Affordable FMS; an opportunity for U.S. foreign and fiscal policy

The United States appear to trend its land power down to a size that's still sufficient to bash some small powers occasionally, but clearly not even remotely sized to take on a great power on its own (never really was).
Officially, this is the consequence of budgeting, but it's as much a consequence of inefficiency  caused by a general unwillingness to tackle inefficiency at the Pentagon for decades. Their accounting is a joke, for example - and Congress adds 'pork' to the budget which benefits individual congressional districts or senators' states much more than the nations' military power.
Ambition is also a cost driver; they could in theory drop the entire strategic airlift if they were fine with the speed of much more cost-efficient sea lift coupled with civilian charter aircraft.
The cost equivalent of a large container ship
The United States are facing China as the only great power rival and this means they're making it official: The United States is an aerospace-naval super power* with enough land power to kick ass in banana republics or Arab countries.

This shift is a little bit troublesome, though.
Most countries lack the industrial versatility to produce enough for their military hardware needs. The United States had begun to be a huge arms exporter in 1940, helping the Allies in WW2 while it stayed neutral itself. This went on post-WW2 when the wartime surplus hardware was exported to rearming or poor countries. In the mid-50's, rearming Germany received or purchased plenty rather Korean War-era hardware (much was already obsolete) and later on NATO standardisation led to adoption of standards used by U.S. forces, giving U.S. army industries an initial edge. Foreign military sales programs meant to harden countries against the supposed domino effect of the red scare added to this. Finally, both Arabs and Israelites received plenty hardware in foreign military sales or aid - a relatively new foreign policy tool.

A U.S.Army of small size, officially oriented at small wars (= officially not meant to fight great powers or 'peer forces'), supplied by a cost-inefficient, gold-plating arms industry will yield plenty expensive products for minimization of casualties, but it's unlikely to yield much of good use for conventional warfare by countries with really small budgets.

N-LOS missile; many of their projects are even too gold-plated for themselves.

It's nevertheless still U.S. foreign policy to maintain many helpers / friendly countries all over the world, seated in the U.S.-friendly/Western bloc rather than in a rivalling one. Aerospace and naval power isn't going to help them much, especially if the conflict (say, border conflict), doesn't interest a U.S. TV audience.
Meanwhile, Europeans tend to go the gold-plating route as well, albeit with a little less inefficiency (except in the UK).

Where are those small powers in need of conventional warfare equipment going to get theirs from? 
Keep in mind the choice of a countries' arms shopping mall was used as an indicator for its bloc alignment during the Cold War, so it's an interesting question. Egypt wasn't considered in bed with the reds when it bought Western equipment, but it was when it bought Soviet equipment and now it's still considered to be in bed with the U.S. as it still gets American equipment. Equipment is rarely equipment-only, after all; trainers and advisers come along with high tech or mere crew-served equipment usually. You cut your spare parts and ammunition supply off if you go against the interests of the supplier bloc.

The United States' military equipment procurement system is so FUBAR that ALL its regulations should be canned, its organizations be disbanded and about 80% of its personnel banned from ever working for government procurement or military contractors again (leaving only engineers, secretaries and others not tainted by (mis)management left for re-hiring).
One way to set up a new agency that would also provide a great foundation for a possible future grand army expansion would be to set up an agency tasked to motivate the development of military goods for friendly and allied nations.

This agency would not accept any input from the gold-plating experts of the active U.S. military, much less anyone who made it to flag rank in it. Almost nobody from the established DoD procurement system or the rms industry would be employed by it.
It would tour the friendly military forces, observe their exercises, investigate threat systems and landscapes and generally try to determine what these countries need for defence. Finally, it would start some development projects** to meet these needs.

The result could mimic the F-5 "Freedom Fighter", a simple, affordable fighter-bomber which already successfully pushed back against the gold-plating trend once. Similarly, the M72 LAW  proved to be a bestseller for its simplicity (even though the French SARPAC was likely better).

