WEBVTT - Why the Pentagon Fails Audits Year After Year After Year 0:00:00.160 --> 0:00:01.520 Hello, odd lots listeners. 0:00:01.560 --> 0:00:03.640 I'm Joe wasent Thal and I'm Tracy Alloway. 0:00:03.920 --> 0:00:08.000 Obviously, mostly we've been talking a lot about the trade 0:00:08.039 --> 0:00:11.160 war lately, the tariffs, but there are other things going 0:00:11.200 --> 0:00:13.920 on in the world, and in fact, there are some 0:00:14.080 --> 0:00:16.759 episodes that we've recorded prior to all this that we 0:00:16.840 --> 0:00:18.040 still want to publish. 0:00:18.079 --> 0:00:20.720 That's right. So what you are about to hear is 0:00:20.760 --> 0:00:24.720 an episode we recorded way back on March eighteenth. It 0:00:24.800 --> 0:00:27.240 feels like it was a lot longer ago, but it's 0:00:27.280 --> 0:00:30.720 been basically a month, and with everything that was happening 0:00:30.800 --> 0:00:34.960 in markets, all the trade announcements, the tariffs, we've had 0:00:35.000 --> 0:00:37.000 to put this one on hold, but we want you 0:00:37.040 --> 0:00:40.159 to listen to it. It's a really interesting topic and 0:00:40.240 --> 0:00:42.959 still very very worthwhile to hear about it. 0:00:43.240 --> 0:00:45.720 Right, we're going to be talking about the Pentagon budget 0:00:45.800 --> 0:00:48.880 and things like that. If it feels a little dated 0:00:48.920 --> 0:00:53.160 the conversation, that's because it is dated. But take a listen. 0:00:53.240 --> 0:00:55.680 I still think that you'll find. You know, there's still 0:00:55.720 --> 0:00:59.240 no world in which the nature of defense spending is 0:00:59.360 --> 0:01:03.200 not an important question, is not something interesting, So even 0:01:03.200 --> 0:01:05.840 with everything else going on in the world, you should 0:01:05.840 --> 0:01:06.400 take a listen. 0:01:06.600 --> 0:01:21.080 Here we Go, Bloomberg Audio Studios, Podcasts, Radio News. 0:01:25.680 --> 0:01:29.280 Hello and welcome to another episode of the Odd Lots podcast. 0:01:29.360 --> 0:01:31.720 I'm Joe Wisenthal and I'm Tracy Alloway. 0:01:31.920 --> 0:01:35.280 Tracy, we've hinted on the podcast a few times over 0:01:35.280 --> 0:01:36.840 the last several months, who want to do more on 0:01:36.880 --> 0:01:38.200 defense and we're gonna We're gonna. 0:01:38.000 --> 0:01:41.160 Starts, Joe, and I think you've said it pretty explicitly. 0:01:41.560 --> 0:01:43.759 But it is interesting, right, Like it is a good 0:01:43.920 --> 0:01:45.679 It does seem like it should be a good topic 0:01:45.720 --> 0:01:46.160 for us, right. 0:01:46.280 --> 0:01:48.920 It's a huge chunk of the economy. I think it's 0:01:49.000 --> 0:01:53.040 like the US government's biggest line item in terms of expenditure. 0:01:53.040 --> 0:01:56.160 It's either defense or interest rate payments on its bomb. Ye, 0:01:56.600 --> 0:01:59.480 it's definitely number one or number two, and so it 0:01:59.560 --> 0:02:02.320 is work of additional study. 0:02:02.360 --> 0:02:04.960 I agree, And you know, I think it's actually really 0:02:05.000 --> 0:02:07.920 important for US because you know, we talk about industrial 0:02:07.960 --> 0:02:12.200 policy a lot in defense is the one area where 0:02:12.560 --> 0:02:15.320 that is never wavered, right, Like it's always been. The 0:02:15.360 --> 0:02:20.320 government is the primary buyer purchaser, but there are these 0:02:20.360 --> 0:02:23.400 private companies and they also sell overseas and stuff. And 0:02:23.400 --> 0:02:25.800 it's always been about staying at the leading edge of tech, 0:02:26.200 --> 0:02:29.320 and probably if you're like thinking about like industrial policy 0:02:29.360 --> 0:02:32.720 and other areas like whether it's cars or batteries or semiconductors. 0:02:33.160 --> 0:02:35.680 I just assume there must be a lot that we 0:02:35.720 --> 0:02:38.800 can learn from how it works in the defense world. 