April 19, 2025 • 38 mins
Last year, it was announced that the US Department of Defense had failed an audit for its seventh straight year, indicating an ongoing inability to track its hundreds of billions of dollars in spending and inventories. Why does this keep happening? Why does the Pentagon get audited in the first place? And what can be done to fix it? On this episode, we speak with Julia Gledhill, a research analyst at the National Security Reform Program at the Stimson Center. She explains how the budgetary process works, as well as the prospects for the Pentagon ever actually passing an audit.
Read more:
Pentagon Still Falls Short on Jump-Starting Innovation, Audit Says
Billionaire Feinberg Says Pentagon Needs an Investor’s Savvy
Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hello, odd lots listeners.
Speaker 2 (00:01):
I'm Joe wasent Thal and I'm Tracy Alloway.
Speaker 1 (00:03):
Obviously, mostly we've been talking a lot about the trade
war lately, the tariffs, but there are other things going
on in the world, and in fact, there are some
episodes that we've recorded prior to all this that we
still want to publish.
Speaker 2 (00:18):
That's right. So what you are about to hear is
an episode we recorded way back on March eighteenth. It
feels like it was a lot longer ago, but it's
been basically a month, and with everything that was happening
in markets, all the trade announcements, the tariffs, we've had
to put this one on hold, but we want you
to listen to it. It's a really interesting topic and
(00:40):
still very very worthwhile to hear about it.
Speaker 1 (00:43):
Right, we're going to be talking about the Pentagon budget
and things like that. If it feels a little dated
the conversation, that's because it is dated. But take a listen.
I still think that you'll find. You know, there's still
no world in which the nature of defense spending is
not an important question, is not something interesting, So even
with everything else going on in the world, you should
(01:05):
take a listen.
Speaker 3 (01:06):
Here we Go, Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1 (01:25):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2 (01:29):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (01:31):
Tracy, we've hinted on the podcast a few times over
the last several months, who want to do more on
defense and we're gonna We're gonna.
Speaker 2 (01:38):
Starts, Joe, and I think you've said it pretty explicitly.
Speaker 1 (01:41):
But it is interesting, right, Like it is a good
It does seem like it should be a good topic
for us, right.
Speaker 2 (01:46):
It's a huge chunk of the economy. I think it's
like the US government's biggest line item in terms of expenditure.
It's either defense or interest rate payments on its bomb. Ye,
it's definitely number one or number two, and so it
is work of additional study.
Speaker 1 (02:02):
I agree, And you know, I think it's actually really
important for US because you know, we talk about industrial
policy a lot in defense is the one area where
that is never wavered, right, Like it's always been. The
government is the primary buyer purchaser, but there are these
private companies and they also sell overseas and stuff. And
(02:23):
it's always been about staying at the leading edge of tech,
and probably if you're like thinking about like industrial policy
and other areas like whether it's cars or batteries or semiconductors.
I just assume there must be a lot that we
can learn from how it works in the defense world.
Speaker 2 (02:39):
As a military brat, I feel comfortable saying as well
that it's kind of also connected to a social safety net.
Speaker 3 (02:47):
Yeah.
Speaker 2 (02:47):
True, you have healthcare tied to military service. You've got
cheap groceries tied to military service. I used to love that,
So it's interesting from a number of perspectives. What blows
me away, though, is you hear that statistic every once
in a while that the Pentagon has never passed an audit,
(03:08):
which raises all these big questions about if this is
the biggest expenditure or one of the biggest expenditures for
the US, how is it possible that we don't actually
seem to know where the money is going.
Speaker 1 (03:19):
No, I think this is a great question, and I
think that what you articulated there is just a great
way of sort of entry weada understanding defense with a
simple question. Because like I've seen those headlines so late
last year headlines Pentagon fails seventh audit in a Row
and then I read the headline. But I don't know
what that means. I don't know what it means to like,
(03:40):
you know, it's like a private company. I don't know
what audits really mean in the government. I don't know
if there are any consequences. I don't know why it is.
Is it because of malfeasance or is it just because
of its sheer size. I mean it's you know, the
Pentagon absolutely enormous, So I think, like, yeah, we should
have What does that mean that they just keep filling
all these audits?
Speaker 2 (03:56):
Well, it also raises an existential question of why are
we even bothering to do audits if we keep getting
the same result and nothing seems to change that too.
Speaker 1 (04:06):
That's a great question. Anyway, We're going to finally get
some answers to at least this question of what it
means that the Pentagon keeps failing audits year after year
and year, and what it says maybe about how we
do defense spending. I'm very excited. We have the perfect
guest we're going to be speaking with, Julia Gledhill. She
is a researcher at the Stimson Center has written quite
a bit about this, has been recommended to me as
(04:27):
someone to talk to about Pentagon and defense spending. So, Julia,
thank you so much for coming on odd lots, thank.
Speaker 4 (04:33):
You for the invitation. It's great to be here.
Speaker 1 (04:36):
What is a Pentagon audit? Apparently we've never passed one,
and we'll get into why. But what does it even
mean for the Pentagon to get audited?
Speaker 5 (04:43):
Yeah, this is an important question. I think Tracy is
hitting the point on the nail here in that what's
the point of doing the same thing over and over
and expecting a different result? That is, in fact the
definition of insanity. And so in thinking about what the
purpose of an audit is and a Pentagon context, it's
a point and to remember why we audit in general? Right,
Companies undergo audits to assure stakeholders that management is accurately
(05:08):
presenting a company's financial performance and position. In other words,
you know, audits help investors and lenders determine the financial
value of a company.
Speaker 4 (05:16):
So how does that apply to the Pentagon.
Speaker 5 (05:18):
Well, the Pentagon audit assesses how well the agency is
managing taxpayer dollars. The difference is that, unlike stakeholders and companies,
taxpayers can't simply opt out of funding the Pentagon when
it fails an audit. But the agency wide consolidated audit
of the Department of Defense looks at DOOD financial statements,
(05:39):
but also internal controls over financial reporting as well as
compliance with relevant laws and regulations.
Speaker 2 (05:45):
What does an audit actually entail for the Pentagon? Because
I imagine, you know, when I think about the Pentagon,
it's this huge, sprawling, industrial military complex. I imagine it must
be quite an undertaking to try to get granular detail
on where money is going.
Speaker 5 (06:04):
It absolutely is a major undertaking, which explains why the
DoD has not only failed so many audits in a row,
but only started to do consolidated audits agency wide in
twenty eighteen. So the Pentagon audit is done by independent
public accounting firms in collaboration with the Department of Defense
(06:25):
Inspector General Office, which is the internal watchdog within the Pentagon,
and what they do is conduct independent audits of several
different DoD components. These can include the military services, but
also combatant commands, field activities like the Defense Logistics Agency,
(06:45):
and then the Department of Defense Inspector General puts all
of those independent audits together in one consolidated agency wide
audit and comes to a conclusion. Notice that I say
conclusion and not opinion, because in the case of failing
a Pentagon audit, the Pentagon has actually received disclaimers of
opinion repeatedly, which means that the agency department wide was
(07:09):
unable to produce the financial statements necessary for auditors to
form an opinion. An audit opinion on the quality and
sort of accuracy of financial reporting throughout the agency, but
it includes a lot of different components and it is
indeed quite laborious.
Speaker 1 (07:28):
So the goal is for the independent firms to be
able to form an opinion. And when we read a
headline that says they failed the audit, it means they
can't even get the documents and the financial statements together
so that they can form an opinion. Like explain to
us what that word failure means in this context.
Speaker 5 (07:46):
Yeah, So I think that the former Comptroller of the
Department of Defense has explained this quite well, and in
describing a disclaimer of opinion in the context of auditing,
he basically said that this is a red light, right,
so is an adverse opinion, which is another level of
(08:07):
there are going to be material persistent weaknesses in financial
reporting throughout DOOD entities, and then you have a yellow light,
which is a qualified opinion, and then you have an
unmodified opinion. This is the goal in the Pentagon audit process,
which is considered a green light, and only a few
of DOOD components have actually achieved this green light, which
(08:30):
means that the financial reporting internal controls generally can be
trusted and assumed to be consistently accurate.
