The Insider

Following several tumultuous weeks of wrangling between Congress and the White House over raising the country's debt ceiling, Defense Secretary Leon Panetta today issued the following message to all Defense Department personnel explaining his stance on cuts to the Pentagon's budget:

As I begin my second month in office as Secretary of Defense, I wanted to take the opportunity to share my thinking with you on one of the key challenges we face as a Department: how to ensure that our military has everything it needs to protect our national security at a time of considerable fiscal challenge in our country.

I know that many of you have been watching with concern the deficit reduction negotiations in Washington. As President Obama has said, our growing national debt, if not addressed, will imperil our prosperity, hurt our credibility and influence around the world, and ultimately put our national security at risk. As part of the nation’s efforts to get its finances in order, defense spending will be – and I believe it must be – part of the solution.

The reductions in defense spending that will take place as a result of the debt ceiling agreement reached by Congress and the President are in line with what this Department’s civilian and military leaders were anticipating, and I believe we can implement these reductions while maintaining the excellence of our military. But to do that, spending choices must be based on sound strategy and policy. In the past, such as after the Vietnam War, our government applied cuts to defense across the board, resulting in a force that was undersized and underfunded relative to its missions and responsibilities. This process has historically led to outcomes that weaken rather than strengthen our national security – and which ultimately cost our nation more when it must quickly rearm to confront new threats.

I am determined not to repeat the mistakes of the past. In order to make the key decisions on how to best implement spending reductions, the President said in April when he unveiled his fiscal framework that “we’re going to have to conduct a fundamental review of America’s missions, capabilities, and our role in a changing world.” As a Department, we are following that approach. We are asking ourselves: What are the essential missions our military must do to protect America and our way of life? What are the risks of the strategic choices we make? And what are the financial costs? Achieving savings based on sound national security policy will serve our nation’s interests, and will also prove more enforceable and sustainable over the long-term.

We expect that the responsible transitions in Iraq and Afghanistan will help reduce total U.S. defense spending over the coming years. But I will do everything I can to ensure that further reductions in defense spending are not pursued in a hasty, ill-conceived way that would undermine the military’s ability to protect America and its vital interests around the globe. For example, the debt ceiling agreement contains a sequester mechanism that would take effect if Congress fails to enact further deficit reduction. If that happens, it could trigger a round of dangerous across-the-board defense cuts that would do real damage to our security, our troops and their families, and our ability to protect the nation. This potential deep cut in defense spending is not meant as policy. Rather, it is designed to be unpalatable to spur responsible, balanced deficit reduction and avoid misguided cuts to our security.

Indeed, this outcome would be completely unacceptable to me as Secretary of Defense, the President, and to our nation’s leaders. That’s because we live in a world where terrorist networks threaten us daily, rogue nations seek to develop dangerous weapons, and rising powers watch to see if America will lose its edge. The United States must be able to protect our core national security interests with an adaptable force capable and ready to meet these threats and deter adversaries that would put those interests at risk. I will do all I can to assist the Administration and congressional leaders to make the commonsense cuts needed to avoid this sequester mechanism.

Our military has always taken on and succeeded in every mission it has been assigned – from the efforts in Iraq and Afghanistan to humanitarian assistance and disaster relief at home and abroad. You – the men and women of the military – have never said “I can’t do it.” Nor have the civilians who support you. That is the military ethos – to salute and press on. The ethos of this nation’s leaders and policy makers must be to ensure that the missions assigned to the military meet critical national security priorities. It is our responsibility to determine those priorities and to ensure that you will always have the training and equipment to succeed in those missions.

I am aware that as Washington discusses strategy and policy, you and your families are discussing the implications of decisions that may be made. I promised in my first message as Secretary that I will fight for you. That means I will fight for you and your families as we face these budget challenges.

The force has been stretched by a decade of combat. We owe you and your families the support you have earned – both on the battlefield and on the home front. To be sure, the current budget constraints will make it all the more challenging to modernize and recapitalize the force. Platforms from the build-up of the 1980s are reaching the end of their shelf life and must be replaced, and units and equipment that have been stressed by a decade of combat must be reset. Going forward, we must ensure that the military gets the effective and affordable weapons it needs by redoubling our efforts to enforce procurement discipline.