0:02:39.240 --> 0:02:42.360 As a military brat, I feel comfortable saying as well 0:02:42.600 --> 0:02:47.240 that it's kind of also connected to a social safety net. 0:02:47.320 --> 0:02:47.480 Yeah. 0:02:47.800 --> 0:02:52.440 True, you have healthcare tied to military service. You've got 0:02:52.520 --> 0:02:55.760 cheap groceries tied to military service. I used to love that, 0:02:56.240 --> 0:02:59.799 So it's interesting from a number of perspectives. What blows 0:02:59.840 --> 0:03:03.600 me away, though, is you hear that statistic every once 0:03:03.639 --> 0:03:07.520 in a while that the Pentagon has never passed an audit, 0:03:08.120 --> 0:03:11.240 which raises all these big questions about if this is 0:03:11.280 --> 0:03:14.200 the biggest expenditure or one of the biggest expenditures for 0:03:14.240 --> 0:03:17.480 the US, how is it possible that we don't actually 0:03:17.520 --> 0:03:19.280 seem to know where the money is going. 0:03:19.639 --> 0:03:21.560 No, I think this is a great question, and I 0:03:21.600 --> 0:03:25.040 think that what you articulated there is just a great 0:03:25.080 --> 0:03:28.760 way of sort of entry weada understanding defense with a 0:03:28.800 --> 0:03:32.040 simple question. Because like I've seen those headlines so late 0:03:32.120 --> 0:03:35.760 last year headlines Pentagon fails seventh audit in a Row 0:03:36.000 --> 0:03:37.520 and then I read the headline. But I don't know 0:03:37.560 --> 0:03:39.920 what that means. I don't know what it means to like, 0:03:40.000 --> 0:03:42.440 you know, it's like a private company. I don't know 0:03:42.480 --> 0:03:44.240 what audits really mean in the government. I don't know 0:03:44.240 --> 0:03:46.320 if there are any consequences. I don't know why it is. 0:03:46.320 --> 0:03:48.240 Is it because of malfeasance or is it just because 0:03:48.280 --> 0:03:50.680 of its sheer size. I mean it's you know, the 0:03:50.680 --> 0:03:53.520 Pentagon absolutely enormous, So I think, like, yeah, we should 0:03:53.560 --> 0:03:55.480 have What does that mean that they just keep filling 0:03:55.720 --> 0:03:56.440 all these audits? 0:03:56.520 --> 0:03:59.400 Well, it also raises an existential question of why are 0:03:59.440 --> 0:04:02.120 we even bothering to do audits if we keep getting 0:04:02.120 --> 0:04:06.080 the same result and nothing seems to change that too. 0:04:06.240 --> 0:04:08.960 That's a great question. Anyway, We're going to finally get 0:04:08.960 --> 0:04:11.320 some answers to at least this question of what it 0:04:11.360 --> 0:04:14.600 means that the Pentagon keeps failing audits year after year 0:04:14.680 --> 0:04:16.640 and year, and what it says maybe about how we 0:04:16.680 --> 0:04:19.320 do defense spending. I'm very excited. We have the perfect 0:04:19.320 --> 0:04:21.560 guest we're going to be speaking with, Julia Gledhill. She 0:04:21.680 --> 0:04:25.479 is a researcher at the Stimson Center has written quite 0:04:25.480 --> 0:04:27.400 a bit about this, has been recommended to me as 0:04:27.400 --> 0:04:31.520 someone to talk to about Pentagon and defense spending. So, Julia, 0:04:31.560 --> 0:04:34.200 thank you so much for coming on odd lots, thank. 0:04:33.960 --> 0:04:35.640 You for the invitation. It's great to be here. 0:04:36.160 --> 0:04:39.040 What is a Pentagon audit? Apparently we've never passed one, 0:04:39.080 --> 0:04:41.440 and we'll get into why. But what does it even 0:04:41.480 --> 0:04:43.120 mean for the Pentagon to get audited? 0:04:43.600 --> 0:04:46.920 Yeah, this is an important question. I think Tracy is 0:04:47.000 --> 0:04:49.560 hitting the point on the nail here in that what's 0:04:49.600 --> 0:04:51.800 the point of doing the same thing over and over 0:04:52.160 --> 0:04:54.200 and expecting a different result? That is, in fact the 0:04:54.200 --> 0:04:57.159 definition of insanity. And so in thinking about what the 0:04:57.160 --> 0:04:59.720 purpose of an audit is and a Pentagon context, it's 0:04:59.720 --> 0:05:02.560 a point and to remember why we audit in general? Right, 0:05:02.800 --> 0:05:08.160 Companies undergo audits to assure stakeholders that management is accurately 0:05:08.200 --> 0:05:12.160 presenting a company's financial performance and position. In other words, 0:05:12.200 --> 0:05:15.640 you know, audits help investors and lenders determine the financial 0:05:15.720 --> 0:05:16.480 value of a company. 