating funds took the brunt of the cuts.

To judge simply by budget totals, the spendup should long ago have solved the readiness problems. One major category of readiness funding rose by more than 80 percent from 1980 to 1984 (this is "centrally managed material readiness," including spare parts and maintenance in repair depots). Overall, funds for operations and maintenance rose by more than a third. Yet readiness rates have remained virtually flat.

In 1982 the Army averaged 161.7 training days per battalion per year. In 1984 it averaged 161.9. In 1980, after the "decade of neglect," the Marines averaged 24.2 flying hours per crew per month. In 1984 they averaged 23.7. (For Army flyers the average was 18.8 hours in 1980 and 16.4 in 1984.) Air Force pilots had increased their flying time to twenty hours a month by 1984, slightly under the target set by the Carter Administration. In other areas there were modest improvements: the Navy's steaming days per ship per quarter was 32.4 in 1980 and 34.9 in 1984. The average "mission capable" rate for Army, Air Force, and Marine equipment was 79 percent in 1980 and 81 percent in 1984. The "Crating"—a measure of units in the top two readiness categories—was 74 percent in 1980 and 75 percent in 1984. None of these figures is a perfect guide to true readiness. Still, the most the Pentagon can claim is that missioncapable rates are "steady or slightly increasing," after years of rearming America.

HOW COULD WE have put so much money into the Pentagon and achieved so few visible results? One partial explanation, which began to attract political attention early this year, is the "inflation dividend" the military has received since 1981.

Ever since Jimmy Carter began the defense spendup in earnest, the political arguments have all concerned how much to increase the budget—after allowing for inflation, of course. Until recently no one paid much attention to just how large the inflation allowance should be. But late last year evidence began to turn up indicating that inflation allowances had inadvertently added as much as $40 billion—after compensating for inflation—to the Pentagon's budget, for no return at all in weaponry or readiness.

For most types of government spending—Social Security payments, say—inflation adjustments are made after the fact. For the Pentagon, however, the inflation adjustments are prospective. First, the Administration decides how much real growth it would like to see in the next year's defense budget, compared with this year's budget. Next, it estimates the inflation rate for the coming year and increases the budget goal accordingly. The resulting "nominal budget growth," or combination of real growth and expected inflation, becomes the basis for the next year's budget request.

During the late 1970s, when the prime rate soared toward 20 percent and inflation seemed chronically beyond control, the beforethefact estimates often turned out to be too low. When they were, Pentagon officials went back to Congress for supplemental appropriations, to make up the difference. For the most part, Congress approved the requests. But during the 1980s exactly the opposite has happened. The estimates turned out to be too generous, but this time there was no afterthefact rectification. The Pentagon did not offer to give the windfall profits back.

The estimates proved to be high not merely because inflation fell so fast but also because of a quirk in the indexing formula. Since fiscal year 1983 the Pentagon has "protected" part of its budget against inflation by means of a 30 percent "kicker." If the expected inflation rate for defensecommodity purchases was five percent, the rate allowed for major weapons purchases would be 30 percent higher, or 6.5 percent. The 30 percent kicker, based on the assumption of fastrising defense prices, was one of the "Carlucci initiatives" for better management of the Pentagon, developed by the Deputy Secretary of Defense, Frank Carlucci, and promulgated by Secretary Caspar Weinberger early in his term.

As a management incentive, the 30 percent kicker has its drawbacks, since it indicates to companies and military planners that continual cost growth is the norm. In addition, technicalities in the indexing system are such that when a weapon's cost rises, the increase can easily be defined as inflation, and therefore not anyone's fault, rather than as the result of mismanagement, waste, cost overrun, goldplating, or other culpable behavior. Nonetheless, the Pentagon's overall costs have not risen as fast as expected, leaving the military with more "protection" than Congress, or even the White House, intended it to have.

At the request of Senators David Pryor, Charles Grassley, and Thomas Eagleton, the General Accounting Office attempted to calculate the size of this inflation dividend. In a report wryly titled "Potential for Excess Funds in DOD," released in March, it estimated that the surplus inflation payments from 1982 to 1986 amounted to the almost unbelievable sum of $39.5 billion, not counting overestimates in the price of fuel. Through the miracle of compound interest each past year's inflation windfall becomes part of the budget baseline and in the next year is itself "protected" against inflation. If the GAO's calculations are correct, the overestimate of inflation—not the price of the weapons themselves, and not even the inflation in weapons costs, but simply the inflation bonus—comes to about $165 per person in the United States.

Even more remarkable, and at first even harder to believe, the GAO contended that no one could really tell what had happened to the money. In the past few years the Pentagon's "unobligated balances"—sums previously appropriated but not yet committed—have mysteriously increased, from $28 billion in 1981 to $63 billion now. Some of this was to be expected—when a big weapons system is approved by Congress, the money goes into unobligated balances until the Pentagon lets the contracts. But the increase is more than can be explained that way. Perhaps the difference is what became of the inflation dividend, the GAO said. At the moment, it is impossible to say for certain, because the Pentagon's auditing system is not designed to reveal clear connections between money approved through the budget and money spent. Some of the money may have been absorbed in various kinds of cost growth; some may be sitting idle, waiting to be "protected" against future inflation; some is eligible for "reprogramming" to other purposes by Congress. What is clear is that the military has received $40 billion that no one intended it to have.