We also must continue to tackle wasteful and duplicative spending, and overhead staffing. We must be accountable to the American people for what we spend, where we spend it, and with what result. While we have reasonable controls over much of our budgetary information, it is unacceptable to me that the Department of Defense cannot produce a financial statement that passes all financial audit standards. That will change. I have directed that this requirement be put in place as soon as possible. America deserves nothing less.

The United States faces a series of tough choices ahead on the budget as we seek to balance the need for fiscal solvency with the need to protect our security. We can – and must – address the budget and protect the country. As we do, we will be guided by the principle that we will do what’s right for our nation now and for its future. By better aligning our resources with our priorities, this Department can lead the way in moving towards a more disciplined defense budget. Only in that way can we ensure that we fulfill the fundamental duty for those of us in public service – which is to do everything we can to give future generations of Americans a better and safer life.

Defense Secretary Leon Panetta and U.K. Minister of Defense Liam Fox met for an hour Aug. 1 at the Pentagon to review "a range of regional and global issues of national security importance to both nations," according to Assistant Secretary of Defense for Public Affairs Doug Wilson.

"Since taking office in July, Panetta has spoken twice to Fox by phone, but today's meeting marks the first time the two have met personally," Wilson said in a statement Monday evening. "Each stressed that the bilateral relationship was of critical strategic importance; Secretary Panetta reinforced the special relationship between the two nations and America's 'tremendous trust' in the United Kingdom. The two defense leaders shared views on budget challenges; political and military challenges in Libya; Afghanistan (including training of and transition to Afghan national security forces); Pakistan; Syria; Yemen; and Iran, focusing on Iranian involvement in rising violence in Iraq and the threat posed by Iran's potential to develop nuclear weapons. The two also focused on the future of NATO, non-proliferation and energy issues."

At least one Wall Street analysis firm is predicting that one-third of the proposed budget deal hammered out on Capitol Hill over the past weekend could be made up of defense-spending cuts over a 10-year period. According to a just-released research note from Credit Suisse:

Defense Cuts are a Big Part of the Solution: The proposed budget deal incorporates two tranches of spending reductions, and defense takes part in both. Ultimately, defense could total around one-third of the total spending reduction over the ten-year period.

*      Tranche 1: The initial spending reduction of $900B includes a defense cut of $350B over 10 yrs ($35B or 6%/yr if linearly applied), which is below the President’s $400B request and far below the Senate's request of ~$1T. At first this appears bullish, but is more onerous once Tranche 2 is considered.

*      Tranche 2: The 2nd reduction is $1.5T (the 2 tranches add to $2.4B). These cuts are scheduled to be allocated by a joint Congressional commission by Nov. 23, 2011 (following broader House & Senate direction in late Oct). The committee will have 12 seats, 6 each from the House & Senate, divided equally between the parties. Given concern that the Commission could stalemate, there is an Enforcement Mechanism (or default Tranche 2 plan) to motivate all sides to come together.

*      Contingency Plan: If the committee stalemates, the enforcement mechanism triggers on December 23, and directs that beginning in FY13, there will be $1.2T in automatic cuts, divided equally between domestic and defense spending. White House guidance indicates this plan, if triggered, adds ~$500B in additional DOD cuts (for FY13 and beyond) to the $350B from Tranche 1. That total, approaching $850B over 10 yrs, is slightly closer to the previous Senate plan ($1.1T for DOD) than either the prior Republican (~$300B) or White House ($400B) plans.

*      Ultimate Outcome Likely Middle Ground: In sum, we see an outcome closer to $850B than $350B as the former is the default position everyone will negotiate from in Dec. We expect a final amt of $700-$850B, for a middle ground between the Boehner and Reid plans, which appears slightly more bearish than investor expectations from last week.

*      Procurement Account Will Bear the Brunt, at Least Initially: Given the inflexibility of the DoD to immediately reduce force structure, the majority of DOD cuts are likely from procurement in FY’12 & FY’13. The "roles and missions" review will identify specific program cuts and is expected in early October. We suspect Def Sec Panetta to essentially reverse engineer the cuts in the study to the new top-line funding levels from the debt deal.

*      Sector Impact: While some may feel visibility increased incrementally today, we see a continuing overhang on defense stocks until Tranche 2 comes into focus.

Inside the Pentagon reported last month that DOD has been looking at cuts much deeper than the $400 billion President Obama seeks to strip from security spending over the next decade.