0:05:16.520 --> 0:05:17.960 So how does that apply to the Pentagon. 0:05:18.080 --> 0:05:21.640 Well, the Pentagon audit assesses how well the agency is 0:05:21.680 --> 0:05:27.440 managing taxpayer dollars. The difference is that, unlike stakeholders and companies, 0:05:27.520 --> 0:05:30.880 taxpayers can't simply opt out of funding the Pentagon when 0:05:30.880 --> 0:05:35.440 it fails an audit. But the agency wide consolidated audit 0:05:35.560 --> 0:05:39.240 of the Department of Defense looks at DOOD financial statements, 0:05:39.279 --> 0:05:42.480 but also internal controls over financial reporting as well as 0:05:42.480 --> 0:05:45.120 compliance with relevant laws and regulations. 0:05:45.839 --> 0:05:49.200 What does an audit actually entail for the Pentagon? Because 0:05:49.240 --> 0:05:51.359 I imagine, you know, when I think about the Pentagon, 0:05:51.480 --> 0:05:57.800 it's this huge, sprawling, industrial military complex. I imagine it must 0:05:57.800 --> 0:06:01.360 be quite an undertaking to try to get granular detail 0:06:01.680 --> 0:06:03.400 on where money is going. 0:06:04.040 --> 0:06:07.719 It absolutely is a major undertaking, which explains why the 0:06:07.760 --> 0:06:11.880 DoD has not only failed so many audits in a row, 0:06:12.040 --> 0:06:16.200 but only started to do consolidated audits agency wide in 0:06:16.240 --> 0:06:21.640 twenty eighteen. So the Pentagon audit is done by independent 0:06:21.640 --> 0:06:25.440 public accounting firms in collaboration with the Department of Defense 0:06:25.480 --> 0:06:30.400 Inspector General Office, which is the internal watchdog within the Pentagon, 0:06:31.160 --> 0:06:37.039 and what they do is conduct independent audits of several 0:06:37.080 --> 0:06:41.080 different DoD components. These can include the military services, but 0:06:41.160 --> 0:06:45.479 also combatant commands, field activities like the Defense Logistics Agency, 0:06:45.760 --> 0:06:49.400 and then the Department of Defense Inspector General puts all 0:06:49.440 --> 0:06:53.279 of those independent audits together in one consolidated agency wide 0:06:53.279 --> 0:06:57.599 audit and comes to a conclusion. Notice that I say 0:06:57.680 --> 0:07:00.760 conclusion and not opinion, because in the case of failing 0:07:01.240 --> 0:07:04.599 a Pentagon audit, the Pentagon has actually received disclaimers of 0:07:04.640 --> 0:07:09.360 opinion repeatedly, which means that the agency department wide was 0:07:09.440 --> 0:07:14.520 unable to produce the financial statements necessary for auditors to 0:07:15.080 --> 0:07:18.640 form an opinion. An audit opinion on the quality and 0:07:18.840 --> 0:07:24.240 sort of accuracy of financial reporting throughout the agency, but 0:07:24.400 --> 0:07:26.880 it includes a lot of different components and it is 0:07:26.960 --> 0:07:28.200 indeed quite laborious. 0:07:28.640 --> 0:07:32.280 So the goal is for the independent firms to be 0:07:32.320 --> 0:07:35.000 able to form an opinion. And when we read a 0:07:35.080 --> 0:07:38.640 headline that says they failed the audit, it means they 0:07:38.640 --> 0:07:41.800 can't even get the documents and the financial statements together 0:07:42.200 --> 0:07:44.200 so that they can form an opinion. Like explain to 0:07:44.240 --> 0:07:46.400 us what that word failure means in this context. 0:07:46.680 --> 0:07:50.520 Yeah, So I think that the former Comptroller of the 0:07:50.520 --> 0:07:54.720 Department of Defense has explained this quite well, and in 0:07:54.840 --> 0:07:59.080 describing a disclaimer of opinion in the context of auditing, 0:07:59.720 --> 0:08:02.240 he basically said that this is a red light, right, 0:08:02.440 --> 0:08:07.240 so is an adverse opinion, which is another level of 0:08:07.440 --> 0:08:12.120 there are going to be material persistent weaknesses in financial 0:08:12.160 --> 0:08:16.800 reporting throughout DOOD entities, and then you have a yellow light, 0:08:16.880 --> 0:08:19.440 which is a qualified opinion, and then you have an 0:08:19.480 --> 0:08:23.560 unmodified opinion. This is the goal in the Pentagon audit process, 0:08:23.840 --> 0:08:26.880 which is considered a green light, and only a few 0:08:27.080 --> 0:08:30.480 of DOOD components have actually achieved this green light, which 0:08:30.560 --> 0:08:34.240 means that the financial reporting internal controls generally can be 0:08:34.320 --> 0:08:38.160 trusted and assumed to be consistently accurate. 