The United States could maintain relations built on providing security without large land force on call, by doing what was likely more relevant for generations already; supply affordable military hardware to make up for the insufficient development and production capacities in many small powers.
The "affordable" angle could be further strengthened by giving such friendly foreign military sales tax credits: About a third to half of the money spent on buying American hardware turns into additional government revenues. Other countries even reach 40-60%. This is a major driver behind all those seemingly inefficient domestic arms production programs. Some countries use offset deals, in which one country buys in another and gets the promise of a reciprocal purchases in return. This way it's almost as if both bought domestically. The United States doesn't do this, and it couldn't simply because it exports much more military hardware than it imports (same with Germany and Russia). A friendly foreign military sales program which is revenue-neutral for the U.S.government could make its wares much, much more affordable and competitive.

The United States are heading towards being a rather modest conventional land warfare power, and plenty pundits are bound to claim that this isn't enough to maintain its relations (they'll likely choose to talk of "obligations"). 
There are other, much less straining ways to contribute to these relations, though. It is not only wasteful, but in the long term extremely troublesome to spend a large share of the economic output on government consumption such as the military. A single per cent of GDP annually more for public infrastructure and education instead of the military could yield enormous benefits, and such a shift of government resources allocation is long overdue.


*: "superpower" is fine in these areas, but I prefer to call them only "great power" in other areas.
**: Without any technological "leaps forward", but maybe with some "leaps backwards".

edit: About the army size cutting thing from the intro; an entertaining video.


  1. Sven, first of all allow me to thank you for your blog. I am an American reader who discovered your blog a few weeks ago. I've already made it back to your 2010 writings and have learned much from you. Your German cultural tinge is also amusing to me (in a positive way).

    Your approach reminds me of an article you wrote about the rotten institutional culture of the Italian Army in the 1930s. You then suggested creating alternative army organizations (specifically, a parachute corps, a colonial army, and IIRC marines) with totally different leaders.

    I like this approach, and can already think of Americans who would be useful in a new procurement organization. Some members of the "military reform" movement of the late Cold War come to mind, especially Chuck Spinney and Pierre Sprey. They are quite old now, but perhaps they mentored younger leaders.

    The new organization should also seek advice from outside experts. I've always admired the great results of the Swedish military-industrial complex, so that would be one place to look. Large industrial corporations may also be worth investigating.

    I would absolutely oppose spending more money on public education in the United States. Our public education bureaucracy is perhaps even worse than our defense bureaucracy. We absolutely require more investment in our infrastructure, and another benefit of lower defense spending would be improved public finances (our federal budget deficit is still 4% of GDP despite endless quantitative easing and the "recovery" being five years old).

    1. Thanks.

      As mentioned, much of the public expenses return as revenue. This means that unless public expenses are crowding out private expenses significantly (not a key issue at this time due to the monetary situation) you won't get very much of an effect on the budget deficit from a peace dividend within about 3 years (a 10B cut may end up reducing the budget by only 2-5B after revenue loss, unemployment pay etc. took effect).
      It's more a potential for a structural correction, and valuable in the long term, not the least if more was spent on public infrastructure.

      Besides, 4% GDP deficit is not dramatic if it doesn't become a habit, albeit the very low interest on U.S. debt hides that it's the equivalent of 5-6%. The United States have a population growth of around 1% p.a., which can as a rule of thumb be subtracted from the deficit (per cent points) when one compares deficits of different countries.
      4% GDP deficit in the U.S. is approx. the equivalent of hypothetical 5% in Germany.

  2. The US federal government historically collects around 20% of GDP as tax revenues since the end of WW2. The percentage varies somewhat, but that seems to be an ingrained baseline. Attempts to raise that (to fund social programs) are effectively vetoed by the Republican Party, and attempts to lower it are effectively vetoed by the Democratic Party.

    The collection feedback on defense spending might be greater than 20%, since defense company profits have fewer opportunities to manipulate transfer pricing and imported intermediaries to lower their corporate tax bill. Defense workers also tend to earn good salaries, which would increase collection of personal income and payroll taxes from defense spending (assuming more workers are hired, which they would be for cheap quantity production).

