Why the Pentagon Fails Audits Year After Year After Year

Summary

Odd Lots Podcast Summary: "Why the Pentagon Fails Audits Year After Year After Year"

Release Date: April 19, 2025
Host/Author: Bloomberg's Odd Lots with Joe Weisenthal and Tracy Alloway

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Introduction

In the April 19, 2025 episode of Bloomberg's Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway delve into a persistent and critical issue: the Pentagon's annual failure to pass federal audits. Recorded on March 18th, amidst a period dominated by discussions on trade wars and tariffs, this episode shifts focus to defense spending—a subject of immense importance given its substantial share of the U.S. federal budget.

The Persistent Audit Failures

Joe Weisenthal opens the discussion by highlighting the perplexing headlines: "Pentagon fails seventh audit in a row." He expresses confusion over the implications of these failures, questioning, "What does that mean that they just keep filling out all these audits?" (04:49).

Tracey Alloway reinforces this confusion, pondering the existential value of recurring audits that yield the same unfavorable results: "Nothing seems to change that too." (04:55).

Understanding Pentagon Audits

To shed light on the issue, the podcast features Julia Gledhill, a researcher at the Stimson Center and an expert on defense spending.

Julia Gledhill explains that the Pentagon audit assesses how effectively the Department of Defense (DoD) manages taxpayer dollars. Unlike private companies, where stakeholders can react to audit results by altering investment decisions or ownership, the Pentagon's failures mean that the agency cannot simply correct course by losing funding—a unique challenge in governmental audits (05:36).

What Constitutes an Audit Failure?

When the Pentagon "fails" an audit, it receives a disclaimer of opinion, meaning auditors cannot verify the accuracy of the DoD's financial statements. Julia Gledhill elaborates:

"The agency-wide consolidated audit of the Department of Defense looks at DoD financial statements, but also internal controls over financial reporting, as well as compliance with relevant laws and regulations." (06:38)

This failure indicates significant weaknesses in financial reporting and internal controls across various DoD components.

Examples of Audit Failures

One striking example discussed is the Navy's inability to track property and inventory records accurately. In 2019, the Pentagon Inspector General flagged errors that led to the discovery of a missing warehouse containing $126 million worth of spare parts (11:12). Despite being a small fraction of the Pentagon's vast budget, such discrepancies highlight systemic issues in financial management.

Furthermore, the F-35 fighter jet program, the most expensive weapons program in U.S. history, suffers from understated spare parts inventories. Gledhill notes:

"The Department of Defense Inspector General has expressed concern that spare parts in the possession of contractors are likely significantly understated." (12:00)

This kind of mismanagement not only leads to financial inefficiencies but also impacts operational readiness, as missing parts can delay maintenance and repairs during critical times.

Impact on Defense Spending and Operational Readiness

The inability to accurately track financial and inventory data has tangible consequences. Tracey Alloway points out that in emergencies, the inability to locate necessary spare parts can jeopardize military operations. Gledhill shares anecdotes from veterans who had to improvise part storage due to unreliable inventory systems, underscoring the real-world implications of audit failures (13:59).

Influence of Defense Contractors

A significant barrier to resolving these audit issues is the influence of defense contractors. Gledhill explains that contractors like Lockheed Martin resist transparency, often citing the high costs of compliance:

"They say, oh well, what are you paying us to provide you with information about government-owned property?" (16:32)

This resistance contributes to the Pentagon's ongoing audit failures, as contractors hold crucial data that the DoD struggles to obtain and verify.

Political and Legislative Battles

The episode also touches on the political dynamics that perpetuate the Pentagon's financial mismanagement. Gledhill highlights how defense contractors wield significant influence in Congress through job creation across all 50 states, making it politically challenging to implement stringent oversight reforms (17:29).

Current legislative efforts, such as the Budget Reconciliation process and the National Defense Authorization Act (NDAA), are battlegrounds where debates over military spending and audit reforms unfold. Gledhill expresses skepticism about meaningful changes, noting:

"Even if the DoD passes an audit, that doesn't justify the money that the DoD is spending because we should be able to achieve more for less." (21:51)

Recommendations for Reform

When asked for recommendations, Gledhill advocates for tangible budgetary reforms, particularly in nuclear spending:

"If I could say one thing, I would probably say cancel the Sentinel program, which would save a lot of money." (36:41)

She argues for reducing unnecessary expansions within the nuclear triad to alleviate financial burdens and restore accountability.