0:08:38.760 --> 0:08:43.000 What happens when the Pentagon actually fails an audit, because I imagine, 0:08:42.960 --> 0:08:46.400 like in theory, there should be consequences, but the fact 0:08:46.440 --> 0:08:49.160 that it keeps happening, as I mentioned, suggests that there 0:08:49.200 --> 0:08:49.839 probably aren't. 0:08:50.600 --> 0:08:54.559 Yeah, there are no consequences, much to the disintment. 0:08:54.880 --> 0:08:55.480 Exactly. 0:08:55.600 --> 0:09:01.120 Imagine imagine a company failing an audit and investors saying, well, 0:09:01.880 --> 0:09:05.840 we're going on ahead anyways, and so no, there are 0:09:05.880 --> 0:09:10.960 no consequences for the Pentagon when it repeatedly fails audits. 0:09:11.600 --> 0:09:15.600 And yet the audit is supposed to give US taxpayers 0:09:15.600 --> 0:09:18.760 some trust that the Department of Defense is spending our 0:09:18.800 --> 0:09:23.640 money efficiently and wisely. But unfortunately, and much to the 0:09:23.679 --> 0:09:27.560 disappointment of components like the Marine Corps or the Defense 0:09:27.600 --> 0:09:30.880 Threat Reduction Agency which have received these green lights, these 0:09:30.960 --> 0:09:36.959 unmodified audit opinions. They are not rewarded for receiving green 0:09:37.040 --> 0:09:40.320 lights in the auditing process. And you know, the Marine 0:09:40.320 --> 0:09:43.000 Corps is still struggling to you know, get their boats. 0:09:43.040 --> 0:09:47.640 So it's an important question, and unfortunately there are just 0:09:47.840 --> 0:09:52.360 no consequences because appropriators are not reading a four hundred 0:09:52.480 --> 0:09:55.800 page audit report on the Pentagon before deciding what to 0:09:55.880 --> 0:09:58.000 spend on national defense. 0:09:58.520 --> 0:10:01.319 So they failed the audit. It's at least they can't 0:10:01.360 --> 0:10:04.920 even put together an opinion. What's happening? Why can't they? 0:10:04.920 --> 0:10:07.000 What are they when they're going in there and they're 0:10:07.040 --> 0:10:09.640 looking for documents and evidence that the money is being 0:10:09.679 --> 0:10:11.720 tracked roughly in accordance with how it should be and 0:10:11.760 --> 0:10:15.480 that the various divisions are What are they seeing when 0:10:15.520 --> 0:10:17.640 they go in there that causes them to not be 0:10:17.679 --> 0:10:20.240 able to produce in a pant sure well. 0:10:20.400 --> 0:10:23.520 One failure point that I love to point to is 0:10:24.640 --> 0:10:30.000 DoD's difficulty in tracking property in inventory records across the 0:10:30.040 --> 0:10:31.200 military services. 0:10:31.520 --> 0:10:34.200 One of my favorite examples of why does this matter? 0:10:34.240 --> 0:10:34.800 Who cares? 0:10:34.920 --> 0:10:37.520 Why do auditors go in and look at inventory records 0:10:37.559 --> 0:10:40.000 and flag this as a weakness in. 0:10:39.760 --> 0:10:40.600 Their audit reports. 0:10:40.640 --> 0:10:44.280 Well, a few years ago, twenty nineteen, the Department of 0:10:44.280 --> 0:10:47.559 Defense Inspector General flagged errors and the Navy's property and 0:10:47.640 --> 0:10:51.360 inventory records, and as a result, the service ended up 0:10:51.440 --> 0:10:55.560 finding a warehouse that was mysteriously absent from its property 0:10:55.559 --> 0:10:56.000 records and. 0:10:56.040 --> 0:10:58.680 They've lost a whole warse amazing. 0:10:58.360 --> 0:11:01.679 Indeed, and inside they found one hundred and twenty six 0:11:01.760 --> 0:11:03.040 million dollars. 