Speaker 2 (08:38):
What happens when the Pentagon actually fails an audit, because I imagine,
like in theory, there should be consequences, but the fact
that it keeps happening, as I mentioned, suggests that there
probably aren't.
Speaker 5 (08:50):
Yeah, there are no consequences, much to the disintment.
Speaker 4 (08:54):
Exactly.
Speaker 5 (08:55):
Imagine imagine a company failing an audit and investors saying, well,
we're going on ahead anyways, and so no, there are
no consequences for the Pentagon when it repeatedly fails audits.
And yet the audit is supposed to give US taxpayers
some trust that the Department of Defense is spending our
(09:18):
money efficiently and wisely. But unfortunately, and much to the
disappointment of components like the Marine Corps or the Defense
Threat Reduction Agency which have received these green lights, these
unmodified audit opinions. They are not rewarded for receiving green
lights in the auditing process. And you know, the Marine
(09:40):
Corps is still struggling to you know, get their boats.
So it's an important question, and unfortunately there are just
no consequences because appropriators are not reading a four hundred
page audit report on the Pentagon before deciding what to
spend on national defense.
Speaker 1 (09:58):
So they failed the audit. It's at least they can't
even put together an opinion. What's happening? Why can't they?
What are they when they're going in there and they're
looking for documents and evidence that the money is being
tracked roughly in accordance with how it should be and
that the various divisions are What are they seeing when
they go in there that causes them to not be
able to produce in a pant sure well.
Speaker 5 (10:20):
One failure point that I love to point to is
DoD's difficulty in tracking property in inventory records across the
military services.
Speaker 4 (10:31):
One of my favorite examples of why does this matter?
Who cares?
Speaker 5 (10:34):
Why do auditors go in and look at inventory records
and flag this as a weakness in.
Speaker 4 (10:39):
Their audit reports.
Speaker 5 (10:40):
Well, a few years ago, twenty nineteen, the Department of
Defense Inspector General flagged errors and the Navy's property and
inventory records, and as a result, the service ended up
finding a warehouse that was mysteriously absent from its property
records and.
Speaker 2 (10:56):
They've lost a whole warse amazing.
Speaker 5 (10:58):
Indeed, and inside they found one hundred and twenty six
million dollars.
Speaker 4 (11:02):
Worth of spare parts.
Speaker 5 (11:04):
Now, in the context of the Pentagon budget, what is
one hundred and twenty six million when we're talking about
a near trillion dollars depending on how you count it.
But they found these spare parts for a number of
different aircraft inside that warehouse, and they were actually able
to fill over twenty million dollars in spare parts orders
without having to procure new ones. And so the scale
(11:28):
of this issue is unknown right because we have a
pervasive inventory and property record keeping issues throughout DoD And importantly,
the Government Accountability Office has actually flagged inventory issues since
the early eighties, since nineteen eighty one, and this is relevant,
for example, to the most expensive weapon program in US history,
(11:51):
the F thirty five fighter jet. Now the reason I
bring it up is because you know, okay, you have
an example of the Navy finding all these aircraft parts
and being able to fill orders.
Speaker 4 (12:00):
So what does that mean.
Speaker 5 (12:01):
In the context of a now two trillion dollar weapon
acquisition program, which is the F thirty five. Well, you
have the GAO, the Government Accountability Office, saying that F
thirty five parts in the possession of contractors are likely
significantly understated. So the government has all these spare parts
are government owned but typically possessed controlled by contractors. And
(12:25):
the GAO has flaged this issue for a long time
because it means we could be over buying on spare
parts as a country. The Department of Defense Inspector General
has likewise expressed this concern and in twenty twenty one
found that, you know, the Army, for example, was forecasting
spare parts needs and was only accurate twenty percent of
the time. Again, why does that matter, because they ended
(12:48):
up overstating how many spare parts the Army needed by
over two hundred million dollars. The military writ large, all
the services together actually overshot their spare parts needs by
nearly a billion dollars. So this matters when you can't
keep track of your property in the possession of contractors.
Speaker 2 (13:06):
It must matter from an operational or execution perspective as well. Right,
if there was a military emergency and we can't find
the spare parts that we need because we've never been
able to track them, that's problematic.
Speaker 5 (13:19):
Oh absolutely. I mean you look back to the early
years of the War on Terror. I mean I meet
a lot of veterans who when I talk to them
about these issues, they say, oh, yeah, we were hiding
you know, parts to maintain our equipment in our bunks
because we had no assurances that we were going to
be able to maintain to repair the equipment that we
(13:40):
need to.
Speaker 4 (13:41):
Do our jobs.
Speaker 5 (13:41):
So it is a readiness issue and one that the
DoD absolutely needs to directify.
Speaker 1 (14:03):
I have to imagine that if one of the problems
is sort of implied here about overordering spare parts, I
would guess that the major weapons suppliers, the defense contractors,
don't really mind that problem.
Speaker 4 (14:17):
That's exactly right, Joe.
Speaker 5 (14:19):
In fact, the DoD has actually requested inventory records from
Lockheed Martin before for the F thirty five program, and
Lockheed Martin said, oh, well, it's going to cost us
a bunch of money to track down this information and
provide the reports, essentially disincentivizing the government from requiring that
(14:39):
in the military contract right. And I wrote a piece
about this a couple of years ago, and it's insane
because you have contractors who have government owned property in
their possession, but they control all of the tracking mechanisms,
and even when government asks, they say, oh, well, what
are you paying us to provide you with information about
government owned property?
Speaker 2 (15:00):
Just on the contractor point. I always wonder about this,
but who does the US actually compete against when it's
buying military stuff, Because I would think with a trillion
dollar budget for defense, the US is probably putting in
the biggest orders, and so could they in theory dictate
the price or at least ask for a volume discount
(15:22):
or something. I mean on the f thirty fives for instance,
Like the US has one hundreds now versus other countries
that have I think a few dozen.
Speaker 4 (15:33):
Yeah. So this is the problem with a monopsone market. Right,
you have.
Speaker 2 (15:37):
Monos sorry that's a trigger word for US.
Speaker 5 (15:43):
You have one buyer, but you also in a lot
of cases have one seller. And that is the genius
of the arms industry. Right with the f thirty five program.
They have politically engineered it such that it exists in
I think all fifty states now. Lackie Martin has an
interactive map so someone can fact check me. But it
is like forty six, if not all fifty at this point.
Speaker 1 (16:06):
So every politician in America has some reason to preserve
the status quo because they have workers.
Speaker 5 (16:13):
That the idea here, that's exactly right, because jobs, even
though we know that military spending is a lousy jobs
creator in comparison to other types of government spending.
Speaker 1 (16:24):
So you know, I guess if the Pentagon has failed
seven audits in a row. I guess implication eight years
ago or nine years ago, there was no mandate for
an audit period because it must be a relatively new thing.
Can you talk to us a little bit about how
that came about the requirement to audit and how the
(16:44):
military contractors sort of try to shape the process of
tracking acquisition.
Speaker 4 (16:50):
Sure, so this is a question I get a lot.
Speaker 5 (16:53):
Was their accountability before the Pentagon started consolidate agency wide audits?
So the answer is yes, but not to the same
extent that we have today. So in nineteen ninety Congress
passed the Chief Financial Officers Act, which required federal agencies
to prepare financial statements for audit, and the DoD submitted,
(17:17):
you know, component financial statements to the DODIG for that purpose,
but did not undergo the thorough.
Speaker 4 (17:26):
Audit that we see today.
Speaker 5 (17:28):
And in fact, the number of components included in the
agency wide audit tends to vary a little bit every year.
Sometimes it's twenty eight, sometimes it's twenty seven. But it
is absolutely true that contractors shape nearly every aspect of
defense policy because of their power and influence on Capitol Hill,
(17:51):
and a major lever for that power an influence is
in fact the sort of jobs creation that they lean
on for these weapon programs. And I have actually think
it's an interesting question because now you see the current
Secretary of Defense, HEG. Seth, really embracing the audit in
his quest to improve military readiness, and on its face,
(18:14):
that is a noble and worthy goal, right, it remains
to be seen how that actually shakes out in this administration.
