1 00:00:00,160 --> 00:00:01,520 Speaker 1: Hello, odd lots listeners. 2 00:00:01,560 --> 00:00:03,640 Speaker 2: I'm Joe wasent Thal and I'm Tracy Alloway. 3 00:00:03,920 --> 00:00:08,000 Speaker 1: Obviously, mostly we've been talking a lot about the trade 4 00:00:08,039 --> 00:00:11,160 Speaker 1: war lately, the tariffs, but there are other things going 5 00:00:11,200 --> 00:00:13,920 Speaker 1: on in the world, and in fact, there are some 6 00:00:14,080 --> 00:00:16,759 Speaker 1: episodes that we've recorded prior to all this that we 7 00:00:16,840 --> 00:00:18,040 Speaker 1: still want to publish. 8 00:00:18,079 --> 00:00:20,720 Speaker 2: That's right. So what you are about to hear is 9 00:00:20,760 --> 00:00:24,720 Speaker 2: an episode we recorded way back on March eighteenth. It 10 00:00:24,800 --> 00:00:27,240 Speaker 2: feels like it was a lot longer ago, but it's 11 00:00:27,280 --> 00:00:30,720 Speaker 2: been basically a month, and with everything that was happening 12 00:00:30,800 --> 00:00:34,960 Speaker 2: in markets, all the trade announcements, the tariffs, we've had 13 00:00:35,000 --> 00:00:37,000 Speaker 2: to put this one on hold, but we want you 14 00:00:37,040 --> 00:00:40,159 Speaker 2: to listen to it. It's a really interesting topic and 15 00:00:40,240 --> 00:00:42,959 Speaker 2: still very very worthwhile to hear about it. 16 00:00:43,240 --> 00:00:45,720 Speaker 1: Right, we're going to be talking about the Pentagon budget 17 00:00:45,800 --> 00:00:48,880 Speaker 1: and things like that. If it feels a little dated 18 00:00:48,920 --> 00:00:53,160 Speaker 1: the conversation, that's because it is dated. But take a listen. 19 00:00:53,240 --> 00:00:55,680 Speaker 1: I still think that you'll find. You know, there's still 20 00:00:55,720 --> 00:00:59,240 Speaker 1: no world in which the nature of defense spending is 21 00:00:59,360 --> 00:01:03,200 Speaker 1: not an important question, is not something interesting, So even 22 00:01:03,200 --> 00:01:05,840 Speaker 1: with everything else going on in the world, you should 23 00:01:05,840 --> 00:01:06,400 Speaker 1: take a listen. 24 00:01:06,600 --> 00:01:21,080 Speaker 3: Here we Go, Bloomberg Audio Studios, Podcasts, Radio News. 25 00:01:25,680 --> 00:01:29,280 Speaker 1: Hello and welcome to another episode of the Odd Lots podcast. 26 00:01:29,360 --> 00:01:31,720 Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway. 27 00:01:31,920 --> 00:01:35,280 Speaker 1: Tracy, we've hinted on the podcast a few times over 28 00:01:35,280 --> 00:01:36,840 Speaker 1: the last several months, who want to do more on 29 00:01:36,880 --> 00:01:38,200 Speaker 1: defense and we're gonna We're gonna. 30 00:01:38,000 --> 00:01:41,160 Speaker 2: Starts, Joe, and I think you've said it pretty explicitly. 31 00:01:41,560 --> 00:01:43,759 Speaker 1: But it is interesting, right, Like it is a good 32 00:01:43,920 --> 00:01:45,679 Speaker 1: It does seem like it should be a good topic 33 00:01:45,720 --> 00:01:46,160 Speaker 1: for us, right. 34 00:01:46,280 --> 00:01:48,920 Speaker 2: It's a huge chunk of the economy. I think it's 35 00:01:49,000 --> 00:01:53,040 Speaker 2: like the US government's biggest line item in terms of expenditure. 36 00:01:53,040 --> 00:01:56,160 Speaker 2: It's either defense or interest rate payments on its bomb. Ye, 37 00:01:56,600 --> 00:01:59,480 Speaker 2: it's definitely number one or number two, and so it 38 00:01:59,560 --> 00:02:02,320 Speaker 2: is work of additional study. 39 00:02:02,360 --> 00:02:04,960 Speaker 1: I agree, And you know, I think it's actually really 40 00:02:05,000 --> 00:02:07,920 Speaker 1: important for US because you know, we talk about industrial 41 00:02:07,960 --> 00:02:12,200 Speaker 1: policy a lot in defense is the one area where 42 00:02:12,560 --> 00:02:15,320 Speaker 1: that is never wavered, right, Like it's always been. The 43 00:02:15,360 --> 00:02:20,320 Speaker 1: government is the primary buyer purchaser, but there are these 44 00:02:20,360 --> 00:02:23,400 Speaker 1: private companies and they also sell overseas and stuff. And 45 00:02:23,400 --> 00:02:25,800 Speaker 1: it's always been about staying at the leading edge of tech, 46 00:02:26,200 --> 00:02:29,320 Speaker 1: and probably if you're like thinking about like industrial policy 47 00:02:29,360 --> 00:02:32,720 Speaker 1: and other areas like whether it's cars or batteries or semiconductors. 48 00:02:33,160 --> 00:02:35,680 Speaker 1: I just assume there must be a lot that we 49 00:02:35,720 --> 00:02:38,800 Speaker 1: can learn from how it works in the defense world. 50 00:02:39,240 --> 00:02:42,360 Speaker 2: As a military brat, I feel comfortable saying as well 51 00:02:42,600 --> 00:02:47,240 Speaker 2: that it's kind of also connected to a social safety net. 52 00:02:47,320 --> 00:02:47,480 Speaker 3: Yeah. 53 00:02:47,800 --> 00:02:52,440 Speaker 2: True, you have healthcare tied to military service. You've got 54 00:02:52,520 --> 00:02:55,760 Speaker 2: cheap groceries tied to military service. I used to love that, 55 00:02:56,240 --> 00:02:59,799 Speaker 2: So it's interesting from a number of perspectives. What blows 56 00:02:59,840 --> 00:03:03,600 Speaker 2: me away, though, is you hear that statistic every once 57 00:03:03,639 --> 00:03:07,520 Speaker 2: in a while that the Pentagon has never passed an audit, 58 00:03:08,120 --> 00:03:11,240 Speaker 2: which raises all these big questions about if this is 59 00:03:11,280 --> 00:03:14,200 Speaker 2: the biggest expenditure or one of the biggest expenditures for 60 00:03:14,240 --> 00:03:17,480 Speaker 2: the US, how is it possible that we don't actually 61 00:03:17,520 --> 00:03:19,280 Speaker 2: seem to know where the money is going. 62 00:03:19,639 --> 00:03:21,560 Speaker 1: No, I think this is a great question, and I 63 00:03:21,600 --> 00:03:25,040 Speaker 1: think that what you articulated there is just a great 64 00:03:25,080 --> 00:03:28,760 Speaker 1: way of sort of entry weada understanding defense with a 65 00:03:28,800 --> 00:03:32,040 Speaker 1: simple question. Because like I've seen those headlines so late 66 00:03:32,120 --> 00:03:35,760 Speaker 1: last year headlines Pentagon fails seventh audit in a Row 67 00:03:36,000 --> 00:03:37,520 Speaker 1: and then I read the headline. But I don't know 68 00:03:37,560 --> 00:03:39,920 Speaker 1: what that means. I don't know what it means to like, 69 00:03:40,000 --> 00:03:42,440 Speaker 1: you know, it's like a private company. I don't know 70 00:03:42,480 --> 00:03:44,240 Speaker 1: what audits really mean in the government. I don't know 71 00:03:44,240 --> 00:03:46,320 Speaker 1: if there are any consequences. I don't know why it is. 72 00:03:46,320 --> 00:03:48,240 Speaker 1: Is it because of malfeasance or is it just because 73 00:03:48,280 --> 00:03:50,680 Speaker 1: of its sheer size. I mean it's you know, the 74 00:03:50,680 --> 00:03:53,520 Speaker 1: Pentagon absolutely enormous, So I think, like, yeah, we should 75 00:03:53,560 --> 00:03:55,480 Speaker 1: have What does that mean that they just keep filling 76 00:03:55,720 --> 00:03:56,440 Speaker 1: all these audits? 77 00:03:56,520 --> 00:03:59,400 Speaker 2: Well, it also raises an existential question of why are 78 00:03:59,440 --> 00:04:02,120 Speaker 2: we even bothering to do audits if we keep getting 79 00:04:02,120 --> 00:04:06,080 Speaker 2: the same result and nothing seems to change that too. 80 00:04:06,240 --> 00:04:08,960 Speaker 1: That's a great question. Anyway, We're going to finally get 81 00:04:08,960 --> 00:04:11,320 Speaker 1: some answers to at least this question of what it 82 00:04:11,360 --> 00:04:14,600 Speaker 1: means that the Pentagon keeps failing audits year after year 83 00:04:14,680 --> 00:04:16,640 Speaker 1: and year, and what it says maybe about how we 84 00:04:16,680 --> 00:04:19,320 Speaker 1: do defense spending. I'm very excited. We have the perfect 85 00:04:19,320 --> 00:04:21,560 Speaker 1: guest we're going to be speaking with, Julia Gledhill. She 86 00:04:21,680 --> 00:04:25,479 Speaker 1: is a researcher at the Stimson Center has written quite 87 00:04:25,480 --> 00:04:27,400 Speaker 1: a bit about this, has been recommended to me as 88 00:04:27,400 --> 00:04:31,520 Speaker 1: someone to talk to about Pentagon and defense spending. So, Julia, 89 00:04:31,560 --> 00:04:34,200 Speaker 1: thank you so much for coming on odd lots, thank. 