The new defense budget: A heady mix of new tech and old politics

There is always one way to tell that it’s an election year: The U.S. defense budget goes up.

What’s the correlation? Well, it largely has to do with two things. One is the politicians want to show that they’re tough on troublemakers and strong on keeping America secure. The other is, the defense contractors have huge constituencies in many states, so it’s in politicians’ interest to keep the contracts rolling — and keeping their voters employed — when election years roll around.

This is the blackmail that goes on between big defense contractors and politicians. If you cut back a ship order or make a reduction of a few planes, the contractors’ lobbyists who are losing the work show up at senatorial and congressional offices and remind the lawmakers what will happen to their state or district if the program is cancelled.

Because this is a continual process — if we’re to trim spending we have to cut somewhere — and everyone is very much in “Not-In-My-Back-Yard” mode, it’s easier just to order more and keep the economy chugging along. Nothing gets done.

That is the general state of bureaucracy in Washington. The ongoing principle is, you spend your entire budget because if you don’t, you can’t ask for more the next year. It defies logic to run an economy on this premise, but that is where we are.

A classic recent example of this absurdity is a story about the Department of Homeland Security. Recall that this department was brought online after 9/11 and is already the largest department in the government outside the defense department.

That means DHS has been spending vast sums of money every year to ramp up its “capabilities.”

The problem is, its growth isn’t nearly in proportion to its effectiveness. For example, recently it was revealed that DHS has spent $6 billion on a cybersecurity network for the department and its agencies that is less effective than a free security app off the Internet.

There are certainly plenty of contractors that have new houses and boats thanks to those contracts.

And the kicker is, the contractors didn’t have to work for that money.

Our tax dollars at play, more than work.

All this to say that it looks like defense spending may well have bottomed, so what are the trends in defense now?

Love or hate our DoD, the fact is, given the state of the world, it isn’t likely to go away anytime soon, so it’s best to look for the opportunity rather than ignore it.

The biggest long-term trend will be transitioning to cyberwarfare and cybersecurity from conventional defense. Unmanned vehicles in the air, on the ground and in the water will also be a long-term growth sector. Companies like iRobot (NASDAQ: IRBT) and AeroVironment (NASDAQ: AVAV) are niche firms that should benefit from this growth.

The thing about “virtual combat” is the fact that you don’t have to pay, feed and care for a huge standing army. It also means less spending on veteran benefits since fewer armed forces will be necessary.

That doesn’t mean we save money however. It just means more for defense and tech contractors (sometimes one and the same!) to grab. Remember that more tech means more opportunities to break in.

Usually the defense sector is the leading edge of new technologies. As they ramp up cybersecurity, you can be sure it will filter into every aspect of our daily lives even more than it has.

Be careful of your online footprint and look to new private routers like the Tor Project (www.torproject.org) that will protect your identity. I’ll have more on this new tech in my next piece on Thursday.

–GS Early

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