July 6, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

Opinion: Why Interest On Federal Debt Matters For Defense

Byron Callan June 30, 2020

The COVID-19 pandemic has stoked consternation that U.S. defense spending is going to be significantly pressured in the 2020s. Congress will likely stick to the $740.5 billion defense discretionary top line agreed to in last year's budget deal for fiscal 2021. But the combination of trillions more in federal debt from higher spending and lower tax receipts this year and next and the probability that there will be future federal spending to better prepare for pandemics raise a higher probability of defense spending pressure.

“Flat” was already the new “up,” but “flat” now may be a budget that does not keep pace with annual inflation. The fears may be that defense spending will decline in the 2020s after a couple of good years of largesse from Congress and the White House.

Despite trillions in additional deficits and federal borrowing in 2020-21, there is one bright spot that indicates less dire defense spending pressures than now perceived—the interest on the federal debt.

U.S. federal debt is comprised of debt held by the public and intragovernmental debt, which is owned by different federal trust funds, the largest of which is Social Security. As of May, total debt held by the public was $19.8 trillion, and intragovernmental debt was another $6 trillion. Often, these two sums are lumped together, but they should be treated separately. The interest paid on debt held by the public is dispersed by the Treasury in the form of outlays to the owners of that debt. The interest paid on intragovernmental debt is, in essence, interest the federal government pays itself.

The Office of Management and Budget (OMB), in its annual projections of outlays, breaks out these two components of interest outlays to show net interest outlays. This is mandatory spending, and so it has been paid along with the other mandatory and discretionary funding the U.S. federal government provides.

One of the silver linings of the pandemic has been the Federal Reserve's aggressive lowering of interest rates. This makes federal debt more affordable, much in the way that a lower interest rate on a home mortgage can make a place to live more affordable.

The OMB projections released in February showed net interest outlays of $378 billion for fiscal 2021 rising to $665 billion by 2030. One could take issue with the deficit projections behind these outlay projects, as they may have rested on GDP growth expectations that were too optimistic and nondefense spending cuts that were not going to be realized. However, dividing interest outlays on debt held by the public by debt projections implied an interest rate of 3% or more over the forecast period.

The pandemic has trashed those rate projections. Federal debt held by the public is offered in different maturities. Treasury bills, which mature in a year or less as of May, were 23% of the total debt held by the public. Treasury notes that mature in 1-10 years were 51%, and bonds that mature in 10-30 years were 12%. (There is another 10% of other Treasury instruments.)

Rates now are much lower, although clearly that would only matter for new debt that is issued by the Treasury. The rate on a 90-day Treasury bill is currently 0.13%. On a five-year note, it is 0.33%, and on the 10-year note, 0.69%. The 30-year note rate is 1.4%.

This implies that interest outlay projections should be declining, although new projections may have to wait until the White House releases its 2022 fiscal budget request and out-year projections, presumably in February-March 2021. Net interest outlays could be at least $100 billion less in 2022-23 than the February 2020 projections on higher debt but lower rates.

In the scheme of total federal outlays, which the OMB projected to be $4.8 trillion for 2021, $100 billion is not a lot, but it indicates there is a bit more headroom for defense spending and other nondefense discretionary spending than a focus on federal debt alone might suggest. Federal infrastructure spending could be one area of more traction in the 2020s, and the issue of social justice may also spur more demand for federal resources.

One outcome of the pandemic, however, will be to make defense expectations more sensitive to interest rate expectations. It is not too difficult to project scenarios with rising debt and interest rates that increase to more “normal” levels. The pandemic also underscores that the unthinkable should be given a bit more room on long-term projections. It is quite conceivable that a major military conflict, a massive natural disaster or another economic contraction could further add to federal debt in the 2020s.

https://aviationweek.com/defense-space/budget-policy-operations/opinion-why-interest-federal-debt-matters-defense