Future Prospects

Despite ongoing discussions and some administrative support for audit improvements, Gledhill remains pessimistic about the Pentagon passing a comprehensive audit in the near future:

"I'm not optimistic, no." (38:50)

She attributes this to the slow progress in rectifying systemic issues and the entrenched interests of defense contractors.

Conclusion

The episode concludes with the hosts reflecting on the complexity and urgency of addressing the Pentagon's financial mismanagement. They underscore the critical need for accountability and transparency to ensure that defense spending serves the nation's best interests without unnecessary waste or inefficiency.

Tracey Alloway summarizes:

"It's kind of crazy... Julia explained everything really well, but I still find it slightly unbelievable that there's all this money going in and out of the Pentagon and we seem unable to track it." (40:35)

Joe Weisenthal adds:

"It's just very interesting, too, the sort of interplay with all that and just the incredible infrastructure around lobbying." (40:46)

The discussion leaves listeners with a profound understanding of why the Pentagon's audit failures matter and the multifaceted challenges in overcoming them.

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Notable Quotes:

• Julia Gledhill [05:36]:
  "What's the point of doing the same thing over and over and expecting a different result? That is, in fact, the definition of insanity."

• Julia Gledhill [11:12]:
  "The Department of Defense Inspector General flagged errors in the Navy's property and inventory records. They found a warehouse that was mysteriously absent from its property record."

• Julia Gledhill [16:32]:
  "Contractors like Lockheed Martin resist transparency, often citing the high costs of compliance."

• Julia Gledhill [38:56]:
  "They have 11 components of the DoD that have received unmodified opinions and it has been a painstakingly slow process. I am not terribly optimistic that they're going to bring that number to 100% of components audited."

Key Takeaways:

• The Pentagon has consistently failed federal audits due to systemic issues in financial management and accountability.
• Audit failures stem from difficulties in tracking property and inventory, exacerbated by defense contractors' resistance to transparency.
• Political influence and defense contractors' lobbying efforts hinder meaningful reforms.
• There is a critical need for structural changes to ensure accountability and efficient use of defense spending.
• Resolving these audit issues is essential for both financial integrity and operational readiness of the U.S. military.

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For more insights and detailed discussions on finance, markets, and economics, tune into Odd Lots every Monday and Thursday on Bloomberg.

Transcript

[KPMG]

KPMG makes the difference by creating value like developing strategic insights that help drive M and a success, or embedding AI solutions into your business to sustain competitive advantage. KPMG make the difference. Learn more at www.kpmg.us insights.

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[Joe Weisenthal]

I'm Joe Weisenthal.

[Tracey Alloway]

And I'm Tracey Alloway.

[Joe Weisenthal]

Obviously, mostly we've been talking a lot about the trade war lately, the tariffs, but there are other things going on in the world. And in fact, there are some episodes that we've recorded prior to all this that we still want to publish.

[Tracey Alloway]

That's right. So what you are about to hear is an episode we recorded way back on March 18th. It feels like it was a lot longer ago, but it's been basically a month. And with everything that was happening in markets, all the trade announcements, the tariffs, we've had to put this one on hold. But we want you to listen to it. It's a really interesting topic and still very, very worthwhile to hear, right?

[Joe Weisenthal]

We're gonna be talking about the Pentagon budget and things like that. If it feels a little dated, the conversation, that's because it is dated. But take a listen. I still think that you'll find, you know, there is still no world in which the nature of defense spending is not an important question, is not something interesting. So even with everything else going on in the world, you should take a listen.

[Tracey Alloway]

Here we go.

[KPMG]

Bloomberg Audio Studios Podcasts Radio News.

[Joe Weisenthal]

Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Wiesenthal.

[Tracey Alloway]

And I'm Tracy Alloway.

[Joe Weisenthal]

Tracy, we've hinted on the podcast a few times over the last several months we want to do more on defense and we're going to start ramping that up.

[Tracey Alloway]

That's a hint, Joe. I think you've said it pretty explicitly.

[Joe Weisenthal]

But it is interesting, right? Like, it is a good it does seem like it should be a good topic for us, right?

