The Cost of Weapons: Defense Spending in a Time of Austerity

August 31st, 2010 - by admin

The Economist – 2010-08-31 22:22:55

The chronic problem of exorbitantly expensive weapons is becoming acute

FARNBOROUGH AND WASHINGTON, DC (August 26, 2010) – There were the starlings: aerobatic teams with mesmerizing group displays. There were the albatrosses: Boeing’s 787 Dreamliner and Airbus’s A380, heavy airliners that still manage long, effortless flight. And there were the buzzing propeller-driven military transporters, including the latest, the Airbus A400M. But the star turn was reserved for the birds of prey — the jet fighters.

At this summer’s Farnborough air show, outside London, America’s most advanced fighter, the F-22 Raptor, announced its power with a thunderous roar. Many think of fighters in terms of speed, altitude and agility. But even more impressive is to see the Raptor at low speed, hovering almost stationary in the air, its nose pointing upwards, like a child’s toy strung up to the sky. In mock battles, its stealth and sensors allow a lone Raptor to kill a flock of any other kind of aircraft.

But the fighter is an endangered species. One threat comes from success: in Iraq and Afghanistan, Western forces have been uncontested in the air, if not on the ground, so sophisticated fighters seem less relevant. Another comes from technology: the advance of robotic warfare may, at some point, make the pilot in the cockpit redundant.

The aircraft that American field commanders most clamor for is not the F-22 but helicopters and the Predator, an unmanned drone able to stay aloft for a day. The fighter pilot seems to be losing his dash. Farewell Tom Cruise in “Top Gun.” Goodbye Biggles, the British adventure-book hero. In their place, welcome the faceless drone operator sitting in a windowless container in the Nevada desert.

Well, eventually perhaps. The extent to which unmanned aircraft could or should supplant piloted ones will be debated for decades. For the moment, though, a third danger is more immediate: the economic crisis, which is forcing Western countries to cut expensive military equipment.

Robert Gates, America’s defence secretary, has ordered that production of the F-22 should end this year, capping the fleet at 187—a final cull for the Raptor, whose numbers were once supposed to reach about 750. In Europe orders for the Typhoon — a fighter made by Britain, Germany, Italy and Spain — will fall. And on both sides of the Atlantic the rising cost of the stealthy F-35 Joint Strike Fighter means its order book could shrink sharply.

On August 9th Mr Gates announced a new set of money-saving measures: among them cutting at least 50 of the 900-plus generals and admirals; eliminating the joint-forces command, which promotes integration among the services; cutting funds for contractors; and reducing staff in Mr Gates’s own office.

There are sound military reasons for this internal cost-cutting, especially the need to redirect money to the war in Afghanistan. But Mr Gates knows that after a decade of ever-rising defence spending, “the gusher has been turned off”; now his greatest fear is that defense spending will be cut to curb the budget deficit.

His dread is already reality for many European colleagues. This week Karl-Theodor zu Guttenberg, Germany’s defence minister, said he favored suspending conscription, with the option of resuming it later, in order to create a “smaller but better and more operational” army that would shrink by a third, to about 165,000. The move is part of Germany’s plan to cut €8.3 billion ($10.5 billion) from the defence budget by 2014.

Even Britain, which has the largest European force in Afghanistan, is likely to cut defense spending by 10-20% over the next five years, following an overdue defense review in the autumn. Spain cut defence spending by 9% this year; Italy will chop by 10% next. Less drastically, France is freezing defense expenditure.

To Americans, it all looks like a dis-arms race. NATO’s longstanding call for allies to spend at least 2% of GDP on defense has been lost in the clamor over wider public-spending cuts.

Is the constraint on military spending evidence of a general decline of the West? Critics of Mr Gates argue that he is hollowing out the armed forces and accepting a diminished position for America in the world. In a seminal book of 1987, “The Rise and Fall of the Great Powers,” Paul Kennedy of Yale University popularized the notion that a country’s military power flows from its economic strength; the global pecking order is determined as much by economic performance in peacetime as by martial abilities in wartime. By this measure, China’s economic strength should give the West cause for concern. China is also fast building up its naval power.

Instead of Strategy
Andrew Krepinevich, director of the Centre for Strategic and Budgetary Assessments, a think-tank in Washington, DC, argues that America is at a crossroads of the sort that faced imperial Britain at the turn of the 20th century, as it contended with a rising America, an expansionist Russia and fast-industrializing Germany and Japan.

Britain’s choice, then, was to surrender its interests in Latin America to the United States, support Japan to check Russia in the East and make up with France so as to confront Germany. “Strategy is what you need when you don’t have any more money,” says Mr Krepinevich. “Britain was a declining power but it managed to hang on for quite a long time with intelligent strategy.”