On the same subject

January 23, 2019 | International, C4ISR

The Army wants to use AI to prevent cyberattacks
By: Justin Lynch If the U.S. Army has its way, soldiers deployed on the battlefield will be shielded from cyberattacks without human involvement. The Army's Aberdeen Proving Ground is conducting research into how artificial intelligence can protect soldiers' tactical networks and communications from cyberattacks, according to a Jan 14. announcement. Among the areas of research are ways for machine learning to automatically detect known cyber vulnerabilities, spot previously unknown malware and respond to a cyberattack. After the market research is submitted, the Army will use the submissions for informational and planning purposes only. The Army's hunt for AI research comes as the Pentagon has grown more interested in defending against cyberattacks that itself use machine learning. It is a future where machines will fight machines in cyberspace. That concern was evident in the service's announcement. “The cyber technology will secure automated network decisions and defend against adaptive autonomous cyberattacks at machine speed,” the Army wrote. Evidence of the Army's focus on AI was evident during the 2018 CyCon conference in November. The Army is interested in three primary categories of artificial intelligence attacks, Maj. Nathan Bastian, a researcher at the Army Cyber Institute said during the conference. First, data poisoning is a method in which an attacker inserts malicious information into a data set. Because artificial intelligence relies on these data sets to make decisions, their manipulation blunts machine learning's effectiveness, Bastian said. Second, an attack on artificial intelligence can take place by changing the classification methods. For example, if a cat is incorrectly labeled as a dog, than artificial intelligence's use is mitigated, Bastian said. Third, an inference attack, or figuring out where machine learning's boundaries lie, can be a weapon to defeat artificial intelligence. By discovering the limitations of the machine's algorithm, Bastian said hackers can manipulate its effectiveness. The Department of Defense has expanded its research into AI in recent months. In October 2018, the service created its AI task force, which is located at Carnegie Mellon University. Projects are initiated by the Army Futures Command. The Pentagon also created its Joint AI Center in the summer of 2018. At the CyCon conference, Brig. Gen. Matthew Easley, head of the Army's new AI task force, said that the Pentagon needs to integrate commercial AI products. “The commercial sector is driving current breakthroughs in applications of AI,” Easley said. Easley laid out four principles for what the Army sees as a successful AI project. They include clean data, an articulate use case, talent and technology. However, Easley cautioned about the boundaries of machine learning during the event. Limitations of AI can include a sample size that is too small and limited ability to use the machine learning in the field. He also said that AI struggles to detect zero-day attacks, which are programming bugs. “AI is not all that easy,” Easley said. “Realizing the potential of AI will require major transformation,” for the Pentagon. https://www.fifthdomain.com/dod/2019/01/22/the-army-wants-to-use-ai-to-prevent-cyberattacks
December 17, 2019 | International, Aerospace, Naval, Land, C4ISR, Security

Défense : la lente remontée des investissements des armées européennes
L'Agence européenne de défense confirme une remontée des investissements dans la défense mais s'inquiète de l'absence persistante de coopération européenne et de la faiblesse toujours plus prononcée de la recherche militaire. Par Anne Bauer Toute statistique compilée, les dépenses militaires de l'Europe s'inscrivent en hausse pour la cinquième année consécutive. Mais l'Agence de défense européenne met en évidence de nombreuses fragilités dans cette reprise. Elle estime à 223 milliards d'euros la dépense militaire des Etats membres en 2018, contre 615 milliards aux Etats-Unis . Cette somme correspond à 1,4 % du PNB des Etats de l'Union, loin des 2 % promis à l'Otan mais aussi dans le cadre de la nouvelle politique européenne de défense. Pour rappel, la plupart des pays européens appartiennent à l'Otan - à l'exception de la Suède, la Finlande, l'Irlande, Chypre, l'Autriche et Malte. Modernisation des équipements Après cinq années consécutives de hausse, le budget militaire des Européens rejoint tout juste son niveau d'avant la crise financière de 2007-2008. Celle-ci avait entraîné des coupes budgétaires sévères, qui se sont traduites par une chute de 11 % des budgets des armées entre 2007 et 2013. La part des salaires des soldats étant incompressibles, les coupes ont été les plus sévères dans les dépenses consacrées aux équipements de défense (-22 %). Il a fallu que les crises au Proche-Orient et sur le flanc est en Ukraine remettent en lumière la misère des armées européennes et que les Etats promettent de consacrer au moins 20 % de leurs moyens à la modernisation des outils de combat. En 2018, l'objectif a été pratiquement atteint avec 44,5 milliards d'euros d'investissements. Mais au lieu de saluer cette remontée, l'Agence sonne l'alerte. Coopération européenne : l'urgence Elle s'inquiète de l'avenir de l'industrie de défense en soulignant une chute toujours importante des budgets alloués à la recherche et l'innovation, tombés de 3 milliards d'euros en 2006 à 2,1 milliards l'an dernier. Les engagements pris pour renforcer l'Europe de la défense sont encore loin d'être entrés dans les moeurs. Alors que les pays européens ont promis de coopérer entre eux pour un minimum de 35 % de leurs équipements, chacun continue à privilégier des fournisseurs nationaux, sans se soucier de la compétitivité de leur industrie de défense. En 2018, l'Agence européenne de défense a ainsi calculé que 17,8 % des dépenses d'équipements seulement (6,4 milliards d'euros) relèvent de programmes européens. Un chiffre qui n'atteint même pas 10 % dans la recherche et l'innovation ! Premières attaques sur le fonds européen de défense Cet état des lieux plaide pour la mise sur pied rapide du nouveau Fonds européen de défense , destiné à rationaliser les investissements des uns et des autres. Président de Dassault Aviation et de l'Association européenne des industries aéronautiques et de défense (ASD), Eric Trappier admettait la semaine dernière sa « surprise » devant les premières tentatives de sabotage de ce futur fonds. Alors que la Commission sortante en accord avec le gouvernement français plaidait pour un fond doté de 13 milliards d'euros de budget, les négociations sur le futur budget européen ont démarré sur une copie avec un fond de défense doté de 6 milliards seulement. https://www.lesechos.fr/industrie-services/air-defense/defense-la-lente-remontee-des-investissements-des-armees-europeennes-1156958
January 30, 2019 | International, Aerospace, Naval, Land, C4ISR, Security, Other Defence