[Tracey Alloway]

It's a huge chunk of the economy. I think it's like the US Government's biggest line item in terms of expenditure is either defense or interest rate payments on its bonds.

[Joe Weisenthal]

Yeah, that's right.

[Tracey Alloway]

It's definitely number one or number two. And so it is worthy of additional study. I agree.

[Joe Weisenthal]

And you know, I think it's actually really important for us because, you know, we talk about industrial policy a lot, and defense is the one area where that has never wavered. Right. Like, it's always been the government is the primary buyer purchaser, but there are these private companies and they also sell overseas and stuff. It's always been about staying at the leading edge of tech. And probably if you're like thinking about like industrial policy in other areas, like whether it's cars or batteries or semiconductors, I just assume there must be a lot that we can learn from how it works in the defense world.

[Tracey Alloway]

As a military brat, I feel comfortable saying as well that it's kind of, kind of also connected to a social safety net.

[Joe Weisenthal]

Right? Yeah, that's a trick.

[Tracey Alloway]

You have health care tied to military service. You've got cheap groceries tied to military service. I used to love that. So it's interesting from a number of perspectives. What blows me away, though, is you hear that statistic every once in a while that the Pentagon has never passed an audit, which raises all these big questions about if this is the biggest expenditure or one of the biggest expenditures for the US how is it possible that we don't actually seem to know where the money is going?

[Joe Weisenthal]

No, I think this is a great question, and I think that what you articulated there is just a great way of sort of entryway to understanding defense with a simple question. Because, like, I've seen those headlines so late last year, headlines, Pentagon fails seventh audit in a row. And then I read the headline. But I don't know what that means. I don't know what it means to like, you know, it's not like a private company. I don't know what audits really mean in the government. I don't know if there are any consequences. I don't know why it is. Is it because of malfeasance or is it just because of its sheer size? I mean, it's, you know, the Pentagon, absolutely enormous. So I think, like, yeah, we should. What does that mean that they just keep filling out all these audits?

[Tracey Alloway]

Well, it also raises an existential question of why are we even bothering to do audits if we keep getting the same results?

[Joe Weisenthal]

That too.

[Tracey Alloway]

Nothing seems to change that too.

[Joe Weisenthal]

That's a great question. Anyway, we're going to finally get some answers to at least this question of what it means that the Pentagon keeps failing audits year after year and year, and what it says maybe about how we do defense spending. I'm very excited. We have the perfect guest we're going to be speaking with. Julia Gledhill. She is a researcher at the Stimson center, has written quite a bit about this, has been recommended to me as someone to talk to about Pentagon and defense spending. So, Julia, thank you so much for coming on odd lots.

[Julia Gledhill]

Thank you for the invitation. It's great to be here.

[Joe Weisenthal]

What is a Pentagon audit? Apparently we've never passed one and we'll get into why. But what does it even mean for the Pentagon to get audited?

[Julia Gledhill]

Yeah, this is an important question. I think Tracy is hitting the point on the nail here in that what's the point of doing the same thing over and over and expecting a different result? That is, in fact, the definition of insanity. And so, in thinking about what the purpose of an audit is in a Pentagon context, it's important to remember why we audit in general. Right. Companies undergo audits to assure stakeholders that management is accurately presenting a company's financial performance and position. In other words, you know, audits help investors and lenders determine the financial value of a company. So how does that apply to the Pentagon? Well, the Pentagon audit assesses how well the agency is managing taxpayer dollars. The difference is that unlike stakeholders and companies, taxpayers can't simply opt out of funding the Pentagon when it fails an audit. But the agency wide consolidated audit of the Department of Defense looks at DoD financial statements, but also internal controls over financial reporting, as well as compliance with relevant laws and regulations.

[Tracey Alloway]

What does an audit actually entail for the Pentagon? Because I imagine, you know, when I think about the Pentagon, it's this huge sprawling industrial military complex. I imagine it must be quite an undertaking to try to get granular detail on where money is going.