Beyond the inflation dividend, and in seeming contradiction to it, is a more basic explanation for the spendup—buildup gap: everything costs more than it used to, so those budget dollars don't go so far. (The higher prices have nothing to do with general inflationary pressures, which the index and "kicker" were meant to offset.)

The average military airplane of the late 1970s cost about $20 million. Its counterpart today costs over $27 million. (And that's not counting two of today's biggestticket items, the B1 bomber and the C5 transport.) Tactical missiles cost roughly $40,000 apiece in the late 1970s and cost $80,000 now. Helicopters have gone from about $5 million apiece to about $8 million.

Some of these increases occur when the military shifts from an older, less expensive system to a more costly replacement. But the costs go up even when the purchase list does not change. Last fall Representative Les Aspin, the chairman of the House Armed Services Committee, reported on the fifteen major weapons whose costs could be tracked from 1977 to 1985. (That is, weapons that had been started before 1977 and were still in production in 1985.) When paving the way for new purchases, military planners always forecast an upward "learning curve," which will drive down the price of weapons as more of them are made. But Aspin's report suggested that if there is a learning curve, it has a downward slope.

Only two of the fifteen weapons got cheaper over the years—the Sidewinder missile and the Harpoon missile. In all the other cases the price went up. A Phoenix missile cost 80 percent more in the mid1980s than it had in the late 1970s. An F15 fighter plane cost about 50 percent more, a TOW or Sparrow missile about 40 percent more. Even during the spendup the defense budget could not keep up with soaring unit costs, so of course the number of weapons purchased went down. Has there ever been a commercial manufacturing industry in which production went up—and unit price went up too? How many computers would have been sold if memory chips still cost $300 apiece, instead of $5?

BUT TO SAY that the weapons cost more is only to raise another question. What drives their prices?

Perhaps the answer is simply increased profit. Without question, military contracting became much more profitable after 1981 than it had been for many years before. For American manufacturers as a whole, the early 1980s were a time of sorrow, caused mainly by export problems (which in turn were caused mainly by the overvalued dollar, which was mainly because of a high rate of government spending and borrowing, which leads us back to the spendup). But during this gloomy era the defense business was remarkably good. To determine just how good, the Navy Department commissioned an audit of profits among twentytwo major defense contractors. According to the report, which was released last summer, companies that undertook both government contracts and commercial work found it far more lucrative to sell to the government. In 1984 sales to the government (mainly the Defense Department) represented 42 percent of Boeing's business but accounted for 94 percent of its profits. For Lockheed the government represented 85 percent of sales and 95 percent of profits. For McDonnellDouglas the government was 69 percent of sales and 98 percent of profits. Raytheon made less than half its sales to the government but made 79 percent of its profits through those sales.

Perhaps profits rose because of contracts that perversely reward companies for jacking costs up, not holding them down. Perhaps prices and profits rose because the government tried to buy so much so quickly, creating bottlenecks. Perhaps the sky'sthelimit atmosphere of defense spending in the early 1980s tempted some contractors to grab for all they could get. Perhaps the government wanted to ensure that the companies making up the "defense/industrial base" remained solvent and financially strong. Whatever the combination of reasons, the result was clear: American manufacturers could make more money producing weapons than doing practically anything else, such as competing with the Japanese.

It was not always this way. In the late 1970s government business was less profitable for these companies than commercial sales. In those days the companies' typical "return on sales"—operating profit divided by sales—was ten percent for private business and eight or nine percent for government contracts. In 1981 the positions reversed. Ever since then government business has been more profitable (nine percent return on sales), and commercial sales less (seven or eight). By 1984 the major defense contractors earned an 11 percent return on assets in their commercial sales. For government contracts their return on assets was 26.7 percent. The FMC corporation, which manufactures the controversial Bradley Fighting Vehicle, received a 54 percent return on assets on government business in 1984.

The life history of the one weapon Caspar Weinberger has canceled after it went into production, the antiaircraft gun called Sergeant York or DIVAD, helps explain where six years of heavy military spending have led. DIVAD earned a profit for its manufacturer, Ford Aerospace—under the cancellation agreement the government will pay for 146 DIVADs, although Ford delivered only sixtyfive. But corporate profitability was of course not the explicit reason that DIVAD was built. As Gregg Easterbrook first explained in these pages, DIVAD was an attempt to automate a function that human beings had previously performed: aiming antiaircraft guns at planes as they maneuvered and dodged. DIVAD was costlier than previous systems, it was more delicate and temperamental—and it could not do the job. Radar and computers could not predict a pilot's next maneuver, and they could not even guess as well as human gunners could. Last December a Nicaraguan contra shot down a Soviet Mi8—exactly the kind of superhelicopter DIVAD was designed to confront—with an SA7 missile that probably cost around $10,000 to manufacture. The one American F111 that went down during the raid on Libya was hit by gunfire, not some advanced radarguided system. DIVAD represented "modernization" for its own sake, divorced from the realities of war.