The beginnings of a sound policy today, he argues, might be for America to withdraw from a costly war in Afghanistan and pull forces out of Europe. Such a move would shock Europeans who hope that the impact of their own defence cuts will be softened by American help in times of need. For the moment, though, America is not giving up any of its commitments.

Mr Gates wants his forces to become better at fighting insurgencies; to preserve enough might to protect allies from, say, North Korean aggression or Chinese hegemony; and also to maintain “all options” for dealing with Iran’s nuclear program. That means finding new money within constrained budgets.

Mr Gates is grappling with the conundrum faced by many of his predecessors: the rising costs of military manpower and equipment, which strain even America’s gargantuan $700 billion defense budget (almost as much as the defense spending of the rest of the world put together). Just to keep up America’s existing combat units, he notes, costs 2-3% more each year. But the annual budget is rising by only 1-2%.

Mr Gates wants the Pentagon to save 1-2% a year in overheads. A study of defense bureaucracies by McKinsey, a global management consultancy, suggests that American forces, though the most potent in the world, are among the least efficient, at least in terms of the “tooth-to-tail” ratio, the proportion of fighting forces to support personnel (the best were Norway, Kuwait and the Netherlands). American forces deploy and fight globally, so need more support than those only defending national borders. Nevertheless, the study suggests there is flab to be trimmed.

Manpower in all-volunteer armies, as most Western ones are these days, is expensive. Pay has to be competitive. In America, moreover, a big burden is the cost of health-care programs for current and former servicemen, and their families. “Health-care costs are eating the defense department alive,” complains Mr Gates. Yet he has a hard time restraining Congress’s generosity to soldiers and veterans.

One response to high manpower costs is to rely on technology. But that does not come cheap. Study after study shows that the price of combat aircraft has been rising substantially faster than inflation, often faster than GDP. The same is true of warships.

In a book published in 1983, Norman Augustine, a luminary of the aerospace industry, drafted a series of lighthearted “laws.” In one aphorism, he plotted the exponential growth of unit cost for fighter aircraft since 1910 (see chart 2), and extrapolated it to its absurd conclusion:

“In the year 2054, the entire defense budget will purchase just one aircraft. This aircraft will have to be shared by the Air Force and Navy 31/2 days each per week except for leap year, when it will be made available to the Marines for the extra day.”

Nearly three decades on, Mr Augustine says, “we are right on target. Unfortunately nothing has changed.” These days Raptors go for $160m apiece ($350m including the cost of developing the jet), compared with $50m-60m for the venerable F-16. In the long run, high unit costs must limit numbers. Since 1970 America’s fleets of combat aircraft and major warships have shrunk, even as defence spending rose (see chart 3).

Much of the performance of modern weapons lies in their computing power and software. So why do weapons not follow Moore’s Law, which predicts the rapid fall in the cost of computing power? For one thing, military equipment lacks the huge scale of consumer electronics, which drives down unit costs. Military software is often bespoke. The need to keep it secure makes it hard to upgrade and to develop the “plug and play” functionality of PCs.

Instead of choosing products in the open market, big countries develop weapons from scratch. And instead of negotiating fixed-price contracts, governments typically bear the risk of designing advanced systems in “cost-plus” arrangements.

Even aerospace giants such as Boeing and Europe’s EADS, which compete to produce expensive civil airliners, are wary of developing a military jet on their own.

The Spiral
The rising cost of military equipment is an old curse. Philip Pugh, author of “The Cost of Seapower,” a 1986 study of shipbuilding costs since the end of the Napoleonic wars, argues that the industrial revolution made the problem more acute: the rapid pace of technological change set off a race to build bigger, more powerful, more heavily armed and better-protected battleships.

At some point, as unit prices rise, one of two things must happen: countries must either scale back their ambition, or seek game-changing technology, as they did when the battleship gave way to the submarine and aircraft-carrier.

Mr Pugh also identified another intriguing trend: the race for bigger, better weapons is fiercest in peacetime but tends to fall once war actually breaks out. At that point, he argues, quantity takes precedence over quality. So the fact that the cold war never turned hot may help explain why Western ministries of defence got into the habit of developing weapons slowly and expensively. “You cannot optimise cost, performance and development-time at the same time,” says Mr Krepinevich. “In the cold war everything was sacrificed to performance.” Cost was secondary, and time was least important of all, given that there was no shooting war. The F-22 began development before the end of the cold war; so did the Typhoon.

Few would disagree with another of Mr Augustine’s laws, that “the last 10% of performance generates one-third of the cost and two-thirds of the problems.” Moreover, the quest for the best is often allied to a “conspiracy of optimism,” whereby bureaucrats and contractors underestimate the likely cost of weapons, wittingly or unwittingly. Once approved, military projects are hard to kill.