[Julia Gledhill]

It absolutely is a major undertaking, which explains why the DoD has not only failed so many audits in a row, but only started to do consolidated audits agency wide in 2018. So the Pentagon audit is done by independent public accounting firms in collaboration with the Department of Defense Inspector General Office, which is the internal watchdog within the Pentagon. And what they do is conduct independent audits of several different DoD components. These can include the military services, but also combatant commands, field activities like the Defense Logistics Agency, and then the Department of Defense Inspector General puts all of those independent audits together in one consolidated agency wide audit and comes to a conclusion Notice that I say conclusion and not opinion. Because in the case of failing a Pentagon audit, the Pentagon has actually received disclaimers of opinion repeatedly, which means that the agency, department wide, was unable to produce the financial statements necessary for auditors to form an opinion, an audit opinion on the quality and sort of accuracy of financial reporting throughout the agency. But it includes a lot of different components and it is indeed quite laborious.

[Joe Weisenthal]

So the goal is for the independent firms to be able to form an opinion. And when we read a headline that says they failed the audit, it means they can't even get the documents and the financial statements together so that they can form an opinion. Like, explain to us what that word failure means in this context.

[Julia Gledhill]

Yeah, so I think that the former comptroller of the Department of Defense has explained this quite well. And in describing a disclaimer of opinion in the context of auditing, he basically said that this is a red light. Right. So is an adverse opinion, which is another level of there are going to be material persistent weaknesses in financial reporting throughout DoD entities. And then you have a yellow light, which is a qualified opinion, and then you have an unmodified opinion. This is the goal in the Pentagon audit process, which is considered a green light. And only a few of DoD components have actually achieved this green light, which means that the financial reporting internal controls generally can be trusted and assumed to be consistently accurate.

[Tracey Alloway]

What happens when the Pentagon actually fails an audit? Because I imagine, like in theory, there should be consequences, but the fact that it keeps happening, as I mentioned, suggests that there probably aren't.

[Julia Gledhill]

Yeah, there are no consequences, much to the disappointment. Exactly. Imagine, imagine a company failing an audit and their investors saying, well, we're going on ahead anyways. And so, no, there are no consequences for the Pentagon when it repeatedly fails audits. And yet the audit is supposed to give us taxpayers some trust that the Department of Defense is spending our money efficiently and wisely. But unfortunately, and much to the disappointment of components like the Marine Corps or the Defense Threat Reduction Agency which have received these green lights, these unmodified audit opinions, they are not rewarded for receiving green lights in the auditing process. And the Marine Corps is still struggling to get their boats. So it's an important question. And unfortunately, there are just no consequences because appropriators are not reading a 400 page audit report on the Pentagon before deciding what to spend on national defense.

[Joe Weisenthal]

So they failed the audits, or at least they can't even put together an opinion. What's happening? Why can't they? What are they, when they're going in there and they're looking for documents and evidence that the money is being tracked roughly in accordance with how it should be and that the various divisions are. What are they seeing when they go in there that causes them to not be able to produce an opinion?

[Julia Gledhill]

Sure. Well, one failure point that I love to point to is DoD's difficulty in tracking property and inventory records across the military services. One of my favorite examples of why does this matter? Who cares? Why do auditors go in and look at inventory records and flag this as a weakness in their audit reports? Well, a few years ago, 2019, the Department of Defense Inspector General flagged errors in the Navy's property and inventory records. And as a result, the service ended up finding a warehouse that was mysteriously absent from its property record.

[Tracey Alloway]

And they've lost a whole warehouse. Amazing.

[Julia Gledhill]

Indeed. And inside, they found $126 million worth of spare parts.

[Tracey Alloway]

Wow.

[Julia Gledhill]

Now, in the context of the Pentagon budget, what is 126 million when we're talking about a near trillion dollars, depending on how you count it. But they found these spare parts for a number of different aircraft inside that warehouse, and they were actually able to fill over $20 million in spare parts orders without having to procure new ones. And so the scale of this issue is unknown. Right. Because we have a pervasive inventory and property record keeping issues throughout DoD. And importantly, the Government Accountability Office has actually flagged inventory issues since the early 80s, since 1981. And this is relevant, for example, to the most expensive weapon program in US history, the F35 fighter jet. Now, the reason I bring it up is because, you know, okay, you have an example of the Navy finding all these aircraft parts and being able to fill orders. So what does that mean in the context of a now $2 trillion weapon acquisition program, which is the F35? Well, you have the GAO, the Government Accountability Office, saying that F35 parts in the possession of contractors are likely significantly understated. So the government has. All these spare parts are government owned, but typically possessed, controlled by contractors. And the GAO has flagged this issue for a long time because it means we could be buying on spare parts as a country. The Department of Defense Inspector General has likewise expressed this concern and in 2021, found that, you know, the army, for example, was forecasting spare parts needs and was only accurate 20% of the time. Again, why does that matter? Because they ended up overstating how many spare parts the army needed by over $200 million. The military writ large, all the Services together actually overshot their spare parts needs by nearly a billion dollars. So this matter, you can't keep track of your property in the possession of contractors.