I only hope for the best and very much encourage
the administration to take this seriously because I do think
that it matters. Again, when you have, for example, military
services over buying spare parts at the expense of the taxpayer. However,
(18:38):
I think that it's noteworthy when you see news a
month ago about the Secretary saying, Okay, we're doing budget
reshuffling to reorder DoD funding and channel it toward Trump's priorities.
President Trump's priorities. And one of those exemptions from potential
reductions in these budget reshufflings was the audit, of course,
(19:00):
or so was nuclear modernization and many other things, and
that is important for military readiness, and we actually should
work toward passing an audit. However, it's important to note
that even if the DoD passes an audit, that doesn't
justify the money that the DoD is spending, because we
should be able to achieve more for less, and we
(19:21):
have not seen that in recent decades.
Speaker 2 (19:23):
Right, just on this note, I kind of want to
back up and ask a big picture question. But you know,
Joe alluded in the intro to the fact that defense
spending has historically been it's always been there, it's always
been with us, and it's always been pretty big. I
know that you can benchmark it to GDP and it's
come down as a percentage of GDP, but I think
(19:45):
we can all agree that one trillion is still a
pretty big number. So why did that happen? And why
is it that we just accept that defense is kind
of untouchable or by its nature going to be this
huge line item.
Speaker 5 (20:02):
I'm so glad you brought up percent of GDP. I
love to talk about this. I think that it's one
of those macro indicators that conceals more than it reveals. Right,
So the distribution of military spending has changed a lot
over time, but we're so beholden to this idea of
a gigantic military budget to keep American safe because of
(20:25):
its legacy after World War Two and bringing the United
States out of sort of the trenches of the Great Depression,
and stimulating the economy. Of course, any significant government spending
would stimulate the economy in sort of offset the effects
of under consumption. And yet we've just been sort of
(20:45):
ingratiated with this idea that military spending is so integral
to our economic growth, when in fact, there's a lot
of economic research out there that says, you know, sort
of ever expanding military budgets can have a depressive effect
on long term economic growth. Why because it impacts productivity. Right,
(21:06):
So World War Two, the sort of narrative, in sort
of dominant historical discourse is we have this productivity miracle. No,
it was a production miracle. We spent a bunch of
money on military industrial output, but that had a depressive
impact on productivity over time. So I argue that this
is actually bad for the economy long term. But we
(21:29):
are as a country, I think, so dedicated to this
idea that the military budget is sort of a core
part of our economic engine. And unfortunately that's not true anymore,
because again the distribution has changed over time. It's a
lot more capital intensive. It's not necessarily this sort of
vehicle of upward economic mobility that it used to be
(21:50):
because it's not as focused on labor. Of course, yes
you have the GI bill, Yes you can get a
free education. That's all very important and good, and we
should absolutely do that. But we're spending more and more
money on research and development and procurement. Who does that benefit.
It benefits electrical engineers, not the working man.
Speaker 2 (22:07):
So just on this note, in preparing for this episode
and looking you up, I noticed that for your undergraduate
thesis you did an econometric study to test the relative
impacts of various types of defense spending on income inequality.
That seems really interesting. I don't know if you remember
your undergrad days or your work, but what did you
(22:31):
find in that?
Speaker 5 (22:32):
So I actually just gave you the short pitch on
my paper, which did find and I had an R
squared of ninety six percent, so explanatory value was good.
But I tested this hypothesis that military spending is good
for jobs, good for people, good for the economy. And
I did that by disaggregating the base budget into the
(22:53):
major categories, some of which I just described research and development, procurement, personnel, operations,
and maintenance, you big ones. And I actually found that
procurement in research and development had exacerbated income and equality
over the eight years of the Obama administration that was
my time span.
Speaker 4 (23:12):
And I actually know someone.
Speaker 5 (23:14):
At an academic institution writing on the same exact topic now,
so I'm very happy that that person will be soon
publishing a paper because I did not publish mine. But yeah,
I mean, I wanted to test this idea that military
spending is good for the economy, and it's military Keensianism, right.
This is the idea that we've all been fed. And
I think that lawmakers really grasp onto because it's a
(23:36):
convenient veil for what our frankly often conflicts of interest,
whether that be congressional members owning and trading stocks or
receiving campaign finance from arms manufacturers. And I think it
really distorts the way that we talk about defense policy,
the military and its role in our economy.
Speaker 1 (23:59):
If I could Devil's advocate for a second, one of
the major sources of anxiety right now in the US
economy is not about jobs, although maybe the labor market
is weakening, but the unemployment rate is still kind of low.
It's mostly this concern that the US is not at
the technological cutting edge in many areas that are at
(24:19):
least in some way adjacent to the military. And of course,
you know, people love to tell you it's like Silicon
Valley got started off, you know, from it was all
military funding. And that's why we have chips, and that's
why we have compact chips and small computers because they
needed to be put in small spaces, et cetera. When
you talk about all of the R and D spending
that they do, or even the capital expenditure isn't that
(24:43):
like when we think about productivity, do we get positive
spillovers from the research that's being done by today's weapons
manufacturers that are then transmitted to the rest of the economy.
Speaker 4 (24:54):
Yeah, this is something I've really been grappling with.
Speaker 5 (24:56):
I'm writing a paper right now on the defense industrial base,
and you're absolutely right. I mean, industrial policy is super
hot right now. Of course, like Robert Reich, I think
said this in the nineties, industrial.
Speaker 4 (25:06):
Policy is back.
Speaker 5 (25:07):
But the thing is, we've always had industrial policy for
military contractors. To your point, Silicon Valley wouldn't exist without
Dharba and ARPA E grants. And in my view, I
sort of see this in the context of our economic
resilience and vitality long term. Okay, I'm an elder Zoomer.
I'm pretty much the oldest you can be and still
(25:29):
claim to be gen z and I think about my
future and I see military investment as mortgaging our futures
on exquisite, expensive platforms. Even in the software realm. That's
not to say that I don't think there isn't innovation happening.
(25:50):
I think, you know, in the context of the audit,
for example, it's important that we have internal controls around
the development of and reporting of sort of more cyberphysical
capabilities and a military context software programs. I'm not convinced
that private industry is necessarily going to make the leaps
(26:14):
and bounds that we did as a country two decades ago,
three decades ago today, And the reason for that is
because I don't think that venture capital is necessarily driven
by innovation and spill over into the civilian economy. They
are driven by profit motive and the ability to return
(26:36):
value to shareholders. Right.
Speaker 4 (26:38):
This is the legacy of VC and Silicon.
Speaker 5 (26:40):
Valley and the way that the government has always shaped
the market through R and D funding. Right, they jump
in right before a product goes to commercial market, if
in fact, you are working on something that is dual use,
and then they leave after the IPO. So in some ways,
I see the government has always been the risk taker
because they're the ones that fund the basic research. So
(27:02):
I don't have fully baked thoughts on this, but I
think that it's critical for the government to continue shaping
the risky investments that we need to do true innovation
and in my view, combat the climate crisis in sort
of new innovative.
Speaker 1 (27:17):
Ways, Tracy, I think this is like a really key point,
which is just as Julia was putting it, which is
(27:39):
that really like long term industrial capacity type innovation does
not strike me as particularly compatible with the types of
returns that either public markets or VC investors expect. And
we talk about this in the context of nuclear anyway,
and this idea that like the payoff timelines and the
(27:59):
risks do not seem in alignment with the opportunity set
for private sector investors.
Speaker 2 (28:04):
Right it seems like a big risk with a lot
of capital expenditure, which the private sector notoriously shies away from. Okay,
I forgot to ask one really granular question on the audits,
and I've read that there's something called an unfunded priority list, which,
as far as I can tell, seems to be like
(28:26):
just a wish list of extra budgetary items that the
Pentagon didn't include in its official budget request.
Speaker 4 (28:33):
What is that?
Speaker 2 (28:34):
And what's the point of having a budget if you
can just have like another budget on top of it.
Speaker 4 (28:39):
You described it perfectly, Tracy.
Speaker 5 (28:42):
It is, in fact a wish list of extra budgetary
items that the DoD not only didn't ask for in
its budget request to Congress, but also did not have
to provide justification documents for And so you see the
services manipulate the UPL.
Speaker 4 (28:59):
Process, wishless process in order.