90 00:04:33,960 --> 00:04:35,640 Speaker 4: You for the invitation. It's great to be here. 91 00:04:36,160 --> 00:04:39,040 Speaker 1: What is a Pentagon audit? Apparently we've never passed one, 92 00:04:39,080 --> 00:04:41,440 Speaker 1: and we'll get into why. But what does it even 93 00:04:41,480 --> 00:04:43,120 Speaker 1: mean for the Pentagon to get audited? 94 00:04:43,600 --> 00:04:46,920 Speaker 5: Yeah, this is an important question. I think Tracy is 95 00:04:47,000 --> 00:04:49,560 Speaker 5: hitting the point on the nail here in that what's 96 00:04:49,600 --> 00:04:51,800 Speaker 5: the point of doing the same thing over and over 97 00:04:52,160 --> 00:04:54,200 Speaker 5: and expecting a different result? That is, in fact the 98 00:04:54,200 --> 00:04:57,159 Speaker 5: definition of insanity. And so in thinking about what the 99 00:04:57,160 --> 00:04:59,720 Speaker 5: purpose of an audit is and a Pentagon context, it's 100 00:04:59,720 --> 00:05:02,560 Speaker 5: a point and to remember why we audit in general? Right, 101 00:05:02,800 --> 00:05:08,160 Speaker 5: Companies undergo audits to assure stakeholders that management is accurately 102 00:05:08,200 --> 00:05:12,160 Speaker 5: presenting a company's financial performance and position. In other words, 103 00:05:12,200 --> 00:05:15,640 Speaker 5: you know, audits help investors and lenders determine the financial 104 00:05:15,720 --> 00:05:16,480 Speaker 5: value of a company. 105 00:05:16,520 --> 00:05:17,960 Speaker 4: So how does that apply to the Pentagon. 106 00:05:18,080 --> 00:05:21,640 Speaker 5: Well, the Pentagon audit assesses how well the agency is 107 00:05:21,680 --> 00:05:27,440 Speaker 5: managing taxpayer dollars. The difference is that, unlike stakeholders and companies, 108 00:05:27,520 --> 00:05:30,880 Speaker 5: taxpayers can't simply opt out of funding the Pentagon when 109 00:05:30,880 --> 00:05:35,440 Speaker 5: it fails an audit. But the agency wide consolidated audit 110 00:05:35,560 --> 00:05:39,240 Speaker 5: of the Department of Defense looks at DOOD financial statements, 111 00:05:39,279 --> 00:05:42,480 Speaker 5: but also internal controls over financial reporting as well as 112 00:05:42,480 --> 00:05:45,120 Speaker 5: compliance with relevant laws and regulations. 113 00:05:45,839 --> 00:05:49,200 Speaker 2: What does an audit actually entail for the Pentagon? Because 114 00:05:49,240 --> 00:05:51,359 Speaker 2: I imagine, you know, when I think about the Pentagon, 115 00:05:51,480 --> 00:05:57,800 Speaker 2: it's this huge, sprawling, industrial military complex. I imagine it must 116 00:05:57,800 --> 00:06:01,360 Speaker 2: be quite an undertaking to try to get granular detail 117 00:06:01,680 --> 00:06:03,400 Speaker 2: on where money is going. 118 00:06:04,040 --> 00:06:07,719 Speaker 5: It absolutely is a major undertaking, which explains why the 119 00:06:07,760 --> 00:06:11,880 Speaker 5: DoD has not only failed so many audits in a row, 120 00:06:12,040 --> 00:06:16,200 Speaker 5: but only started to do consolidated audits agency wide in 121 00:06:16,240 --> 00:06:21,640 Speaker 5: twenty eighteen. So the Pentagon audit is done by independent 122 00:06:21,640 --> 00:06:25,440 Speaker 5: public accounting firms in collaboration with the Department of Defense 123 00:06:25,480 --> 00:06:30,400 Speaker 5: Inspector General Office, which is the internal watchdog within the Pentagon, 124 00:06:31,160 --> 00:06:37,039 Speaker 5: and what they do is conduct independent audits of several 125 00:06:37,080 --> 00:06:41,080 Speaker 5: different DoD components. These can include the military services, but 126 00:06:41,160 --> 00:06:45,479 Speaker 5: also combatant commands, field activities like the Defense Logistics Agency, 127 00:06:45,760 --> 00:06:49,400 Speaker 5: and then the Department of Defense Inspector General puts all 128 00:06:49,440 --> 00:06:53,279 Speaker 5: of those independent audits together in one consolidated agency wide 129 00:06:53,279 --> 00:06:57,599 Speaker 5: audit and comes to a conclusion. Notice that I say 130 00:06:57,680 --> 00:07:00,760 Speaker 5: conclusion and not opinion, because in the case of failing 131 00:07:01,240 --> 00:07:04,599 Speaker 5: a Pentagon audit, the Pentagon has actually received disclaimers of 132 00:07:04,640 --> 00:07:09,360 Speaker 5: opinion repeatedly, which means that the agency department wide was 133 00:07:09,440 --> 00:07:14,520 Speaker 5: unable to produce the financial statements necessary for auditors to 134 00:07:15,080 --> 00:07:18,640 Speaker 5: form an opinion. An audit opinion on the quality and 135 00:07:18,840 --> 00:07:24,240 Speaker 5: sort of accuracy of financial reporting throughout the agency, but 136 00:07:24,400 --> 00:07:26,880 Speaker 5: it includes a lot of different components and it is 137 00:07:26,960 --> 00:07:28,200 Speaker 5: indeed quite laborious. 138 00:07:28,640 --> 00:07:32,280 Speaker 1: So the goal is for the independent firms to be 139 00:07:32,320 --> 00:07:35,000 Speaker 1: able to form an opinion. And when we read a 140 00:07:35,080 --> 00:07:38,640 Speaker 1: headline that says they failed the audit, it means they 141 00:07:38,640 --> 00:07:41,800 Speaker 1: can't even get the documents and the financial statements together 142 00:07:42,200 --> 00:07:44,200 Speaker 1: so that they can form an opinion. Like explain to 143 00:07:44,240 --> 00:07:46,400 Speaker 1: us what that word failure means in this context. 144 00:07:46,680 --> 00:07:50,520 Speaker 5: Yeah, So I think that the former Comptroller of the 145 00:07:50,520 --> 00:07:54,720 Speaker 5: Department of Defense has explained this quite well, and in 146 00:07:54,840 --> 00:07:59,080 Speaker 5: describing a disclaimer of opinion in the context of auditing, 147 00:07:59,720 --> 00:08:02,240 Speaker 5: he basically said that this is a red light, right, 148 00:08:02,440 --> 00:08:07,240 Speaker 5: so is an adverse opinion, which is another level of 149 00:08:07,440 --> 00:08:12,120 Speaker 5: there are going to be material persistent weaknesses in financial 150 00:08:12,160 --> 00:08:16,800 Speaker 5: reporting throughout DOOD entities, and then you have a yellow light, 151 00:08:16,880 --> 00:08:19,440 Speaker 5: which is a qualified opinion, and then you have an 152 00:08:19,480 --> 00:08:23,560 Speaker 5: unmodified opinion. This is the goal in the Pentagon audit process, 153 00:08:23,840 --> 00:08:26,880 Speaker 5: which is considered a green light, and only a few 154 00:08:27,080 --> 00:08:30,480 Speaker 5: of DOOD components have actually achieved this green light, which 155 00:08:30,560 --> 00:08:34,240 Speaker 5: means that the financial reporting internal controls generally can be 156 00:08:34,320 --> 00:08:38,160 Speaker 5: trusted and assumed to be consistently accurate. 157 00:08:38,760 --> 00:08:43,000 Speaker 2: What happens when the Pentagon actually fails an audit, because I imagine, 158 00:08:42,960 --> 00:08:46,400 Speaker 2: like in theory, there should be consequences, but the fact 159 00:08:46,440 --> 00:08:49,160 Speaker 2: that it keeps happening, as I mentioned, suggests that there 160 00:08:49,200 --> 00:08:49,839 Speaker 2: probably aren't. 161 00:08:50,600 --> 00:08:54,559 Speaker 5: Yeah, there are no consequences, much to the disintment. 162 00:08:54,880 --> 00:08:55,480 Speaker 4: Exactly. 163 00:08:55,600 --> 00:09:01,120 Speaker 5: Imagine imagine a company failing an audit and investors saying, well, 164 00:09:01,880 --> 00:09:05,840 Speaker 5: we're going on ahead anyways, and so no, there are 165 00:09:05,880 --> 00:09:10,960 Speaker 5: no consequences for the Pentagon when it repeatedly fails audits. 