Today we face a remarkable range of challenges to our national security. There is the terrorist threat demonstrated so cruelly and tragically on September 11, 2001, the threat posed by the proliferation of weapons of mass destruction (WMD), and the imminent prospect of a war with Iraq. Figuring out how to effectively meet and manage these challenges while also meeting other demands on our national resources, such as preparing for the retirement of the baby boomer generation towards the end of this decade, is a complex and difficult task. But it is a task that falls very much within the purview of this committee.

It is my hope that I might be able to help you, in some small way, with this task through my testimony today. I would like to focus on three important topics related to defense policies, programs and spending. First, the question of whether or not the administration’s latest defense plan puts the Department of Defense (DoD) and the Services on a path that is likely to prove affordable and sustainable over the long term. Second, whether the administration’s defense plan adequately provides for the transformation of the US military. Third, I want to spend a few minutes talking about the cost of a potential war with Iraq, as well as the costs associated with occupying Iraq for some period of time after a war.

Affordability and Sustainability
During the 2000 presidential campaign, then-candidate Bush suggested that the US military should modernize its military “selectively,” but that the real goal should be to “move beyond marginal improvements—to replace existing programs with new technologies and strategies: to skip a generation of technology.” These goals were essentially reaffirmed in the 2001 Quadrennial Defense Review (QDR). After conducting a series of program reviews, however, the administration seems to have decided to largely abandon this approach. With the exception of the Crusader artillery system, which was canceled last year, the administration has decided to move ahead with virtually all of the major weapons platforms included in the plans it inherited from the Clinton Administration.

This decision has enormous implications for US defense spending. Buying all of these new weapons systems in the quantities called for in the Services’ plans, while simultaneously maintaining the current force structure and high readiness levels, will require dramatically increasing funding for defense over not just the next few years, but the coming decade and beyond.

The administration’s fiscal year FY 2004 request would bring the defense budget to its highest level since the early 1990s. The proposed budget would be about 13 percent higher than the average Cold War budget in real (inflation-adjusted) terms.² In addition, under the administration’s long-term plan, by FY 2009 DoD’s budget would reach some $430 billion (FY 2004 dollars). This would be about 22 percent above average Cold War levels and roughly equal to the levels sustained during the 1980s, the decade of the Reagan buildup. But even defense budgets of this magnitude are unlikely to prove sufficient to pay for DoD’s existing long-term plans.

A recent report by the Congressional Budget Office (CBO) concluded that—assuming historical rates of cost growth in operations and support (O&S) activities and modernization programs—executing existing plans could require substantially higher DoD funding levels, perhaps as much as an additional $60 billion a year.³ This would bring defense budgets up to nearly $500 billion (FY 2004 dollars) annually. Furthermore, this level of spending would need to be sustained through 2020 and beyond. Such a large and sustained boost in spending on defense would be truly unprecedented for the United States.

Moreover, it is not just historical precedent that suggests that achieving and sustaining these budget levels would be difficult. The long-term federal budget picture has dramatically worsened over the past two years. Two years ago, CBO projected a 10-year surplus of about $5.6 trillion over the FY 2002-11 period. By contrast, CBO’s baseline estimate now projects large deficits for the next several years and a net surplus over the entire FY 2002-11 period of only about 20 billion. The dramatic change in the government’s fiscal outlook has resulted from the enactment of large tax cuts, as well as a weak economy and other factors. Unfortunately, it is likely that the outlook will deteriorate still further in coming years. The administration has proposed further large tax cuts at the same time it is proposing a large increase in defense spending. In addition, there is strong bipartisan support for adding a Medicare prescription drug benefit, and increasing spending on homeland security, as well popular domestic programs, such as education. Taken together, this mix is likely to lead to sizable deficits for the remainder of this decade. And at the end of this decade, we will begin to see the retirement of the “baby boomer” generation, with the enormous implications that has for spending on Social Security and Medicare, and for a worsening of the deficit picture in the years beyond this decade.

With this fiscal outlook, is it really reasonable and wise to assume that DoD will be able to achieve and sustain budget levels approaching $500 billion a year? Probably not. At best making such an assumption amounts to a very risky approach to defense planning. It is risky because, if those funding levels do not materialize or prove unsustainable, DoD will have wasted tens of billions of dollars developing new weapons systems it cannot ultimately afford to put into production, or which it can produce only at very low and inefficient rates.