[Tracey Alloway]

It must matter from an operational or execution perspective as well, right? If there was a military emergency and we can't find the spare parts that we need because we've never been able to track them, that's problematic.

[Julia Gledhill]

Oh, absolutely. I mean, you look back to the early years of the war on terror. I mean, I meet a lot of veterans who, when I talk to them about these issues, they say, oh yeah, we were hiding, you know, parts to maintain our equipment in our bunks because we had no assurances that we were going to be able to maintain to repair the equipment that we need to do our jobs. So it is a readiness issue and one that the DoD absolutely needs to rectify.

[KPMG]

KPMG makes the difference by creating value like developing strategic insights that help drive M and A success and embedding AI solutions into your business to sustain competitive advantage or deploying tech enabled audits to deliver more accurate and transparent outcomes. Brighter insights, bolder solutions, better outcomes. It's how KPMG makes the difference every day. KPMG make the difference. Learn more at www.kpmg.us insights.

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[Joe Weisenthal]

Have to imagine that if one of the problems is sort of implied here about over ordering spare parts, I would guess that the major weapons suppliers, the defense contractors, don't really mind that problem.

[Julia Gledhill]

That's exactly right, Joe. In fact, the DoD has actually requested Inventory records from Lockheed Martin before for the F35 program. And Lockheed Martin said, oh well, it's gonna cost us a bunch of money to track down this information and provide the reports. Essentially disincentivizing the government from requiring that in the military contract. Right. And I wrote a piece about this a couple years ago and it's insane because you have contractors who have government owned property in their possession, but they control all of the tracking mechanisms. And even when government asks, they say, oh well, what are you paying us to provide you with information about government owned property?

[Tracey Alloway]

Just on the contractor point, I always wonder about this, but who does the US actually compete against when it's buying military stuff? Because I would think with a trillion dollar budget for defense, the US is probably putting in the biggest orders. And so could they in theory dictate the price or at least ask for a volume discount or something? I mean, on the F35s, for instance, like the US has hundreds now versus other countries that have, I think, a few dozen.

[Julia Gledhill]

Mm, yeah. So this is the problem with a monopsony market, right?

[Tracey Alloway]

You have monopsony klaxon. Yeah, sorry, that's, that's a trigger word for us.

[Julia Gledhill]

You have one buyer, but you also in a lot of cases have one seller. And that is the genius of the arms industry. Right. With the F35 program, they have politically engineered it such that it exists in I think all 50 states. Now Lockheed Martin has an interactive map so someone can fact check me, but it is like 46 if not all 50 at this point.

[Joe Weisenthal]

So every politician in America has some reason to preserve the status quo because they have workers. Is that the idea here?

[Julia Gledhill]

That's exactly right. Because jobs, even though we know that military spending is a lousy jobs creator in comparison to other types of government spending.

[Joe Weisenthal]

So, you know, I guess if the Pentagon has failed seven audits in a row, I guess by implication eight years ago or nine years ago, there was no mandate for an audit period because it must be a relatively new thing. Can you talk to us a little bit about how that came about, the requirement to audit and how the military contractors sort of try to shape the process of tracking acquisition?

