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.