Fortunately, there is good reason to believe that US security requirements could be met at lower levels of defense spending than are now being proposed by the administration, or would be required to execute the Services’ existing plans. One important element in this alternative strategy would be for the administration to re-embrace the concept of skipping a generation of some weapons systems and to adopt a more selective approach to modernization.

DoD and the Services are in the best position to make the kinds of hard choices that would be required to implement this approach. But one step in particular would almost certainly be necessary: the Services’ plans for tactical fighter modernization would have to be significantly scaled back. These plans have been cut somewhat over the past few years, but they still remain enormously ambitious and expensive. Altogether, the Air Force, Navy and Marine Corps plan to buy some 3,300 new F/A-22 fighters, F/A-18E/F fighters and Joint Strike Fighters at a cost that is likely to exceed $300 billion over the next couple decades. Given the level of superiority the United States currently enjoys with its existing air forces, the impressive capabilities of new, and far cheaper, current-generation systems like the F-16 Block 60, and the promise of new kinds of systems such as unmanned combat air vehicles (UCAVs), it seems clear that the planned buy of at least one of these new, next-generation fighters could be substantially scaled back, or possibly even cancelled, without significantly reducing the effectiveness of the US military.

Transformation
Another critical element that could, over the long-term, help the US military live within more modest spending levels is the transformation of the US military. The need to transform the US military is driven by the notion that advances in technology—especially information technology—and changes in organization and operational concepts could dramatically alter the way wars are fought in the future. This revolution in military affairs (RMA) creates both opportunities and challenges for the US military. However, transforming the US military is, over time, likely to help DoD control or even reduce costs because, by definition, successfully transformed forces should prove more cost-effective than the forces and systems they replace.

A central theme of the administration’s FY 2004 defense budget request is that it would effectively support efforts to transform the US military. According to the administration, the proposed budget includes $23 billion in FY 2004 and $239 billion over the FY 2004-09 period for military transformation. Until the DoD provides greater detail concerning which programs are included in this estimate, it is difficult to evaluate the reasonableness of this claim. However, an analysis of DoD’s FY 2004 request for defense research and development (R&D) suggests that—notwithstanding administration assertions to the contrary—efforts to transform the US military may not be receiving sufficient priority in DoD’s plans.

Although the FY 2004 budget request does contain R&D funding for several programs widely believed to be important for transformation (such as the conversion of four Trident ballistic missile submarines to carry Tomahawk cruise missiles), overall, defense R&D funding still appears to be very much focused on traditional kinds of weapons programs. For example, while the FY 2004 request includes $870 million for the development of unmanned aerial vehicles (UAVs), it includes $5.5 billion for continued development of the Services’ three short-range fighter programs. No one believes that the US military can or should be transformed overnight, but the magnitude of the tilt in this budget toward traditional systems may be inconsistent with an effective transformation strategy. The allocation of funding among different R&D budget activities also raises questions about the priority given to transformation in the FY 2004 budget request.

The Science and Technology (S&T) budget activity includes programs in the three earliest phases of R&D. The discovery and development of new technologies promising major leaps in military capability are most likely to be made in these early phases of R&D. As a result, many advocates of military transformation believe that S&T programs should be given a high priority. Under the administration’s plan, at $10.2 billion, funding for S&T programs would be higher in FY 2004 than it was in FY 2001. But the level of growth provided is extremely modest compared to the increases provided for the overall R&D budget. Under the new plan, S&T funding would be increased by only some $1.3 billion, or 10 percent, between FY 2001 and FY 2004. Moreover, the administration’s new plan actually calls for spending six percent less on DoD S&T programs in FY 2004 than in FY 2003. By comparison, the overall defense R&D budget is projected to grow by some 8 percent in FY 2004, and by a total of 42 percent between FY 2001 and FY 2004. The level of increase requested for S&T programs also falls far below that projected for specific programs, such as ballistic missile defense (BMD) activities and fighter development.

The Advanced Component Development and Prototypes budget activity represents the middle phase of the R&D process. Compared to S&T programs, which focus primarily on technology development, these efforts place greater emphasis on the development of specific weapon systems and testing under realistic operational conditions. Thus, the potential for major breakthroughs is less, but there is a greater potential for nearer-term payoff. As such, the demonstration and validation phase of the R&D process might also be considered important for transformation. Under the administration’s plan, funding in this category would grow by $5.1 billion, from $8.1 billion in FY 2001 to $13.2 billion in FY 2004, or 57 percent. However, this projected increase is almost entirely due to the expansion of BMD programs. Exclusive of BMD programs, funding for advanced component development and prototype programs would grow by only some $773 million, or 11 percent, over this period.

