In the economics of acquisition, who is in the best place to make choices?

Economist Arnold Kling recounts an argument from Milton Friedman about whether people make rational decisions on behalf of other people:

1. If you buy a coat for yourself, you pick the right coat for the right price
2. If someone else (a parent, perhaps) says that they will pay for any coat you choose, you pick the right coat for the wrong price (you spend more on a coat than you would using your own money).
3. If someone gives you a coat as a present, they pay the right price (what they are willing to spend) but get you the wrong coat (one you would not have picked for that price).
4. If government buys you a coat—wrong coat, wrong price

Unfortunately this doesn’t cleanly map to defense acquisition problems. Virtually every decision in DoD is on behalf of other people — on behalf of the taxpayer and citizen’s interests. But that is not a bad thing. Most people do not have the requisite knowledge about weapons technology, concepts of operations, and enemy threats to make informed decisions about what DoD should buy. The career professional must do it on their behalf.

However, I think Milton Friedman’s argument has some applicability. Consider the pre-1960s days of the navy bureau and army arsenal systems. These systems were destroyed in the 1960s, reorganized into systems commands which execute on plans and programs handed down by the military staffs. Today, program offices are usually not the source of weapons choice. One office sets requirements, another does an analysis of alternatives, another lines up money, another approves the test and evaluation plan, the sustainment plan, the contracting plan, the lifecycle cost estimate, and so forth.

While the warfighter is ultimately the “user” or “consumer” of weapons, you cannot expect every officer in the field to fully equip and resupply him or herself. The current system of program executive offices (PEOs) are the equivalents of the old bureau/arsenal system. The problem for them is that if they save a dollar on one weapon, they cannot use that dollar somewhere else. Even worse, saving a dollar makes it likely they’ll lose budget next year.

So here is the acquisition version of Friedman’s argument:

1. If a PEO buy a weapon for the warfighter, it picks the right weapon for the right price
2. If someone else (50 offices throughout the bureaucracy) says that they will pay for any weapon the PEO chooses, the PEO picks the right weapon for the wrong price (it spends more on a weapon than it would if the PEO had its own money to make weapons choices).
3. If the bureaucracy gives the PEO a weapon as a pre-specified program, they pay the right price (what they are willing to spend) but get the warfighter the wrong weapon (one the PEO would not have picked for that price).
4. When the bureaucracy-designed program comes to fruition, it turns out it was the wrong weapon at the wrong price.

Of course, this line of argument depends on the PEO being resident to long-tenured experts in their field who work closely with their military users. That is why I brought up the bureau/arsenal system where that was more likely to be true. But it is more ridiculous to think that dozens of offices throughout the bureaucracy would do better — none of which have intimate ties to the integrated problem and none of which have an responsibility to the warfighter for delivering a successful weapon.

In any case, the second scenario is kind of the requirements approach. The PEO doesn’t face an opportunity cost for asking for more money to execute a program. That money would go somewhere else if not the requirement. Just like when my parents buy me a coat, I get the more expensive model even though the quality isn’t worth it to me if it were my money. It’s not like I could reallocate that savings to food, shoes, rent, or anything else. So I see money as “cheap.” And this is why government offices build empires — they don’t face the opportunity cost. They are not empowered to make tradeoffs within a resource constraint.

When the bureaucracy selects weapons, plans them out, and then hands it over to the PEO to go execute, I think you will get something like the “right price for the wrong weapon.” Think about a couple examples. The “systems analysts” in the late 1940s thought the Air Force should pursue a turbo-prop bomber because it was cheaper than a turbo-jet bomber. Luckily, the Air Force went with the turbo-jet, and we now have the venerable B-52.

In the 1960s, systems analysts again thought the Navy should not pursue nuclear aircraft carriers. They were too expensive. Luckily, Rickover successfully argued against them. And then repeatedly, the systems analysts advised for  “joint” fighter aircraft built from scratch. The F-35 and F-111 are testaments to this “wrong weapon, right price” strategy. But since DoD actually executed on the joint aircraft — and ran into all sorts of technical difficulties — by the end the aircraft were the “wrong weapon, wrong price.”

The conclusion here is that the PEO should be given a portfolio budget to make its own opportunity cost choices — evaluated and held into account by military users and joint staff. The joint staff doesn’t have the knowledge or incentives to make the right choices on behalf of the PEOs. But then again, so many years of bureaucratic intrusion means perhaps no one in DoD has the knowledge and incentives to make the right choices. It is all fractured, no where integrated.