Contract Awards by US Department of Defense - January 29, 2019
AIR FORCE Honeywell International Aerospace, Albuquerque, New Mexico, has been awarded an $85,676,969 contract for C‐5 Honeywell software and engineering support services. This contract provides hardware and software support for the C-5 aircraft. Work will be performed at the following locations: Warner Robins, Georgia; Phoenix, Arizona; Aguadilla, Puerto Rico; Redmond, Washington; and Albuquerque, New Mexico, and is expected to be completed Jan. 30, 2025. This award is the result of a sole-source acquisition. A combination of fiscal 2019 Transportation Working Capital funds; and operations and maintenance funds in the amount $9,359,960 are being obligated at the time of award. Air Force Life Cycle Management Center, Robins Air Force Base, Georgia, is the contracting activity (FA8525‐19‐D‐0002). Diligent Consulting Inc., San Antonio, Texas, has been awarded a $17,490,000 cost-plus-incentive-fee, firm-fixed-price and cost-reimbursable modification (P00003) to contract FA8770-18-F-1009 for undefinitized contract action against the maintenance, repair and overhaul initiative task order. The modification will better align capabilities with user needs by realigning the fielding strategy to match the needs of individual units through the use of agile methods, and incorporate two financial processes necessary to be compliant with Financial Improvement and Audit Readiness and the Federal Information System Controls Audit Manual. Work will be performed in at Wright-Patterson Air Force Base, Ohio; and San Antonio, Texas, and is expected to be completed Jan. 28, 2023. This contract is being funded with fiscal 2019 research, development, test and evaluation funds, and total cumulative face value of the contract is $49,257,000. Air Force Life Cycle Management center, Wright-Patterson AFB, Ohio, is the contracting activity. DEFENSE HEALTH AGENCY SeKON Enterprise Inc., Arlington, Virginia, is being awarded a $32,696,823 modification to previously awarded cost-reimbursable task order HT0011-14-F-0030 to exercise an option for engineering, cybersecurity, and configuration management support services. The cumulative maximum value of the task order is $144,344,198. HT0011-14-F-0030 provides services in support of the Program Executive Office (PEO) - Defense Healthcare Management Systems (DHMS) in its efforts to provide systems engineering processes, cybersecurity processes, data management and governance, synthetic test data, process and software tool support, and enterprise solutions architecture for PEO DHMS programs. The period of performance for the option is 12 months with an estimated completion date of Jan. 28, 2020. Work location is at the contractor's facility in Arlington, Virginia. The modification is funded with fiscal 2018 and 2019 research, development, test, and evaluation funds; and fiscal 2019 operations and maintenance funds. The original task order was issued on a competitive basis, with fair opportunity being provided to contract holders under the National Institutes of Health Chief Information Officer – Solutions And Partners 3 (CIO-SP3) Small Business Government-Wide Acquisition Contract. The Defense Health Agency - Contracting Office - Defense Healthcare Management Systems, Arlington, Virginia, is the contracting activity. MISSILE DEFENSE AGENCY Lockheed Martin Rotary and Mission Systems Division, Moorestown, New Jersey, has been awarded a $13,113,482 cost-plus-incentive-fee modification (P00314) under contract HQ0276-10-C-0001. This modification increases the total cumulative contract value from $2,917,816,118 to $2,930,929,600. Under this modification, the contractor will provide installation; test and training; logistics and material planning; and additional program planning, technical coordination and scheduling for Aegis BMD 4.x aboard AEGIS destroyers for the AEGIS BMD program office. The work will be performed in Moorestown, New Jersey, with an expected completion date of June 30, 2021. Fiscal 2019 defense wide procurement funds in the amount of $7,127,611 are being obligated at the time of award. This contract modification is the result of a sole-source acquisition. The Missile Defense Agency, Dahlgren, Virginia, is the contracting activity. NAVY General Dynamics Mission Systems, Pittsfield, Massachusetts, is awarded $13,067,576 for contract modification P00006 to a previously awarded cost-plus-incentive-fee, firm-fixed-price contract (N00030-18-C-0005) for sustainment of the U.S. and United Kingdom SSBN Fire Control System; and the U.S. SSGN Attack Weapon Control System, including training and support equipment and research and development. The work will be performed in Pittsfield, Massachusetts (97.50 percent); and other various locations less than one percent each (2.50 percent), with an expected completion date of December 2020. Fiscal 2019 other procurement (Navy) funds in the amount of $10,004,025; United Kingdom funds in the amount of $2,240,000; and fiscal 2019 operations and maintenance (Navy) funds in the amount of $823,551 are obligated on this award. Funds in the amount of $823,551 will expire at the end of the current fiscal year. Strategic Systems Programs, Washington, District of Columbia, is the contracting activity. ARMY MedTrust LLC, San Antonio, Texas, was awarded a $12,939,322 firm-fixed-price contract for registered nursing services. One bid was solicited via the internet with one bid received. Work locations and funding will be determined with each order, with an estimated completion date of May 31, 2019. U.S. Army Medical Research Acquisition Activity, Fort Sam Houston, Texas, is the contracting activity (W81K04-19-D-0009). https://dod.defense.gov/News/Contracts/Contract-View/Article/1743253/source/GovDelivery/

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