The final phase of the R&D process I would like to discuss today is the System Development and Demonstration (SDD) budget activity. This is the last phase of R&D prior to production, as well as the most costly phase for most programs. Under the administration’s plan, SDD funding would increase more than any other category. Between FY 2001 and FY 2004, SDD funding would grow by about $7.5 billion, or 81 percent. Altogether, SDD programs account for $15.9 billion of the FY 2004 request. The dramatic growth in SDD funding projected in DoD’s latest plan essentially reflects the administration’s decision—noted earlier—to proceed with virtually all of the new weapons systems it inherited from the Clinton Administration and to forego the skip-a-generation strategy it had earlier embraced. Among the long-planned, next-generation programs included in the administration’s plans are the F-35 JSF, the Comanche helicopter, and the DD(X) destroyer. Much of the funding growth projected for SDD funding is due to the JSF program in particular. The decision to move ahead with this short-range fighter will cause SDD funding associated with fighter modernization programs to increase by $3.6 billion between FY 2001 and FY 2004.

The administration and the Services claim that most of the programs undergoing SDD are transformational systems, or at least consistent with a sound transformation strategy. If so, this boost in SDD funding may be appropriate. But at least some of the weapons programs being pushed into SDD appear ill-suited for the emerging security environment. Perhaps most questionable is the administration’s decision to continue to move ahead with all three planned tactical fighter programs. This focus on relatively short-range tactical fighters seems at odds with recent experience in Operation Enduring Freedom (Afghanistan, 2001-03), Operation Desert Fox (Iraq, 1998) and elsewhere which suggests that, in the future, the US military may often have to operate in wartime without access to forward bases. Arguably, a better approach would be to shift some of the funding allocated to SDD programs to earlier phases of the R&D process, and to focus more on the development long-range weapon systems.

Another problem is that the administration’s decision to move ahead with so many costly traditional programs today might make it impossible to increase funding for more transformational kinds of systems several years down the road, when their feasibility and potential is better proven and they are ready to be moved beyond the early stages of R&D. This is because the level of funding absorbed by traditional weapon systems entering SDD today will grow significantly over the next five years or more, as they move further through the SDD process and into production—potentially crowding out promising, emerging transformation programs.

Determining the appropriate level of funding for defense R&D is an important and challenging task. But even more critical than the question of how much the United States should spend on defense R&D is the question of how defense R&D dollars should be spent. This is especially true today because of the widespread belief that we are in the midst of an RMA. However, while there is broad support for the notion that the US military needs to be transformed, there is substantial disagreement over specifically what transformation means.

In general, if one believes that the greatest threats to US security are relatively near-term challenges, and that the major weapons programs already under development by the Services are well suited to counter those challenges, or one believes that the threat of ballistic missile attacks is the preeminent military challenge facing the United States, one may be well satisfied with the administration’s new R&D budget request and its approach towards transformation. As noted above, it provides a large increase in SDD funding, as well as an enormous increase for BMD programs over the FY 2001-04 period.

On the other hand, if one believes that the greatest threats to US security are likely to emerge over the longer term, and that many of the major weapons programs included in the Services’ existing plans will likely prove ill-equipped to counter these challenges, or even many of the challenges that exist today, one may find the administration’s plan more troubling. As mentioned earlier, the most significant breakthroughs, with the greatest long-term payoff, are likely to come from the earliest phases of R&D. But the new defense plan provides only a very modest increase in funding for S&T programs over the FY 2001-04 period, and would actually reduce funding for S&T activities between FY 2003 and FY 2004. Moreover, the effect of buying-in today to the many weapons programs in the Services’ existing plans may be to crowd out purchases of more transformation-oriented weapons programs later in this decade.

Potential Cost of a War with Iraq and Its Post-War Occupation
The last topic I would like to discuss is the potential cost of a war with Iraq and its post-war occupation. The Bush Administration has made clear that it expects to soon begin military operations against Iraq, very possibly within the next several weeks. One of the factors that should be considered before a decision is made to initiate a war with Iraq is the likely financial and economic costs of such a war, as well as the costs of any post-war occupation, humanitarian assistance and reconstruction activities. In deciding whether to begin this war, it may be appropriate to give greater weight to political, strategic and humanitarian interests than to the likely financial and economic costs and consequences of the war, but those costs should at least be considered.

