Maintaining the Competitive Posture of the United States in an Turbulent Economic Era

The Honorable Alan R. Shaffer

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Paul Kennedy’s 1987 book, “The Rise and Fall of Great Powers” laid out the case that throughout history, Great Powers fell into decline when their economic power failed to support their military and political ambitions.  In other words, ways, ends, and means for a strategy fell out of balance.  Though Kennedy’s thesis has not been proven entirely correct, the basic premise stands.  It is therefore appropriate to ask the question:  What is the current condition of the United States, and how will these conditions effect the United States ability to be competitive in a new era of global competition?

There are three elements of national power: economic, military, and political power.  Economic and military power tend to support political power, so we will focus on the state of the economy and the state of the military.  For the economy, it is important to address both the near-term economy, and the investment in those elements that would support a continued competitive stature —science, technology, and engineering.   In this paper, we will show areas that are a concern for United States global competitiveness; and there are growing fissures that could erode the competitive posture of the United States.

Economic:

The United States economy in 2021 is on a trajectory to erode the competitive stature of the United States.  Put in simple terms, the United States is living beyond its means.  The United States debt is at $28.6T, the largest in U.S. history.  Even more troubling is that the ratio of debt to GDP is also the highest in history, at 128.38%[i].  The peak of the debt to GDP ratio following World War II was 114%.  And with the current projections of spending and revenue in the U.S., the trend is getting worse.  A September 2020 report by the Congressional Budget Office[ii] projects that the debt will continue to grow for the next 30 years, reaching 200% of GDP by 2050.

 Why does debt matter?  For several reasons, but we will focus on one of the more significant problems with debt, the cost to “Service” the debt. In short, the cost to “Service” the debt continues to rise.   In 2020, the United States paid $522B to service the debt—at very low interest rates (2.4% in 2019 and 1.3% in 2020).[iii] The American Institute for Economic Research suggests that inflation could be between 5-6% for 2021.[iv]  This would strongly increase the cost of servicing United States debt.   A 2019 study projected the cost to service the debt will be larger than the Defense Budget by 2025.  While we really don’t know when the cost of servicing the debt will be more than the annual defense budget, it is clear that the United States will soon reach this dubious milestone.[v]  This is a situation that is neither sustainable nor acceptable when considering American competitiveness.

Equally troubling for the long-term economic viability of the United States is the growth in “mandatory” spending as opposed to discretionary spending.  Mandatory spending (social security, Medicaid / Medicare, etc.) has risen from about 25% of the federal outlays in 1962 to an estimated 65% in 2025.[vi] In constant dollars the buying power of the discretionary budget has remained fairly constant since the early 1990’s, but mandatory budgets continue to climb rapidly. Therefore, there is less and less opportunity for the government to begin to retire debt without restructuring mandatory spending programs—which is not a path politicians seem to want to tread.  To effectively retire the debt, there will need to be fundamental changes to programs like social security, Medicare, Medicaid, and so forth.  This is unlikely, but without it, retiring the debt will have to come at the expense of discretionary spending, of which Defense is roughly 50%.

Another economic issue is also a converged national security and economic challenge: supply chain vulnerability in National Security sectors.  This issue is categorized as an economic issue because in several sectors critical to national defense, the nation does not produce or manufacture sufficient supply to meet the demand.  There are two significant national security sectors with significant supply chain issues that need to be addressed.   The two are Microelectronics and Rare Earth Elements. 

• Microelectronic Supply Chain Vulnerability
  Currently, the United States only produces 12% of the world supply of microelectronics, and very little at State of the Art (roughly under 14nm).  By 2030, the Semiconductor Industry Association predicts that the United States share of global production will decrease to 10%, while China and Taiwan will produce 50% of global microelectronics.  Since the US consumes about 48% of the world semiconductor market, the United States must use non-domestically produced chips.  When a product is something that can be visually inspected (metals for instance), this is not really a problem. When the product can’t be visually inspected, like microelectronics, there is a significantly increased risk of potential adversaries inserting either software or hardware “bugs” that could conceivably give the adversary “control” over the chip—a chip that could be used to control systems or allow access.  An adversary could turn systems on or off remotely.  The recent shutdown of the Colonial Pipeline occurred when Russian hackers took control of the pipeline operating systems.  Suppose that this were not a hacker group, but a group enabled by nondomestic chips with backdoors embedded. 
  
  We have heard some in the United States say “the United States can’t be competitive in things like microelectronics”.  This is a shortsighted view.  When the very national security of a nation is dependent upon a product, there is really no choice but to spend what is needed to ensure economic and security self-sufficiency.  In 2021 the Senate passed the United States Innovation and Competition Act (USICA), which provides $52B for microelectronics to attempt to increase domestic production.  The House has not yet acted on this bull, which is likely only a down-payment to address manufacture.  This is probably only a down payment.  If the US defines self-sufficiency as available domestically or from very trusted partners., passage of USICA is a must accomplish task for Congress.
  