166 00:09:11,600 --> 00:09:15,600 Speaker 5: And yet the audit is supposed to give US taxpayers 167 00:09:15,600 --> 00:09:18,760 Speaker 5: some trust that the Department of Defense is spending our 168 00:09:18,800 --> 00:09:23,640 Speaker 5: money efficiently and wisely. But unfortunately, and much to the 169 00:09:23,679 --> 00:09:27,560 Speaker 5: disappointment of components like the Marine Corps or the Defense 170 00:09:27,600 --> 00:09:30,880 Speaker 5: Threat Reduction Agency which have received these green lights, these 171 00:09:30,960 --> 00:09:36,959 Speaker 5: unmodified audit opinions. They are not rewarded for receiving green 172 00:09:37,040 --> 00:09:40,320 Speaker 5: lights in the auditing process. And you know, the Marine 173 00:09:40,320 --> 00:09:43,000 Speaker 5: Corps is still struggling to you know, get their boats. 174 00:09:43,040 --> 00:09:47,640 Speaker 5: So it's an important question, and unfortunately there are just 175 00:09:47,840 --> 00:09:52,360 Speaker 5: no consequences because appropriators are not reading a four hundred 176 00:09:52,480 --> 00:09:55,800 Speaker 5: page audit report on the Pentagon before deciding what to 177 00:09:55,880 --> 00:09:58,000 Speaker 5: spend on national defense. 178 00:09:58,520 --> 00:10:01,319 Speaker 1: So they failed the audit. It's at least they can't 179 00:10:01,360 --> 00:10:04,920 Speaker 1: even put together an opinion. What's happening? Why can't they? 180 00:10:04,920 --> 00:10:07,000 Speaker 1: What are they when they're going in there and they're 181 00:10:07,040 --> 00:10:09,640 Speaker 1: looking for documents and evidence that the money is being 182 00:10:09,679 --> 00:10:11,720 Speaker 1: tracked roughly in accordance with how it should be and 183 00:10:11,760 --> 00:10:15,480 Speaker 1: that the various divisions are What are they seeing when 184 00:10:15,520 --> 00:10:17,640 Speaker 1: they go in there that causes them to not be 185 00:10:17,679 --> 00:10:20,240 Speaker 1: able to produce in a pant sure well. 186 00:10:20,400 --> 00:10:23,520 Speaker 5: One failure point that I love to point to is 187 00:10:24,640 --> 00:10:30,000 Speaker 5: DoD's difficulty in tracking property in inventory records across the 188 00:10:30,040 --> 00:10:31,200 Speaker 5: military services. 189 00:10:31,520 --> 00:10:34,200 Speaker 4: One of my favorite examples of why does this matter? 190 00:10:34,240 --> 00:10:34,800 Speaker 4: Who cares? 191 00:10:34,920 --> 00:10:37,520 Speaker 5: Why do auditors go in and look at inventory records 192 00:10:37,559 --> 00:10:40,000 Speaker 5: and flag this as a weakness in. 193 00:10:39,760 --> 00:10:40,600 Speaker 4: Their audit reports. 194 00:10:40,640 --> 00:10:44,280 Speaker 5: Well, a few years ago, twenty nineteen, the Department of 195 00:10:44,280 --> 00:10:47,559 Speaker 5: Defense Inspector General flagged errors and the Navy's property and 196 00:10:47,640 --> 00:10:51,360 Speaker 5: inventory records, and as a result, the service ended up 197 00:10:51,440 --> 00:10:55,560 Speaker 5: finding a warehouse that was mysteriously absent from its property 198 00:10:55,559 --> 00:10:56,000 Speaker 5: records and. 199 00:10:56,040 --> 00:10:58,680 Speaker 2: They've lost a whole warse amazing. 200 00:10:58,360 --> 00:11:01,679 Speaker 5: Indeed, and inside they found one hundred and twenty six 201 00:11:01,760 --> 00:11:03,040 Speaker 5: million dollars. 202 00:11:02,880 --> 00:11:03,880 Speaker 4: Worth of spare parts. 203 00:11:04,679 --> 00:11:07,120 Speaker 5: Now, in the context of the Pentagon budget, what is 204 00:11:07,240 --> 00:11:09,920 Speaker 5: one hundred and twenty six million when we're talking about 205 00:11:10,080 --> 00:11:12,640 Speaker 5: a near trillion dollars depending on how you count it. 206 00:11:13,240 --> 00:11:16,040 Speaker 5: But they found these spare parts for a number of 207 00:11:16,040 --> 00:11:20,120 Speaker 5: different aircraft inside that warehouse, and they were actually able 208 00:11:20,200 --> 00:11:24,040 Speaker 5: to fill over twenty million dollars in spare parts orders 209 00:11:24,280 --> 00:11:28,079 Speaker 5: without having to procure new ones. And so the scale 210 00:11:28,080 --> 00:11:31,840 Speaker 5: of this issue is unknown right because we have a 211 00:11:31,960 --> 00:11:38,040 Speaker 5: pervasive inventory and property record keeping issues throughout DoD And importantly, 212 00:11:38,280 --> 00:11:42,760 Speaker 5: the Government Accountability Office has actually flagged inventory issues since 213 00:11:42,800 --> 00:11:47,240 Speaker 5: the early eighties, since nineteen eighty one, and this is relevant, 214 00:11:47,240 --> 00:11:51,040 Speaker 5: for example, to the most expensive weapon program in US history, 215 00:11:51,400 --> 00:11:54,000 Speaker 5: the F thirty five fighter jet. Now the reason I 216 00:11:54,000 --> 00:11:56,120 Speaker 5: bring it up is because you know, okay, you have 217 00:11:56,160 --> 00:11:58,520 Speaker 5: an example of the Navy finding all these aircraft parts 218 00:11:58,520 --> 00:11:59,840 Speaker 5: and being able to fill orders. 219 00:12:00,200 --> 00:12:01,400 Speaker 4: So what does that mean. 220 00:12:01,280 --> 00:12:05,200 Speaker 5: In the context of a now two trillion dollar weapon 221 00:12:05,200 --> 00:12:08,480 Speaker 5: acquisition program, which is the F thirty five. Well, you 222 00:12:08,559 --> 00:12:12,720 Speaker 5: have the GAO, the Government Accountability Office, saying that F 223 00:12:12,760 --> 00:12:16,480 Speaker 5: thirty five parts in the possession of contractors are likely 224 00:12:16,520 --> 00:12:20,080 Speaker 5: significantly understated. So the government has all these spare parts 225 00:12:20,080 --> 00:12:25,760 Speaker 5: are government owned but typically possessed controlled by contractors. And 226 00:12:25,960 --> 00:12:27,880 Speaker 5: the GAO has flaged this issue for a long time 227 00:12:27,960 --> 00:12:31,360 Speaker 5: because it means we could be over buying on spare 228 00:12:31,360 --> 00:12:34,160 Speaker 5: parts as a country. The Department of Defense Inspector General 229 00:12:34,200 --> 00:12:38,280 Speaker 5: has likewise expressed this concern and in twenty twenty one 230 00:12:38,440 --> 00:12:41,559 Speaker 5: found that, you know, the Army, for example, was forecasting 231 00:12:42,160 --> 00:12:44,959 Speaker 5: spare parts needs and was only accurate twenty percent of 232 00:12:45,000 --> 00:12:48,280 Speaker 5: the time. Again, why does that matter, because they ended 233 00:12:48,360 --> 00:12:51,600 Speaker 5: up overstating how many spare parts the Army needed by 234 00:12:51,760 --> 00:12:55,319 Speaker 5: over two hundred million dollars. The military writ large, all 235 00:12:55,360 --> 00:12:59,040 Speaker 5: the services together actually overshot their spare parts needs by 236 00:12:59,080 --> 00:13:02,480 Speaker 5: nearly a billion dollars. So this matters when you can't 237 00:13:02,720 --> 00:13:06,199 Speaker 5: keep track of your property in the possession of contractors. 238 00:13:06,400 --> 00:13:10,640 Speaker 2: It must matter from an operational or execution perspective as well. Right, 239 00:13:10,720 --> 00:13:13,680 Speaker 2: if there was a military emergency and we can't find 240 00:13:13,760 --> 00:13:16,760 Speaker 2: the spare parts that we need because we've never been 241 00:13:16,800 --> 00:13:19,000 Speaker 2: able to track them, that's problematic. 242 00:13:19,640 --> 00:13:22,439 Speaker 5: Oh absolutely. I mean you look back to the early 243 00:13:22,559 --> 00:13:24,160 Speaker 5: years of the War on Terror. I mean I meet 244 00:13:24,160 --> 00:13:27,120 Speaker 5: a lot of veterans who when I talk to them 245 00:13:27,120 --> 00:13:30,120 Speaker 5: about these issues, they say, oh, yeah, we were hiding 246 00:13:30,559 --> 00:13:33,680 Speaker 5: you know, parts to maintain our equipment in our bunks 247 00:13:33,720 --> 00:13:37,120 Speaker 5: because we had no assurances that we were going to 248 00:13:37,120 --> 00:13:40,680 Speaker 5: be able to maintain to repair the equipment that we 249 00:13:40,760 --> 00:13:41,120 Speaker 5: need to. 250 00:13:41,040 --> 00:13:41,640 Speaker 4: Do our jobs. 251 00:13:41,800 --> 00:13:45,560 Speaker 5: So it is a readiness issue and one that the 252 00:13:45,640 --> 00:14:00,160 Speaker 5: DoD absolutely needs to directify. 