I would like to share with you some of findings of a recent CSBA study that attempted to estimate a subset of the potential costs of a war and its aftermath. Specifically, our study focused on the direct military costs to the United States of a war with Iraq and the post-war occupation of the country. Although not the focus of our study, I will also briefly note some of the non-military costs that might be incurred in the aftermath of a war. Among other things our study concluded the following:

• Given the great amount of uncertainty surrounding the size of the US force that will be required, the level of resistance that will be offered, the duration of the conflict, the level of allied participation, and other factors, it is impossible to provide more than a very rough estimate of even the direct military costs of a war with Iraq and its post-war occupation.

• Based on publicly available information, a reasonable estimate of the number of US troops that might ultimately be deployed to the Gulf region would be 175,000 to 350,000. Assuming the war were to last from one to six months, this suggests that the direct military costs of the war could range from as little as $18 billion to as much as $85 billion, roughly the cost of the 1991 Gulf War.

• Occupation costs could far exceed the direct military costs of the war itself. A reasonable estimate of the average number of US troops that would be required for occupation and peacekeeping duties after a war might be 20,000 to 90,000 over the next five years. This would equate to five-year costs of roughly $25-105 billion.

• Even a relatively small occupation force could greatly exceed the size of past US deployments to peacekeeping missions (e.g., in Bosnia and Kosovo, where the US military has had an average of about 10,000 troops stationed over the past few years). The need to maintain this presence over a period of years could impair the ability of the US military to recruit and retain quality personnel, and to carry out some other important military missions. On the other hand, the fact that the US military would no longer have to plan and prepare for a possible future war with Iraq might partially offset the risks associated with lower readiness levels.

• Although the focus of our study was on direct military costs, it is important to understand that those costs could be substantially exceeded by various non-military costs associated with the war and its aftermath. By one estimate, those costs include roughly $6-10 billion for aid to allies in the region, $1-10 billion for humanitarian assistance, $5-12 billion for governance activities, $10-105 billion for reconstruction and recovery, and $62-361 billion for debt relief and related costs.⁴ On the other hand, these costs would almost certainly be borne not just by the United States, but by US friends, allies and international financial institutions.

Ironically, what may be the most important insight to be gained from these estimates is related to what may also be their most serious limitation: they show in graphic terms just how much uncertainty there is surrounding a war with Iraq and its aftermath. The existence of so much uncertainty should not necessarily prevent the country from going to war. Policymakers rarely have the luxury of operating in an environment of perfect information, especially when trying to decide questions of war and peace. At a minimum, however, the existence of so much uncertainty, and the possibility that the costs of a war with Iraq and the peace following the war could be quite high and be incurred over a period of many years, might suggest that policymakers should take a more cautious approach to considering additional tax cuts or spending increases than they otherwise might—at least until the war is over and we have better idea of what the true costs of the war and its aftermath will be.

A second insight that flows from our study is how critically some of these costs are likely to depend on the level of support the United States receives from friends and allies. Under any circumstances the United States will undoubtedly have to pay for the bulk of the direct military costs associated with the war itself. However, if the United States can win the support of a broad range of friends and allies, it might be able to significantly reduce the size of the occupation force it needs to maintain in Iraq and the level of reconstruction and related assistance it need to provide. Conversely, the failure to win broad and deep support among important friends and allies could leave the United States with a bill that ranges toward the high end of the estimates discussed earlier.

1. This is the prepared text of Steven Kosiak’s testimony before the House Budget Committee on February 27, 2003.

2. Unless otherwise noted, all changes in funding levels noted in this testimony are expressed in real terms.

3. Lane Pierrot and Gregory T. Kiley, The Long-Term Implications of Current Defense Plans (Washington, DC: CBO, January 2003), p. 5. With cost risk, CBO estimates that executing the current defense plan would require an average of $471 billion (FY 2002 dollars) a year over the FY 2008-20 period. This is equivalent to roughly $490 billion in FY 2004 dollars.

4. Gordon Adams and Steven Kosiak, “The Price We Pay,” The New York Times, February 15, 2003, p. A31.