  
• Rare Earth Elements
  The same is true in rare earth elements, which by some estimates, China controls 97% of the global supply.[vii]  They could turn off the supply at the moment of their choosing, thereby using access to materials as a strategic lever.  This is not an acceptable position for the United States as rare earths provide real capabilities needed by the Department of Defense. 

There is a final economic megatrend that must be addressed.  In a healthy economy, the gap between the very rich and very poor tends to decrease—a solid economy raises all boats.  The United States, as measured by the Gini index, is going in the wrong direction.  The 2020 Census Bureau report of income inequality shows the Gini Index in the United States has grown from .36 in the late 60’s to .46 today—basically, the gap between rich and poor continues to grow.  This is significant, because the Gini coefficient is very strongly correlated with community violence; violence leads to social unrest.[viii]  In general, greater income inequality tends to support social unrest.  The higher the Gini coefficient, the greater the income inequality.  In 2020, according to Statista, the United States had the 32^nd highest Gini Coefficient of 130 largest nations; only one NATO nation had a higher Gini coefficient, and hence more inequality than the United States than the United States—Turkey.  The United States income inequality now is more like a third world nation than advanced liberal democracy.   If this trend is not reversed, the United States risks continued growing social unrest, putting United States global competitiveness at risk.

Thus, to summarize the United States economy, the United States is deeply in debt, with increasing mandatory federal spending, with fragile embedded supply chains and growing income inequality.  This leaves some very hard choices—how to reduce the federal debt while simultaneously shifting federal funds from nondiscretionary to discretionary funding and addressing income inequality.  If the United States is to remain competitive, it will have to address these problems.

Military: 

In August 2021, ADM Chris Acquilino, Commander USINDOPACOM stated at the Aspen Security Conference that the United States still has the finest military in the world.  By all measures, he is correct.  Unfortunately, there are several troubling signs for the United States military when considering long term competition.  Among the most troubling is that the Department of Defense has deferred modernization of conventional platforms for a number of years—essentially since the end of the Cold War.  Mackenzie Eaglen details these issues in her March 2021 report on “The 2020’s Tri-Service Modernization Crunch”.   The Department of Defense has more weapons systems in the pipeline than there is currently funding to support.  A lot of the modernization bow-wave issues have arisen due to continued deferral of modernization programs.  The reasons these deferrals occurred is straightforward, and as individual decisions were logical.  The compound effect over time has left the United States with a number of ageing and expensive platforms that need to be replaced simultaneously.  As the Warsaw Pact fell in the early 1990’s, the nation took a “peace dividend”; moving into the 21^st century, the focus of the United States shifted from conventional to counter insurgency warfare.  This focus lasted nearly 20 years.  The Department was further constrained legislatively by the “Budget Control Act” of 2011.  Because of this, the United States has a number of very large modernization programs coming into the phase of their development where there are large increases in funding requirements.

As an example, consider nuclear modernization.  Currently, the United States is modernizing all three legs of the Triad, with the Ground Based Strategic Deterrent replacing Minuteman-III; the Columbia class submarine replacing the Ohio class; The B-21 Raider and Long-Range Strike Option replacing the B-2 and Air Launched Cruise Missile.  Minuteman III was initially fielded in 1970 with an expected missile life of 10 years.  Through several “Service Life Extension Programs”, the missile has remained viable, but there is no more viable extension available, according to ADM Chas Richards, Commander of Stratcom.[ix]  The Ohio class submarine was first fielded in1981; the first will be replaced in 2031.  The previous submarine with the longest in commission time was the USS Bremerton, which served 40 years. A similar situation exists with the air launched cruise missile, which was commissioned in the early 1980’s with a 10-year life expectancy.  They will not be replaced until the late 2020’s.  The overall expected cost of the nuclear modernization program is estimated at $1.2T.  In May 2021, the Congressional Budget Office estimated the cost of nuclear modernization over just the period 2021 to 2030 to be $634B.  When the overall average total DoD RDT&E and Procurement Budget Request is about $250B per year, nuclear modernization will consume over 25% of the total DoD RDT&E and Procurement budget.  But, Nuclear Modernization is the bedrock of the United States defense.  The Strategic Deterrent has prevented a large-scale conventional warfare since 1945.  That makes the deterrent a bargain.

