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C Tax Foundation'S) .

Tax ReviewNational Defense and Fiscal Policy

By The Honorable Caspar W. Weinberger.' :, ;co. ",

ur mmiS atIon IS y an CO e eel caye-;w Icn: I§" one of ttIe rlleBSill'es-aeSignea to""'cc-ted to reducing the burden of taxation on both individ- encourage saving. That provided a little over $15 billionuals and corporations. The President has pointed out in deposits in just the first few days of October. Some ofmany times that corporations are not the groups that pay it came from other deposits and other forms of savings,taxes. It is the people who ultimately pay them, and so but there was a considerable amount of new money. Thehe has been concerned particularly with the need to $15 billion total did exceed expectations in those firstreduce both forms of taxation. few days.

Some Hopeful Signs Increased Savings

We have now been in office 10 months. That really is The percent of after-tax income that Americans arenot quite long enough to eliminate the ills of the past 15 saving, which was one of the more worrisome statis-or 20 years, but there are some very hopeful signs. Some tics-and we were particularly worried about it in De-of the things that we believe will happen when all of our fense, because it translates into investment-was one ofnew policies are in effect and have had an opportunity the lowest of any industrialized nation in the world.to work are starting to happen now. Things are not in This has now started a healthy recovery, and movedthe condition that we would like, but they are beginning' from 4.3 percent in January to about 5.3 percent as ofto look up, after really quite a short time of 10 months- today.and, actually, the program has been in effect only two All these things are encouraging. They certainly domonths. Already interest rates, the short-term rates par- not mean that we are out of the woods, but the Presi-ticularly, are indeed coming down. The prime rate, in dent's program is working, and I think its prospects arejust a little over nine weeks.. has gone ~rom 201/2 percent very goo~. It has bee~ ';Inder he~v,! crit~cism, and. in this .. ; to 16 percent. Long-term rates are startmg to come down. very fragIle and sensItIve area, It IS entIrely possIble for "c

The inflation rate is coming down to the point where us to talk ourselves, or write ourselves, or even imagine:c'f:::~m~_~eople were quite sure that last month's statistics ourselv~sJnto far- worse conditions ~~n we actualry -

had to have some kind of error, because the CPI rose by have, because so much is built on expectations for tIle ~ ~~""

only .4 percent in October, which is annualized at about future. I think that if we look at what is happening on4.5 percent. By current standards that is so unbelievably the economic front and how long the country has beengood that people think it is a statistical mistake. But, of on the wrong path and how much there is to work outcourse, I remember just a few years ago, when an infla- of the system, then I do feel quite encouraged. Mosttion rate of 4.5 percent triggered all kinds of demands c '" c"

_~il"Cfor wage and price controls. So that can show you how c~.~ffff. ..far we have come in that period of time. It's all compar- Issue In BrIeft .a Ive. Th'. f T R . k. . . . IS Issue 0 .ax evlew presents remar sThat IS the lowest figure ofmflatIon m 15 months. The d t d f S h d I. r d b Sec tary. . a ap e rom a peec e Ive eyrean~ual rate for.1gB1 wIll be Just about ~o percent, maybe Weinberger at the Tax Foundation's 44th Annual

a lIttle less, wIth any luck. Last year It was 12 percent. Dinner at which he received the Foundation's Dis-We are starting, I believe, not only clearly to move in tinguished Public Service Award for 1981. Thethe right direction, but I believe we will continue in that views expressed are those of the author and notdirection. necessarily those of the Tax Foundation.

We were very encouraged with the new All Savers

Copyright 1982 by Tax Foundation, Incorporated, 1875 Connecticut A venue, N. W.. Washington, D.C. 20009 (202) 328-4500

