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