Simultaneously, there are standard airplane procurements (to include Full Rate Production of the F-35, the KC-46, and Next Generation Air Dominance Fighter, plus Virginia Class Submarines, Ford Class Aircraft carrier, Missile Defense, and the list goes on and an.  It is apparent that to complete all the programs in the pipeline will take more money.  Eaglen estimates covering the complete bill would require a 3-5% increase in defense spending every year over the decade.  The Fiscal Year 2022 budget request of the Biden administration did not even keep pace with inflation.  While it appears that Congress will appropriate more than the request, it will not be the 3-5% required, and given the overall economic realities of the United States, it is not likely that the Defense Budget will grow at 3-5% increase year over year. 

To compound the issue, the continued increases in “entitlements” (retired pay, health costs for retirees, etc.) further exacerbates the problem.  For instance, from 2020 to 2021, the cost of pay, housing and benefits grew by 5%, while force size only grew 1%.[x] Major General Arnold Punaro (Ret) has recently pointed out that the fully burdened cost of a mid-career person has ballooned from $80K to $400K per servicemember in the last twenty years.[xi]  There are a lot of reasons for this—rising health care costs, retirees that are living longer, more retirees than active force, and so forth.  The result is that each year, personnel and retiree costs eat a little more of the Defense Budget, actually eroding buying power.  There needs to be a serious review of how to control these costs. 

Instead of continued defense budget growth, a realistic likely scenario is that the Nation will shift some resources from the Department of Defense budget to address social programs or to retire some deficit, or to do both.  If there is a budget decline in the Department of Defense, the way the DoD has reacted to reductions in the past led to a hollowing of the force—one that does not have money to train or maintain the systems. The hollow force should not be acceptable to anyone in America.  The force America has should be ready to fight.  How much capability America has should be a function of what America can afford?  In the past, this has not been the case.    If the United States should begin to address the overall economic conditions (budget deficit) outlined above, we will have to recognize that the Department of Defense makes up slightly more than 50% of the discretionary budget.  Can the nation begin to become a more significant economic power without cutting Defense spending?  This is one of the strategic decisions before America. 

So, if a defense budget contraction occurs, what needs to be done?  The DoD needs to start with a complete bottom-up review to better align capabilities bought with capabilities needed.  The Marine Corps did this in their 2022 budget request—and in so doing, retired a number of systems (to include all main battle tanks).  The warfight of the future will be different, and yet the DoD budget is still largely platform centric.  People talk of a 355 ship Navy; in 2019, the Center for Strategic and Budget Analysis presented a study saying the Air Force needed to grow to 386 squadrons—an increase by about 50 squadrons.  Instead of talking in terms of numbers of platforms, the discussion should start with what the Nation needs the  Department of Defense to do.  Several near-term things need to be implemented as a way to control cost and increase agility.  The DoD has to embrace digital engineering for all acquisition programs.  The DoD has to embrace open systems architectures for all acquisitions.  The Services are moving in these directions.  They need to accelerate.  Finally, the budget needs to focus more on combat enablers (electronic warfare, all domain command and control, cyber (offensive and defensive), to posture for future fights.  We still believe in the deterrence of the nuclear triad, but one can think about the numbers of warheads. 

Finally, a lot of people point to a broken acquisition system.  It could be made better.  But acquisition starts with the requirements process, and needs to include system prototyping that will address manufacture and sustainment of new systems—not just technology demonstrations.  With the coming budget crunch, if it occurs, the Military will have to do a bottom-up review of capability and platform, while continuing to overhaul bureaucratic process and addressing costs of the force.  This will also not be easy.

Investment Balance—Today (Social Programs and Defense) or Tomorrow (Science and Technology):

Historically, both economic and military strength are rooted in scientific discovery and adoption.  Consider the impact of the semiconductor and computers.  These two interrelated industries were driven by investment by the United States and led to the creation of the transistor, then semiconductors, and computers.  In large part, the dissolution of the Soviet Union occurred as they fell behind in technology and had to spend more money than they had to retain some military viability. In the 1980’s, the Soviet Union was about three generations behind the United States in high end computers.[xii] As the United States adopted semiconductors in computers, IR sensors, reconnaissance satellites, and so forth, the Soviet Union could not keep up.  The basis of United States military and economic power in the 1980’s and 1990’s was built on the back of semiconductors.  Semiconductors were built based on a large federal investment in science in the post-World War II era.