Speaker 5 (29:02):
To make it look like their budgets aren't as big
as they actually are.
Speaker 4 (29:06):
We've seen the Navy do this with destroyers.
Speaker 5 (29:07):
I mean, it is absolute blasphemy. I think it's a
slab in the face to tax payers and to the
rest of the federal government. You've seen some members of Congress,
I believe Tim Kaine has suggested, oh well, why don't
we have civilian agencies also statutorily required to submit unfunded
priority lists. Look, if it's not in your budget, it
is not a priority. And we do not need to
(29:29):
standardize or normalize what I consider to be a pretty
undemocratic version of the budget process.
Speaker 1 (29:38):
Talk to us a little bit more about the fights
right now going on Capitol Hill. Sitting aside the assumption
that defense contractors always want more spending, what are some
of the tension points? So the fights that are happening
about sort of guardrails on spending or other issues related
or maybe related to the audit, Like, what are the
fights right now about?
Speaker 5 (29:59):
Yes, So, I mean, obviously we just averted a government shutdown.
So the CR the Continuing Resolution, has taken over everybody's
minds in the last couple of weeks here and sort
of The next big fight is the budget reconciliation process.
I'm sure listeners are familiar with that if they listen
to this podcast. It is also a mechanism through which
(30:21):
to avoid regular order and thereby the filibuster and the
Senate and add potentially hundreds of billions of dollars to
the military budget. And then after that we have the
National Defense Authorization Act, the annual Defense Policy Bill that
sets the top line for military spending in this country.
It is just whammy after whammy in twenty twenty five.
I sort of can't believe that it's only March because
(30:44):
it feels like it has been months since this year began.
But you know, we have a couple of things going on.
We have a fight for incredible military budget increases through reconciliation,
and then in the Defense Policy Bill and the NDAA,
we have a pretty coordinated effort industry. Why that is
supported by many members of Congress to essentially gut the
(31:07):
weapon acquisition process. Now, why would contractors want this?
Speaker 1 (31:12):
You explain this.
Speaker 5 (31:13):
Yeah, it's part of a decade long effort to eliminate
oversight guardrails in the budgeting and acquisition process at DoD.
And the justification for it is we need to prepare
for warwi China, which if you subscribe to that frame
of foreign policy, which I consider to be a bit reactive,
why would we base our foreign policy on another country? Right? Like,
(31:37):
why would we do that? Wouldn't we want a positive
vision of what the US wants and how we are
going to navigate the world. But if you subscribe to
that vision, then it makes a lot of sense. Okay,
we're gonna lift the pesky red tape so that industry
can better sell weapon acquisition programs to the Pentagon, do
(31:58):
it faster and more, and sort of eliminate the milestones
at which the DoD is able to decide, Hey, do
we really need this? Are we going to need it
in five years? Is it cost effective? Is it filling
a capability gap? Could we do it cheaper? Is there competition?
And there are a couple of ways that they're doing this.
But you know, acquisition reform at large is sort of
(32:20):
I think, another big fight, and it's interesting because the
silicon Valley tech firms have actually jumped on board with
this as well.
Speaker 2 (32:25):
Yeah, what would be your recommendation for reform of defense spending? Like,
imagine your hexith, what would you add, Like, what's number
one on your list?
Speaker 4 (32:37):
Gosh, this is hard.
Speaker 5 (32:38):
I think I will pick an area that I think
Trump could be instinctually open to, and that is raining
in nuclear expansion. And I say expansion rather than nuclear modernization,
because I think that's a mischaracterization of what's going on.
About a month ago, you saw President Trump say I
(33:00):
want to pursue arms control agreements with Russia and China
and with the ultimate goal of cutting our respective military
budgets in half. Now I think that his heart was
in the right place, if only for a moment, because,
of course, a week later, nuclear modernization, as I mentioned before,
was exempted from the potential budget reductions that heg Seth
(33:23):
talked about. It's not a reduction of the military budget
top line, but rather a reshuffling of funds. That area
was protected against potential reshuffling. But what I would do
is rain in nuclear expansion spending. I do not think
that we need to be investing in the modernization of
all three legs of the nuclear triad, I would argue,
(33:46):
for just the sea leg of the nuclear triad, there's
no reason we need to be doubling down on the
land based leg of our nuclear arsenal, the Sentinel program,
for a bunch of reasons, not least of which is
the fact that the program has experienced eighty one percent
cost growth since twenty twenty. It's not the most accurate
nuclear weapon we have in our arsenal anymore. And the
(34:09):
program just has a bunch of issues that the DOOD
has not been able to resolve. And so if I
could say one thing I would, I would probably say
cancel the Sentinel program, which would save a lot of money,
and you could argue that it's helpful in terms of
de escalating tensions with other nuclear powers. I will just
wrap this by saying that our pursuit of nuclear expansion
(34:32):
across the board and our nuclear enterprise has inspired other
nuclear powers to do the same.
Speaker 1 (34:38):
I just have one last, very quick question. Do you
think it's plausible that in the next four years the
Pentagon will pass an audit? Is it conceived?
Speaker 2 (34:45):
Don't they have a target by like twenty twenty eight?
Speaker 4 (34:47):
Yes?
Speaker 1 (34:49):
Do you see it happening.
Speaker 4 (34:50):
I'm not optimistic.
Speaker 5 (34:51):
No, what, they have eleven components of the DoD that
have received unmodified opinion, and it has been a painstakingly
slow process. I am not terribly optimistic that they're going
to bring that number to one hundred percent of components
audited at DoD in addition to the agency wide audit.
Speaker 4 (35:13):
I would love to be wrong.
Speaker 1 (35:15):
Well, we'll see. Maybe we'll have you back on in
four years or well as soon as we get the
next when we get a pass, we'll chat with you
and we'll see what they did to accomplish that. Julia Gledhill,
thank you so much for coming on odd Lots really
appreciate you taking your time.
Speaker 4 (35:28):
Thank you for having me.
Speaker 1 (35:42):
Tracy. I'm really glad we did that episode. You know,
like when I hear those defense specialists like rattle off
the names of the different weapons programs or the different
legs of the nuclear triad, I have like no idea,
you know, I really lose it. So it's this enormous
complex thing. But I thought that was just like really
help full in getting a sort of simple answer to
(36:02):
a basic question, particularly like things like you know, the
fact that the government doesn't know what's in its own warehouses?
Speaker 2 (36:09):
Right, Well, Julia explained everything really well, but I still
find it slightly unbelievable that there's all this money going
in and out of the Pentagon and we seem unable
to track it, and no one really knows where it is.
No one really has a full picture of the assets,
the stuff sitting in warehouses. As you just mentioned, it's
(36:29):
kind of crazy.
Speaker 1 (36:30):
Do you keep a really good personal budget? Oh no,
so that can't you like sort of sacrifice with the Pentagon?
Speaker 2 (36:36):
I need too, because I can just look at like
my one bank account.
Speaker 1 (36:39):
Right, Yeah, that's true. I guess I'm not totally surprised, right,
I mean, it is insane to me. It's also just
very interesting too, the sort of interplay with all that
and just the incredible infrastructure around lobbying and oh, we
have manufacturing in all fifty states or maybe it's forty
eight states, or maybe it's forty six states. Like how
(37:02):
complete of a package the defense contractors have put together
to make it so politically difficult to really meaningfully turn
the dials on either the volume or just the approach
to procurement.
Speaker 2 (37:14):
Yeah, and on that note, the unfunded priority list like
the extra budget on top of the existing budget. It's
kind of funny, fascinate.
Speaker 1 (37:24):
There's plenty more to dive into. I thought this was
a great entry point.
Speaker 2 (37:27):
Yeah, more to come. Shall we leave it there for now?
Speaker 1 (37:29):
Let's leave it there.
Speaker 2 (37:30):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (37:36):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our guest Julia Gledhill. She's at Julia Gledhill. Follow
our producers Carman Rodriguez at Kerman armand dash Ol Bennett
at Dashbock and Kelbrooks at Kelbrooks. For more Odd Laws content,
go to Bloomberg dot com slash odd Lots. We have
all of our episodes in the daily newsletter, and you
can chut about all of these topics with fellow listeners
(37:57):
in our discord discord dot od Lots.