253 00:14:03,120 --> 00:14:05,880 Speaker 1: I have to imagine that if one of the problems 254 00:14:06,320 --> 00:14:10,920 Speaker 1: is sort of implied here about overordering spare parts, I 255 00:14:10,960 --> 00:14:14,839 Speaker 1: would guess that the major weapons suppliers, the defense contractors, 256 00:14:15,160 --> 00:14:17,040 Speaker 1: don't really mind that problem. 257 00:14:17,080 --> 00:14:18,480 Speaker 4: That's exactly right, Joe. 258 00:14:19,480 --> 00:14:25,120 Speaker 5: In fact, the DoD has actually requested inventory records from 259 00:14:25,160 --> 00:14:29,080 Speaker 5: Lockheed Martin before for the F thirty five program, and 260 00:14:29,200 --> 00:14:31,880 Speaker 5: Lockheed Martin said, oh, well, it's going to cost us 261 00:14:31,920 --> 00:14:34,360 Speaker 5: a bunch of money to track down this information and 262 00:14:34,400 --> 00:14:39,160 Speaker 5: provide the reports, essentially disincentivizing the government from requiring that 263 00:14:39,560 --> 00:14:42,360 Speaker 5: in the military contract right. And I wrote a piece 264 00:14:42,360 --> 00:14:44,920 Speaker 5: about this a couple of years ago, and it's insane 265 00:14:45,040 --> 00:14:48,480 Speaker 5: because you have contractors who have government owned property in 266 00:14:48,520 --> 00:14:52,440 Speaker 5: their possession, but they control all of the tracking mechanisms, 267 00:14:52,720 --> 00:14:55,760 Speaker 5: and even when government asks, they say, oh, well, what 268 00:14:55,840 --> 00:14:58,320 Speaker 5: are you paying us to provide you with information about 269 00:14:58,400 --> 00:14:59,760 Speaker 5: government owned property? 270 00:15:00,840 --> 00:15:03,800 Speaker 2: Just on the contractor point. I always wonder about this, 271 00:15:03,960 --> 00:15:07,320 Speaker 2: but who does the US actually compete against when it's 272 00:15:07,360 --> 00:15:10,720 Speaker 2: buying military stuff, Because I would think with a trillion 273 00:15:10,800 --> 00:15:14,720 Speaker 2: dollar budget for defense, the US is probably putting in 274 00:15:14,760 --> 00:15:18,800 Speaker 2: the biggest orders, and so could they in theory dictate 275 00:15:18,840 --> 00:15:22,119 Speaker 2: the price or at least ask for a volume discount 276 00:15:22,200 --> 00:15:25,280 Speaker 2: or something. I mean on the f thirty fives for instance, 277 00:15:25,480 --> 00:15:29,840 Speaker 2: Like the US has one hundreds now versus other countries 278 00:15:29,880 --> 00:15:31,560 Speaker 2: that have I think a few dozen. 279 00:15:33,120 --> 00:15:36,480 Speaker 4: Yeah. So this is the problem with a monopsone market. Right, 280 00:15:36,560 --> 00:15:37,000 Speaker 4: you have. 281 00:15:37,040 --> 00:15:42,880 Speaker 2: Monos sorry that's a trigger word for US. 282 00:15:43,320 --> 00:15:45,800 Speaker 5: You have one buyer, but you also in a lot 283 00:15:45,840 --> 00:15:50,280 Speaker 5: of cases have one seller. And that is the genius 284 00:15:50,360 --> 00:15:52,840 Speaker 5: of the arms industry. Right with the f thirty five program. 285 00:15:52,880 --> 00:15:56,080 Speaker 5: They have politically engineered it such that it exists in 286 00:15:56,720 --> 00:16:00,240 Speaker 5: I think all fifty states now. Lackie Martin has an 287 00:16:00,280 --> 00:16:03,200 Speaker 5: interactive map so someone can fact check me. But it 288 00:16:03,280 --> 00:16:06,200 Speaker 5: is like forty six, if not all fifty at this point. 289 00:16:06,320 --> 00:16:11,040 Speaker 1: So every politician in America has some reason to preserve 290 00:16:11,080 --> 00:16:13,320 Speaker 1: the status quo because they have workers. 291 00:16:13,480 --> 00:16:16,720 Speaker 5: That the idea here, that's exactly right, because jobs, even 292 00:16:16,800 --> 00:16:20,240 Speaker 5: though we know that military spending is a lousy jobs 293 00:16:20,240 --> 00:16:23,800 Speaker 5: creator in comparison to other types of government spending. 294 00:16:24,320 --> 00:16:27,480 Speaker 1: So you know, I guess if the Pentagon has failed 295 00:16:27,520 --> 00:16:31,720 Speaker 1: seven audits in a row. I guess implication eight years 296 00:16:31,760 --> 00:16:34,720 Speaker 1: ago or nine years ago, there was no mandate for 297 00:16:34,960 --> 00:16:38,440 Speaker 1: an audit period because it must be a relatively new thing. 298 00:16:38,880 --> 00:16:40,920 Speaker 1: Can you talk to us a little bit about how 299 00:16:40,960 --> 00:16:43,880 Speaker 1: that came about the requirement to audit and how the 300 00:16:44,360 --> 00:16:49,040 Speaker 1: military contractors sort of try to shape the process of 301 00:16:49,400 --> 00:16:50,280 Speaker 1: tracking acquisition. 302 00:16:50,840 --> 00:16:53,400 Speaker 4: Sure, so this is a question I get a lot. 303 00:16:53,880 --> 00:17:01,200 Speaker 5: Was their accountability before the Pentagon started consolidate agency wide audits? 304 00:17:01,760 --> 00:17:04,960 Speaker 5: So the answer is yes, but not to the same 305 00:17:04,960 --> 00:17:09,160 Speaker 5: extent that we have today. So in nineteen ninety Congress 306 00:17:09,200 --> 00:17:13,160 Speaker 5: passed the Chief Financial Officers Act, which required federal agencies 307 00:17:13,160 --> 00:17:17,200 Speaker 5: to prepare financial statements for audit, and the DoD submitted, 308 00:17:17,320 --> 00:17:21,480 Speaker 5: you know, component financial statements to the DODIG for that purpose, 309 00:17:21,640 --> 00:17:26,360 Speaker 5: but did not undergo the thorough. 310 00:17:26,119 --> 00:17:27,720 Speaker 4: Audit that we see today. 311 00:17:28,359 --> 00:17:32,520 Speaker 5: And in fact, the number of components included in the 312 00:17:32,600 --> 00:17:36,640 Speaker 5: agency wide audit tends to vary a little bit every year. 313 00:17:36,880 --> 00:17:40,240 Speaker 5: Sometimes it's twenty eight, sometimes it's twenty seven. But it 314 00:17:40,359 --> 00:17:45,959 Speaker 5: is absolutely true that contractors shape nearly every aspect of 315 00:17:46,200 --> 00:17:51,000 Speaker 5: defense policy because of their power and influence on Capitol Hill, 316 00:17:51,359 --> 00:17:54,639 Speaker 5: and a major lever for that power an influence is 317 00:17:54,680 --> 00:17:57,200 Speaker 5: in fact the sort of jobs creation that they lean 318 00:17:57,240 --> 00:18:00,480 Speaker 5: on for these weapon programs. And I have actually think 319 00:18:00,480 --> 00:18:04,840 Speaker 5: it's an interesting question because now you see the current 320 00:18:04,960 --> 00:18:09,639 Speaker 5: Secretary of Defense, HEG. Seth, really embracing the audit in 321 00:18:09,760 --> 00:18:14,240 Speaker 5: his quest to improve military readiness, and on its face, 322 00:18:14,520 --> 00:18:19,920 Speaker 5: that is a noble and worthy goal, right, it remains 323 00:18:19,920 --> 00:18:23,080 Speaker 5: to be seen how that actually shakes out in this administration. 324 00:18:23,480 --> 00:18:26,959 Speaker 5: I only hope for the best and very much encourage 325 00:18:26,960 --> 00:18:29,360 Speaker 5: the administration to take this seriously because I do think 326 00:18:29,359 --> 00:18:32,800 Speaker 5: that it matters. Again, when you have, for example, military 327 00:18:32,840 --> 00:18:38,120 Speaker 5: services over buying spare parts at the expense of the taxpayer. However, 328 00:18:38,359 --> 00:18:41,359 Speaker 5: I think that it's noteworthy when you see news a 329 00:18:41,400 --> 00:18:44,879 Speaker 5: month ago about the Secretary saying, Okay, we're doing budget 330 00:18:44,920 --> 00:18:51,600 Speaker 5: reshuffling to reorder DoD funding and channel it toward Trump's priorities. 331 00:18:51,640 --> 00:18:56,040 Speaker 5: President Trump's priorities. And one of those exemptions from potential 332 00:18:56,080 --> 00:19:00,000 Speaker 5: reductions in these budget reshufflings was the audit, of course, 333 00:19:00,080 --> 00:19:03,439 Speaker 5: or so was nuclear modernization and many other things, and 334 00:19:04,119 --> 00:19:06,840 Speaker 5: that is important for military readiness, and we actually should 335 00:19:07,000 --> 00:19:10,840 Speaker 5: work toward passing an audit. However, it's important to note 336 00:19:10,920 --> 00:19:14,240 Speaker 5: that even if the DoD passes an audit, that doesn't 337 00:19:14,359 --> 00:19:18,080 Speaker 5: justify the money that the DoD is spending, because we 338 00:19:18,119 --> 00:19:21,000 Speaker 5: should be able to achieve more for less, and we 339 00:19:21,080 --> 00:19:22,720 Speaker 5: have not seen that in recent decades. 