During the early days of the Reagan Administration, David Blond was the Senior Economist, Office of the Secretary of Defense. He sent me this note in response to the piece I wrote about national defense (which can be found at https://kotokreport.com/national-defense/). He was kind enough to give me permission to share some of his personal observations. So here they are. 

~David Kotok

(David Blond is an economic consultant specializing in quantitative analysis of economic data.)

David Blond wrote:

It has been fifty years since I was there for the last transition from Carter to Reagan and I’ve been trying to recall all the ins and outs of that time in my office that stood at the pivot of the budget and policy and set Defense budgets.  This is rather long, but it is as much for my understanding of what might happen although we have no clear picture of any Trump direction whereas Reagan came in with a clear agenda — to drive the Soviets into the dust by showing we could out spend them and we did just that.  

Interesting take on the transition in defense that is likely to happen once Trump comes in or more the lack of understanding of what exactly what the incoming SecDef plans to do, but I do fondly recall the last transition from liberal to conservative as I was working in the Office of the Secretary of Defense Systems Analysis after coming back from Geneva from 1978 through 1985.  I had been searching for a job from Europe, been turned down (for now) from DRI, Evans Economics, and Wharton  as much for what my advent might do to the cozy arrangement that some of the Directors, I interviewed with at these forecasting firms a fact that became apparent when I finally started to work at  DRI in 1985 creating the global trade model and the World Sea Trade Service and the reasons for not getting a job were revealed as my having suggested too many new ideas like cross product and cross country model development rather than time series forecasts with heavy add factoring, the usual cribs.  I was anxious to leave UNCTAD, I had created many things therew and made some enemies but also friends including the Under Secretary who threw a huge going away party at his house for everyone in UNCTAD in my honor where the Russian, I called The Colonel as he as feared by the other Russians who reported each day to the Russian legation.  The Colonel was very interested in my next job as the Senior and for most of my tyime, only real economist in the Pentagon.  I had managed to get that job once Carter won against Ford in 1978.  I noticed that my old bosses in Systems Analysis (I had worked three summers as an intern in Systems Analysis including Southeast Asia Programs (creating the initial data base on the war on the DARPA internet system, one summer as the Assistant to the man who prepared the Draft Presidential Memoranda that set Defense policy, and the last summer in the NATO Division).  One of my old bosses was the new Assistant Secretary for Systems Analysis and I wrote to the HR head asking that I wanted to come back to establish true economic analysis for the Department and I was available now.  I listed a few ideas and they said — yes, so I returned with my Doctorate as a GS 14 (one of the Schedule F jobs I think) and was to be promoted in one year to GS-15 with a comparable rank of Bird Colonel, long ay from highest rank when I was in the Air National Guard  avoiding Vietnam and  managing to get the degree without interruption.

Carter was not really anti-defense, but he did depend upon the analysts at Systems Analysis, the division I returned to, to set goals and to not overspend on Congressionally mandated boondoggles.  They had served McNamara and designed the logistic train that allowed America to fight a war of attrition 6000 miles away.  The office I was to be the Economist analyzed among its functions the costs of new weapons that were being built after the long hiatus of the Vietnam War had used nearly all the World War II and Korean War aircraft — the F14 was at the end of its run, the F-15 andF-18 were being introduced, and new aircraft carriers and missile subs, as well as many new smart weapons — thus the high cost in the early parts of the production runs had to be amortized and built into the Five Year Defense Budget.  I had a free reign to do what I wanted and I dabbled in many areas from the Family of Weapons (NATO AWACS mistakes), and the limited amount of data on how defense spending impacted the general economy.   DOD was running into production bottlenecks from the hollowed out manufacturing base and the fact that we were competing against new Boeing and McDonald Douglas aircraft.  When you cite the spending by State that was a bi-product of one of my enduring projects the Defense Economic Impact Modeling System (DEIMS)  and its companion the State level and Congressional level modelling reports.  I built it to understand why we didn’t have enough capacity to make aircraft and Bradley fighting vehicles.  