Vice Chairman of the Joint Chiefs of Staff Gen. James Cartwright told reporters at a July 14 breakfast in Washington that DOD wants to understand the effects of steeper cuts should they become necessary. Further:

Although Cartwright said the Pentagon has not been told to prepare for anything greater than the $400 billion through FY-23 that Obama laid out in the spring, he said that "you're most worried about a deeper cut."

Greater defense spending reductions have been discussed by lawmakers and the White House as they debate long-term budget cuts.

"You want to understand that if you go beyond that target, what are the implications that you've done something in the current target of $400 billion that would disadvantage the department or the capability . . . if you took one more cut?" Cartwright said. "So we're doing due diligence on that."

The budget drills were self-initiated, Cartwright said.

The department has "three buckets" it can cut from, Cartwright noted. The first bucket involves readiness and operating costs for the next three years. The second, which is aimed at spending four to six years into the future, deals with force structure. To make cuts in this arena, DOD can change the balance of the active-duty and reserve forces. "Those are all different characters and they have different costs that you can manage based on time when you bring those forces into theater," Cartwright said.

The third bucket, which starts more than six years out, deals with infrastructure and entitlements, Cartwright said.

The White House is finalizing draft legislation that will detail how the administration plans to create a single export licensing agency and a single export control list, Inside U.S. Trade reported on Friday. The effort is the third and final phase of the export-control reform process.

Michael Froman, deputy national security adviser for international economic affairs, said draft legislation that would spell out how to implement these changes is "nearly ready to go."

"We envision a single licensing agency, a merger of the two control lists and the consolidation of two of our export enforcement units, all of which has to be done through legislation," he said at a July 25 event on export control reform at the Hudson Institute. Further:

Brian Nilsson, the National Security Council's point person on export control reform, said the administration has been working on the legislation for the past year in consultation with Congress. However, he admitted there is still a lot of work to do in the current phase two of the reform initiative before the final phase would move forward.

"By looking at what we envision for phase three, it helps us make sure we didn't miss anything in phase one and two," he told reporters after the event.

Phase two of the reform initiative will involve the implementation of a process that will move thousands of items from the strict control of the U.S. Munitions List (USML) to comparatively less stringent Commerce Control List (CCL), where they will be eligible for more license exceptions and export to additional countries.

The administration is currently in the process of consulting with Congress on this issue because the transfer of items from one list to the other requires congressional notification under Section 38(f) of the Arms Export Control Act (AECA).

A July 15 proposed Commerce Department rule would create a framework for this to occur by describing where the former USML items would be located on the control list. This would mean the creation of a special "600 series" of Export Control Classifications Numbers (ECCNs) where these former USML products will be placed.

Some 600 series items will be restricted from using certain license exceptions (Inside U.S. Trade, July 22).

Nilsson explained that the administration has previewed to Congress the method through which it plans to start the transfer of USML items to the CCL, and said there was "some comfort level" from Congress in the "two rule" approach.

This two-rule approach involves using two simultaneous rules to describe what would be coming off the USML and how it would be placed on the CCL. The "first rule" would describe the revised USML category, showing a positive list of items that were found to still require control under the USML. Any items not listed in that positive list would be either decontrolled or transferred to the CCL.

The "second rule" would apply the July 15 Commerce proposal to provide a clear picture of how transferred items will be controlled by the CCL. This would consist of a "positive list . . . describing what will go under the Commerce Control List," Nilsson said.

A horse-bound cavalry charge combined with laser-guided bombs dominated the battle of Mazar-e Sharif, in northern Afghanistan, which pitted U.S. Special Forces and Afghan Northern Alliance guerrillas against the ruling Taliban in the months after the Sept. 11, 2001, terrorist attacks.

The Pentagon's Joint Electronic Library has released an unclassified DVD, produced by an Institute for Defense Analyses and Defense Advanced Research Project Agency team, that purports to outline the lessons learned from the battle. According to a page on the JEL website:

The victory at Mazar-e Sharif is legendary. In October 2001, Special Operations Forces (SOF) linked with the Northern Alliance, a 19th Century indigenous force on horseback, and directed precision weapons from the air to defeat the Taliban -- a seemingly undefeatable foe. The battle, hailed as "transformational" by Secretary of Defense Rumsfeld, was key to the coalition force victory in the north and ultimately Afghanistan. While many recall the image of American SOF fighting from the backs of Afghan horses, the project enhances our understanding of the various aspects of this novel campaign and provides important lessons as we transform to a future force. Two examples include: the interdependencies among the indigenous forces, SOF, air operations and other government agencies; and the power of small, adaptable units integrating joint/coalition capabilities. "Learning from the First Victory of the 21st Century: Mazar-e Sharif" provides those insights.

