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Vast Right Wing Conspiracy

November 28, 2011

Adam Weinstein has a new piece up at Mother Jones entitled, “Inside the Corporate Plan to Occupy the Pentagon.” In it he makes the case that the Defense Business Board is basically a secretive Rumsfeldian cabal made up of evil Wall Street hedge-fund managers who are quietly twisting the Department of Defense into an employee abusing, pension-stealing corporation that operates with merciless efficiency and an eye towards the bottom line.  Here is how Adam describes the DBB…

They are investment bank CEOs and CFOs, outsourcing experts, and layoff specialists who promote a corporate agenda of “behavior change” and “business solutions” in the military bureaucracy. The board proposes not only to slash and privatize military pensions, but also to have the Pentagon invest in oil futures, boost pay for its executives and political appointees, and make it easier for them to fire rank-and-file employees while scaling back those workers’ collective-bargaining rights.

Initial caveats: I know Adam (via twitter) and have read enough of his work to understand that this story is going to slant left.  As a routinely left-of-center guy myself, I understand the desire to approach it from that perspective.  However, in this case I think Adam’s desire to tell a good partisan story overwhelmed his responsibility to be intellectually honest.  This article completely overstates the influence of the DBB, wrongly frames them as lacking empathy for military members and misrepresents their recommendations on a number of issues such as Fuel Hedging, the National Security Personnel System, and probably most importantly Military Retirement Reform.

INFLUENCE OF THE DEFENSE BUSINESS BOARD

First off, I kind of resent being in the position of having to defend the DBB.  The reason you’ve never heard of the DBB isn’t that they are overly secretive, its just that they aren’t really that important.  Strangely, Adam even admits it in his piece:

“While the board’s ideas have enjoyed support on Capitol Hill over the years, it has made only a modest impact on policy.”

Adam doesn’t cite the “support on Capitol Hill” they have received, so I can’t address that directly, but the only large-scale DBB recommendations that were ever adopted were the National Security Personnel System (NSPS), which has since been entirely dismantled (I’ll discuss that in more detail later) and the creation of the DoD Chief Management Officer (which as Adam points out has only been staffed to the deputy-level).  Apart from the very limited succeses listed here, the DBB has also had some notable failures.  They have recommended the outsourcing of military mail (not adopted) and endorsed the creation of a Combatant Command dedicated to medical issues (also not adopted).The majority of their recommendations and formal reports are completely boring, buzzword laced Powerpoint presentations built from interviews with various senior leaders within the department and the proverbial “best practices” from industry.  Their reports have titles like, Innovation and Cultural Change [.pdf-2006] and Financial Indicators, Ratios and Indexes [.pdf-2002].  These reports center around the consistent themes of metrics and tracking, human capital (especially senior leadership) and logistics.    They mostly rehash the myriad ways that the DoD is inefficient and poorly organized and how it would benefit from adopting business practices from industry [I should note that DoD inefficiency and organizational sprawl is hardly a minority view.  The DBB just states this in MBA jargon instead of MilSpeak].

In order to further frame the scope and magnitude of influence that the Defense Business Board actually wields, here are some additional facts.  The DBB averages around 8 reports a year that are delivered to the Deputy Secretary of Defense (and in theory on to the Secretary).  These reports normally consist of about 6 pages of text with an accompanying Powerpoint slideshow of around 20 pages.  If the track record of the DBB discussed above isn’t convincing enough, you should also note that the DBB has absolutely no authority to implement any of its recommendations.  These decisions are left to the senior military and civillian leadership and therefore they are the ones that are actually responsible for any changes adopted.  According to their Jan 2010 charter, the overall budget for the DBB is $750,000  plus 6 full-time equivalents (4 active duty officers and 2 support personnel).  Not to downplay this amount, but the budget for the various department bands is $320 million and the overall DoD annual budget is $530 billion.

You could argue that the real power behind the DBB isn’t their quantity of work or their budget, but their routine access to the halls of power; the ability to consistently pull the strings of the Pentagon senior leadership.  Well, there’s a problem there too: The DBB only meets four times a year.  The last one of these meetings was held in October 2011 and was scheduled to be 30 uninterrupted minutes of greed and undue corporate influence on the DoD.  That means that over the course of the year, the DBB will produce a few hundred pages of [mostly boring] reports and have a few hours of meetings.  Did I mention that these meetings are open to the public and the meeting minutes are published on the internet? Neither did Adam.

This doesn’t exactly seem like the way you would run a secretive Wall Street takeover of the Department of Defense.

