Election 2020: A Biden win could mean policy changes at DOD

By Tony Bertuca Marjorie Censer / November 2, 2020

If former Vice President Joe Biden defeats President Trump, the Defense Department could see significant changes, despite a likely continued focus on COVID-19 and great power competition with China.

Biden and other Democrats have said they do not intend to dramatically reduce defense spending if they win power, but the liberal wing of the party has pledged to pursue steep Pentagon cuts. At press time, no winner had been declared.

"Biden will not be able to completely ignore the Democratic left, so he will likely make some cuts to defense," said Mark Cancian, an analyst at the Center for Strategic and International Studies. "My guess is that he makes a modest cut upfront, maybe $10 billion or $20 billion, then freezes the defense topline in nominal terms. That makes it look like the administration is sustaining defense when, in fact, it is cutting defense 2% per year because of inflation."

House Armed Services Committee Chairman Adam Smith (D-WA) has said he does not support large defense cuts and has predicted the party will have "a big fight" about it.

Smith said the defense budget under a Democrat-led government would likely be in the range of $720 billion to $740 billion. The fiscal year 2021 defense budget request, meanwhile, is $740.5 billion and Trump's Pentagon is projecting $759 billion in FY-22.

"A flat line may be a little bit of a cut, but a $20 billion cut out of $740 billion isn't 20%, isn't even 10%," Smith said Oct. 21, referencing the reductions sought by some liberal lawmakers.

Tom Spoehr, an analyst with the Heritage Foundation, said it is unlikely a newly minted Biden administration would be able to submit a budget in February and might have to hold off until April.

"A Biden administration would be under pressure from the progressive wing to make at least a symbolic cut to defense spending in their FY-22 budget request," he said. "Budget cuts in the short term are hard because you typically can't cut people or programs in active procurement, so they might endeavor to hold the budget at $740.5 billion for 2022 or make a 1% [to] 2% cut. Either one would be difficult for defense to absorb since their costs inexorably go up with inflation, so it would be a major loss of buying power."

The Heritage Foundation, along with congressional Republicans led by Senate Armed Services Committee Chairman Jim Inhofe (R-OK), seek annual defense spending increases of 3% to 5%, per the recommendation of a bipartisan commission on the National Defense Strategy.

But Zach Mears, a former DOD official who now works as a senior adviser at law firm Covington & Burling, said even the Trump administration is projecting flat defense budgets in the coming years.

Mears said the more significant difference in a Biden administration would be priorities, including moving away from large force structure increases, like Defense Secretary Mark Esper's proposal for a 500-ship Navy.

"I expect the Defense Department leaders in a potential Biden administration to shift the debate away from numbers of platforms to the types of capabilities and concepts of operation needed to contend with a revanchist Russia and more effectively deter China as its rises as a strategic competitor," he said.

Cancian also said Democrats are far less likely to continue the boost in arms sales that have accelerated under Trump.

"The Trump administration has viewed arms sales as manufacturing policy and an enhancement to employment," he said. "The Democrats will apply a human rights lens and cut back on sales to countries they see as human rights violators. Saudi Arabia will be particularly vulnerable."

Progress payments

Aside from pushing broader policy and budget changes, a new Biden administration would have to contend with ongoing DOD acquisition reforms, including plans to study how defense contractors are paid.

Pentagon acquisition chief Ellen Lord said DOD needs up to $20 billion in supplemental funding to address pandemic-related impacts on the defense industrial base. Democrats and Republicans have both balked at including such funds in dueling stimulus bills that have yet to advance beyond the House and Senate.

In March as the COVID-19 pandemic generated crisis, DOD officials approved a temporary increase in progress payment rates for contractors from 80% to 90% for large businesses and from 90% to 95% for small businesses.

There have been unsuccessful efforts in the past to lower progress payments, and a Pentagon study underway could lead to changes.

But a former senior DOD official said it is unlikely Biden's team would change the new rates until it is clear the U.S. economy has recovered from the current economic crisis driven by COVID-19.

"It's going to be awfully hard to claw back," the former official said.

Even when the economy recovers, the former official said, the new rate will be difficult to reverse as companies lobby to keep it in place permanently.

Alan Chvotkin of the Professional Services Council, an industry group, said the association was pleased to see the new progress payments directive was issued without an expiration date.

"We started collecting data from our members," he said, noting that he was meeting with PSC's government finance committee last week "to get an update from them on where they are in terms of the value of the increased progress payment rate and the ability of prime contractors to flow that rate through to their subcontractors."

But some Democrats, like Sen. Elizabeth Warren (D-MA), have accused the Pentagon of hiring too many former defense executives and criticized COVID-19 stimulus payments that went to help the defense industrial base.