340 00:19:23,040 --> 00:19:25,320 Speaker 2: Right, just on this note, I kind of want to 341 00:19:25,640 --> 00:19:28,919 Speaker 2: back up and ask a big picture question. But you know, 342 00:19:29,000 --> 00:19:32,400 Speaker 2: Joe alluded in the intro to the fact that defense 343 00:19:32,440 --> 00:19:36,800 Speaker 2: spending has historically been it's always been there, it's always 344 00:19:36,800 --> 00:19:39,560 Speaker 2: been with us, and it's always been pretty big. I 345 00:19:39,640 --> 00:19:42,800 Speaker 2: know that you can benchmark it to GDP and it's 346 00:19:42,800 --> 00:19:45,160 Speaker 2: come down as a percentage of GDP, but I think 347 00:19:45,200 --> 00:19:48,600 Speaker 2: we can all agree that one trillion is still a 348 00:19:48,600 --> 00:19:53,320 Speaker 2: pretty big number. So why did that happen? And why 349 00:19:53,440 --> 00:19:56,640 Speaker 2: is it that we just accept that defense is kind 350 00:19:56,640 --> 00:20:00,280 Speaker 2: of untouchable or by its nature going to be this 351 00:20:00,440 --> 00:20:01,600 Speaker 2: huge line item. 352 00:20:02,200 --> 00:20:05,239 Speaker 5: I'm so glad you brought up percent of GDP. I 353 00:20:05,320 --> 00:20:08,840 Speaker 5: love to talk about this. I think that it's one 354 00:20:08,880 --> 00:20:13,560 Speaker 5: of those macro indicators that conceals more than it reveals. Right, 355 00:20:13,920 --> 00:20:16,640 Speaker 5: So the distribution of military spending has changed a lot 356 00:20:16,680 --> 00:20:20,640 Speaker 5: over time, but we're so beholden to this idea of 357 00:20:20,680 --> 00:20:24,960 Speaker 5: a gigantic military budget to keep American safe because of 358 00:20:25,000 --> 00:20:28,520 Speaker 5: its legacy after World War Two and bringing the United 359 00:20:28,560 --> 00:20:32,000 Speaker 5: States out of sort of the trenches of the Great Depression, 360 00:20:32,840 --> 00:20:37,160 Speaker 5: and stimulating the economy. Of course, any significant government spending 361 00:20:37,480 --> 00:20:41,160 Speaker 5: would stimulate the economy in sort of offset the effects 362 00:20:41,160 --> 00:20:45,119 Speaker 5: of under consumption. And yet we've just been sort of 363 00:20:45,880 --> 00:20:50,000 Speaker 5: ingratiated with this idea that military spending is so integral 364 00:20:50,160 --> 00:20:54,160 Speaker 5: to our economic growth, when in fact, there's a lot 365 00:20:54,200 --> 00:20:57,320 Speaker 5: of economic research out there that says, you know, sort 366 00:20:57,320 --> 00:21:01,840 Speaker 5: of ever expanding military budgets can have a depressive effect 367 00:21:02,000 --> 00:21:06,800 Speaker 5: on long term economic growth. Why because it impacts productivity. Right, 368 00:21:06,880 --> 00:21:10,480 Speaker 5: So World War Two, the sort of narrative, in sort 369 00:21:10,520 --> 00:21:14,560 Speaker 5: of dominant historical discourse is we have this productivity miracle. No, 370 00:21:14,760 --> 00:21:17,560 Speaker 5: it was a production miracle. We spent a bunch of 371 00:21:17,640 --> 00:21:21,960 Speaker 5: money on military industrial output, but that had a depressive 372 00:21:22,000 --> 00:21:25,600 Speaker 5: impact on productivity over time. So I argue that this 373 00:21:25,720 --> 00:21:29,040 Speaker 5: is actually bad for the economy long term. But we 374 00:21:29,160 --> 00:21:33,000 Speaker 5: are as a country, I think, so dedicated to this 375 00:21:33,160 --> 00:21:35,720 Speaker 5: idea that the military budget is sort of a core 376 00:21:35,800 --> 00:21:41,479 Speaker 5: part of our economic engine. And unfortunately that's not true anymore, 377 00:21:41,520 --> 00:21:43,800 Speaker 5: because again the distribution has changed over time. It's a 378 00:21:43,840 --> 00:21:47,439 Speaker 5: lot more capital intensive. It's not necessarily this sort of 379 00:21:47,560 --> 00:21:50,520 Speaker 5: vehicle of upward economic mobility that it used to be 380 00:21:50,520 --> 00:21:53,840 Speaker 5: because it's not as focused on labor. Of course, yes 381 00:21:53,920 --> 00:21:55,720 Speaker 5: you have the GI bill, Yes you can get a 382 00:21:55,760 --> 00:21:58,040 Speaker 5: free education. That's all very important and good, and we 383 00:21:58,080 --> 00:22:00,920 Speaker 5: should absolutely do that. But we're spending more and more 384 00:22:01,000 --> 00:22:04,040 Speaker 5: money on research and development and procurement. Who does that benefit. 385 00:22:04,119 --> 00:22:06,760 Speaker 5: It benefits electrical engineers, not the working man. 386 00:22:07,520 --> 00:22:10,919 Speaker 2: So just on this note, in preparing for this episode 387 00:22:11,040 --> 00:22:14,320 Speaker 2: and looking you up, I noticed that for your undergraduate 388 00:22:14,440 --> 00:22:18,720 Speaker 2: thesis you did an econometric study to test the relative 389 00:22:18,840 --> 00:22:23,600 Speaker 2: impacts of various types of defense spending on income inequality. 390 00:22:23,960 --> 00:22:27,000 Speaker 2: That seems really interesting. I don't know if you remember 391 00:22:27,320 --> 00:22:30,919 Speaker 2: your undergrad days or your work, but what did you 392 00:22:31,119 --> 00:22:31,879 Speaker 2: find in that? 393 00:22:32,640 --> 00:22:35,600 Speaker 5: So I actually just gave you the short pitch on 394 00:22:35,640 --> 00:22:38,600 Speaker 5: my paper, which did find and I had an R 395 00:22:38,600 --> 00:22:42,080 Speaker 5: squared of ninety six percent, so explanatory value was good. 396 00:22:42,800 --> 00:22:47,920 Speaker 5: But I tested this hypothesis that military spending is good 397 00:22:47,920 --> 00:22:51,040 Speaker 5: for jobs, good for people, good for the economy. And 398 00:22:51,080 --> 00:22:53,639 Speaker 5: I did that by disaggregating the base budget into the 399 00:22:53,680 --> 00:22:59,200 Speaker 5: major categories, some of which I just described research and development, procurement, personnel, operations, 400 00:22:59,200 --> 00:23:02,680 Speaker 5: and maintenance, you big ones. And I actually found that 401 00:23:02,920 --> 00:23:07,720 Speaker 5: procurement in research and development had exacerbated income and equality 402 00:23:07,880 --> 00:23:10,439 Speaker 5: over the eight years of the Obama administration that was 403 00:23:10,480 --> 00:23:11,480 Speaker 5: my time span. 404 00:23:12,119 --> 00:23:14,120 Speaker 4: And I actually know someone. 405 00:23:14,040 --> 00:23:17,560 Speaker 5: At an academic institution writing on the same exact topic now, 406 00:23:17,640 --> 00:23:20,440 Speaker 5: so I'm very happy that that person will be soon 407 00:23:20,480 --> 00:23:23,720 Speaker 5: publishing a paper because I did not publish mine. But yeah, 408 00:23:23,760 --> 00:23:26,520 Speaker 5: I mean, I wanted to test this idea that military 409 00:23:26,520 --> 00:23:30,120 Speaker 5: spending is good for the economy, and it's military Keensianism, right. 410 00:23:30,200 --> 00:23:32,840 Speaker 5: This is the idea that we've all been fed. And 411 00:23:32,880 --> 00:23:36,560 Speaker 5: I think that lawmakers really grasp onto because it's a 412 00:23:36,600 --> 00:23:41,480 Speaker 5: convenient veil for what our frankly often conflicts of interest, 413 00:23:41,880 --> 00:23:46,520 Speaker 5: whether that be congressional members owning and trading stocks or 414 00:23:47,359 --> 00:23:52,040 Speaker 5: receiving campaign finance from arms manufacturers. And I think it 415 00:23:52,240 --> 00:23:55,960 Speaker 5: really distorts the way that we talk about defense policy, 416 00:23:56,200 --> 00:23:58,760 Speaker 5: the military and its role in our economy. 