It is one of history’s great ironies that a major factor in defeating Soviet communism was one of the largest centrally planned economies in the world — the U.S. Department of Defense. The Senate’s defense authorization bill puts the Defense Department’s central planning process — called the Planning, Programming, Budgeting, and Execution (PPBE) system — back in the spotlight with its call for a reform commission. At over $700 billion per year, the Defense Department is by far the largest discretionary spending account in the federal government. It is no surprise, then, that its half-century-old PPBE process has been a regular target of criticism and calls for reform.
But this latest attention from the Senate has the potential to be different, and more impactful, than previous attempts for two key reasons. First, it is coming right on the heels of major and, so far, successful reform to the Defense Department’s acquisition oversight process… Second, near-peer competitors like China and Russia are eroding America’s competitive advantage. They were not sitting still while the United States fought terrorists in Iraq and Afghanistan.
That was from John Whitley and Gregory Pejic, Senate commission to fix defense budgeting is right on the mark. Read the whole thing.
The authors are right that DoD is a massive centrally planned organization, but I don’t think it beat the Soviets. The remainder of the US, with its liberal governance and embrace of markets/entrepreneurship, created a vast disparity in human flourishing. That led to accelerated economic and technological progress. The DoD could ride that wave.
While DoD runs blind in building weapon systems (i.e., without genuine price signals), the Soviets ran blind in their entire economy! DoD can’t know the “true” price of a navy destroyer, but when you break it down it can know the price of dual-use inputs like steel, electronics, the cost of an hour of welding or pipe-fitting. This valuable information shines a light on the DoD’s otherwise blind foray into weapon systems, controlled by analyses rather than multi-sided competition. Defense ministries in the USSR, however, would often internalize raw material production to assure access. Without prices, they didn’t know the opportunity cost of their actions.
And so, when thinking about PPBE reform, we must ask whether we want incremental change of PPBE or whether we seek an alternative to PPBE. Certainly in my mind it is the latter. The alternatives are all around us: budgeting by organization and object. This is how DoD operated before FY 1963. How the commercial tech sector works. How other nations budget for their national defense.
Yet the realist in me says, create pockets of what is “right” within the broader PPBE. The system and its workforce are not ready for such fundamental change. But there are organizations which are funded and managed in a more traditional way, like the Strategic Capabilities Office and the Space Development Agency. These pockets should be carefully grown. China incrementally introduced special economic zones with markets to their central plan, then they experimented and grew over time. This kind of agile approach to disruptive change is often the right way compared to something more sweeping like the USSR’s perestroika.
The problem is that within China, markets are a fundamental contradiction to the political authoritarianism of the party. That’s a bill that will come due at some point. By trying to introduce flexibilities within the PPBE, what contradictions will exist?
I think the key issue will be PPBE continuing to compartmentalize effort by budget portfolio rather than allowing overlapping responsibilities. The DoD used to be a “multi-buyer” organization, as Harvard researchers Peck and Scherer found in 1962. This competition on the demand side is critical to have proper competition on the supply side. And ultimately, it is the tug and pull of these overlapping responsibilities that creates something akin to a price signal in the market. This is how scientific progress works, of course. It should also be how defense acquisition works.
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