It remains unclear how much influence those Democrats would have or what impact they might have on officials appointed to DOD. For instance, Michèle Flournoy, a former Obama administration DOD official, is widely considered to be Biden's leading candidate for defense secretary and has been a defense industry consultant for several years.

Spoehr of Heritage, however, said he is "seeing themes emerging" from more progressive Democrats "that the defense industry is too powerful and influential."

"There are already moves to try to restrict defense industry executives from serving in a Biden Pentagon, based on a misplaced perception they will be beholden to their former employers, even though former defense industry executives have proven very effective in leading the Pentagon, and there has been no contemporary evidence of collusion," he said.

Domestic sourcing

The Trump administration has pushed for the Pentagon to require increased domestic sourcing of goods and services, with the support of many Democrats.

The House version of the FY-21 defense authorization bill has a provision that would require 75% of the Pentagon's new major defense acquisition programs be manufactured and sourced within the United States by October 2021, eventually moving to 100% by 2026. U.S. allies have sought to block this and other "Buy American" initiatives.

Jerry McGinn, a former top industrial policy official at the Pentagon who now leads George Mason University's Center for Government Contracting, said he thinks both Trump and Biden would pursue increased on-shoring of the defense supply chain.

Trump, McGinn said, has been clear about economic protectionism and Biden's positions are "pretty darn 'Buy American' too."

Biden on his campaign website says, "U.S. manufacturing was the Arsenal of Democracy in World War II, and must be part of the Arsenal of American Prosperity today, helping fuel an economic recovery for working families."

McGinn said that "regardless of who wins, there will be a push for more balance with domestic sourcing."

He added that much of the bipartisan consensus on the issue has been achieved because of increased anti-China sentiment. McGinn said he hopes either administration will first focus on supply chain areas where the United States is overly exposed to China, but not to the detriment of a robust global supply chain for defense.

He also said supply chain security policy, including new cybersecurity certifications, is expected to be important to either presidential administration.

Independent research and development

A Biden administration could bring renewed attention to how contractors manage their independent research and development spending after the Trump administration undid an Obama administration policy on the matter.

In 2015, then-acquisition chief Frank Kendall called for major contractors to better communicate with Pentagon officials about their independent research & development projects.

At the time, Kendall argued there was simply little supervision of IRAD and that the "laissez faire approach of the last few decades has allowed defense companies" to emphasize creating intellectual property over improving military capability.

"The goal of this initiative is to restore the balance between these goals," he said. Kendall is now advising the Biden campaign.

But defense industry executives, including Lord, then the chief executive of Textron Systems and now DOD's top acquisition official, criticized the Pentagon's plans. A rule requiring "technical interchanges” was eventually issued in 2016, but repealed in 2018.

The Pentagon said the repeal followed a recommendation from the DOD Regulatory Reform Task Force.

The task force "determined that the [Defense Federal Acquisition Regulation Supplement] coverage was outmoded and recommended removal, since requiring a technical interchange between the Government and major contractors is unnecessary," the notice read. "The objective of the interchange can be met through other means."

Loren Thompson, a defense industry consultant, said that under Democrats, "in general, there is an attempt to gain more regulatory control over virtually every facet of the defense industry."

"The defense industry is a captive of a government and therefore [Democrats] feel that they should have more say over contractors, including over IRAD," Thompson added. "I would expect that, when it comes to managing military contractors, the Biden administration will be a replay of the Obama administration."

Consolidation

During the Obama administration, DOD officials made clear they were not open to significant defense industry consolidation, particularly among the largest contractors.

In 2015, Kendall spoke out when Lockheed Martin announced it was purchasing Sikorsky, even though the deal did not trigger Justice Department concerns.

"While the Lockheed-Sikorsky transaction does not trigger antitrust concerns of having a negative impact on competition and we understand and agree with the basis upon which the Department of Justice decided not to issue a request for additional information about the transaction, we believe that these types of acquisitions still give rise to significant policy concerns," he told reporters.

Kendall argued size begets power and "the department's experience with large defense contractors is that they are not hesitant to use this power for corporate advantage."

"The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition,” he added.

During the Trump administration, there have been several large transactions, including the merger between Raytheon and parts of United Technologies and Northrop Grumman's acquisition of Orbital ATK, but none among the five largest prime contractors.

Still, Thompson said he thinks both of those deals would have gotten closer scrutiny under a different administration.

Going forward, "I think that it's going to be hard to consolidate because the top of the sector already consists of only a handful of companies, and Democrats don't really trust market forces to resolve these issues."