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V I

TAX REVIEW, January 1982

things that are worth doing cannot be accomplished systems, and some categories of ships. They have also

overnight. It is the same for many of the things we are erased and degraded the naval superiority that we once

trying to do in the Department of Defense. It is the same had and have had since World War II, because they have

as the overall program that we have embarked on to constructed a blue-water navy, with offensive power

redress the many years of neglect from which Defense and a protection capability that really is unparalleled in

has suffered. the world's history. They have built their ships and their

Defense is a critically important field. I remember navy more rapidly than any other country in history. It

writing back in 1970, when I was first with aMB, that is one of the things that I first noted when I came back

the Defense budget was really in a different category, to government, after six years or so of absence, and

because it was the one area where we could not afford resumed getting the daily briefings. I was struck by the

mistakes. It is the one area where the margin for error is enormous growth and improvement that has taken place

so extremely small. That is the chilling fact. Defense is in the Soviet fleet during that period.

an area in which it is extremely important to do enough

and to do it on time. Soviet Advances

Military Imbalance Just last week, Jane's Fighting Ships, which is, of

course, the world authority on the subject, said that the- I have talked to a great many audiences, and I am sure Soviet navy today has the largest submarine fleet and ~ ~many of you have heard or read all too much, perhaps the largest mine laying capability in the world. We

more than you wish to, about the imbalance that is de- should never make the mistake in this regard that many

veloping between the Soviets and the United States in of us did earlier in connection with the Japanese arma-

military terms. I think it's important just to remind our- ment, that we didn't really know about until we got into

selves that, for almost 20 years, the Soviets have in- the war. The Soviet equipment is very, very good. It is

creased their defense spending by an average of about much better than they provide for the civilian economy.

4 percent to 5 percent each year, in real terms. The The civilian economy is in dreadful shape, but that is

United States has been steadily reducing defense expen- not anything that constrains this regular, steady, large

ditures as a percentage of Gross National Product during annual increase in defense expenditures. Their new Al-

that period. And, in constant dollars, the defense expen- pha class submarine, for example, we are told by Jane's,

ditures of 1980 were just about the same as they were in can outrun and outdive any Western submarine cur-

1960. In this kind of world, that is not a kind of ratio or rently in production. And they have been able to

a kind of negative growth pattern that we can afford. threaten our technological edge in many other areas,

We have had to look now at what has happened as a such as space technology. They are starting now,

result of the United States coming down, relatively through imports and various other means, to acquire

speaking, during that period, while the Soviets never computer technology that, when applied to battlefield

stopped. They just went straight up ever since the first techniques, can give them a degree of capability that we

Cuban missile crisis in 1961. The Soviets have erased will have to contend with if we want to keep a balance.

the unquestioned strategic superiority that we possessed Now none of this-and that is one of the real con-

in the '50s and that we maintained through most of the cerns-none of this growth is really defensive in char-

',,' '60s. We started to lose the long lead we had in the '70s, acter. There have been all types of attempts to rationalize

i because of the length of time it takes to bring strategic why they had this enormous growth, and some people

;- systems on line, and because of the momentum behind have said that they simply were concerned, almost

~~ the Soviet program. Fop example, the-Soviet&~w pathologically since World War II, aboutdefendina their taking delivery of a number of things they ordered in borders. But that doesn't really explain in any way what

1978, 1979, and 1980. We did very little in those years. has taken place, or the kinds of weapons, the kinds of

They have erased, also-and this is not nearly so well things, that they have acquired, or the volume or rapidity

known, but is a source of considerable concern-the with which they have acquired them.

unquestioned qualitative technological edge that we What they have done is reached for, and now grasped,

had in many rather prosaic but very crucial areas, such the means to implement their whole doctrine of expan-

as armored fighting vehicles, sophisticated anti-aircraft sion, which has underlined their activities for the whole

length of the Soviet existence. If you go back into history,

it is not at all different from what the Russian Empire in

the past has sought. They are now within reach of some

of those things that they have been talking about in

Russian history for centuries.