Such are the ingredients for a spiral of cost and delay: technological stumbles hold up development; delay raises costs; governments postpone work further to avoid busting yearly budgets, incurring greater long-term costs.

With time, technology becomes outdated, so weapons must be redesigned, giving the top brass a chance to tinker endlessly with requirements. In the end, governments cut the size of the purchase, so driving up unit costs further. There were supposed to be 132 stealthy B-2 bombers but only 20 were built. They cost $2 billion each.

Repeated reforms have failed to break this dire cycle. According to the last full report by America’s Government Accountability Office (GAO), the cost of 96 of America’s biggest weapons programs in 2008 had risen on average by 25%, incurring an average delay of 22 months.

It’s Even Worse in Europe
This is not just an American affliction. France is down to one aircraft-carrier. Britain has two pint-sized ones, and they often sail without aircraft. It has ordered two big new carriers, but no sooner had work started than the government slowed down construction. The National Audit Office says this case of “save now, spend later” would save about £450m ($695m) in the first four years, but add £1.1 billion overall.

European countries in any case struggle to generate much bang for their money. European states have more troops than America but only a fraction of America’s fighting power. Their budgets are divided among more than two dozen air forces, navies and armies; and many have defence industries to preserve.

As a result, their choices are agonising. America may debate how many nuclear weapons it should have, but in Britain even some among the top brass think that nukes are too expensive; Mr Gates wonders whether America needs 11 aircraft-carrier groups; some people in Britain and France ask whether they can buy new ones at all. The Netherlands has given up maritime reconnaissance; Denmark has abandoned submarines. The Baltic states have no air force to speak of, relying instead on NATO allies to police their skies.

Plainly, Europe needs economies of scale. But how to achieve them, short of an implausible single European army? One option would be for Europeans to specialise. But the bigger military powers do not want to depend too much on others, so they try to keep a bit of everything. Some NATO allies are sharing the cost of new C-17 military transporters but such examples of pooling are few and far between.

Jointly developing weapons carries considerable costs: decisions are arduous and work has to be shared out. Reconciling the needs of each can result in building countless variants, or in piling multiple requirements on a single aircraft.

This happened to the A400M, which suffered a cost overrun of more than €11 billion. Germany wanted it to skim over treetops, Britain needed it to lift (now-scrapped) new armored vehicles. Both Britain and France said it had to operate from rough airfields. One Airbus insider calls the A400M an eierlegende Wollmilchsau, or “egg-producing wool-milk-sow.”

Perhaps Europeans should just buy American kit off the shelf. But those with their own military industries want to preserve high-tech manufacturing and software skills, protect an important export industry and maintain some independence.

So is there any way of developing weapons more cheaply? More transatlantic co-operation would help. The F-35 fighter, despite disputes over rising costs, still looks less expensive than Augustine’s law would predict. It inherits technology from the F-22, and three variants are being built for the American air force, navy and marine corps. Several countries have joined the program. It would also help to use more off-the-shelf technology — as has been done with the mine-resistant vehicles rushed to the battlefield in recent years. In general, countries need to take smaller technological steps, build quickly to minimize disruption and upgrade when technology is ready.

One might argue that the mounting price of weapons does not matter given that modern equipment is so much more effective than older kit. Maybe, but in a disordered world of diffuse threats, having a widespread presence is valuable.

In Iraq and Afghanistan, numbers matter more than firepower. The same applies to warships fighting pirates off the cost of Somalia; a ship cannot be in two places at the same time. As Stalin reputedly said, quantity has a quality all of its own.

Quantity, Quality or Technology?
At Farnborough this year, the big aerospace companies still enjoyed the best chalets. But they were looking over their shoulder at an insurgent: Neal Blue, CEO of General Atomics. Better known for its work in nuclear physics, General Atomics stole a march on the big firms by producing the Predator drone.

Early models were powered by snowmobile engines. The first flying cameras evolved into armed versions that could strike targets at short notice, then into a bigger plane, the Reaper, able to carry more weapons. Now Mr Blue is showing off a jet-powered, stealthier version, called the Avenger.

Getting the pilot out of the cockpit, he says, is the best way to keep prices down. He claims the cost of an Avenger is about a tenth of a new “hyper-expensive” manned jet. The future, he reckons, lies in cheaper, expendable drones that can swarm or spread out as circumstance requires.

Mr Blue’s critics argue that drones only fill a niche. Pilotless planes require more people on the ground, are slow and vulnerable, and hungry for satellite bandwidth. “If your data links are jammed, do you really want to be without an air force?” asks Steve O’Brien of Lockheed Martin.

Developing drones able to fight autonomously in high-end combat will make them much more expensive and much less expendable. Mr Blue thinks technology will provide both quality and quantity. But if history is any guide, Augustine’s law will one day strike the drones as surely as it has already done with Biggles.

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