Modernization—an emphasis on more expensive, delicate, and theoretically capable weapons—is the theme of the spendup years, and it explains why our forces have not grown larger and are, on average, getting older. For more than a generation the American arsenal has evolved toward smaller numbers of more costly and delicate pieces of equipment, each of which is in principle able to do far more than the preceding version. The stated reason for this progression is not simply America's technological superiority but also the Soviet Union's numerical edge. Because they have more tanks and planes, we build fewer but more complex tanks and planes—and then we're more outnumbered than before. When American military spending intensified, starting in the late Carter years, the Pentagon decided not to deviate from this pattern but to intensify it, at full speed. Our military planners have staked their future, and ours, on a smaller, more fragile, but only partly modernized force.

This kind of modernization is driven by the habits of a peacetime military, in which weapons can be judged on their theoretical potential, rather than on how they stand up to dirty, dusty wartime conditions when used by confused troops. But it also reflects a deliberate policy choice, based on American's comparative advantage over the Soviet Union, and on the historic importance of technology in war. In one sense modernization is the only thing that matters in combat. Cavalry does not count for much these days, no matter how numerous the horses. Nuclear propulsion allows missile submarines to remain submerged and undetected for months. The newest versions of the Sidewinder missile are more effective than the old ones; advances in engine technology and control systems make newer fighters like the F16 more maneuverable than their predecessors.

But often, as in the case of DIVAD, modernization is confused with complexity and indiscriminate automation, which may or may not make battlefield sense. The incentives of the procurement system tempt soldiers to stop thinking about the uncertainties of combat and to concentrate on getting budgets approved. In its push for more-modern systems—even though they are more expensive and can't be bought in large numbers—the Reagan Administration is betting that all of them represent the right kind of modernization. Aegis cruisers, with elaborate radar and missile systems that can theoretically deter any airborne attack, will be purchased at some $1 billion apiece—even though the system has never been subjected to realistic, seaskimming saturationattack tests. (Nearly all of its tests have been against single attackers.) The F15 has been America's highcost, firstline, modern fighter plane. Its high maximum speed and extensive electronic systems account for much of its $20millionplus unit cost, but the Air Force has said they are necessary if the plane is to prevail in aerial combat. Now some F-15s are being built in a $40 million "Strike Eagle" bomber version, which is so laden with electronic gear and external fuel tanks that it is no longer useful as a fighter, the purpose for which the F-15 was originally designed. The Air Force will buy Lockheed's C5B transport planes, at $270 million apiece, rather than much cheaper altered versions of the Boeing 747. The Army will forge ahead with the modernized Bradley Fighting Vehicle, a "tank supplement," or personnel carrier, that costs as much as a tank. The vehicle it is replacing, the M113, costs about $130,000 (that's right—thousands, not millions), or less than one tenth as much as the Bradley.

By placing our chips on a complex, costly force, the Administration is finally gambling with our survival, if the machines don't work when called on. But this gamble creates problems even in time of peace. More than five years ago a Pentagon analyst named Franklin Spinney said that complex, modernized weaponry had forced the military into a selfaggravating cycle of shrinking forces and decaying readiness. Generation after generation of complex machinery had cost more than predicted and turned out to be unexpectedly hard to maintain. Because costs kept rising, the machinery was bought in smaller quantities and therefore became more expensive still. As costs still kept rising, lastminute cutbacks always had to be made, and they typically came out of the readiness accounts. The result was a shrinking force with chronic readiness problems.

Spinney's findings were derided as "merely historical in nature" by the Reagan Administration, but his predictions about cost growth and readiness cutbacks have been borne out. Weinberger's latest "posture statement," or apologia pro vita sua, is full of laments about "unexpected" budget constraints and "unforeseen" pressure to reduce operating funds. The place to make the cuts, the statement suggests, is in the readiness accounts. After six years of big budgets, readiness never really rose and is about to ratchet down. The Congressional Budget Office recently pointed out that the military is already falling behind in its "war reserve stocks of secondary items," the material that would keep tanks, airplanes, and soldiers going if we went to war. Since 1980 these war reserves have increased by 106 percent—but the "objectives," or requirements, have increased by 118 percent. "These increases in objectives do not result from changing assumptions regarding the scope or length of a future war," the CBO report said. "Rather ... [the] increases stem from the advent of new weapons that require much more expensive spare parts. ... Indeed, this may be one of the less visible ways in which more complex weapons add to DoD costs."

The gamble will pay off if the forces never have to be used. Our main hope is that the Russian military thinks like ours, and is impressed by the spendup.