Defense Cuts Could Be Only the Beginning

President Obama unveiled the Pentagon's new defense strategy last week, calling it a moment to "turn the page" on the past decade of wars in Iraq and Afghanistan. The new strategy places a greater emphasis on Asia and reduces ground forces in favor of air and sea forces. It accepts greater risks in some areas -- most notably in abandoning the policy that the United States must be able to fight two major, protracted ground wars at once. The Pentagon argues that a two-war construct does not do justice to the complexity of the current threat environment. It has to be able to adapt to a wide, complex array of global threats rather than prepare for an arbitrary number of simultaneous wars.

But while changing threats are no doubt a factor in the shift, constraints from last summer's budget deal also play an important role. Under the bipartisan budget agreement reached last August, the 2013 defense budget will return to roughly the same level it was in 2008 and grow only with inflation for the rest of the decade. This is a $487 billion reduction from the growth the administration had planned over the next 10 years.

There is a glaring oversight in the Pentagon's plan. The new strategy claims to plan for a wide array of contingencies, but it fails to plan for perhaps the most likely contingency of all: further defense cuts and the sequestration process set in motion by the super committee's failure to reach a deficit reduction deal last November.

That failure means that an additional $500 billion in cuts will take effect beginning in January 2013 beyond what the Pentagon already planned for in the new strategy. Unless Congress and the administration act, there will be uniform cuts across every account in the defense budget -- the antithesis of a strategic and targeted approach. The new strategy effectively ignores this possibility, and defense officials acknowledge that if sequestration occurs, the new strategy essentially will be thrown out the window.

The fiscal reality is that it will be difficult for Congress to find a way to avoid sequestration or further significant defense cuts. Doing so would require some combination of increased borrowing, major cuts to programs like Social Security and Medicare, and higher taxes. No alternative is particularly attractive. Sequestration would return the defense budget to roughly the level it was in 2007, a decline of about 14% from 2010, adjusting for inflation. To put things in historical perspective, the end of the Cold War saw a decline in defense spending of 34% from the peak in 1985 to the floor in 1998. Further cuts are likely, and the Pentagon would be wise to begin planning for them, even if it requires another rethink of American military strategy.

But for the moment, the Pentagon stopped short of providing specifics on how it will implement even the strategy it announced Thursday, deferring many of the details to the release of the president's budget request in a few weeks. One unanswered question is how the Pentagon will curb military personnel costs, one of the fastest-growing areas of the defense budget. From 2001 to 2011, military pay and benefits increased by 46% on a per-person basis, excluding war funding and adjusting for inflation. If personnel costs are allowed to keep growing that quickly while the overall defense budget grows only with inflation, pay and benefits will swallow the entire defense budget by 2039. The new budget needs to tackle the complex issue of military compensation reform, and health care in particular.

The new strategy also calls for shrinking the Army and Marine Corps and relying more on air and sea power. This is consistent with the new focus on Asia, and China in particular, where war plans would probably place a greater emphasis on stealthy systems that can operate over longer distances, such as submarines and long-range bombers. But for decades, the military services have garnered roughly equal shares of the budget. If the Pentagon is serious about the strategy, the new budget should show a shift toward funding for the Air Force and Navy.

The bottom line is it is too soon to tell if the Pentagon's new plan is a real shift in defense strategy or just words on a page. The test will be in a few weeks, when the administration submits its budget request to Congress. To understand if the Pentagon means what it says, follow the money.