Surge and Starve Mentality

If we do not act rapidly enough, all these trends will

continue, and in fact, will worsen to the point where we

must face the untenable position of lacking the ability

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TAX REVIEW, January 1982

to deter aggression. That is one of the real concerns we must have been referring to Pentagons of the past. Wehave about the way in which the defense expenditures, like to believe that they could not be referring to thethe defense strength of this country, have been treated Pentagon as it has been operated since January.in the past. There have been some years where therewere sufficient alarms so that there was a genuine in- Effecting Economiescrease. Then, right away, it would be seen as conflictingwith domestic expenditures, which have a much larger, Now one of our proudest boasts is that, in the first five~uch more popular constituency, and those defense weeks of our Administration, at the same time that weexpenditures would be tamped down. You would have were urging acquisition of greater strength, we managedthis surge and starve. That is not only one of the worst to reduce and eliminate some $3.2 billion in programsways to maintain any kind of strength or any kind of from the previous Administration. Now no one noticedcredibility in this sort of world, but it is also one of the this much, because it isn't much of a story in Washingtonmost expensive ways to arm yourself, because you never today. But $3.2 billion that you're saving is no story atorder at an economical rate. You do all manner of things all. And when you don't see it, because the plus has tothat stretch out, slow down, and add to inflation, and be so much greater than the minus, very little attentionbecome much more expensive because of inflation. is paid to it. But I was proud of it, because it seemed to me

So what we have tried to do now, in this Administra- that it was an important part of trying to keep that plus as -~~~ tion, is em ar on a program 0 rearmmg me c a sma as we paSSl y cou . :::---~=~-~.!",; will restore the defenses of the United States to the And then in March we outlined a very comprehensive

margins of safety that we have enjoyed in the past. Not program that we think will save $31 billion in defensesuperiority, but the margins of safety which historically budget requirements over the next six years. These arehave been the only things that have really prevented in three general categories. The first is the type that Iaggression. What prevents war is not peace marches and just described, the reductions from the previous Admin-not unilateral disarmament; what prevents war is the istration, that we think are of lower priority or not reallycertain knowledge, on both sides, that if there is an essential at all. That will be almost $10 billion.attack made, the retaliatory capability is such that the The second category involves procurement efficiency,cost to the aggressor will be unacceptably high. But if such as multi-year contracting and procuring of the mostyou get to the point where you are out of balance, and economical quantities. Sometimes this requires a littlewhere it is viewed as possible to prevail after a first more spending in year one to get real saving in yearsstrike, then you are really inviting war, allowing your- two and three. It requires not pursuing the path of tryingself to become weaker. to keep the initial cost low, so as to fool everybody into

What is essential is that we do rearm America and that thinking it's going to be a very low-cost program, andwe do regain the strength that is needed to deter aggres- then when the production line is closed down, havingsion. We have a very urgent national necessity to do to reopen it to get your spare parts that you should havethat. ordered in the first place. That, we believe, can save

about $5 billion, and we think we will get a lot moreThe Need for Consensus than that, particularly through the multi-year procure-

ment, which Congress has now finally authorized afterWe also have an urgent national necessity to maintain many years of refusing to do so. We think this can save

the current consensus, which is now, I think, fully be- literally billions in very large orders, particularly largehind the idea of increasing defensive strength. And we airplane orders. c' 't~ij:'1j

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it than most because of all my past OMB experience- general governmental savings that the President has put ~i';::;that we have to do this with a sense of greater respon- into effect, such things as restraints on civil service pay ,sibility as to how we spend the taxpayers' money. and retirement pay, which, over the six years, will total

We can never sustain this national consensus, nor almost $17 billion.indeed should we, if we are viewed as being wasteful,as feeling that because we have to increase defense ex- Management Improvementspenditures, it doesn't matter how we go about it. Sincelast January we have done our very best to fulfill these We have not stopped there. These identified savingsresponsibilities of trying to maintain defense expendi- are already in place, but we are trying to reinforce themtures and increase defensive strength, but to do it in a by a very vigorous pursuit of a number of other man-way that is both economical and efficient. It is, I think, agement actions that we feel will enable us to operateessential that we do. them more efficiently and get more defensive strength

We cannot bring this about overnight, just exactly as out of the dollar that we spend.with the President's program for economic recovery, but I think it is absolutely vital that we do this to counterwe have to start, and we believe we have started. You a perception that the Defense Department is a wastefulmay have heard from some that the Pentagon is a great department. Of course, any organization that spends inswamp of waste. People who have said this, I think, excess of $200 billion a year is going to have some waste

