February 16, 2016
Economics of the Third Offset, Part 1
Why the shift of billions from procurement to development funding?
By James Hasik
Under the accrual-based, generally accepted accounting principles (GAAP) of the Government Accounting Standards Board (GASB), software is an intangible asset to be capitalized on the balance sheet, when and where appropriate. In the Pentagon’s cash-based bookkeeping (such as it is), software is mostly paid for with RDT&E funds. As the software content of major weapon systems has increased over time, spending has concomitantly shifted from procurement to development. The trouble, as the Pentagon’s Josh Marcuse noted in November 2014, is that we may approaching the point at which “software is eating the war.” Marcuse was citing Marc Andreessen’s 2011 essay in the Wall Street Journal on how “software is eating the world.” It’s all software nowadays, just like ball bearings, and that’s part of the problem with developing new capabilities. The investments are pulling left in funding profiles, and capabilities aren’t available until the coders get it all right. Witness the Joint Strike Fighter.
Yet as our former colleague Kristin Oakley described here in February 2014, the ratio between RDT&E spending and procurement spending has been gradually rising for the Defense Department since at least the mid-1960s, well before the digital era. As I wrote on this column back in January 2015 (“Getting Faster at Revolutionary”), this suggests a second possibility. As one former Net Assessment staff officer once put it to me, it is possible that “a dollar does not deliver as much advance as in the past.” In the January 2009 Review of Economic Studies, Benjamin Jones of Northwestern’s Kellogg School argued that “accumulating knowledge” has been demanding progressively greater investment for each succeeding advance. (See “The Burden of Knowledge and the ‘Death of the Renaissance Man’: Is Innovation Getting Harder?”). That may be why there aren’t so many Tony Starks in our business anymore, but it specifically doesn’t bode well for sustaining a military-technological advantages over the long run.
A third possibility is an institutional assessment at the Pentagon that the Department been buying the wrong stuff, or that it needs to stop buying the current stuff. In this budget, the Navy is the big bill-payer. Secretary Carter certainly signaled his discontent in his earlier upbraiding of Secretary Mabus’s enthusiasm for capacity over capability; we had already heard that the Independence- and Freedom-class building programs would be truncated. Now, we know that naval aviation would also endure a $3.4 billion cut in procurement funding next year. As Jim McAleese noted in a circular at lunchtime, “P-8 orders collapse by 2020.” The tenth carrier air wing is to be permanently stood down. The budget does include $4.6 billion for building and overhauling super-carriers, but this reflects the half-finished projects of the Fords and the installed base of the Nimitzes. The enduring value of airpower-at-sea remains a subject of intense debate; the budget submission suggests that one side has caught the attention of the current leadership.
Collectively, these trends make for a scary story: our software development efforts are a mess, militarily-useful technological advances are getting harder, and the Navy is about to sink. Fortunately, the scary version is not the only possible future. In several forthcoming essays, I’ll suggest some economic, technological, and organizational alternatives to relative decline.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.