417 00:23:59,240 --> 00:24:02,879 Speaker 1: If I could Devil's advocate for a second, one of 418 00:24:02,920 --> 00:24:05,840 Speaker 1: the major sources of anxiety right now in the US 419 00:24:05,880 --> 00:24:09,160 Speaker 1: economy is not about jobs, although maybe the labor market 420 00:24:09,200 --> 00:24:11,320 Speaker 1: is weakening, but the unemployment rate is still kind of low. 421 00:24:11,560 --> 00:24:15,360 Speaker 1: It's mostly this concern that the US is not at 422 00:24:15,359 --> 00:24:19,600 Speaker 1: the technological cutting edge in many areas that are at 423 00:24:19,640 --> 00:24:23,000 Speaker 1: least in some way adjacent to the military. And of course, 424 00:24:23,040 --> 00:24:25,440 Speaker 1: you know, people love to tell you it's like Silicon 425 00:24:25,520 --> 00:24:27,760 Speaker 1: Valley got started off, you know, from it was all 426 00:24:27,800 --> 00:24:29,920 Speaker 1: military funding. And that's why we have chips, and that's 427 00:24:29,920 --> 00:24:33,159 Speaker 1: why we have compact chips and small computers because they 428 00:24:33,200 --> 00:24:37,040 Speaker 1: needed to be put in small spaces, et cetera. When 429 00:24:37,080 --> 00:24:39,560 Speaker 1: you talk about all of the R and D spending 430 00:24:39,640 --> 00:24:43,240 Speaker 1: that they do, or even the capital expenditure isn't that 431 00:24:43,359 --> 00:24:47,119 Speaker 1: like when we think about productivity, do we get positive 432 00:24:47,160 --> 00:24:50,520 Speaker 1: spillovers from the research that's being done by today's weapons 433 00:24:50,560 --> 00:24:54,120 Speaker 1: manufacturers that are then transmitted to the rest of the economy. 434 00:24:54,520 --> 00:24:56,720 Speaker 4: Yeah, this is something I've really been grappling with. 435 00:24:56,760 --> 00:24:59,600 Speaker 5: I'm writing a paper right now on the defense industrial base, 436 00:25:00,160 --> 00:25:02,480 Speaker 5: and you're absolutely right. I mean, industrial policy is super 437 00:25:02,520 --> 00:25:05,040 Speaker 5: hot right now. Of course, like Robert Reich, I think 438 00:25:05,320 --> 00:25:07,280 Speaker 5: said this in the nineties, industrial. 439 00:25:06,880 --> 00:25:07,640 Speaker 4: Policy is back. 440 00:25:07,680 --> 00:25:10,119 Speaker 5: But the thing is, we've always had industrial policy for 441 00:25:10,440 --> 00:25:14,160 Speaker 5: military contractors. To your point, Silicon Valley wouldn't exist without 442 00:25:14,240 --> 00:25:18,760 Speaker 5: Dharba and ARPA E grants. And in my view, I 443 00:25:18,920 --> 00:25:22,080 Speaker 5: sort of see this in the context of our economic 444 00:25:22,160 --> 00:25:26,840 Speaker 5: resilience and vitality long term. Okay, I'm an elder Zoomer. 445 00:25:27,160 --> 00:25:29,640 Speaker 5: I'm pretty much the oldest you can be and still 446 00:25:29,640 --> 00:25:33,040 Speaker 5: claim to be gen z and I think about my 447 00:25:33,200 --> 00:25:40,240 Speaker 5: future and I see military investment as mortgaging our futures 448 00:25:40,280 --> 00:25:46,480 Speaker 5: on exquisite, expensive platforms. Even in the software realm. That's 449 00:25:46,520 --> 00:25:50,880 Speaker 5: not to say that I don't think there isn't innovation happening. 450 00:25:50,960 --> 00:25:52,679 Speaker 5: I think, you know, in the context of the audit, 451 00:25:52,720 --> 00:25:57,800 Speaker 5: for example, it's important that we have internal controls around 452 00:25:57,880 --> 00:26:02,680 Speaker 5: the development of and reporting of sort of more cyberphysical 453 00:26:02,800 --> 00:26:07,840 Speaker 5: capabilities and a military context software programs. I'm not convinced 454 00:26:08,200 --> 00:26:14,400 Speaker 5: that private industry is necessarily going to make the leaps 455 00:26:14,440 --> 00:26:18,720 Speaker 5: and bounds that we did as a country two decades ago, 456 00:26:18,800 --> 00:26:22,159 Speaker 5: three decades ago today, And the reason for that is 457 00:26:22,240 --> 00:26:26,760 Speaker 5: because I don't think that venture capital is necessarily driven 458 00:26:26,920 --> 00:26:31,719 Speaker 5: by innovation and spill over into the civilian economy. They 459 00:26:31,720 --> 00:26:36,760 Speaker 5: are driven by profit motive and the ability to return 460 00:26:36,840 --> 00:26:38,120 Speaker 5: value to shareholders. Right. 461 00:26:38,440 --> 00:26:41,320 Speaker 4: This is the legacy of VC and Silicon. 462 00:26:40,960 --> 00:26:44,439 Speaker 5: Valley and the way that the government has always shaped 463 00:26:44,440 --> 00:26:48,679 Speaker 5: the market through R and D funding. Right, they jump 464 00:26:48,800 --> 00:26:53,000 Speaker 5: in right before a product goes to commercial market, if 465 00:26:53,040 --> 00:26:55,680 Speaker 5: in fact, you are working on something that is dual use, 466 00:26:56,160 --> 00:26:58,359 Speaker 5: and then they leave after the IPO. So in some ways, 467 00:26:58,359 --> 00:27:00,359 Speaker 5: I see the government has always been the risk taker 468 00:27:00,400 --> 00:27:02,639 Speaker 5: because they're the ones that fund the basic research. So 469 00:27:02,720 --> 00:27:05,480 Speaker 5: I don't have fully baked thoughts on this, but I 470 00:27:05,480 --> 00:27:09,200 Speaker 5: think that it's critical for the government to continue shaping 471 00:27:09,760 --> 00:27:13,080 Speaker 5: the risky investments that we need to do true innovation 472 00:27:13,280 --> 00:27:16,760 Speaker 5: and in my view, combat the climate crisis in sort 473 00:27:16,800 --> 00:27:18,159 Speaker 5: of new innovative. 474 00:27:17,640 --> 00:27:35,720 Speaker 1: Ways, Tracy, I think this is like a really key point, 475 00:27:35,760 --> 00:27:38,959 Speaker 1: which is just as Julia was putting it, which is 476 00:27:39,000 --> 00:27:45,080 Speaker 1: that really like long term industrial capacity type innovation does 477 00:27:45,119 --> 00:27:48,720 Speaker 1: not strike me as particularly compatible with the types of 478 00:27:48,840 --> 00:27:52,480 Speaker 1: returns that either public markets or VC investors expect. And 479 00:27:52,520 --> 00:27:55,080 Speaker 1: we talk about this in the context of nuclear anyway, 480 00:27:55,320 --> 00:27:59,439 Speaker 1: and this idea that like the payoff timelines and the 481 00:27:59,560 --> 00:28:03,160 Speaker 1: risks do not seem in alignment with the opportunity set 482 00:28:03,160 --> 00:28:04,359 Speaker 1: for private sector investors. 483 00:28:04,520 --> 00:28:06,560 Speaker 2: Right it seems like a big risk with a lot 484 00:28:06,600 --> 00:28:12,800 Speaker 2: of capital expenditure, which the private sector notoriously shies away from. Okay, 485 00:28:13,160 --> 00:28:17,960 Speaker 2: I forgot to ask one really granular question on the audits, 486 00:28:18,640 --> 00:28:23,920 Speaker 2: and I've read that there's something called an unfunded priority list, which, 487 00:28:24,040 --> 00:28:25,760 Speaker 2: as far as I can tell, seems to be like 488 00:28:26,200 --> 00:28:29,560 Speaker 2: just a wish list of extra budgetary items that the 489 00:28:29,560 --> 00:28:32,760 Speaker 2: Pentagon didn't include in its official budget request. 490 00:28:33,240 --> 00:28:33,920 Speaker 4: What is that? 491 00:28:34,040 --> 00:28:36,040 Speaker 2: And what's the point of having a budget if you 492 00:28:36,040 --> 00:28:39,120 Speaker 2: can just have like another budget on top of it. 493 00:28:39,520 --> 00:28:41,960 Speaker 4: You described it perfectly, Tracy. 494 00:28:42,200 --> 00:28:45,280 Speaker 5: It is, in fact a wish list of extra budgetary 495 00:28:45,360 --> 00:28:49,520 Speaker 5: items that the DoD not only didn't ask for in 496 00:28:49,600 --> 00:28:52,360 Speaker 5: its budget request to Congress, but also did not have 497 00:28:52,480 --> 00:28:56,920 Speaker 5: to provide justification documents for And so you see the 498 00:28:56,960 --> 00:28:59,720 Speaker 5: services manipulate the UPL. 499 00:28:59,400 --> 00:29:02,760 Speaker 4: Process, wishless process in order. 500 00:29:02,600 --> 00:29:05,080 Speaker 5: To make it look like their budgets aren't as big 501 00:29:05,080 --> 00:29:06,120 Speaker 5: as they actually are. 502 00:29:06,160 --> 00:29:07,880 Speaker 4: We've seen the Navy do this with destroyers. 