The U.S. military is becoming increasingly expensive. On per active-duty service member basis, the cost of defense has increased in inflation-adjusted terms from approximately $252,000 in 1989 to more than $412,000 in 2015. While there are a variety of reasons behind the increase, the Congressional Budget Office found in 2014 that military personnel costs accounted for 46 percent of the increased cost of defense over that period. It would make sense then, that all efforts should be taken to control spiraling personnel costs by reforming various types of military compensation. However, in a new piece at Politico, Todd Harrison of the Center for Strategic and International Studies explains why one proposed compensation reform will make matters worse. In doing so, Harrison highlights the potential of well-intentioned reforms to produce unintended consequences.
In his article, Harrison focuses on a proposal in the Senate’s version of the fiscal year 2017 National Defense Authorization Act (NDAA) to make changes to the Basic Allowance for Housing (BAH) military personnel receive as part of their overall compensation. As it currently stands, the BAH is provided based on a service member’s rank, location, and number of dependents. If housing is available at lower cost than the amount of the allowance, service members keep the difference. The proposed change in the NDAA would make the allowance equivalent to what each service member actually spends on housing.
The proposal makes a certain amount of sense at first glance, but as Harrison explains, the logic behind it falls apart when looked at more closely. He writes:
The most obvious problem is the behavior this change would incentivize. Consider a first lieutenant with no dependents who currently rents an apartment in the DC area with two other people. She currently receives a housing allowance of $2241 per month, but because she’s living with roommates, her share of the rent might only be $1200. With this change, she would no longer get to keep the $1041 difference. So what incentive would she have to economize and live with roommates? Why not get her own place—or move with her roommates to a larger, more luxurious apartment with better amenities—and use the full amount of the benefit? Under the change proposed by the Senate, the housing allowance would become a use it or lose it benefit.
Harrison also highlights the problems the proposal will cause for communities with large numbers of military personnel nearby, as landlords raise rents to maximize their income in response the newfound willingness of service members to pay more for housing. “It will distort the local housing market around bases,” Harrison explains, “driving up prices and making housing less affordable for lower and middle income families.”
The alternative Harrison proposes to dealing with exploding personnel costs is more efforts to address non-cash compensation, such as health care and retirement benefits. Because personnel are not required to pay federal income taxes on any difference between the BAH their actual housing expenses, the reimbursement is another form of cash compensation. In terms of recruiting and retention, cash compensation is what personnel value most and military benefits are already heavily weighted toward non-cash instruments. Therefore, it is both more economical and more political expedient to address the latter when trying to get control of the rising cost of military personnel.
In highlighting the problems with the Senate’s BAH proposal though, Harrison’s article should also be taken as a cautionary tale by all would-be defense reformers. There are always unintended consequences of every proposed policy, and while it is impossible to identify all the potential results of any proposal, it is imperative to be cognizant of possible negative outcomes.
For example, in the 1980s, the military reform movement in Congress went on a crusade against “waste, fraud, and abuse” in defense spending following scandals dealing with overpayment for spare parts. As a result, legislation was passed requiring competitive bidding for defense contracts. However, as political scientist Daniel Wirls details in his book on the Reagan defense build-up, the competitive bidding requirements led to one of the largest insider trading scandals in American history in 1988. In what Wirls refers to as the “irony of military reform,” one of the reform movement’s only substantive successes helped encourage the corruption it was suppose to address. He writes:
Whereas under noncompetitive contracting, fraud is associated with overcharging, under competitive system, contractors may place a high value on getting inside information about other companies’ bids and specifications in the scramble to win the contract during the often-protracted competitive negotiations in which bids are adjusted and rewritten.
The scandal, revealed in an FBI investigation known as Operation Ill Wind, did not garner as many salacious headlines as the purchases of $435 hammers the military reform movement was trying to address. However, it does highlight the point Harrison is explaining in his piece on the BAH: new policies provide new incentives that lead to new behavior. That behavior might not be what the proposed reform sought, but it can lead to a result worse than the status quo if not taken into account beforehand.