Speaker 2 (38:01):
And if you enjoy odd Lots, if you like it
when we dig into the defense industry, then please leave
us a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely ad free. All you need
to do is find the Bloomberg channel on Apple Podcasts
and follow the instructions there. Thanks for listening.
Hello, odd lots listeners.
Speaker 2 (00:01):
I'm Joe wasent Thal and I'm Tracy Alloway.
Speaker 1 (00:03):
Obviously, mostly we've been talking a lot about the trade
war lately, the tariffs, but there are other things going
on in the world, and in fact, there are some
episodes that we've recorded prior to all this that we
still want to publish.
Speaker 2 (00:18):
That's right. So what you are about to hear is
an episode we recorded way back on March eighteenth. It
feels like it was a lot longer ago, but it's
been basically a month, and with everything that was happening
in markets, all the trade announcements, the tariffs, we've had
to put this one on hold, but we want you
to listen to it. It's a really interesting topic and
(00:40):
still very very worthwhile to hear about it.
Speaker 1 (00:43):
Right, we're going to be talking about the Pentagon budget
and things like that. If it feels a little dated
the conversation, that's because it is dated. But take a listen.
I still think that you'll find. You know, there's still
no world in which the nature of defense spending is
not an important question, is not something interesting, So even
with everything else going on in the world, you should
(01:05):
take a listen.
Speaker 3 (01:06):
Here we Go, Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1 (01:25):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2 (01:29):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (01:31):
Tracy, we've hinted on the podcast a few times over
the last several months, who want to do more on
defense and we're gonna We're gonna.
Speaker 2 (01:38):
Starts, Joe, and I think you've said it pretty explicitly.
Speaker 1 (01:41):
But it is interesting, right, Like it is a good
It does seem like it should be a good topic
for us, right.
Speaker 2 (01:46):
It's a huge chunk of the economy. I think it's
like the US government's biggest line item in terms of expenditure.
It's either defense or interest rate payments on its bomb. Ye,
it's definitely number one or number two, and so it
is work of additional study.
Speaker 1 (02:02):
I agree, And you know, I think it's actually really
important for US because you know, we talk about industrial
policy a lot in defense is the one area where
that is never wavered, right, Like it's always been. The
government is the primary buyer purchaser, but there are these
private companies and they also sell overseas and stuff. And
(02:23):
it's always been about staying at the leading edge of tech,
and probably if you're like thinking about like industrial policy
and other areas like whether it's cars or batteries or semiconductors.
I just assume there must be a lot that we
can learn from how it works in the defense world.
Speaker 2 (02:39):
As a military brat, I feel comfortable saying as well
that it's kind of also connected to a social safety net.
Speaker 3 (02:47):
Yeah.
Speaker 2 (02:47):
True, you have healthcare tied to military service. You've got
cheap groceries tied to military service. I used to love that,
So it's interesting from a number of perspectives. What blows
me away, though, is you hear that statistic every once
in a while that the Pentagon has never passed an audit,
(03:08):
which raises all these big questions about if this is
the biggest expenditure or one of the biggest expenditures for
the US, how is it possible that we don't actually
seem to know where the money is going.
Speaker 1 (03:19):
No, I think this is a great question, and I
think that what you articulated there is just a great
way of sort of entry weada understanding defense with a
simple question. Because like I've seen those headlines so late
last year headlines Pentagon fails seventh audit in a Row
and then I read the headline. But I don't know
what that means. I don't know what it means to like,
(03:40):
you know, it's like a private company. I don't know
what audits really mean in the government. I don't know
if there are any consequences. I don't know why it is.
Is it because of malfeasance or is it just because
of its sheer size. I mean it's you know, the
Pentagon absolutely enormous, So I think, like, yeah, we should
have What does that mean that they just keep filling
all these audits?
Speaker 2 (03:56):
Well, it also raises an existential question of why are
we even bothering to do audits if we keep getting
the same result and nothing seems to change that too.
Speaker 1 (04:06):
That's a great question. Anyway, We're going to finally get
some answers to at least this question of what it
means that the Pentagon keeps failing audits year after year
and year, and what it says maybe about how we
do defense spending. I'm very excited. We have the perfect
guest we're going to be speaking with, Julia Gledhill. She
is a researcher at the Stimson Center has written quite
a bit about this, has been recommended to me as
(04:27):
someone to talk to about Pentagon and defense spending. So, Julia,
thank you so much for coming on odd lots, thank.
Speaker 4 (04:33):
You for the invitation. It's great to be here.
Speaker 1 (04:36):
What is a Pentagon audit? Apparently we've never passed one,
and we'll get into why. But what does it even
mean for the Pentagon to get audited?
Speaker 5 (04:43):
Yeah, this is an important question. I think Tracy is
hitting the point on the nail here in that what's
the point of doing the same thing over and over
and expecting a different result? That is, in fact the
definition of insanity. And so in thinking about what the
purpose of an audit is and a Pentagon context, it's
a point and to remember why we audit in general? Right,
Companies undergo audits to assure stakeholders that management is accurately
(05:08):
presenting a company's financial performance and position. In other words,
you know, audits help investors and lenders determine the financial
value of a company.
Speaker 4 (05:16):
So how does that apply to the Pentagon.
Speaker 5 (05:18):
Well, the Pentagon audit assesses how well the agency is
managing taxpayer dollars. The difference is that, unlike stakeholders and companies,
taxpayers can't simply opt out of funding the Pentagon when
it fails an audit. But the agency wide consolidated audit
of the Department of Defense looks at DOOD financial statements,
(05:39):
but also internal controls over financial reporting as well as
compliance with relevant laws and regulations.
Speaker 2 (05:45):
What does an audit actually entail for the Pentagon? Because
I imagine, you know, when I think about the Pentagon,
it's this huge, sprawling, industrial military complex. I imagine it must
be quite an undertaking to try to get granular detail
on where money is going.
Speaker 5 (06:04):
It absolutely is a major undertaking, which explains why the
DoD has not only failed so many audits in a row,
but only started to do consolidated audits agency wide in
twenty eighteen. So the Pentagon audit is done by independent
public accounting firms in collaboration with the Department of Defense
(06:25):
Inspector General Office, which is the internal watchdog within the Pentagon,
and what they do is conduct independent audits of several
different DoD components. These can include the military services, but
also combatant commands, field activities like the Defense Logistics Agency,
(06:45):
and then the Department of Defense Inspector General puts all
of those independent audits together in one consolidated agency wide
audit and comes to a conclusion. Notice that I say
conclusion and not opinion, because in the case of failing
a Pentagon audit, the Pentagon has actually received disclaimers of
opinion repeatedly, which means that the agency department wide was
(07:09):
unable to produce the financial statements necessary for auditors to
form an opinion. An audit opinion on the quality and
sort of accuracy of financial reporting throughout the agency, but
it includes a lot of different components and it is
indeed quite laborious.
Speaker 1 (07:28):
So the goal is for the independent firms to be
able to form an opinion. And when we read a
headline that says they failed the audit, it means they
can't even get the documents and the financial statements together
so that they can form an opinion. Like explain to
us what that word failure means in this context.
Speaker 5 (07:46):
Yeah, So I think that the former Comptroller of the
Department of Defense has explained this quite well, and in
describing a disclaimer of opinion in the context of auditing,
he basically said that this is a red light, right,
so is an adverse opinion, which is another level of
(08:07):
there are going to be material persistent weaknesses in financial
reporting throughout DOOD entities, and then you have a yellow light,
which is a qualified opinion, and then you have an
unmodified opinion. This is the goal in the Pentagon audit process,
which is considered a green light, and only a few
of DOOD components have actually achieved this green light, which
(08:30):
means that the financial reporting internal controls generally can be
trusted and assumed to be consistently accurate.
Speaker 2 (08:38):
What happens when the Pentagon actually fails an audit, because I imagine,
like in theory, there should be consequences, but the fact
that it keeps happening, as I mentioned, suggests that there
probably aren't.
Speaker 5 (08:50):
Yeah, there are no consequences, much to the disintment.
Speaker 4 (08:54):
Exactly.
Speaker 5 (08:55):
Imagine imagine a company failing an audit and investors saying, well,
we're going on ahead anyways, and so no, there are
no consequences for the Pentagon when it repeatedly fails audits.
