Of Silk Purses and Sow’s Ears

If you think the Defense Department deserves a stable budget, there is a silver lining to the budget deal emerging from the negotiations between Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI). It is not clear that the deal is done — one well-informed source I talked to says 50-50 to 60-40 in favor. But if it emerges this week, it will definitely be a short-term fix. That said, it looks like a two-year deal, so calling it "short-term" is a whopping misnomer — we’ve been counting temporary budget deals in months, not years, since the Budget Control Act (BCA) of 2011.

News over the transom says the deal might raise the BCA caps for 2014 and 2015 — or, if it doesn’t, it will simply add about $45 billion in funds government-wide in fiscal year 2014 and another $20 billion in fiscal year 2015. For the crowd shilling to "stabilize the Pentagon budget," half of this increase would be enough to avert the fiscal year 2014 and fiscal year 2015 sequesters that currently loom in mid-January.

Were there to be a sequester, the base defense budget would go down another $20 billion from the $498 billion level it was in the fiscal year 2013 sequester, settling in the mid-$478 billion range. With a two-year deal, it would be roughly frozen, just below $500 billion. (Spoiler alert: If the deal is announced this week, the media will say that the defense budget will be around $520 billion. But this covers the "national defense" budget function, which includes nuclear weapons funds at the Department of Energy, plus a handful of other national security programs, largely at the Department of Homeland Security. The Pentagon itself actually gets about 95 percent of the total.)

So the "good news" is that a budget deal could spare the military having to find an additional $20 billion in budget cuts below the funding level set in the current continuing resolution, which expires Jan. 15. Of course, some will not see it that way, especially some in the services.

For the last few months, the services have been conducting a new round of whining. The sequester, they say, would mean cutting $52 billion out of their budget. (Another spoiler: Watch out for this bouncing baseline problem. In February, the Defense Department asked for $526.6 billion for fiscal year 2014. Needless to say, it has seen nothing like that kind of money. The continuing resolution provided the $498 billion the Pentagon actually ended up with last year. But rhetoric springs eternal. While the Defense Department has lived reasonably well with this lower level of funding, it is still claiming that in fiscal year 2014 it should get the $526.6 billion that was on its wish list.

So, from the Pentagon’s perspective, a budget for this year below $500 billion is at least $35 billion in "cuts," and, if there were to be a sequester, a slash of more than $50 billion. But let’s get real: $498 billion is a pretty good deal in a world where threats to the United States are low, terror attacks are down, and the wars in Iraq and Afghanistan are basically over.

And the bottom line is, the Pentagon should be happy. The current level of funding is roughly $100 billion above the constant-dollar Cold War average. The underlying reality for the Defense Department is that it needs to make a silk purse out of what they would love to call a sow’s ear. They could have done worse; the Wall Street Journal warned Republicans in Congress to resist fixing the sequester, as it was the only way to get spending down. Moreover, in the editorial board’s view, "the appropriators and defense hawks exaggerate how severe the cuts are."

The emerging decision to temper the next round of sequester may suggest that the pace of the defense drawdown is slowing, but in truth it will continue at least through the next couple of years, and probably long thereafter. It’s quite possible that U.S. forces may be entirely out of Afghanistan next year (unless Hamid Karzai signs off on the bilateral security agreement now pending), and a sharp shift in public attention to such small controversies as the Affordable Care Act, immigration, and, oh yes, the federal budget and the debt ceiling have moved priorities elsewhere. The defense budget will be well below the levels former secretaries Robert Gates and Leon Panetta planned and hoped for. That makes Secretary Chuck Hagel the first, full-drawdown secretary.

A long-term budget agreement is receding in the distance; nobody is going for the Simpson-Bowles or Rivlin-Domenici "big bang" options. This is especially true as the annual budget deficits slide downward with economic recovery and the improved federal revenues that result. Toward the end of the decade, this picture is likely to change, especially as the boomer generation starts to weigh on Medicare and other mandatory spending looms. The Committee for a Responsible Federal Budget keeps warning of these dark days to come, but nobody in Washington looks that far ahead.

In the short term, political Washington seems to be leaning against having yet another round of budgetary groundhog days like we’ve seen for the last three years. Republicans, in particular, may have finally decided that they are not on the winning side of such things as the "fiscal cliff" and the "shut down," both of which will be once again on the horizon after the holidays if the Murray-Ryan negotiations fail to produce a deal. And they may not want to play that hand again in the 2014 congressional elections, especially with the deep wellspring of those who hate Obamacare on their side.

Meanwhile, the Defense Department, which always wants more, will be fine with the same level of funding as last year. While the contractors complain, they have actually done very well, even with declining defense budgets. Lockheed Martin’s shares have risen 45 percent this year, for example. But the Pentagon will have greater flexibility than it’s letting on, as the "base budget" we have been talking about is not the sum total it will receive. Congress is also likely to stuff their holiday stocking with something like $90 billion in funds for the "leftovers" from the war in Afghanistan — the so-called war budget, or Overseas Contingency Operations (OCO). Since most of that OCO funding is for operations, it ends up going to exactly the same accounts the Pentagon uses for operations in the base budget. So resist those siren songs about military readiness. The Pentagon will have additional space to work with, even at a lower level of funding than they sought.

All told, the budget deal is not so bad for defense, and clearly not as bad as the defense constituency would want us to believe. Time to get on with the job, Mr. Secretary, and plan for the drawdown that is really underway.