0:11:02.880 --> 0:11:03.880 Worth of spare parts. 0:11:04.679 --> 0:11:07.120 Now, in the context of the Pentagon budget, what is 0:11:07.240 --> 0:11:09.920 one hundred and twenty six million when we're talking about 0:11:10.080 --> 0:11:12.640 a near trillion dollars depending on how you count it. 0:11:13.240 --> 0:11:16.040 But they found these spare parts for a number of 0:11:16.040 --> 0:11:20.120 different aircraft inside that warehouse, and they were actually able 0:11:20.200 --> 0:11:24.040 to fill over twenty million dollars in spare parts orders 0:11:24.280 --> 0:11:28.079 without having to procure new ones. And so the scale 0:11:28.080 --> 0:11:31.840 of this issue is unknown right because we have a 0:11:31.960 --> 0:11:38.040 pervasive inventory and property record keeping issues throughout DoD And importantly, 0:11:38.280 --> 0:11:42.760 the Government Accountability Office has actually flagged inventory issues since 0:11:42.800 --> 0:11:47.240 the early eighties, since nineteen eighty one, and this is relevant, 0:11:47.240 --> 0:11:51.040 for example, to the most expensive weapon program in US history, 0:11:51.400 --> 0:11:54.000 the F thirty five fighter jet. Now the reason I 0:11:54.000 --> 0:11:56.120 bring it up is because you know, okay, you have 0:11:56.160 --> 0:11:58.520 an example of the Navy finding all these aircraft parts 0:11:58.520 --> 0:11:59.840 and being able to fill orders. 0:12:00.200 --> 0:12:01.400 So what does that mean. 0:12:01.280 --> 0:12:05.200 In the context of a now two trillion dollar weapon 0:12:05.200 --> 0:12:08.480 acquisition program, which is the F thirty five. Well, you 0:12:08.559 --> 0:12:12.720 have the GAO, the Government Accountability Office, saying that F 0:12:12.760 --> 0:12:16.480 thirty five parts in the possession of contractors are likely 0:12:16.520 --> 0:12:20.080 significantly understated. So the government has all these spare parts 0:12:20.080 --> 0:12:25.760 are government owned but typically possessed controlled by contractors. And 0:12:25.960 --> 0:12:27.880 the GAO has flaged this issue for a long time 0:12:27.960 --> 0:12:31.360 because it means we could be over buying on spare 0:12:31.360 --> 0:12:34.160 parts as a country. The Department of Defense Inspector General 0:12:34.200 --> 0:12:38.280 has likewise expressed this concern and in twenty twenty one 0:12:38.440 --> 0:12:41.559 found that, you know, the Army, for example, was forecasting 0:12:42.160 --> 0:12:44.959 spare parts needs and was only accurate twenty percent of 0:12:45.000 --> 0:12:48.280 the time. Again, why does that matter, because they ended 0:12:48.360 --> 0:12:51.600 up overstating how many spare parts the Army needed by 0:12:51.760 --> 0:12:55.319 over two hundred million dollars. The military writ large, all 0:12:55.360 --> 0:12:59.040 the services together actually overshot their spare parts needs by 0:12:59.080 --> 0:13:02.480 nearly a billion dollars. So this matters when you can't 0:13:02.720 --> 0:13:06.199 keep track of your property in the possession of contractors. 0:13:06.400 --> 0:13:10.640 It must matter from an operational or execution perspective as well. Right, 0:13:10.720 --> 0:13:13.680 if there was a military emergency and we can't find 0:13:13.760 --> 0:13:16.760 the spare parts that we need because we've never been 0:13:16.800 --> 0:13:19.000 able to track them, that's problematic. 0:13:19.640 --> 0:13:22.439 Oh absolutely. I mean you look back to the early 0:13:22.559 --> 0:13:24.160 years of the War on Terror. I mean I meet 0:13:24.160 --> 0:13:27.120 a lot of veterans who when I talk to them 0:13:27.120 --> 0:13:30.120 about these issues, they say, oh, yeah, we were hiding 0:13:30.559 --> 0:13:33.680 you know, parts to maintain our equipment in our bunks 0:13:33.720 --> 0:13:37.120 because we had no assurances that we were going to 0:13:37.120 --> 0:13:40.680 be able to maintain to repair the equipment that we 0:13:40.760 --> 0:13:41.120 need to. 0:13:41.040 --> 0:13:41.640 Do our jobs. 0:13:41.800 --> 0:13:45.560 So it is a readiness issue and one that the 0:13:45.640 --> 0:14:00.160 DoD absolutely needs to directify. 