    A major question about the effect on public finances is the multiplier effect. Left-leaning economists in the USA (not socialist obviously) often claim that defense spending has a lower multiplier effect than other kinds of government spending. I don't think this would be true with your proposed FMS procurement system.

    I think the low multiplier effect these left-leaning economists claim is an artifact of what you term "gold-plating". Raising defense spending in a "gold-plating" system doesn't necessarily increase production runs, the number of workers hired, or the amount of materials ordered from suppliers. Thus much of the spending increase just disappears as executive salaries, white-elephant research projects, and stockholder profits (usually through stock buybacks).

    Your proposed FMS procurement system would presumably result in quantity production runs. This would require hiring more production and technical workers, ordering more parts from suppliers, and increase demand in the metallurgy sector. Buy-American provisions would mean these materials would be supplied by domestic companies and workers. I think the multiplier effect here could be quite large and benefit aggregate demand.

    A word about the crowding out effect. You wouldn't observing any crowding out of private investment since there's so little capital investment in America these days outside of the oil and gas sector. But a different kind of crowding out can occur with defense spending which is more pernicious. It was originally detailed by the industrial engineer and economist Seymour Melman.

    Melman claimed that "permanent war economy" that emerged after 1940 distorted the US industrial sector severely by turning the Department of Defense into the nation's number one consumer for manufactured goods, both capital goods and finished goods. The result was to spread the "gold-plating" mentality to capital goods producers and to generally make the American industrial sector uncompetitive compared to German and Japanese competition. The US Air Force invented numerical control machine tools, but its gold-plate CNC machine tools were unaffordable to private companies. US civilian goods producers kept using manual machine tools from the 1940s, and the first practical CNC machine tools for civilian goods were invented in Germany instead.

    I agree that a 4% GDP deficit is not dramatic, except that it has become a habit. I now regard a large public deficit as a structural feature of the US economy, and the current QE-induced low interest rate situation is clearly not sustainable (for how long is anyone's guess and could make a good guesser very wealthy). I'm not sure our population growth is an advantage. It's primarily driven by Third World immigration and their offspring. About two-thirds of these people tend to be net tax consumers. So while it increases US GDP growth, it seems like it simultaneously worsens US public finances. The current dominant political push in the USA is also to increase immigration levels, though thus far this has been partially prevented in the lower chamber of our Congress.

    1. The state revenues and the potential for exports are also relevant. Finally, the proposed FMS scheme is not entirely about foreign military aid only, but about financing modest development projects and regular probably subsidized exports.

      The biggest hindrance would probably be the industry, which acquired too many bad habits.

      "About two-thirds of these people tend to be net tax consumers."

      Maybe that's true, but an underpaid agricultural day labourer may easily be more of a benefit to society than a CEO paying millions in taxes on a golden parachute he received after almost bankrupting his company.
      It's a sponsored myth that compensation corresponds with productivity. Only the most basic, least realistic economic model uses this as a starting point.

  3. The potential for exports is important, though it's possible your FMS scheme would reduce defense exports in dollar terms. Effective, low-cost, and easy to maintain military equipment could end up cannibalizing the market for "gold-plated" hardware, service, and spares. In particular our defense contractors do a lively business in price gouging Gulf Arabs.

    Perhaps the bad habits of industry could be partially addressed by encouraging civilian industries to submit bids for less technologically advanced weapons systems? I think that mandating fixed cost contracts (with performance-based incentives and penalties), competitive prototype testing, and conducting live fire tests will go a long way in correcting bad habits.

    I agree with your points on agricultural laborers and CEOs. Agricultural laborers do productive work, though unfortunately agribusiness prefers to socialize the cost of their labor to increase their profits. Most low-wage workers in America qualify for various welfare programs, which to me seems like a subsidy to business. A CEO making millions is generally plundering the corporation's shareholders even if he is doing a good job. But that is a very different issue.

    On a very different note, Armed Forces Journal recently published an article about one of your major interests: the lack of preparedness Western armies have for fighting competent opponents. Link: http://www.armedforcesjournal.com/seduced-by-success/

  4. Let's wait a few decades until China is ready to trash enemies over some island dispute. This will rapidly cure most procurement illnesses.