And yet the audit is supposed to give US taxpayers
some trust that the Department of Defense is spending our
(09:18):
money efficiently and wisely. But unfortunately, and much to the
disappointment of components like the Marine Corps or the Defense
Threat Reduction Agency which have received these green lights, these
unmodified audit opinions. They are not rewarded for receiving green
lights in the auditing process. And you know, the Marine
(09:40):
Corps is still struggling to you know, get their boats.
So it's an important question, and unfortunately there are just
no consequences because appropriators are not reading a four hundred
page audit report on the Pentagon before deciding what to
spend on national defense.
Speaker 1 (09:58):
So they failed the audit. It's at least they can't
even put together an opinion. What's happening? Why can't they?
What are they when they're going in there and they're
looking for documents and evidence that the money is being
tracked roughly in accordance with how it should be and
that the various divisions are What are they seeing when
they go in there that causes them to not be
able to produce in a pant sure well.
Speaker 5 (10:20):
One failure point that I love to point to is
DoD's difficulty in tracking property in inventory records across the
military services.
Speaker 4 (10:31):
One of my favorite examples of why does this matter?
Who cares?
Speaker 5 (10:34):
Why do auditors go in and look at inventory records
and flag this as a weakness in.
Speaker 4 (10:39):
Their audit reports.
Speaker 5 (10:40):
Well, a few years ago, twenty nineteen, the Department of
Defense Inspector General flagged errors and the Navy's property and
inventory records, and as a result, the service ended up
finding a warehouse that was mysteriously absent from its property
records and.
Speaker 2 (10:56):
They've lost a whole warse amazing.
Speaker 5 (10:58):
Indeed, and inside they found one hundred and twenty six
million dollars.
Speaker 4 (11:02):
Worth of spare parts.
Speaker 5 (11:04):
Now, in the context of the Pentagon budget, what is
one hundred and twenty six million when we're talking about
a near trillion dollars depending on how you count it.
But they found these spare parts for a number of
different aircraft inside that warehouse, and they were actually able
to fill over twenty million dollars in spare parts orders
without having to procure new ones. And so the scale
(11:28):
of this issue is unknown right because we have a
pervasive inventory and property record keeping issues throughout DoD And importantly,
the Government Accountability Office has actually flagged inventory issues since
the early eighties, since nineteen eighty one, and this is relevant,
for example, to the most expensive weapon program in US history,
(11:51):
the F thirty five fighter jet. Now the reason I
bring it up is because you know, okay, you have
an example of the Navy finding all these aircraft parts
and being able to fill orders.
Speaker 4 (12:00):
So what does that mean.
Speaker 5 (12:01):
In the context of a now two trillion dollar weapon
acquisition program, which is the F thirty five. Well, you
have the GAO, the Government Accountability Office, saying that F
thirty five parts in the possession of contractors are likely
significantly understated. So the government has all these spare parts
are government owned but typically possessed controlled by contractors. And
(12:25):
the GAO has flaged this issue for a long time
because it means we could be over buying on spare
parts as a country. The Department of Defense Inspector General
has likewise expressed this concern and in twenty twenty one
found that, you know, the Army, for example, was forecasting
spare parts needs and was only accurate twenty percent of
the time. Again, why does that matter, because they ended
(12:48):
up overstating how many spare parts the Army needed by
over two hundred million dollars. The military writ large, all
the services together actually overshot their spare parts needs by
nearly a billion dollars. So this matters when you can't
keep track of your property in the possession of contractors.
Speaker 2 (13:06):
It must matter from an operational or execution perspective as well. Right,
if there was a military emergency and we can't find
the spare parts that we need because we've never been
able to track them, that's problematic.
Speaker 5 (13:19):
Oh absolutely. I mean you look back to the early
years of the War on Terror. I mean I meet
a lot of veterans who when I talk to them
about these issues, they say, oh, yeah, we were hiding
you know, parts to maintain our equipment in our bunks
because we had no assurances that we were going to
be able to maintain to repair the equipment that we
(13:40):
need to.
Speaker 4 (13:41):
Do our jobs.
Speaker 5 (13:41):
So it is a readiness issue and one that the
DoD absolutely needs to directify.
Speaker 1 (14:03):
I have to imagine that if one of the problems
is sort of implied here about overordering spare parts, I
would guess that the major weapons suppliers, the defense contractors,
don't really mind that problem.
Speaker 4 (14:17):
That's exactly right, Joe.
Speaker 5 (14:19):
In fact, the DoD has actually requested inventory records from
Lockheed Martin before for the F thirty five program, and
Lockheed Martin said, oh, well, it's going to cost us
a bunch of money to track down this information and
provide the reports, essentially disincentivizing the government from requiring that
(14:39):
in the military contract right. And I wrote a piece
about this a couple of years ago, and it's insane
because you have contractors who have government owned property in
their possession, but they control all of the tracking mechanisms,
and even when government asks, they say, oh, well, what
are you paying us to provide you with information about
government owned property?
Speaker 2 (15:00):
Just on the contractor point. I always wonder about this,
but who does the US actually compete against when it's
buying military stuff, Because I would think with a trillion
dollar budget for defense, the US is probably putting in
the biggest orders, and so could they in theory dictate
the price or at least ask for a volume discount
(15:22):
or something. I mean on the f thirty fives for instance,
Like the US has one hundreds now versus other countries
that have I think a few dozen.
Speaker 4 (15:33):
Yeah. So this is the problem with a monopsone market. Right,
you have.
Speaker 2 (15:37):
Monos sorry that's a trigger word for US.
Speaker 5 (15:43):
You have one buyer, but you also in a lot
of cases have one seller. And that is the genius
of the arms industry. Right with the f thirty five program.
They have politically engineered it such that it exists in
I think all fifty states now. Lackie Martin has an
interactive map so someone can fact check me. But it
is like forty six, if not all fifty at this point.
Speaker 1 (16:06):
So every politician in America has some reason to preserve
the status quo because they have workers.
Speaker 5 (16:13):
That the idea here, that's exactly right, because jobs, even
though we know that military spending is a lousy jobs
creator in comparison to other types of government spending.
Speaker 1 (16:24):
So you know, I guess if the Pentagon has failed
seven audits in a row. I guess implication eight years
ago or nine years ago, there was no mandate for
an audit period because it must be a relatively new thing.
Can you talk to us a little bit about how
that came about the requirement to audit and how the
(16:44):
military contractors sort of try to shape the process of
tracking acquisition.
Speaker 4 (16:50):
Sure, so this is a question I get a lot.
Speaker 5 (16:53):
Was their accountability before the Pentagon started consolidate agency wide audits?
So the answer is yes, but not to the same
extent that we have today. So in nineteen ninety Congress
passed the Chief Financial Officers Act, which required federal agencies
to prepare financial statements for audit, and the DoD submitted,
(17:17):
you know, component financial statements to the DODIG for that purpose,
but did not undergo the thorough.
Speaker 4 (17:26):
Audit that we see today.
Speaker 5 (17:28):
And in fact, the number of components included in the
agency wide audit tends to vary a little bit every year.
Sometimes it's twenty eight, sometimes it's twenty seven. But it
is absolutely true that contractors shape nearly every aspect of
defense policy because of their power and influence on Capitol Hill,
(17:51):
and a major lever for that power an influence is
in fact the sort of jobs creation that they lean
on for these weapon programs. And I have actually think
it's an interesting question because now you see the current
Secretary of Defense, HEG. Seth, really embracing the audit in
his quest to improve military readiness, and on its face,
(18:14):
that is a noble and worthy goal, right, it remains
to be seen how that actually shakes out in this administration.
I only hope for the best and very much encourage
the administration to take this seriously because I do think
that it matters. Again, when you have, for example, military
services over buying spare parts at the expense of the taxpayer. However,
(18:38):
I think that it's noteworthy when you see news a
month ago about the Secretary saying, Okay, we're doing budget
reshuffling to reorder DoD funding and channel it toward Trump's priorities.