503 00:29:07,920 --> 00:29:10,520 Speaker 5: I mean, it is absolute blasphemy. I think it's a 504 00:29:10,560 --> 00:29:13,040 Speaker 5: slab in the face to tax payers and to the 505 00:29:13,040 --> 00:29:15,920 Speaker 5: rest of the federal government. You've seen some members of Congress, 506 00:29:15,920 --> 00:29:18,840 Speaker 5: I believe Tim Kaine has suggested, oh well, why don't 507 00:29:18,880 --> 00:29:24,440 Speaker 5: we have civilian agencies also statutorily required to submit unfunded 508 00:29:24,480 --> 00:29:27,200 Speaker 5: priority lists. Look, if it's not in your budget, it 509 00:29:27,280 --> 00:29:29,600 Speaker 5: is not a priority. And we do not need to 510 00:29:29,640 --> 00:29:33,760 Speaker 5: standardize or normalize what I consider to be a pretty 511 00:29:33,880 --> 00:29:37,400 Speaker 5: undemocratic version of the budget process. 512 00:29:38,040 --> 00:29:40,600 Speaker 1: Talk to us a little bit more about the fights 513 00:29:40,800 --> 00:29:44,720 Speaker 1: right now going on Capitol Hill. Sitting aside the assumption 514 00:29:44,840 --> 00:29:48,880 Speaker 1: that defense contractors always want more spending, what are some 515 00:29:48,960 --> 00:29:51,480 Speaker 1: of the tension points? So the fights that are happening 516 00:29:51,600 --> 00:29:55,440 Speaker 1: about sort of guardrails on spending or other issues related 517 00:29:55,560 --> 00:29:57,720 Speaker 1: or maybe related to the audit, Like, what are the 518 00:29:57,720 --> 00:29:58,760 Speaker 1: fights right now about? 519 00:29:59,520 --> 00:30:04,280 Speaker 5: Yes, So, I mean, obviously we just averted a government shutdown. 520 00:30:04,400 --> 00:30:07,600 Speaker 5: So the CR the Continuing Resolution, has taken over everybody's 521 00:30:07,640 --> 00:30:10,560 Speaker 5: minds in the last couple of weeks here and sort 522 00:30:10,600 --> 00:30:14,000 Speaker 5: of The next big fight is the budget reconciliation process. 523 00:30:14,160 --> 00:30:17,080 Speaker 5: I'm sure listeners are familiar with that if they listen 524 00:30:17,120 --> 00:30:21,120 Speaker 5: to this podcast. It is also a mechanism through which 525 00:30:21,720 --> 00:30:25,760 Speaker 5: to avoid regular order and thereby the filibuster and the 526 00:30:25,800 --> 00:30:28,680 Speaker 5: Senate and add potentially hundreds of billions of dollars to 527 00:30:28,760 --> 00:30:31,280 Speaker 5: the military budget. And then after that we have the 528 00:30:31,360 --> 00:30:34,680 Speaker 5: National Defense Authorization Act, the annual Defense Policy Bill that 529 00:30:34,800 --> 00:30:38,120 Speaker 5: sets the top line for military spending in this country. 530 00:30:38,480 --> 00:30:40,880 Speaker 5: It is just whammy after whammy in twenty twenty five. 531 00:30:41,160 --> 00:30:44,320 Speaker 5: I sort of can't believe that it's only March because 532 00:30:44,320 --> 00:30:47,760 Speaker 5: it feels like it has been months since this year began. 533 00:30:48,360 --> 00:30:50,040 Speaker 5: But you know, we have a couple of things going on. 534 00:30:50,120 --> 00:30:56,120 Speaker 5: We have a fight for incredible military budget increases through reconciliation, 535 00:30:56,440 --> 00:30:59,120 Speaker 5: and then in the Defense Policy Bill and the NDAA, 536 00:30:59,640 --> 00:31:02,800 Speaker 5: we have a pretty coordinated effort industry. Why that is 537 00:31:02,840 --> 00:31:07,360 Speaker 5: supported by many members of Congress to essentially gut the 538 00:31:07,440 --> 00:31:12,120 Speaker 5: weapon acquisition process. Now, why would contractors want this? 539 00:31:12,600 --> 00:31:13,200 Speaker 1: You explain this. 540 00:31:13,480 --> 00:31:17,160 Speaker 5: Yeah, it's part of a decade long effort to eliminate 541 00:31:17,280 --> 00:31:22,280 Speaker 5: oversight guardrails in the budgeting and acquisition process at DoD. 542 00:31:22,840 --> 00:31:25,600 Speaker 5: And the justification for it is we need to prepare 543 00:31:25,640 --> 00:31:28,920 Speaker 5: for warwi China, which if you subscribe to that frame 544 00:31:28,960 --> 00:31:32,240 Speaker 5: of foreign policy, which I consider to be a bit reactive, 545 00:31:32,280 --> 00:31:37,160 Speaker 5: why would we base our foreign policy on another country? Right? Like, 546 00:31:37,240 --> 00:31:39,960 Speaker 5: why would we do that? Wouldn't we want a positive 547 00:31:40,640 --> 00:31:44,360 Speaker 5: vision of what the US wants and how we are 548 00:31:44,360 --> 00:31:46,760 Speaker 5: going to navigate the world. But if you subscribe to 549 00:31:46,800 --> 00:31:48,440 Speaker 5: that vision, then it makes a lot of sense. Okay, 550 00:31:48,480 --> 00:31:53,600 Speaker 5: we're gonna lift the pesky red tape so that industry 551 00:31:53,760 --> 00:31:58,440 Speaker 5: can better sell weapon acquisition programs to the Pentagon, do 552 00:31:58,480 --> 00:32:04,040 Speaker 5: it faster and more, and sort of eliminate the milestones 553 00:32:04,080 --> 00:32:06,840 Speaker 5: at which the DoD is able to decide, Hey, do 554 00:32:06,880 --> 00:32:08,560 Speaker 5: we really need this? Are we going to need it 555 00:32:08,560 --> 00:32:11,080 Speaker 5: in five years? Is it cost effective? Is it filling 556 00:32:11,080 --> 00:32:14,840 Speaker 5: a capability gap? Could we do it cheaper? Is there competition? 557 00:32:15,800 --> 00:32:17,560 Speaker 5: And there are a couple of ways that they're doing this. 558 00:32:17,640 --> 00:32:20,200 Speaker 5: But you know, acquisition reform at large is sort of 559 00:32:20,240 --> 00:32:22,680 Speaker 5: I think, another big fight, and it's interesting because the 560 00:32:22,680 --> 00:32:25,320 Speaker 5: silicon Valley tech firms have actually jumped on board with 561 00:32:25,360 --> 00:32:25,800 Speaker 5: this as well. 562 00:32:25,880 --> 00:32:31,440 Speaker 2: Yeah, what would be your recommendation for reform of defense spending? Like, 563 00:32:31,480 --> 00:32:35,560 Speaker 2: imagine your hexith, what would you add, Like, what's number 564 00:32:35,560 --> 00:32:36,440 Speaker 2: one on your list? 565 00:32:37,120 --> 00:32:38,120 Speaker 4: Gosh, this is hard. 566 00:32:38,200 --> 00:32:41,479 Speaker 5: I think I will pick an area that I think 567 00:32:41,720 --> 00:32:47,800 Speaker 5: Trump could be instinctually open to, and that is raining 568 00:32:47,960 --> 00:32:53,360 Speaker 5: in nuclear expansion. And I say expansion rather than nuclear modernization, 569 00:32:53,520 --> 00:32:56,320 Speaker 5: because I think that's a mischaracterization of what's going on. 570 00:32:56,920 --> 00:33:00,600 Speaker 5: About a month ago, you saw President Trump say I 571 00:33:00,680 --> 00:33:04,000 Speaker 5: want to pursue arms control agreements with Russia and China 572 00:33:04,040 --> 00:33:07,440 Speaker 5: and with the ultimate goal of cutting our respective military 573 00:33:07,480 --> 00:33:11,960 Speaker 5: budgets in half. Now I think that his heart was 574 00:33:12,040 --> 00:33:15,520 Speaker 5: in the right place, if only for a moment, because, 575 00:33:15,560 --> 00:33:19,080 Speaker 5: of course, a week later, nuclear modernization, as I mentioned before, 576 00:33:19,200 --> 00:33:23,280 Speaker 5: was exempted from the potential budget reductions that heg Seth 577 00:33:23,320 --> 00:33:25,520 Speaker 5: talked about. It's not a reduction of the military budget 578 00:33:25,560 --> 00:33:29,000 Speaker 5: top line, but rather a reshuffling of funds. That area 579 00:33:29,120 --> 00:33:33,440 Speaker 5: was protected against potential reshuffling. But what I would do 580 00:33:33,960 --> 00:33:38,600 Speaker 5: is rain in nuclear expansion spending. I do not think 581 00:33:38,680 --> 00:33:42,760 Speaker 5: that we need to be investing in the modernization of 582 00:33:42,880 --> 00:33:45,880 Speaker 5: all three legs of the nuclear triad, I would argue, 583 00:33:46,080 --> 00:33:49,400 Speaker 5: for just the sea leg of the nuclear triad, there's 584 00:33:49,400 --> 00:33:52,320 Speaker 5: no reason we need to be doubling down on the 585 00:33:52,400 --> 00:33:56,440 Speaker 5: land based leg of our nuclear arsenal, the Sentinel program, 586 00:33:56,800 --> 00:33:59,360 Speaker 5: for a bunch of reasons, not least of which is 587 00:33:59,400 --> 00:34:02,000 Speaker 5: the fact that the program has experienced eighty one percent 588 00:34:02,080 --> 00:34:05,920 Speaker 5: cost growth since twenty twenty. It's not the most accurate 589 00:34:06,040 --> 00:34:09,000 Speaker 5: nuclear weapon we have in our arsenal anymore. And the 590 00:34:09,440 --> 00:34:12,400 Speaker 5: program just has a bunch of issues that the DOOD 591 00:34:12,520 --> 00:34:14,480 Speaker 5: has not been able to resolve. And so if I 592 00:34:14,480 --> 00:34:16,399 Speaker 5: could say one thing I would, I would probably say 593 00:34:16,560 --> 00:34:20,560 Speaker 5: cancel the Sentinel program, which would save a lot of money, 594 00:34:20,960 --> 00:34:24,080 Speaker 5: and you could argue that it's helpful in terms of 595 00:34:24,239 --> 00:34:28,359 Speaker 5: de escalating tensions with other nuclear powers. I will just 596 00:34:28,520 --> 00:34:32,160 Speaker 5: wrap this by saying that our pursuit of nuclear expansion 597 00:34:32,239 --> 00:34:36,799 Speaker 5: across the board and our nuclear enterprise has inspired other 598 00:34:36,920 --> 00:34:38,279 Speaker 5: nuclear powers to do the same. 599 00:34:38,600 --> 00:34:40,800 Speaker 1: I just have one last, very quick question. Do you 600 00:34:40,840 --> 00:34:42,880 Speaker 1: think it's plausible that in the next four years the 601 00:34:42,880 --> 00:34:45,120 Speaker 1: Pentagon will pass an audit? Is it conceived? 602 00:34:45,160 --> 00:34:47,719 Speaker 2: Don't they have a target by like twenty twenty eight? 603 00:34:47,920 --> 00:34:48,120 Speaker 4: Yes? 604 00:34:49,080 --> 00:34:49,920 Speaker 1: Do you see it happening. 605 00:34:50,120 --> 00:34:51,200 Speaker 4: I'm not optimistic. 606 00:34:51,320 --> 00:34:57,239 Speaker 5: No, what, they have eleven components of the DoD that 607 00:34:57,800 --> 00:35:02,440 Speaker 5: have received unmodified opinion, and it has been a painstakingly 608 00:35:02,480 --> 00:35:06,080 Speaker 5: slow process. I am not terribly optimistic that they're going 609 00:35:06,120 --> 00:35:09,640 Speaker 5: to bring that number to one hundred percent of components 610 00:35:09,680 --> 00:35:12,840 Speaker 5: audited at DoD in addition to the agency wide audit. 611 00:35:13,840 --> 00:35:15,000 Speaker 4: I would love to be wrong. 612 00:35:15,719 --> 00:35:17,880 Speaker 1: Well, we'll see. Maybe we'll have you back on in 613 00:35:17,880 --> 00:35:19,920 Speaker 1: four years or well as soon as we get the 614 00:35:19,920 --> 00:35:22,400 Speaker 1: next when we get a pass, we'll chat with you 615 00:35:22,440 --> 00:35:25,160 Speaker 1: and we'll see what they did to accomplish that. Julia Gledhill, 616 00:35:25,239 --> 00:35:27,399 Speaker 1: thank you so much for coming on odd Lots really 617 00:35:27,400 --> 00:35:28,640 Speaker 1: appreciate you taking your time. 618 00:35:28,800 --> 00:35:29,719 Speaker 4: Thank you for having me. 619 00:35:42,200 --> 00:35:44,560 Speaker 1: Tracy. I'm really glad we did that episode. You know, 620 00:35:44,640 --> 00:35:48,160 Speaker 1: like when I hear those defense specialists like rattle off 621 00:35:48,200 --> 00:35:50,720 Speaker 1: the names of the different weapons programs or the different 622 00:35:50,800 --> 00:35:53,959 Speaker 1: legs of the nuclear triad, I have like no idea, 623 00:35:54,000 --> 00:35:56,800 Speaker 1: you know, I really lose it. So it's this enormous 624 00:35:57,360 --> 00:35:59,680 Speaker 1: complex thing. But I thought that was just like really 625 00:35:59,760 --> 00:36:02,480 Speaker 1: help full in getting a sort of simple answer to 626 00:36:02,520 --> 00:36:05,840 Speaker 1: a basic question, particularly like things like you know, the 627 00:36:05,920 --> 00:36:09,200 Speaker 1: fact that the government doesn't know what's in its own warehouses? 628 00:36:09,400 --> 00:36:12,480 Speaker 2: Right, Well, Julia explained everything really well, but I still 629 00:36:12,520 --> 00:36:17,160 Speaker 2: find it slightly unbelievable that there's all this money going 630 00:36:17,280 --> 00:36:20,280 Speaker 2: in and out of the Pentagon and we seem unable 631 00:36:20,320 --> 00:36:22,440 Speaker 2: to track it, and no one really knows where it is. 632 00:36:22,520 --> 00:36:25,600 Speaker 2: No one really has a full picture of the assets, 633 00:36:25,680 --> 00:36:29,359 Speaker 2: the stuff sitting in warehouses. As you just mentioned, it's 634 00:36:29,440 --> 00:36:30,240 Speaker 2: kind of crazy. 635 00:36:30,520 --> 00:36:33,279 Speaker 1: Do you keep a really good personal budget? Oh no, 636 00:36:33,680 --> 00:36:36,400 Speaker 1: so that can't you like sort of sacrifice with the Pentagon? 637 00:36:36,520 --> 00:36:38,560 Speaker 2: I need too, because I can just look at like 638 00:36:38,600 --> 00:36:39,720 Speaker 2: my one bank account. 639 00:36:39,800 --> 00:36:45,640 Speaker 1: Right, Yeah, that's true. I guess I'm not totally surprised, right, 640 00:36:45,680 --> 00:36:48,279 Speaker 1: I mean, it is insane to me. It's also just 641 00:36:48,520 --> 00:36:51,200 Speaker 1: very interesting too, the sort of interplay with all that 642 00:36:51,680 --> 00:36:57,160 Speaker 1: and just the incredible infrastructure around lobbying and oh, we 643 00:36:57,200 --> 00:36:59,640 Speaker 1: have manufacturing in all fifty states or maybe it's forty 644 00:36:59,640 --> 00:37:02,080 Speaker 1: eight states, or maybe it's forty six states. Like how 645 00:37:02,160 --> 00:37:06,400 Speaker 1: complete of a package the defense contractors have put together 646 00:37:06,760 --> 00:37:11,000 Speaker 1: to make it so politically difficult to really meaningfully turn 647 00:37:11,040 --> 00:37:13,960 Speaker 1: the dials on either the volume or just the approach 648 00:37:14,000 --> 00:37:14,640 Speaker 1: to procurement. 649 00:37:14,880 --> 00:37:18,560 Speaker 2: Yeah, and on that note, the unfunded priority list like 650 00:37:18,600 --> 00:37:21,920 Speaker 2: the extra budget on top of the existing budget. It's 651 00:37:22,040 --> 00:37:23,280 Speaker 2: kind of funny, fascinate. 652 00:37:24,160 --> 00:37:26,000 Speaker 1: There's plenty more to dive into. I thought this was 653 00:37:26,040 --> 00:37:26,960 Speaker 1: a great entry point. 654 00:37:27,040 --> 00:37:29,359 Speaker 2: Yeah, more to come. Shall we leave it there for now? 655 00:37:29,440 --> 00:37:30,160 Speaker 1: Let's leave it there. 656 00:37:30,320 --> 00:37:32,920 Speaker 2: This has been another episode of the Odd Loots podcast. 657 00:37:33,040 --> 00:37:36,120 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway. 658 00:37:36,239 --> 00:37:38,920 Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart. 659 00:37:39,200 --> 00:37:43,080 Speaker 1: Follow our guest Julia Gledhill. She's at Julia Gledhill. Follow 660 00:37:43,120 --> 00:37:46,480 Speaker 1: our producers Carman Rodriguez at Kerman armand dash Ol Bennett 661 00:37:46,480 --> 00:37:50,440 Speaker 1: at Dashbock and Kelbrooks at Kelbrooks. For more Odd Laws content, 662 00:37:50,480 --> 00:37:52,759 Speaker 1: go to Bloomberg dot com slash odd Lots. We have 663 00:37:52,800 --> 00:37:55,360 Speaker 1: all of our episodes in the daily newsletter, and you 664 00:37:55,360 --> 00:37:57,880 Speaker 1: can chut about all of these topics with fellow listeners 665 00:37:57,960 --> 00:38:01,360 Speaker 1: in our discord discord dot od Lots. 666 00:38:01,640 --> 00:38:04,080 Speaker 2: And if you enjoy odd Lots, if you like it 667 00:38:04,120 --> 00:38:07,239 Speaker 2: when we dig into the defense industry, then please leave 668 00:38:07,320 --> 00:38:11,240 Speaker 2: us a positive review on your favorite podcast platform. And remember, 669 00:38:11,320 --> 00:38:13,880 Speaker 2: if you are a Bloomberg subscriber, you can listen to 670 00:38:14,040 --> 00:38:17,200 Speaker 2: all of our episodes absolutely ad free. All you need 671 00:38:17,239 --> 00:38:20,080 Speaker 2: to do is find the Bloomberg channel on Apple Podcasts 672 00:38:20,080 --> 00:38:38,400 Speaker 2: and follow the instructions there. Thanks for listening.