At the end of the Carter time I had come up with my Grandest plan for saving NATO.  The problem was that European members didn’t spend enough on Defense .  The problem for these countries was that they couldn’t support the defense industry if the product s they made were not being bought  by others .  The NATO AWACS had been negotiated over nearly a decade as its price tripled as the 707 on which it was built was now out of production.  The fight  had been over the correct cross-exchange rate.  My answer to the underspending by our partners was to propose that we jointly issue something called NATO Bonds in the currencies of the member states (before the Euro) in proportion to their economic size, thus in Lira to be repaid by Italians, in D-marks, in dollars, etc.  I had Solomon Brothers helping with the details and the support of the Under Secretary.  My goal was to demonstrate to the Soviets that we could out spend them in multiples with one of the expected results Soviet economic collapse.  If Carter had won, then NATO Bonds might have been on the table, but now Reagan was coming in with a different agenda — Star Wars, but the same general idea , to destroy Soviet confidence they could keep up with America technology or spending capacity.

In the Republican platform that Reagan ran on there was a line item that called for the dismantling of the pointy heated whiz kids, Systems Analysis, within the Office of the Secretary of Defense.  My division was like the Department of Education is today, the enemy of rational thinking and good policy, but a budget the size of the Pentagon’s needs that kind of analysis to function so Weinberger who became Secretary of Defense simply changed the name from Assistant Secretary of Defense for Systems Analysis to the Director of Program Analysis and Evaluation, PA&E, same people, same issues, new name.  Still, we were worried, so we planned.  We hired some Consulting firm for a useless report because he was a Republican acolyte, but once Reagan came into office on January 20^th the real work had to be to restructure the massive DoD line items budget to fit with the new ideas he came in with including a satellite aniti-missile defense shield.  We had spent a year working on Carter’s budget with about 3% growth, but in October just before the election I had run a Symposium on Defense Spending and its impact on the US economy with six major forecasters in attendance including Larry Klein who had just won the Nobel Prize.  It became a big deal, but one of its ideas was to test the impact of a 10% yearly growth in the budget spending against the proposed 3% growth.   Reagan’s new budget was that same 10% growth.  

The project then was to slice up the printed line item of the Carter budget, i.e. we cut it with scissors, then we rearranged if on 9 x 11 inch paper with some thought, I guess, as to where to add spending or not, sent it off to the printer and we had a new Reagan budget with pretty much the same line items but looking different and this became the new Fiscal Guidance that we set each year to force the four services to live within their budgets.  In prior years before this process the DoD budget as split evenly in thirds with a bit more in the NAVY for the Marines.  So now the new Reagan budget could be sent over to the Congress, a virtual copy in a different order, of the Carter budget.  At least that was the transition from Carter to Reagan.  

One of the things that changed once he took over was that they brought in someone to manage me.  I had always took credit for DEIMS and the NATO Bonds and it seemed I guess to my boss that I needed another set of eyes on what I was doing.  My friend, David Chu, the new Director of PA&E, created a separate economic group but had to bring in someone that my boss wanted to manage it rather than promoting me.  The tell was that they gave me the Second Highest Civilian Award as a kind of going away present.     Reagan didn’t believe in what he called ‘indicative planning’ and yet DEIMS was the ultimate in that by showing the impact of spending on key industries.  The original model included a materials model, a skilled labor model, with the industrial model.  One additional component was a Congressional model that split it out to individual Congressional districts and they used these to sell the higher spending during the Reagan years. 

I left the Pentagon in 1985 and went  to DRI and never looked back.   

The Soviets collapsed in 1990 as predicated on the higher level of spending we had started in 1981, but unlike the NATO Bonds plan I was promoting the NATO partners didn’t increase there spending until Trump and Ukraine snapped them out of their lethargy.   

As to Trump — who the hell knows what he wants to do with Defense budgets, but the deficit hawks in his own coalition may have other ideas.

David <Blond>