LACKING EMPATHY FOR MILITARY PERSONNEL

This blackhearted organization has also recommended increasing the accessibility of benefits for severely wounded military members [Addressing Benefit Disparities to Wounded Warriors .pdf 2010] and recommended ways to improve the public school systems surrounding military installations [Public School Improvement To Enhance Quality of Life Around Military Bases .pdf 2002].  Their proposal on military retirement reform would actually expand benefits to a much wider group of veterans (but more on that later).

Adam also attempts to paint the DBB as completely divorced from military understanding:

Its 21 members know little about military affairs, but they are rich in Wall Street experience, including with some of the biggest companies implicated in the 2008 financial meltdown. [emphasis mine]

However, several of the DBB members named in the article are cited by Adam as having clear military experience.

The head of the Defense Business Board’s pensions task force, Richard Spencer, served as a Marine aviator in the 1970s.
The leader of the board’s supply chain task force was Gus Pagonis, a senior VP for Sears who, as an Army general had managed supply and logistics for the Gulf War, [emphasis mine]
A 3rd DBB member named by Adam is Denis A. Bovin (who also appears to have some experience…)
Mr. Bovin has been awarded the Department of Defense Medal for Distinguished Public Service, the highest honor that can be conferred on a civilian, for his “dedication and commitment to the men and women of the U.S. Armed Forces” and for his “vital and lasting contributions to the Department of Defense.”  — From his profile page hosted at the Center for a New American Security

FUEL HEDGING

Adam also makes claims that are either factual oversights or outright deception on the topic of fuel hedging.
Its members have consistently advocated for the Pentagon to engage in fuel hedging—investing in oil futures to lock in a supposedly low cost for their long-term fuel needs. The board’s fuel-hedging push was led by member Denis Bovin, who was a top investment banker for Bear Stearns until the firm went bust in late 2008. After consulting with energy giants BP and Shell, among others, Bovin’s team concluded that the Department of Defense should invest based on rising oil prices, even while he conceded that “as a whole, DoD is not highly exposed to fuel price volatility.” Such deals, he noted, would incur investment transaction costs of “$10 to $250 million per year.” Even though no federal agency currently engages in fuel hedging, the board tasked Bovin with another study on oil futures last January.
But here is the text from the board’s initial fuel hedging study, conducted in 2004 actually indicates that their preferred recommendation was *not* to hedge fuel purchases.

The Board’s Task Group [led by the aforementioned Denis Bovin]concluded that DoD could feasibly hedge its fuel purchases. In particular, the Department could design an effective hedging program that does not disrupt commercial markets. Though DoD is a large consumer of fuels, its consumption does not exceed that of a major airline by a significant amount. While the commercial market for fuel and fuel contracts could handle a DoD fuel hedging program, the question remained: Should DoD hedge?After an examination of the viability of a fuel hedging program for DoD, two recommendation options were developed by the Task Group:

OPTION 1: Don’t Hedge

OPTION 2: Implement a Low-Risk Pilot Program

Under this option [Option 1], the Department of Defense would not engage in fuel hedging in the commercial markets or elsewhere and would not pursue this approach any further. The option is based on the decision that both the political risks and the legislative effort required to establish such a program are not justified by the potential benefits. [emphasis mine]
Another fact that is conveniently glossed over is that the fuel hedging concept wasn’t even the idea of the Defense Business Board

TASK: At the direction of the Under Secretary of Defense (Comptroller) (USD(C)), the Defense Business Board (formerly known as the Defense Business Practice Implementation Board) was tasked with examining potential ways to reduce the Department’s exposure to fuel price volatility by hedging in commercial markets. This request was initiated by the USD(C) after the Office of Management and Budget (OMB) directed that the Department of Defense (DoD) consider fuel hedging.  [emphasis mine]

NATIONAL SECURITY PERSONNEL SYSTEM

Adam also takes issue with the implementation of the National Security Personnel System, which was a system designed to replace the General Schedule (GS) pay scale for DoD civilians.  He was in no way alone on this one.  There were a litany of people that opposed this change for a wide variety of reasons.

2008 investigation by Federal Times found that the first round of bonus pay under the new policy had been riddled with iniquities. And a May 2009 investigation by the Pentagon itself found that employees previously making below $60,000 ended up making less under the policy—while workers with salaries above $80,000 ended up making more.

However, it is important to note that NSPS was a pay-for-performance system; inequality was a feature not a bug.  NSPS gave managers much more discretion with regards to how employees received bonuses and promotions.  It also simplified the hiring and firing processes for federal employees on the theory that if government employment policies more closely reflected the commercial sector government would be more efficient.  Whether or not you support those changes largely depends on your perspective towards organized labor and pay-for-performance compensation.  However, the implication that NSPS was discriminatory is unfounded.  The Federal Times analysis that Adam cites stating that NSPS is unfair was only based on one year of data, and it would only go as far as to say this:

Most experts interviewed by Federal Times say it’s too early to judge whether NSPS is discriminatory or otherwise faulty. But many agree the apparent inequalities cause concern, and they say Defense needs to closely watch these trends in coming years. If the inequalities continue, experts say, NSPS must be revised to correct them.