0:14:03.120 --> 0:14:05.880 I have to imagine that if one of the problems 0:14:06.320 --> 0:14:10.920 is sort of implied here about overordering spare parts, I 0:14:10.960 --> 0:14:14.839 would guess that the major weapons suppliers, the defense contractors, 0:14:15.160 --> 0:14:17.040 don't really mind that problem. 0:14:17.080 --> 0:14:18.480 That's exactly right, Joe. 0:14:19.480 --> 0:14:25.120 In fact, the DoD has actually requested inventory records from 0:14:25.160 --> 0:14:29.080 Lockheed Martin before for the F thirty five program, and 0:14:29.200 --> 0:14:31.880 Lockheed Martin said, oh, well, it's going to cost us 0:14:31.920 --> 0:14:34.360 a bunch of money to track down this information and 0:14:34.400 --> 0:14:39.160 provide the reports, essentially disincentivizing the government from requiring that 0:14:39.560 --> 0:14:42.360 in the military contract right. And I wrote a piece 0:14:42.360 --> 0:14:44.920 about this a couple of years ago, and it's insane 0:14:45.040 --> 0:14:48.480 because you have contractors who have government owned property in 0:14:48.520 --> 0:14:52.440 their possession, but they control all of the tracking mechanisms, 0:14:52.720 --> 0:14:55.760 and even when government asks, they say, oh, well, what 0:14:55.840 --> 0:14:58.320 are you paying us to provide you with information about 0:14:58.400 --> 0:14:59.760 government owned property? 0:15:00.840 --> 0:15:03.800 Just on the contractor point. I always wonder about this, 0:15:03.960 --> 0:15:07.320 but who does the US actually compete against when it's 0:15:07.360 --> 0:15:10.720 buying military stuff, Because I would think with a trillion 0:15:10.800 --> 0:15:14.720 dollar budget for defense, the US is probably putting in 0:15:14.760 --> 0:15:18.800 the biggest orders, and so could they in theory dictate 0:15:18.840 --> 0:15:22.119 the price or at least ask for a volume discount 0:15:22.200 --> 0:15:25.280 or something. I mean on the f thirty fives for instance, 0:15:25.480 --> 0:15:29.840 Like the US has one hundreds now versus other countries 0:15:29.880 --> 0:15:31.560 that have I think a few dozen. 0:15:33.120 --> 0:15:36.480 Yeah. So this is the problem with a monopsone market. Right, 0:15:36.560 --> 0:15:37.000 you have. 0:15:37.040 --> 0:15:42.880 Monos sorry that's a trigger word for US. 0:15:43.320 --> 0:15:45.800 You have one buyer, but you also in a lot 0:15:45.840 --> 0:15:50.280 of cases have one seller. And that is the genius 0:15:50.360 --> 0:15:52.840 of the arms industry. Right with the f thirty five program. 0:15:52.880 --> 0:15:56.080 They have politically engineered it such that it exists in 0:15:56.720 --> 0:16:00.240 I think all fifty states now. Lackie Martin has an 0:16:00.280 --> 0:16:03.200 interactive map so someone can fact check me. But it 0:16:03.280 --> 0:16:06.200 is like forty six, if not all fifty at this point. 0:16:06.320 --> 0:16:11.040 So every politician in America has some reason to preserve 0:16:11.080 --> 0:16:13.320 the status quo because they have workers. 0:16:13.480 --> 0:16:16.720 That the idea here, that's exactly right, because jobs, even 0:16:16.800 --> 0:16:20.240 though we know that military spending is a lousy jobs 0:16:20.240 --> 0:16:23.800 creator in comparison to other types of government spending. 0:16:24.320 --> 0:16:27.480 So you know, I guess if the Pentagon has failed 0:16:27.520 --> 0:16:31.720 seven audits in a row. I guess implication eight years 0:16:31.760 --> 0:16:34.720 ago or nine years ago, there was no mandate for 0:16:34.960 --> 0:16:38.440 an audit period because it must be a relatively new thing. 0:16:38.880 --> 0:16:40.920 Can you talk to us a little bit about how 0:16:40.960 --> 0:16:43.880 that came about the requirement to audit and how the 0:16:44.360 --> 0:16:49.040 military contractors sort of try to shape the process of 0:16:49.400 --> 0:16:50.280 tracking acquisition. 0:16:50.840 --> 0:16:53.400 Sure, so this is a question I get a lot. 0:16:53.880 --> 0:17:01.200 Was their accountability before the Pentagon started consolidate agency wide audits? 