[Julia Gledhill]

Sure. So this is a question I get a lot. Was there accountability before the Pentagon started consolidated agency wide audits? So the answer is yes, but not to the same extent that we have today. So in 1990, Congress passed the Chief Financial Officers act, which required federal agencies to prepare financial statements for audit. And the DoD submitted component financial statements to the DoD IG for that purpose. But did not undergo the thorough audit that we see today. And in fact, the number of components included in the agency wide audit tends to vary a little bit every year. Sometimes it's 28, sometimes it's 27. But it is absolutely true that contractors shape nearly every aspect of defense policy because of their power and influence on Capitol Hill. And a major lever for that power and influence is in fact, the sort of jobs creation that they lean on for these weapon programs. And I actually think it's an interesting question because now you see the current Secretary of Defense, Hegseth, really embracing the audit in his quest to improve military readiness. And on its face, that is a noble and worthy goal. Right. It remains to be seen how that actually shakes out in this administration. I only hope for the best and very much encourage the administration to take this seriously because I do think that it matters again, when you have, for example, military services over buying spare parts at the expense of the taxpayer. However, I think that it's noteworthy when you see news a month ago about the secretary saying, okay, we're doing budget reshuffling to reorder DoD funding and channel it toward Trump's priorities, President Trump's priorities. And one of those exemptions from potential reductions in these budget reshufflings was the audit. Of course, so was nuclear modernization and many other things. And, and that is important for military readiness. And we actually should work toward passing an audit. However, it's important to note that Even if the DoD passes an audit, that doesn't justify the money that the DoD is spending because we should be able to achieve more for less. And we have not seen that in recent decades.

[Tracey Alloway]

Right. Just on this note, I kind of want to back up and ask a big picture question, but Joe alluded in the intro to the fact that defense spending has historically been. It's always been there, it's always been with us, and it's always been pretty big. I know that you can benchmark it to GDP and it's come down as a percentage of GDP, but I think we can all agree that 1 trillion is still a pretty big number. So why did that happen? And why is it that we just accept that defense is kind of untouchable or by its nature going to be this huge line item?

[Julia Gledhill]

I'm so glad you brought up percent of gdp. I love to talk about this. I think that it's one of those macro indicators that conceals more than it reveals. Right. So the distribution of military spending has changed a lot over time, but we're so beholden to this idea of a gigantic military budget to keep Americans safe because of its legacy after World War II in bringing the United States out of sort of the trenches of the Great Depression and stimulating the economy. Of course, any significant government spending would stimulate the economy and sort of offset the effects of under consumption. And yet we've just been sort of ingratiated with this idea that military spending is so integral to our economic growth, when in fact there's a lot of economic research out there that, that says sort of ever expanding military budgets can have a depressive effect on long term economic growth. Why? Because it impacts productivity. Right. So World War II, the sort of narrative in sort of dominant historical discourse is we have this productivity miracle. No, it was a production miracle. We spent a bunch of money on military industrial output, but that had a depressive impact on productivity over time. So I argue that this is actually bad for the economy long term term. But we are as a country, I think, so dedicated to this idea that the military budget is sort of a core part of our economic engine. And unfortunately that's not true anymore because again, the distribution has changed over time. It's a lot more capital intensive. It's not necessarily this sort of vehicle of upward economic mobility that it used to be because it's not as focused on labor. Of course, yes, you have the GI Bill, yes, you can get a free education. That's all very important and good and we should absolutely do that. But we're spending more and more money on research and development and procurement. Who does that benefit? It benefits electrical engineers, not the working man.

[Tracey Alloway]

So just on this note, in preparing for this episode and looking you up, I noticed that for your undergraduate thesis you did an econometric study to test the relative impacts of various types of defense spending on income inequality. That seems really interesting. I don't know if you remember your undergrad days or your work, but what did you find in that?

[Julia Gledhill]

So I actually just gave you the short pitch on my paper which did find, and I had an r squared of 96%. So explanatory value was good. But I tested this hypothesis that military spending is good for jobs, good for people, good for the economy. And I did that by disaggregating the base budget into the major categories, some of which I just described. Research and development, procurement, personnel, operations and maintenance, the big ones. And I actually found that procurement in research and development had exacerbated income inequality over the eight years of the Obama administration. That was my time span. And I actually know someone at an academic institution writing on the same exact topic now. So I'm very happy that that person will be soon publishing a paper, because I did not publish mine. But yeah, I mean, I wanted to test this idea that military spending is good for the economy and it's military Keynesianism. Right. This is the idea that we've all been, been fed and I think that lawmakers really grasp onto because it's a convenient veil for what are frankly often conflicts of interest, whether that be congressional members owning and trading stocks or receiving campaign finance from arms manufacturers. And I think it really distorts the way that we talk about defense policy, the military and its role in our economy.