However, as Adam correctly points out, eventually there was enough pushback against this system that it was defunded by Congress has since been phased out.

MILITARY RETIREMENT REFORM

So, with all of that out of the way we finally get down to what I think was the real motivation behind writing this story: Adam doesn’t like the DBB’s recent recommendation to shift the military retirement system over to a 401(k) style system.  Again, he isn’t alone.  There has been much wailing and gnashing of teeth over the mere suggestion that military retirement could be adjusted in any way, other than up of course.  Robert Goldich and Andrew Bacevich both make impassioned defenses of the current system, while completely ignoring the fact that it is entirely unsustainable.  So, back to Weinstein…
The board’s proposal would set aside 16.5 percent of a troop’s base salary [misleading, since this would not be removed from troops salary] in a savings account to be invested in the markets. Assuming a modest annual return—hardly a safe assumption these days—the plan would still provide retired soldiers with far less money than what they are entitled to now. Critics say the proposal would also make it harder for the military to retain its most senior, most knowledgeable members. –[bracketed portion is mine]
Despite the fact that I disagree with his framing of the 16.5% quantity and the assertions that retention would be dramatically effected, this characterization of the DBB proposal is technically true, however, by omitting key facts about how the current military retirement system works,  the reader is left with an amazingly skewed perspective.  Since I’ve already written fairly extensively on the unfairness inherent in the current military retirement system [Silent Majority, September 2011] I’m going to quote myself:

For those less familiar with the subject, military retirement works like this: After 20 years of service, you can retire and receive 50% of your base pay for the rest of your life.  Keep in mind most military members retire around 40 years old and receive benefits for the next ~40 years, roughly twice the length of  their service.

The salient fact here is that 83% of veterans do not receive any retirement benefits and this percentage is almost entirely drawn from the junior ranks - the demographic that has done the vast majority of the fighting and dying over the last decade.

Now, ‘base pay’ varies widely across ranks and time in service, but a completely typical O-5 who retires after 20 years of service and lives another 40 years will make $1,920,000.00 in 2011 dollars over his lifespan.  If that same LtCol separates at 19 years, 364 days (for some unimaginable reason) he would receive nothing.  The DBB proposal for retirement would reduce the huge payouts to the 17% of veterans that currently receive, but it would greatly expand the number of military members that receive some form of post-service benefits by creating a 401(k) style plan for all members that they would become vested in at 3-5 years.  While a goal of the DBB proposal was clearly to rein in retirement expenses, the fact that the benefits of military service would be more equally distributed amongst a wider pool of  veterans seems to be the kind of proposal that would be embraced by liberals, not rejected.

Even if you do support the ‘pot of gold’ retirement system that currently only benefits 17% of veterans, the system is fiscally unsustainable.  It is growing at a rate well beyond that of normal inflation and assuming a flat defense budget over the next decade, that means a smaller and smaller percentage of the defense budget is going to be used to support those that are currently in the military.

So, unless you are willing to accept an ever growing DoD budget, or you want to continuously cut more and more defense programs to offset the additional costs, you have to recognize that the retirement system must be altered. Personally, I’m not convinced that the 401(k) style plan is the correct way to go, but there are a lot of advantages to the proposal and it doesn’t represent some kind of Wall Street takeover or undue corporate influence.  Its a serious, albeit drastic proposal from a set of adults on a way to confront the hard choices the DoD is currently facing.

I don’t necessarily believe that the DoD would be best served by blindly accepting every proposal put forth by the Defense Business Board, but at some point, we need to stop waving the flag long enough to balance our checkbook.  Even though we aren’t driven by a profit motive, with 3.2 million employees and 312 million shareholders, its pretty hard to make the case that we shouldn’t adopt sound business practices.  While individual Marines, Airmen, Soldiers and Sailors may be motivated by patriotism, the Department of Defense runs on cash and our bill is about to come due.

One Comment
  1. January 2, 2012 8:58 am

    Hi Jimmysky77,
    Speaking of which, Does being right-wing make you a conspiracy theorist or is it the other way around? Every last conspiracy theorist I’ve ever met or heard of-with one exception- has been either Republican, Libertarian or a Conservative like myself. I’m mystefied as to why that is, does anyone know why?
    Great Job!

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