0:17:01.760 --> 0:17:04.960 So the answer is yes, but not to the same 0:17:04.960 --> 0:17:09.160 extent that we have today. So in nineteen ninety Congress 0:17:09.200 --> 0:17:13.160 passed the Chief Financial Officers Act, which required federal agencies 0:17:13.160 --> 0:17:17.200 to prepare financial statements for audit, and the DoD submitted, 0:17:17.320 --> 0:17:21.480 you know, component financial statements to the DODIG for that purpose, 0:17:21.640 --> 0:17:26.360 but did not undergo the thorough. 0:17:26.119 --> 0:17:27.720 Audit that we see today. 0:17:28.359 --> 0:17:32.520 And in fact, the number of components included in the 0:17:32.600 --> 0:17:36.640 agency wide audit tends to vary a little bit every year. 0:17:36.880 --> 0:17:40.240 Sometimes it's twenty eight, sometimes it's twenty seven. But it 0:17:40.359 --> 0:17:45.959 is absolutely true that contractors shape nearly every aspect of 0:17:46.200 --> 0:17:51.000 defense policy because of their power and influence on Capitol Hill, 0:17:51.359 --> 0:17:54.639 and a major lever for that power an influence is 0:17:54.680 --> 0:17:57.200 in fact the sort of jobs creation that they lean 0:17:57.240 --> 0:18:00.480 on for these weapon programs. And I have actually think 0:18:00.480 --> 0:18:04.840 it's an interesting question because now you see the current 0:18:04.960 --> 0:18:09.639 Secretary of Defense, HEG. Seth, really embracing the audit in 0:18:09.760 --> 0:18:14.240 his quest to improve military readiness, and on its face, 0:18:14.520 --> 0:18:19.920 that is a noble and worthy goal, right, it remains 0:18:19.920 --> 0:18:23.080 to be seen how that actually shakes out in this administration. 0:18:23.480 --> 0:18:26.959 I only hope for the best and very much encourage 0:18:26.960 --> 0:18:29.360 the administration to take this seriously because I do think 0:18:29.359 --> 0:18:32.800 that it matters. Again, when you have, for example, military 0:18:32.840 --> 0:18:38.120 services over buying spare parts at the expense of the taxpayer. However, 0:18:38.359 --> 0:18:41.359 I think that it's noteworthy when you see news a 0:18:41.400 --> 0:18:44.879 month ago about the Secretary saying, Okay, we're doing budget 0:18:44.920 --> 0:18:51.600 reshuffling to reorder DoD funding and channel it toward Trump's priorities. 0:18:51.640 --> 0:18:56.040 President Trump's priorities. And one of those exemptions from potential 0:18:56.080 --> 0:19:00.000 reductions in these budget reshufflings was the audit, of course, 0:19:00.080 --> 0:19:03.439 or so was nuclear modernization and many other things, and 0:19:04.119 --> 0:19:06.840 that is important for military readiness, and we actually should 0:19:07.000 --> 0:19:10.840 work toward passing an audit. However, it's important to note 0:19:10.920 --> 0:19:14.240 that even if the DoD passes an audit, that doesn't 0:19:14.359 --> 0:19:18.080 justify the money that the DoD is spending, because we 0:19:18.119 --> 0:19:21.000 should be able to achieve more for less, and we 0:19:21.080 --> 0:19:22.720 have not seen that in recent decades. 0:19:23.040 --> 0:19:25.320 Right, just on this note, I kind of want to 0:19:25.640 --> 0:19:28.919 back up and ask a big picture question. But you know, 0:19:29.000 --> 0:19:32.400 Joe alluded in the intro to the fact that defense 0:19:32.440 --> 0:19:36.800 spending has historically been it's always been there, it's always 0:19:36.800 --> 0:19:39.560 been with us, and it's always been pretty big. I 0:19:39.640 --> 0:19:42.800 know that you can benchmark it to GDP and it's 0:19:42.800 --> 0:19:45.160 come down as a percentage of GDP, but I think 0:19:45.200 --> 0:19:48.600 we can all agree that one trillion is still a 0:19:48.600 --> 0:19:53.320 pretty big number. So why did that happen? And why 0:19:53.440 --> 0:19:56.640 is it that we just accept that defense is kind 0:19:56.640 --> 0:20:00.280 of untouchable or by its nature going to be this 0:20:00.440 --> 0:20:01.600 huge line item. 0:20:02.200 --> 0:20:05.239 I'm so glad you brought up percent of GDP. I 0:20:05.320 --> 0:20:08.840 