Fiscal Cliff Notes - By Gordon Adams

With the November 6 election, the shadow play over the defense budget and the fiscal cliff has come to an end. For the past 15 months, we have been entertained by a drama scripted in the Budget Control Act that appears to threaten a fiscal cliff for discretionary spending in January 2013. Defense has played one of the lead roles.

President Obama has argued that if Congress wants to eliminate the threat of automatic spending cuts, Republicans need only put revenues on the table. In an election year? Unlikely. And, soon after agreeing to the fiscal cliff, the stalwart "defenders of defense" in the GOP came down with a sudden case of buyer's remorse, arguing that national security would be threatened unless defense were somehow exempted from the planned cuts.

Senators McCain, Ayotte, and Graham manufactured a circus big top that traveled to bases and defense factories, spreading "fiscal cliff fear" as far as they could. The defense industry, with a big stake in the defense budget, enthusiastically joined the chorus, threatening the loss of a million jobs. (That is, they went along until it was clear that their politicking might backfire, so they drew back.)

It was always a show, theater for the electorate. The need to "defend defense" was always exaggerated. The American military is far and away the strongest in the world. Moreover, in recent years the United States has been spending more on defense, in constant dollars, than at any time since 1945. While losing $50 billion through "sequester" from the planned defense budget this fiscal year would pose management challenges, it would be survivable.

But now that the entertainment portion of the program has ended, it's time to get real. Here are the five things about the defense budget the next administration has to deal with:

1. We are in a defense draw-down. Defense resources will shrink from their FY 2010 peak, the highest level of defense spending in constant dollars that we have seen since World War II. Current projections suggest that military spending will still keep pace with inflation, but in fact defense budgets will go into a real-dollar decline. They will shrink because we are out of one war and about to leave another. The public is focused on jobs, the economy, the deficit, and the debt, and it wants these things fixed. And they will shrink because any fix to the nation's fiscal situation demands that everything be on the table. It is the only way a deal is possible, both budgetarily and politically. So it is high time to start thinking about how to manage a serious draw-down, instead of pretending that it will not happen.

The Department of Defense, the military services, the White House, and Congress are not there yet; all are whistling through the graveyard pretending that there is no draw-down and that resources will continue to grow, at least at the rate of inflation. But already the defense budget has shrunk in real terms: the base defense budget for FY 2011 was the same as FY 2010; FY 2012 was below FY 2011; and FY 2013 will probably not keep up with inflation.

There are discussions underway outside government about how to manage a draw-down that could look like the ones we have been through before -- Korea, Vietnam, the Cold War. During each of those, defense budgets declined 30 percent in constant dollars over ten years. The Center for Strategic and International Studies has a working group looking at what kind of military force would result from a 30 percent budget cut. Nearly two years ago, on the basis of work we did for the Rivlin-Domenici Debt Task Force, my colleague Matt Leatherman and I took a look at the options for a significant draw-down. The CSIS group is still crafting the options; we found that a force of 1.25 million troops (versus the 1.4 million we have now) would be able to execute national strategy and maintain global superiority.

2. Defense budgets and defense strategy are inseparable. Those who insist that defense budgets should be based on strategy and threat, independent of resources, do not understand this fact. Every strategy is resource-constrained; every budget disciplines the choice of strategic priorities. Acceptable levels of risk mediate this relationship.

This has always been true: Ask Eisenhower about how he traded off ground forces against nuclear forces ("massive retaliation") as he sought to balance the federal budget. Ask Nixon about how he changed the military force planning algorithm from 2.5 wars to 1.5 wars and sought regional strategic partners (like the Shah of Iran) as the defense budget declined in the early 1970s. Ask George H.W. Bush and Colin Powell about how they constructed a new force-planning algorithm (2 Major Regional Contingencies) around which to build the "Base Force," as the defense budget declined in the face of major deficit reduction efforts from 1985 to 1990.

It is silly to pretend there is no connection between budget and strategy; there is a connection between them for every country in the world. Budgets are a great way to discipline endless expansion of strategic appetite. And strategy and missions are essential to writing budgets. So we need to stop claiming, as Secretary Panetta did in his interim strategic guidance, that his budget decisions were strategy-driven. There would have been no need for an interim strategy review between the 2010 and 2014 quadrennial defense reviews had the budget not begun to flatten from previous projections.