At the request of the General Franks, Combatant Commander, U.S. Central Command (USCENTCOM) an Institute for Defense Analyses (IDA)/Defense Advanced Research Project Agency (DARPA) team reconstructed selected events from the Campaign for Mazar-e Sharif to support historical analysis, leadership development and research and development. The result of that work provided a comparison of simulation technologies from ’73 Easting to those available for Mazar, an overview of the campaign and a methodology for experimentation.

General Schoomaker, Chief of Staff of the Army, asked that the material be consolidated into a DVD set to be used as an educational resource for leadership development. He felt that the lessons from Mazar were applicable to the NCO as well as the four star level.

The unclassified DVD was approved by the Army and includes multi-perspective reconstruction of the campaign and an archive of the reference materials. Its purpose: To serve as an educational resource for leader development as well as to support historical analysis and further research and development.

The National Guard Association of the United States, which believes it is closer than ever to its long-sought goal of a Guard seat on the Joint Chiefs of Staff, is not happy about the Pentagon's recent decision to choose an active-duty general, and not a Guard officer, to head a key command. According to NGAUS, it's one more piece of evidence backing its claim that the Guard Bureau needs more clout:

This week's nomination of an active-component Army general to lead U.S. Northern Command over two qualified National Guard officers underscores the need for National Guard empowerment at the Pentagon.

Lt. Gen. Charles H. Jacoby Jr., the nominee to head NORTHCOM, is obviously a talented officer deserving of a four-star command, and the Guard community looks forward to meeting him and working with him.

But he was selected over two senior Guard officers who are far more experienced with the NORTHCOM mission of coordinating the defense of the U.S. homeland.

Gen. Craig R. McKinley, the chief of the National Guard Bureau, is a former commander of the Continental U.S. North American Aerospace Defense Command. Lt. Gen. Frank J. Grass is currently the deputy commander at NORTHCOM. Obviously, both are thoroughly familiar with the Guard, which supplies the bulk of forces available to NORTHCOM. And both know first-hand the complexity of interagency collaboration, which is so vital to operations here at home.

For the last three years, Defense Department officials have spoken publicly of putting a National Guard officer at the helm of NORTHCOM. The reasons are obvious: Domestic operations are a uniquely Guard mission. But twice now, uniquely qualified Guard candidates have been passed over.

Much has changed in the U.S. military over the last few years. Unfortunately, much remains the same. The Guard may have more of a voice at the Pentagon, but a voice without a vote in final decisions is far too often a voice in the wilderness.

This is another Pentagon decision that shows why the National Guard needs both a seat and a vote at the table. The U.S. House of Representatives and 43 U.S. senators and counting all support legislation that would provide the NGB chief with both a seat and a vote.

Army Chief of Staff Gen. Martin Dempsey, appearing before the Senate Armed Services Committee this morning for his confirmation hearing as the next chairman of the Joint Chiefs of Staff, says he would be open to having a larger role for the service chiefs in acquisition matters.

“It would be impossible for me to justify the current process,” Dempsey told Sen. John McCain (R-AZ). “We absolutely have to seek acquisition reform.”

Dempsey said it would be “reasonable to consider a different role for the four service chiefs in acquisition.”

He noted that service chiefs now mostly concern themselves with the requirements process whereas service secretaries are more responsible for acquisition.

Dempsey's statement came after McCain once again cited the Decker-Wagner Army acquisition study, which states that the service has spent approximately $3.8 billion a year in canceled programs since 2004. McCain has cited the shocking statistic numerous times in Senate hearings. Inside the Army first broke the Decker-Wagner story in February.

Just last week, McCain suggested that service chiefs should have a larger role in acquisition. In the July 21 confirmation hearing of Gen. Raymond Odierno, who is slated to replace Dempsey as Army chief, McCain asked, “Doesn't it have to be one of your highest priorities of trying to get this procurement situation under control, and wouldn't it be helpful if we gave legislative authority to the service chiefs to be more involved in the whole acquisition process?”

Odierno requested more time to answer the question and said he would get back to McCain, but promised -- if confirmed -- to work closely with Army Secretary John McHugh.