President Trump's priorities. And one of those exemptions from potential
reductions in these budget reshufflings was the audit, of course,
(19:00):
or so was nuclear modernization and many other things, and
that is important for military readiness, and we actually should
work toward passing an audit. However, it's important to note
that even if the DoD passes an audit, that doesn't
justify the money that the DoD is spending, because we
should be able to achieve more for less, and we
(19:21):
have not seen that in recent decades.
Speaker 2 (19:23):
Right, just on this note, I kind of want to
back up and ask a big picture question. But you know,
Joe alluded in the intro to the fact that defense
spending has historically been it's always been there, it's always
been with us, and it's always been pretty big. I
know that you can benchmark it to GDP and it's
come down as a percentage of GDP, but I think
(19:45):
we can all agree that one trillion is still a
pretty big number. So why did that happen? And why
is it that we just accept that defense is kind
of untouchable or by its nature going to be this
huge line item.
Speaker 5 (20:02):
I'm so glad you brought up percent of GDP. I
love to talk about this. I think that it's one
of those macro indicators that conceals more than it reveals. Right,
So the distribution of military spending has changed a lot
over time, but we're so beholden to this idea of
a gigantic military budget to keep American safe because of
(20:25):
its legacy after World War Two and bringing the United
States out of sort of the trenches of the Great Depression,
and stimulating the economy. Of course, any significant government spending
would stimulate the economy in sort of offset the effects
of under consumption. And yet we've just been sort of
(20:45):
ingratiated with this idea that military spending is so integral
to our economic growth, when in fact, there's a lot
of economic research out there that says, you know, sort
of ever expanding military budgets can have a depressive effect
on long term economic growth. Why because it impacts productivity. Right,
(21:06):
So World War Two, the sort of narrative, in sort
of dominant historical discourse is we have this productivity miracle. No,
it was a production miracle. We spent a bunch of
money on military industrial output, but that had a depressive
impact on productivity over time. So I argue that this
is actually bad for the economy long term. But we
(21:29):
are as a country, I think, so dedicated to this
idea that the military budget is sort of a core
part of our economic engine. And unfortunately that's not true anymore,
because again the distribution has changed over time. It's a
lot more capital intensive. It's not necessarily this sort of
vehicle of upward economic mobility that it used to be
(21:50):
because it's not as focused on labor. Of course, yes
you have the GI bill, Yes you can get a
free education. That's all very important and good, and we
should absolutely do that. But we're spending more and more
money on research and development and procurement. Who does that benefit.
It benefits electrical engineers, not the working man.
Speaker 2 (22:07):
So just on this note, in preparing for this episode
and looking you up, I noticed that for your undergraduate
thesis you did an econometric study to test the relative
impacts of various types of defense spending on income inequality.
That seems really interesting. I don't know if you remember
your undergrad days or your work, but what did you
(22:31):
find in that?
Speaker 5 (22:32):
So I actually just gave you the short pitch on
my paper, which did find and I had an R
squared of ninety six percent, so explanatory value was good.
But I tested this hypothesis that military spending is good
for jobs, good for people, good for the economy. And
I did that by disaggregating the base budget into the
(22:53):
major categories, some of which I just described research and development, procurement, personnel, operations,
and maintenance, you big ones. And I actually found that
procurement in research and development had exacerbated income and equality
over the eight years of the Obama administration that was
my time span.
Speaker 4 (23:12):
And I actually know someone.
Speaker 5 (23:14):
At an academic institution writing on the same exact topic now,
so I'm very happy that that person will be soon
publishing a paper because I did not publish mine. But yeah,
I mean, I wanted to test this idea that military
spending is good for the economy, and it's military Keensianism, right.
This is the idea that we've all been fed. And
I think that lawmakers really grasp onto because it's a
(23:36):
convenient veil for what our frankly often conflicts of interest,
whether that be congressional members owning and trading stocks or
receiving campaign finance from arms manufacturers. And I think it
really distorts the way that we talk about defense policy,
the military and its role in our economy.
Speaker 1 (23:59):
If I could Devil's advocate for a second, one of
the major sources of anxiety right now in the US
economy is not about jobs, although maybe the labor market
is weakening, but the unemployment rate is still kind of low.
It's mostly this concern that the US is not at
the technological cutting edge in many areas that are at
(24:19):
least in some way adjacent to the military. And of course,
you know, people love to tell you it's like Silicon
Valley got started off, you know, from it was all
military funding. And that's why we have chips, and that's
why we have compact chips and small computers because they
needed to be put in small spaces, et cetera. When
you talk about all of the R and D spending
that they do, or even the capital expenditure isn't that
(24:43):
like when we think about productivity, do we get positive
spillovers from the research that's being done by today's weapons
manufacturers that are then transmitted to the rest of the economy.
Speaker 4 (24:54):
Yeah, this is something I've really been grappling with.
Speaker 5 (24:56):
I'm writing a paper right now on the defense industrial base,
and you're absolutely right. I mean, industrial policy is super
hot right now. Of course, like Robert Reich, I think
said this in the nineties, industrial.
Speaker 4 (25:06):
Policy is back.
Speaker 5 (25:07):
But the thing is, we've always had industrial policy for
military contractors. To your point, Silicon Valley wouldn't exist without
Dharba and ARPA E grants. And in my view, I
sort of see this in the context of our economic
resilience and vitality long term. Okay, I'm an elder Zoomer.
I'm pretty much the oldest you can be and still
(25:29):
claim to be gen z and I think about my
future and I see military investment as mortgaging our futures
on exquisite, expensive platforms. Even in the software realm. That's
not to say that I don't think there isn't innovation happening.
(25:50):
I think, you know, in the context of the audit,
for example, it's important that we have internal controls around
the development of and reporting of sort of more cyberphysical
capabilities and a military context software programs. I'm not convinced
that private industry is necessarily going to make the leaps
(26:14):
and bounds that we did as a country two decades ago,
three decades ago today, And the reason for that is
because I don't think that venture capital is necessarily driven
by innovation and spill over into the civilian economy. They
are driven by profit motive and the ability to return
(26:36):
value to shareholders. Right.
Speaker 4 (26:38):
This is the legacy of VC and Silicon.
Speaker 5 (26:40):
Valley and the way that the government has always shaped
the market through R and D funding. Right, they jump
in right before a product goes to commercial market, if
in fact, you are working on something that is dual use,
and then they leave after the IPO. So in some ways,
I see the government has always been the risk taker
because they're the ones that fund the basic research. So
(27:02):
I don't have fully baked thoughts on this, but I
think that it's critical for the government to continue shaping
the risky investments that we need to do true innovation
and in my view, combat the climate crisis in sort
of new innovative.
Speaker 1 (27:17):
Ways, Tracy, I think this is like a really key point,
which is just as Julia was putting it, which is
(27:39):
that really like long term industrial capacity type innovation does
not strike me as particularly compatible with the types of
returns that either public markets or VC investors expect. And
we talk about this in the context of nuclear anyway,
and this idea that like the payoff timelines and the
(27:59):
risks do not seem in alignment with the opportunity set
for private sector investors.
Speaker 2 (28:04):
Right it seems like a big risk with a lot
of capital expenditure, which the private sector notoriously shies away from. Okay,
I forgot to ask one really granular question on the audits,
and I've read that there's something called an unfunded priority list, which,
as far as I can tell, seems to be like
(28:26):
just a wish list of extra budgetary items that the
Pentagon didn't include in its official budget request.
Speaker 4 (28:33):
What is that?
Speaker 2 (28:34):
And what's the point of having a budget if you
can just have like another budget on top of it.
Speaker 4 (28:39):
You described it perfectly, Tracy.
Speaker 5 (28:42):
It is, in fact a wish list of extra budgetary
items that the DoD not only didn't ask for in
its budget request to Congress, but also did not have
to provide justification documents for And so you see the
services manipulate the UPL.
Speaker 4 (28:59):
Process, wishless process in order.
Speaker 5 (29:02):
To make it look like their budgets aren't as big
as they actually are.
Speaker 4 (29:06):
We've seen the Navy do this with destroyers.
Speaker 5 (29:07):
I mean, it is absolute blasphemy. I think it's a
slab in the face to tax payers and to the
rest of the federal government. You've seen some members of Congress,
I believe Tim Kaine has suggested, oh well, why don't
we have civilian agencies also statutorily required to submit unfunded
priority lists. Look, if it's not in your budget, it
is not a priority. And we do not need to
(29:29):
standardize or normalize what I consider to be a pretty
undemocratic version of the budget process.
