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President's Perspective 

‘Gentlemen, We Have Run Out Of Money; Now We Have to Think’ 

11  2,011 

By Lawrence P. Farrell Jr. 

The quote above is attributed to Sir Winston Churchill. A variation, “We’ve got no money, so we’ve got to think,” is attributed to the New Zealand physicist, Ernest Rutherford. Both of them have precisely nailed the situation in which the United States finds itself today.

We see massive deficits in national budget projections. We see a Budget Control Act and a Super Committee in the Congress that make only the faintest stab at closing the gap. We see a national debt piling up an additional $15.3 trillion unfunded liability for entitlements between 2012 and 2021. This is 10 times the Super Committee’s debt-reduction target of $1.5 trillion. We see the total deficit during that period of $9.4 trillion, and interest costs in 2021 rising from $168 billion in 2010 to $928 billion in 2021. If projections hold, one can expect a defense budget of $582 billion in 2021. And in 2021, we see discretionary spending at 26 percent of outlays, versus 61 percent for mandatory spending.

These numbers are so staggering that one at first views them in disbelief. How can the country continue along this track? And if these numbers are even close to being right, why does the Budget Control Act set such a low and inadequate deficit reduction target of $2.4 trillion?

Even this paltry target must be a difficult stretch for the Super Committee, as current reports of progress and dueling quotes from panel members are not encouraging.

Meanwhile, folks are nervous. Defense Secretary Leon Panetta has said that if the “trigger” of the Budget Control Act is activated, it is unacceptable, and will lead to a hollow force. But Panetta also said everything should be on the table. And we know from the language in the Budget Control Act that entitlements — 61 percent on present outlays — are clearly “off the table.”

The Super Committee must deliver $1.2 trillion in deficit reductions to prevent the sequester from occurring. The difficulty of finding $1.5 trillion seems a trivial exercise when one considers that the United States is set to outlay $40 trillion over the next 10 years.

The Simpson-Bowles deficit-reduction proposal delivered a “gift-wrapped” solution to all this last December. Sadly it landed in a “cone of silence,” little remarked-upon by either the president or Congress. If the nation had taken it seriously, we might be on the way to a grand solution by now. Unfortunately, we are nowhere, and even if the Super Committee delivers, it will be but the faintest reflection of what might have been.

All of that is out of our hands now, so we are only left to “think.”

Accepting the reality that the defense budget is going to come down, what must we think about? For starters we know that the Budget Control Act brought the baseline down to $526 billion in 2012 and $529 billion in 2013 — respectively $27 billion and $42 billion below the president’s request for those years. We also know that when the second tranche comes along, we could see another $50 billion cut from out-year projections — totaling about $86 billion a year in reductions from the president’s baseline request for each year out through 2021.

If the trigger occurs, the total reduction goes to $104 billion per year. This is clearly unacceptable to the military services. Officials have said that any cuts beyond the first tranche would require smaller forces and structural changes to mission. But that is where we find ourselves, for surely the second tranche will come with a hefty price tag.

As the department restructures forces and missions, the need will be to do so in a balanced fashion. One remembers Gen. George C. Marshall’s warning to President Franklin D. Roosevelt not to put too much money into one mission area at the expense of others, as the resulting imbalance could prove disastrous. Marshall was right.

If we accept the need for a balanced reduction in both scope and pace, the next need is to ensure that critical and leading edge — read world class — technologies are preserved in the base. This is a job for both industry and government, and close collaboration is critical. The Departments of Defense and Commerce are now performing a joint study of the industrial base. Once initial results are in, government needs to reach out to industry to validate and adjust. A worry is that companies, lacking this collaboration, have begun to adjust on their own. The danger is that some critical capability may fall through a crack.

Some capabilities needed to maintain our technological dominance are in the design/integration areas — advanced aircraft, submarine, ship, vehicle, sensor, network design and manufacturing processes. There are others, but one wonders if they have been identified. Many of the component suppliers are in lower tiers. If not accounted for, their capabilities will be compromised. We have a complex supply chain, and all the pieces need to be analyzed. And we must not overlook the munitions industrial base. This sector almost collapsed during the post-Cold War build down. Old programmers know that the first place to go for cuts as wars wind down are the munitions accounts.

Investment will be heavily stressed. Procurement has traditionally tumbled by 50 to 75 percent in previous drawdowns, while personnel, operations and maintenance accounts have only decreased by 10 to 35 percent. Depending on the rate of decline, investment could take an early and severe hit. By the way, the Defense Department administrative overhead has traditionally grown during past funding decreases.

Yes, it is time to think. And there is much to do.

Reader Comments

Re: ‘Gentlemen, We Have Run Out Of Money; Now We Have to Think’

A monetarily sovereign nation issuing its own nonconvertible, fiat currency with a floating exchange rate and owes all of its debt in its own currency never, involuntarily, faces insolvency, can go broke or run out of its own currency, The U.S., Japan, China, Australia, Canada, Singapore, Russia, the Isle of Guernsey, Saudi Arabia, Dubai,etc are all monetarily sovereign. You, me, firms, households, the states or not monetarily sovereign and we must have income/revenue to pay our bills. The monetarily sovereign government never needs revenue per se to fund its expenditures. It creates its currency ex nihilo. But for political reasons it taxes buys securities and imposes austerity. These levies,Treasury transactions and impositions are not needed to fund the Federal Government.

As for debt and deficits one need only take a refresher course in accounting 101 to rediscover that where ever there's a deficit or debt there's a surplus or an asset. Our Federal government's annual deficit is equal, to the penny, to net financial assets in the private sector. The accumulation of these annual deficits aggregates to net national savings. We hold all the debt in Treasury securities not foreign currencies.

Robert Bostick on 09/04/2014 at 18:22

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