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Smart Bombs: Military, Defense and National Security

How Inflation Makes the US Military Poorer Overnight

CF-1 Flt 453 piloted by Lockheed Martin test pilot Mr. Dan Canin flies with external GBU-31 weapons for the first time on an F-35, the test was flown from NAS Patuxent River, MD on 5 Aug 2016

Right now, it’s hard to find any good, commodity or service that is getting cheaper. Those same inflationary trends hold true for the Department of Defense’s finances. Congress keeping the military on a spending freeze for nearly half a year is only exacerbating budget challenges.

The result is an agency surging troops forward as Russia builds up forces near Ukraine that is losing buying power near equivalent to sequestration levels of 2013. Absent a fast fix, the military will continue to financially triage as planned costs for everything from fuel to timber to rental assistance far outpace actual bills.

The Pentagon is losing between $4 and 6 billion a month when accounting for the loss of spending increase Congress provided this year in the absence of appropriations and inflation running from three to 7% or more depending on account. Roughly $3 billion is simply lost due to the lack of money, or purchasing power, from Congress. While the Hill voted to authorize a 5% topline increase of $36 billion, appropriators have yet to “cut the check” for these finances. The federal government is stuck at Trump-era levels of spending—to say nothing of hundreds of misaligned accounts and priorities due to the fiscal freeze.

In addition to the spending lock, another two to four billion dollars are essentially lost each month for the military as those funds are being used to instead cover inflation costs far above planned levels, with no end in sight.

This loss of tens of billions in reduced buying power for the military is roughly the same as the “sword of Damocles” sequestration that occurred in 2013, which destroyed military readiness and took the Pentagon over a half-decade from which to recover. In some cases, the armed forces are still digging out from the deep and avoidable readiness hole.

And yet, when money is squeezed, the two pots that get raided for rising inflation are readiness (again) and procurement (again). That’s because military pay and compensation are must-pay bills, along with the same for nearly 800,000 defense civilians.

Price increases are touching nearly every aspect of the sprawling Defense Department—including for commodities like steel for weapons and building materials for base upgrades, fuel and electricity, and general maintenance, parts and global operations.

Nor is there an escape for servicemembers and their families using discounted military commissaries or exchanges. Inflation is everywhere.

Oil prices are up more than 40% from a year ago. As John Ferrari, former Army program chief notes, “Military services do not hedge fuel costs, hence they have to absorb the price increase by either reducing training or reducing global operations, which is the first step in creating a hollow force.” The military consumes 12.6 million gallons of fuel per day so “even small fluctuations become expensive.” He predicts accounts for fuel and spare parts need to grow by an additional $6 billion this year due to inflation alone.

Fuel is paid for out of a working capital fund where each service pays for its own fuel from within. If fuel winds up costing more than projected, there is a shortfall and the fund becomes insolvent. Congress must then step in and help, but so far the Hill has proven to be a very unreliable partner in providing steady, predictable funding.

Whether it is the left pocket or the right pocket, it is the same pair of spending pants to cover rising costs. Ultimately everything gets squeezed.

Base operations are heavily contracted out to keep America’s military humming around the globe, spanning thousands of locations and facilities. For branches like the US Army, there are as many contractors as Army civilians servicing soldiers and infrastructure. The operations and maintenance (O&M) account is a murky hodgepodge of priorities ranging from health care to recruiting to body armor.

Sustainment, repair and maintenance of infrastructure and weapons are all covered in this critical account. Because it is so expansive, it lacks the political constituencies of other spending urgencies. But O&M is quite simply the financial oil that makes the military machine run.

Military construction is also a key aspect of servicemember quality of life. Inflation has caused a triple whammy for new starts given previous supply chain challenges from Covid-19 and the spending handcuffs from a continuing resolution. The Army alone has 154 installations (camps, posts, and stations) that need facilities upgrades.

These little cities are seeing cost growth across the board due to increased expenses for labor and materials, supply and demand imbalances, and contracting uncertainty.

Nor is the impact of inflation equally distributed across every good and service. Pentagon program managers ask for annual budgets knowing current costs. They do not have magic 8 balls to predict projected costs accurately as inflation persists. This causes the many contractors, big and small, doing business with the military to return to the negotiating table to revise agreements as they grapple with rising inflation.

The bottom line is that there is no part of the defense budget that is unaffected by sustained high inflation—including those in uniform.

While prices are climbing rapidly, requested funds simply cannot cover this growth across accounts. The money will be taken from elsewhere in the budget—further putting the military behind as it attempts to compete with China and effectively deter Russia.

Now a 1945 Contributing Editor, Mackenzie Eaglen is a resident fellow in the Marilyn Ware Center for Security Studies at the American Enterprise Institute. You can follow her on Twitter: @MEaglen.

More about Mackenzie Eaglen: While working at AEI, Ms. Eaglen served as a staff member on the National Defense Strategy Commission, a congressionally mandated bipartisan review group whose final report in November 2018, “Providing for the Common Defense,” included assessments and recommendations for the administration. Earlier, Ms. Eaglen served as a staff member on the 2014 congressionally mandated National Defense Panel, established to assess US defense interests and strategic objectives, and in 2010 on the congressionally mandated bipartisan Quadrennial Defense Review Independent Panel, which evaluated the Pentagon’s defense strategy. She is also one of the 12-member US Army War College Board of Visitors, which offers advice about program objectives and effectiveness.

Written By

Now a 1945 Contributing Editor, Mackenzie Eaglen is a senior fellow at the American Enterprise Institute (AEI), where she works on defense strategy, defense budgets, and military readiness. She is also a regular guest lecturer at universities, a member of the board of advisers of the Alexander Hamilton Society, and a member of the steering committee of the Leadership Council for Women in National Security.