Speaker 1 (29:38):
Talk to us a little bit more about the fights
right now going on Capitol Hill. Sitting aside the assumption
that defense contractors always want more spending, what are some
of the tension points? So the fights that are happening
about sort of guardrails on spending or other issues related
or maybe related to the audit, Like, what are the
fights right now about?
Speaker 5 (29:59):
Yes, So, I mean, obviously we just averted a government shutdown.
So the CR the Continuing Resolution, has taken over everybody's
minds in the last couple of weeks here and sort
of The next big fight is the budget reconciliation process.
I'm sure listeners are familiar with that if they listen
to this podcast. It is also a mechanism through which
(30:21):
to avoid regular order and thereby the filibuster and the
Senate and add potentially hundreds of billions of dollars to
the military budget. And then after that we have the
National Defense Authorization Act, the annual Defense Policy Bill that
sets the top line for military spending in this country.
It is just whammy after whammy in twenty twenty five.
I sort of can't believe that it's only March because
(30:44):
it feels like it has been months since this year began.
But you know, we have a couple of things going on.
We have a fight for incredible military budget increases through reconciliation,
and then in the Defense Policy Bill and the NDAA,
we have a pretty coordinated effort industry. Why that is
supported by many members of Congress to essentially gut the
(31:07):
weapon acquisition process. Now, why would contractors want this?
Speaker 1 (31:12):
You explain this.
Speaker 5 (31:13):
Yeah, it's part of a decade long effort to eliminate
oversight guardrails in the budgeting and acquisition process at DoD.
And the justification for it is we need to prepare
for warwi China, which if you subscribe to that frame
of foreign policy, which I consider to be a bit reactive,
why would we base our foreign policy on another country? Right? Like,
(31:37):
why would we do that? Wouldn't we want a positive
vision of what the US wants and how we are
going to navigate the world. But if you subscribe to
that vision, then it makes a lot of sense. Okay,
we're gonna lift the pesky red tape so that industry
can better sell weapon acquisition programs to the Pentagon, do
(31:58):
it faster and more, and sort of eliminate the milestones
at which the DoD is able to decide, Hey, do
we really need this? Are we going to need it
in five years? Is it cost effective? Is it filling
a capability gap? Could we do it cheaper? Is there competition?
And there are a couple of ways that they're doing this.
But you know, acquisition reform at large is sort of
(32:20):
I think, another big fight, and it's interesting because the
silicon Valley tech firms have actually jumped on board with
this as well.
Speaker 2 (32:25):
Yeah, what would be your recommendation for reform of defense spending? Like,
imagine your hexith, what would you add, Like, what's number
one on your list?
Speaker 4 (32:37):
Gosh, this is hard.
Speaker 5 (32:38):
I think I will pick an area that I think
Trump could be instinctually open to, and that is raining
in nuclear expansion. And I say expansion rather than nuclear modernization,
because I think that's a mischaracterization of what's going on.
About a month ago, you saw President Trump say I
(33:00):
want to pursue arms control agreements with Russia and China
and with the ultimate goal of cutting our respective military
budgets in half. Now I think that his heart was
in the right place, if only for a moment, because,
of course, a week later, nuclear modernization, as I mentioned before,
was exempted from the potential budget reductions that heg Seth
(33:23):
talked about. It's not a reduction of the military budget
top line, but rather a reshuffling of funds. That area
was protected against potential reshuffling. But what I would do
is rain in nuclear expansion spending. I do not think
that we need to be investing in the modernization of
all three legs of the nuclear triad, I would argue,
(33:46):
for just the sea leg of the nuclear triad, there's
no reason we need to be doubling down on the
land based leg of our nuclear arsenal, the Sentinel program,
for a bunch of reasons, not least of which is
the fact that the program has experienced eighty one percent
cost growth since twenty twenty. It's not the most accurate
nuclear weapon we have in our arsenal anymore. And the
(34:09):
program just has a bunch of issues that the DOOD
has not been able to resolve. And so if I
could say one thing I would, I would probably say
cancel the Sentinel program, which would save a lot of money,
and you could argue that it's helpful in terms of
de escalating tensions with other nuclear powers. I will just
wrap this by saying that our pursuit of nuclear expansion
(34:32):
across the board and our nuclear enterprise has inspired other
nuclear powers to do the same.
Speaker 1 (34:38):
I just have one last, very quick question. Do you
think it's plausible that in the next four years the
Pentagon will pass an audit? Is it conceived?
Speaker 2 (34:45):
Don't they have a target by like twenty twenty eight?
Speaker 4 (34:47):
Yes?
Speaker 1 (34:49):
Do you see it happening.
Speaker 4 (34:50):
I'm not optimistic.
Speaker 5 (34:51):
No, what, they have eleven components of the DoD that
have received unmodified opinion, and it has been a painstakingly
slow process. I am not terribly optimistic that they're going
to bring that number to one hundred percent of components
audited at DoD in addition to the agency wide audit.
Speaker 4 (35:13):
I would love to be wrong.
Speaker 1 (35:15):
Well, we'll see. Maybe we'll have you back on in
four years or well as soon as we get the
next when we get a pass, we'll chat with you
and we'll see what they did to accomplish that. Julia Gledhill,
thank you so much for coming on odd Lots really
appreciate you taking your time.
Speaker 4 (35:28):
Thank you for having me.
Speaker 1 (35:42):
Tracy. I'm really glad we did that episode. You know,
like when I hear those defense specialists like rattle off
the names of the different weapons programs or the different
legs of the nuclear triad, I have like no idea,
you know, I really lose it. So it's this enormous
complex thing. But I thought that was just like really
help full in getting a sort of simple answer to
(36:02):
a basic question, particularly like things like you know, the
fact that the government doesn't know what's in its own warehouses?
Speaker 2 (36:09):
Right, Well, Julia explained everything really well, but I still
find it slightly unbelievable that there's all this money going
in and out of the Pentagon and we seem unable
to track it, and no one really knows where it is.
No one really has a full picture of the assets,
the stuff sitting in warehouses. As you just mentioned, it's
(36:29):
kind of crazy.
Speaker 1 (36:30):
Do you keep a really good personal budget? Oh no,
so that can't you like sort of sacrifice with the Pentagon?
Speaker 2 (36:36):
I need too, because I can just look at like
my one bank account.
Speaker 1 (36:39):
Right, Yeah, that's true. I guess I'm not totally surprised, right,
I mean, it is insane to me. It's also just
very interesting too, the sort of interplay with all that
and just the incredible infrastructure around lobbying and oh, we
have manufacturing in all fifty states or maybe it's forty
eight states, or maybe it's forty six states. Like how
(37:02):
complete of a package the defense contractors have put together
to make it so politically difficult to really meaningfully turn
the dials on either the volume or just the approach
to procurement.
Speaker 2 (37:14):
Yeah, and on that note, the unfunded priority list like
the extra budget on top of the existing budget. It's
kind of funny, fascinate.
Speaker 1 (37:24):
There's plenty more to dive into. I thought this was
a great entry point.
Speaker 2 (37:27):
Yeah, more to come. Shall we leave it there for now?
Speaker 1 (37:29):
Let's leave it there.
Speaker 2 (37:30):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (37:36):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our guest Julia Gledhill. She's at Julia Gledhill. Follow
our producers Carman Rodriguez at Kerman armand dash Ol Bennett
at Dashbock and Kelbrooks at Kelbrooks. For more Odd Laws content,
go to Bloomberg dot com slash odd Lots. We have
all of our episodes in the daily newsletter, and you
can chut about all of these topics with fellow listeners
(37:57):
in our discord discord dot od Lots.
Speaker 2 (38:01):
And if you enjoy odd Lots, if you like it
when we dig into the defense industry, then please leave
us a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely ad free. All you need
to do is find the Bloomberg channel on Apple Podcasts
and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
40s and Free Agents: NFL Draft Season
Daniel Jeremiah of Move the Sticks and Gregg Rosenthal of NFL Daily join forces to break down every team's needs this offseason.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.