Unfortunately, United States leadership in science and technology has eroded over time.  I do acknowledge that some believe the world is stabilized with a global science and technology base.  That may be true, nut there is no way to prove or disprove this.    We also acknowledge that some data on science and technology leadership does suggest the United States is still preeminent. In fact, the United States still has the largest expenditure (federal and industrial) in R&D[xiii] with $549B total investment.  But China and the EU both have been putting more emphasis on R&D.  From 2000 to 2017 the investment by the United States fell from 56% of the total R&D investment in 2000 to 37% in 2017.  Thus, the combined investment by China and the EU has outpaced the United States.   This National Science Foundation  also points out that  federal R&D funding has fallen from 1.9% of the federal budget in the 1960’s to .7% today.  Finally, in 1960, total United States investment in S&T accounted for two-thirds of the total world investment, a figure that has fallen to 29 percent in 2019.  On the whole, growth in S&T globally is a good thing, but the trends are clear, the preeminence of the United States is waning and the conclusion is that future significant discovery may not come from the United States.   So, the United States competitive advantage in S&T investment is waning.

What about focus?  President Xi has led a very focused effort to increase Chinese stature in knowledge creation, and specifically called out sectors of interest.  When Xi rolled out the 14th five-year plan, covering 2021 to 2026 in March 2021, Xi specifically cited the need for China to develop independent innovation [xiv] Xi specifically said “New-generation information technologies, represented by artificial intelligence, quantum information science, mobile telecommunications, the Internet of Things, and blockchain are accelerating breakthrough applications. The realm of life sciences, represented by synthetic biology, gene editing, brain science, and regenerative medicine, is giving birth to new changes. The new manufacturing technologies of integrated robotics, digitalization, and new materials are accelerating the manufacturing industry's shift toward intelligent systems, focusing on services, and eco-friendliness. The development of clean, high-efficiency, and sustainable energy technologies is accelerating and will usher in a global energy revolution. Space and maritime technologies are expanding the frontiers of where humans can live and work. In sum, creative breakthroughs in areas such as information technology, life sciences, manufacturing, energy, space, and maritime are supplying ever more wellsprings of innovation for cutting-edge and disruptive technologies”.[xv] This is a level of focus at a senior level that we don’t see in the United States, EU, or other friendly nations.

There are two other elements of competitiveness that need to at least be mentioned: Research Intensity and STEM and first-degree awards.  To remain competitive in a global sense in S&T, the nation has to be perceived as being supportive of R&D, as measured by R&D investment as a percentage of GDP.  This is research intensity.  In 2000, only Japan had a higher R&D intensity that the United States; by 2017, Germany, South Korea, Japan had surpassed the United States, and China was getting close.  Simply, other nations are valuing S&T more—a fact that will likely impact future competitiveness of the United States.  Similarly, in first university degree in S&T, in 2000, the United States produced about the same number as the EU, with China producing about ½ the number as the United States.  By 2017, China was producing more than double the number of new scientists and engineers (about 1.7M / year). 

So, to summarize the trends in science and technology competitiveness, the rest of the world (led by China) have increased their S&T investment relative to the United States, in both total dollars and R&D intensity, while producing more scientists and engineers.   All of these “indicators” increase the likelihood that the United States will not be the first developer of tomorrow’s significant technology for the military and economy. 

Options: 

The premise of this paper is that the United States has some significant issues that have to be addressed to retain its position as a leader in global competition.   In fact, the picture may seem bleak.  To be sure,  “competitors” to the United States also have significant economic, military, and political issues to deal with.  But, it is clear that some structural issues have to be dealt with by the United States.  At the top level, several steps have to be taken:

• Begin to control the overall budget deficit.  The United States has to retire some of the total debt or the nation will soon be paying more for interest than defense of the nation.  This probably won’t be realistic without reduction of the overall mandatory outlays of the budget.  This could be done by a structured reduction in “entitlements” or an increase in funds available—presumably through increased tax.  The economic competitiveness is even more at question without increasing the investment in the future.  None of this will be easy, but the debt has to be dealt with.  With any new tax structure, it must be done in a way that does not increase income inequality.
• The investment by the Department of Defense has to be given a serious bottoms-up-review.  To date, the DoD has not really asked the question—what capabilities does the DoD need for the future. Future combat will likely be much more cyber and digitally centered.  Electronics warfare, cyber warfare, and autonomous systems will likely replace large monolithic ground and air platforms.  Finally, the DoD must follow industry and adopt open systems,  Finally, the United States must draw back on some unilateral military deployments, and reduce overall force size, using automation to offset personnel. 
•  Increase federal investment in R&D in real terms, or incentivize industrial investment in research, and publish a viable national strategic plan, with foci, just as Xi did with the 14th five-year plan.

The steps are easy to write down, but implementation would be very difficult and would force a change to current programmatic and trajectories.  Further, at the macro level, the ability to address these problems comes down to balancing overall outlays with goals and means of the Nation.  The simultaneous need to address these issues needs to start a national debate, but action cannot continue to be deferred.    

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Maintaining the Competitive Posture of the United States in an Turbulent Economic Era

The Honorable Alan R. Shaffer

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.