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TAX REVIEW, January 1982

in it, but that is what we are trying to find and eliminate achieve this expansion and the rapid delivery that wecompletely. We are going to have difficulty in the sense so urgently need.of bringing it home to the American people, because it In implementing our management improvements, weis not a very exciting story if you save money. If you find receive suggestions from allover. We have done sucha warehouse full of World War II shoes that haven't been minor things as putting in a telephone hot line that getsused, that's a big story. We are, of course, looking for a large number of calls per month--over 600 in the firstthat too, but we're looking for these much larger, better few months. We find that about 25 percent of those areways of management. quite worthwhile. When pursued, they can save us small

We have completely overhauled the whole defense amounts sometimes, sometimes reasonably largeprocurement process. We have overhauled and changed amounts. We have also had suggestions, of course, fromthe whole program budgeting system. We found that it the General Accounting Office, the Congressional Bud-took some 1,100 pages under the so-called zero-based get Office, and several other groups. We pursue eachbudgeting to state the justification for one small pro- one of these very carefully. We have had about 180 -~~igram. That is not very practical, and that, of course, has recommendations from these organized groups, and we i~1fd;j!~~~

been eliminated. We have greatly strengthened our have put about 160 of these into effect. ~~~;:;;~~h 1 d. f, 11 . h h bl . h f "". "", woe au ~t 0 ow-up system wit t e esta IS me~t 0

a new AssIstant to the Secretary whose sole task IS to Projected Savings ~ ";;'""",,,c

manage this and look at all matters of review and over- . " . .," sight. He divides his time between helping to secure We thmk we wIll get savmgs of about $3.3 bIllion

indictments and finding better ways of doing things that from these efforts in fiscal year '83 and almost $14 billiondon't permit fraud or waste to creep in. in the next four years. These figures are included in

some of the other numbers I have given, but basicallyMonitoring Contracts these are indications of all of the things that we're trying

to do. I understand it is very unglamorous and dullWe now monitor very closely the execution of con- reciting all of these, but I do want you to know that these

tracts. We found that some of the problems we had where are things we find important as the design of a new tankthings were as much as two years late-very vital things or a fighter aircraft. They are absolutely essential if wethat we needed, and way, way over budget estimates- are to maintain the Congressional and public supporthad occurred simply because nobody from the Depart- which we must have for the national consensus essentialment paid sufficient attention to the day-to-day contrac- for national strength.tor operations to know that things were going wrong. We have to do something more than rearm; we haveNow we try to follow the big major contracts on almost to do something more than save money; we have toa day-to-day, certainly a month-to-month basis, so that rearm for a purpose. And the purpose for which wewe can identify very early some of the warning signals. rearm is to insure that we will have for the Americanthat overruns may be coming. That whole acquisition people, not only the degree of strength that can enableprocess, too, is particularly promising for innovative us to deter aggression, but the degree of strength thatmanagement. can enable us to conduct negotiations that can lead, if

The Deputy Secretary, Frank Carlucci, who's done the President's dream is realized, to a genuine reductionsuch a fine job in all the management aspects of the in armaments.Department, put together a package of some 32 initia-tives. If successfully implemented, these initiatives will A Daring Proposalyield several billions in savings over the next six toseven years. There are such things as stable program The President has, as you know, called for two-tbi~~s. ~-- funding; multi-year procurements; contract administra- He has called for a major increase in all of our arma-

tion; and increased competitive bidding, getting away, ments, strategic and conventional, and he has coupledwhenever we can, from sole source bidding. That, of that with the strong proposal, which has captured thecourse, occurs to a considerable extent because the gov- imagination of the world, that starting with the inter-ernment has been viewed as such a bad customer. Many mediate range nuclear weapons in Europe, we simplypeople have gone out of the defense manufacturing bus i- will not deploy any of the ones we have planned if theness completely. We can't really blame them, but we are Soviets will take out more than 260 SS-20 missiles, andtrying to tell them that it is a different world and that the SS-4's and 5's that give them such a terrible advan-we do need them back, because the rearmament of tage in this balance that we have to maintain.America will require a major expansion of the industrial The Soviets are deploying a new SS-20 every week,base. or almost every five days now, and we have plans to put