love to talk about this. I think that it's one 0:20:08.880 --> 0:20:13.560 of those macro indicators that conceals more than it reveals. Right, 0:20:13.920 --> 0:20:16.640 So the distribution of military spending has changed a lot 0:20:16.680 --> 0:20:20.640 over time, but we're so beholden to this idea of 0:20:20.680 --> 0:20:24.960 a gigantic military budget to keep American safe because of 0:20:25.000 --> 0:20:28.520 its legacy after World War Two and bringing the United 0:20:28.560 --> 0:20:32.000 States out of sort of the trenches of the Great Depression, 0:20:32.840 --> 0:20:37.160 and stimulating the economy. Of course, any significant government spending 0:20:37.480 --> 0:20:41.160 would stimulate the economy in sort of offset the effects 0:20:41.160 --> 0:20:45.119 of under consumption. And yet we've just been sort of 0:20:45.880 --> 0:20:50.000 ingratiated with this idea that military spending is so integral 0:20:50.160 --> 0:20:54.160 to our economic growth, when in fact, there's a lot 0:20:54.200 --> 0:20:57.320 of economic research out there that says, you know, sort 0:20:57.320 --> 0:21:01.840 of ever expanding military budgets can have a depressive effect 0:21:02.000 --> 0:21:06.800 on long term economic growth. Why because it impacts productivity. Right, 0:21:06.880 --> 0:21:10.480 So World War Two, the sort of narrative, in sort 0:21:10.520 --> 0:21:14.560 of dominant historical discourse is we have this productivity miracle. No, 0:21:14.760 --> 0:21:17.560 it was a production miracle. We spent a bunch of 0:21:17.640 --> 0:21:21.960 money on military industrial output, but that had a depressive 0:21:22.000 --> 0:21:25.600 impact on productivity over time. So I argue that this 0:21:25.720 --> 0:21:29.040 is actually bad for the economy long term. But we 0:21:29.160 --> 0:21:33.000 are as a country, I think, so dedicated to this 0:21:33.160 --> 0:21:35.720 idea that the military budget is sort of a core 0:21:35.800 --> 0:21:41.479 part of our economic engine. And unfortunately that's not true anymore, 0:21:41.520 --> 0:21:43.800 because again the distribution has changed over time. It's a 0:21:43.840 --> 0:21:47.439 lot more capital intensive. It's not necessarily this sort of 0:21:47.560 --> 0:21:50.520 vehicle of upward economic mobility that it used to be 0:21:50.520 --> 0:21:53.840 because it's not as focused on labor. Of course, yes 0:21:53.920 --> 0:21:55.720 you have the GI bill, Yes you can get a 0:21:55.760 --> 0:21:58.040 free education. That's all very important and good, and we 0:21:58.080 --> 0:22:00.920 should absolutely do that. But we're spending more and more 0:22:01.000 --> 0:22:04.040 money on research and development and procurement. Who does that benefit. 0:22:04.119 --> 0:22:06.760 It benefits electrical engineers, not the working man. 0:22:07.520 --> 0:22:10.919 So just on this note, in preparing for this episode 0:22:11.040 --> 0:22:14.320 and looking you up, I noticed that for your undergraduate 0:22:14.440 --> 0:22:18.720 thesis you did an econometric study to test the relative 0:22:18.840 --> 0:22:23.600 impacts of various types of defense spending on income inequality. 0:22:23.960 --> 0:22:27.000 That seems really interesting. I don't know if you remember 0:22:27.320 --> 0:22:30.919 your undergrad days or your work, but what did you 0:22:31.119 --> 0:22:31.879 find in that? 0:22:32.640 --> 0:22:35.600 So I actually just gave you the short pitch on 0:22:35.640 --> 0:22:38.600 my paper, which did find and I had an R 0:22:38.600 --> 0:22:42.080 squared of ninety six percent, so explanatory value was good. 0:22:42.800 --> 0:22:47.920 But I tested this hypothesis that military spending is good 0:22:47.920 --> 0:22:51.040 for jobs, good for people, good for the economy. And 0:22:51.080 --> 0:22:53.639 I did that by disaggregating the base budget into the 0:22:53.680 --> 0:22:59.200 major categories, some of which I just described research and development, procurement, personnel, operations, 0:22:59.200 --> 0:23:02.680 and maintenance, you big ones. And I actually found that 0:23:02.920 --> 0:23:07.720