There are people who say you can't do it in time. I in the counter to this; we have no counter now. It wouldthink we can. We have done it in the past. If we can be a NATO operation, but it is an operation which theconvince American industry that the Defense Depart- President has said we will forego if they will take outment is going to be a much better-a tougher, but a and disassemble their intermediate range weapons. Peo-much better-customer, then I think we will be able to pIe have said, "But that still leaves all of the intercon-

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TAX REVIEW, January 1982

tinental missiles." The President has addressed that. He it up with all the cautionary phrases that people kepthas said that we should not stop at getting the zero urging on him, and he went with the very bold andnumbers of intermediate range missiles. We should then significant proposal. I very much hope, as I say, for themove on and start negotiating a major reduction in the sake of the world, that it succeeds, because it is reallyintercontinental missiles, and also conventional battle- the only way that we can restore the feeling of confi-field missiles. All of this has captured the imagination dence and that we can obtain for ourselves and for ourof the world, but as everyone in this room perhaps knows allies the President's greatest ambition and his greatestbetter than almost any other audience in America, you aim and dream. That is, that we do all of the things thatcannot succeed in a negotiation if you enter it through are necessary to maintain in this world, for ourselvesweakness. We have entered negotiations in the past from and for our allies, peace with freedom-and do them ina position of weakness, and we have been grievously time.disappointed.

Peace with FreedomNegotiating from Strength

In a tortured sort of way, I suppose, we could say thatThis negotiation we enter from the position of Poland is at peace, but it is not a peace with freedom.

strength, if we can maintain the national consensus to And it is that peace with freedom that we have enjoyed. stren. tho Th~!s not so~thin - ng t~tw~!!c!<e i~for granted. Indeed, many of

we can do m 10 months. It is a strength that can ~ our allies have come to feel that almost anything thatcome over a steady, concentrated period of the next six enables them to be at peace is indeed sufficient. They

iffil~i!~""" or sev~n years. The President's five-poi~t st~ategi~ pro- have lived so close to conditions that involve peacegram mcludes replacement and modernization of mter- without freedom, or a situation in which they allowcontinental missiles and manned bombers, new sub- themselves to get so underarmed and so understrength,marines, and improvements in our air defenses, and our that they feel it is no longer within their power to defendcommunications and command and control. These themselves. Then you get a condition that is totallythings are all started now, and the Congress basically has intolerable to any of the things we have known andbeen quite sympathetic to them. grown up with and take for granted, and that is why

There are very important votes today in the Senate on these enormous efforts are needed, these twin efforts: tothe subject, but so far the coalition for strengthened rearm ourselves and to get the strength necessary todefense has held, and that enables us to go into the enter into and to succeed in the negotiations for perhapsnegotiations, which started two days ago, from a posi- the most critical goal that many of us can imagine.tion of perceived strength. I hope very much, for the The real worry about all of this is that it takes so longsake of the world, that these negotiations will be to regain this strength. It takes the steady, solid dedi-successful. cation and commitment to what we are doing, and it

The President's proposal is a demonstration of his takes sacrifices, of course. It is an area in which thecommitment to peace. He is, perhaps, one of the most margins are extremely small, and in which you willunderestimated men in the world, for people who don't never know that you have not done enough until it isknow him. To people who do know him, the enormous too late.success he had in California and the enormous successhe has had thus far in his Presidency, have come as no Concluding Thoughtssurprise. It will take time for the people of the world tounderstand his unique abilities, and it will take time, We are fully committed to the preservation of peace

, seated commitment to peace, in the European theater, maintain it for ourselves and our allies. That is a vitalin the Middle East, and allover the world. His proposal necessity for ourselves, for our children, for all of ouris a demonstration of that commitment, and it is a dem- allies, for all of the nations of the world who have tastedonstration of his willingness to adopt a very bold, a very the blessings of freedom, or indeed feel that is somethingmajor sort of proposal, a very simple proposal, which they should strive for, too. It is something to which wecan be clearly understood by the world. He quite prop- are totally committed and pledged to maintain. Thankerly set aside all of the attempts to fudge it or to cover you very much.

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