[Joe Weisenthal]

If I could play devil's advocate it for a second, one of the major sources of anxiety right now in the US Economy is not about jobs, although maybe the labor market is weakening, but the unemployment rate is still kind of low. It's mostly this concern that the US Is not at the technological cutting edge in many areas that are at least in some way adjacent to the military. And of course, people love to tell you it's like, oh, Silicon Valley got started off, it was all military funding and that's why we have chips and that's why we have have compact chips and small computers because they needed to be put in small spaces, et cetera. When you talk about all of the R and D spending that they do or even the capital expenditure, isn't that like, when we think about productivity, do we get positive spillovers from the research that's being done by today's weapons manufacturers that are then transmitted to the rest of the economy?

[Julia Gledhill]

Yeah, this is something I've really been grappling with. I'm writing a paper right now on the defense industrial base. And you're absolutely right. I mean, industrial policies, super hot right now. Of course, like Robert Reich, I think, said this in the 90s, industrial policy is back. But the thing is, we've always had industrial policy for military contractors. To your point, Silicon Valley wouldn't exist without DARPA and ARPA E grants. And in my view, I sort of see this in the context of our economic resilience and vitality long term. Okay, I'm an elder Zoomer. I'm pretty much the oldest you can be and still claim to be Gen Z. And I think about my future and I see military investment as mortgaging our futures on exquisite expensive platforms, even in the software realm. That's not to say that I don't think there isn't innovation happening. I think in the context of the audit, for example, it's important that we have internal controls around the development of and reporting of more cyber physical capabilities in a military context, software programs. I'm not convinced that private industry is necessarily going to make the leaps and bounds that we did as a country two decades ago, three decades ago today. And the reason for that is because I don't think that venture capital is necessarily driven by innovation and spillover into the civilian economy. They are driven by profit motive and the ability to return value to shareholders. Right? This is the legacy of VC and Silicon Valley and the way that the government has always shaped the market through R and D funding. Right? They jump in right before product goes to commercial market. If in fact you are working on something that is dual use and then they leave after the ipo. So in some ways I see the government has always been the risk taker because they're the ones that fund the basic research. So I don't have fully baked thoughts on this, but I think that it's critical for the government to continue shaping the risky investments that we need to do true innovation and in my view, combat the climate crisis in sort of new, innovative way.

[KPMG]

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[Joe Weisenthal]

Think this is like a really key point which is just as Julia was putting it, which is that like, like really like long term industrial capacity type innovation does not strike me as particularly compatible with the types of returns that either public markets or VC investors expect. And we talk about this in the context of nuclear anyway, and this idea that, like the payoff timelines and the risks do not seem in alignment with the opportunity set for private sector investors.

[Julia Gledhill]

Right.

[Tracey Alloway]

It seems like a big risk with a lot of capital expenditure, which the private sector notoriously shies away from. Okay, I forgot to ask one really granular question on the audits. And I read that there's something called an unfunded priority list, which as far as I can tell, seems to be like just a wish list of extra budgetary items that the Pentagon didn't include in its official budget request. What is that? And what's the point of having a budget if you can just have like another budget on top of it?

[Julia Gledhill]

You described it perfectly, Tracy. It is in fact a wish list of extra budgetary Items that the DoD not only didn't ask for in its budget request to Congress, but also did not have to provide justification documents for. And so you see the services manipulate the UPL process, the wish list process, in order to make it look like their budgets aren't as big as they actually are. We've seen the Navy do this with destroyers. I mean, it is absolute blasphemy. I think it's a slap in the face to taxpayers and to the rest of the federal government. You've seen some members of Congress, I believe Tim Kaine has suggested. Oh, well, why don't we have civilian agencies also statutorily required to submit unfunded priority lists? Look, if it's not in your budget, it is not a priority. And we do not need to standardize or normalize what I consider to be a pretty undemocratic a version of the budget process.

[Joe Weisenthal]

Hmm. Talk to us a little bit more about the fights right now going on Capitol Hill. Setting aside the assumption that defense contractors always want more spending, what are some of the tension points or the fights that are happening about sort of guardrails on spending or other issues or maybe related to the audit, like what are the fights right now about?

[Julia Gledhill]

Yeah, so I mean, obviously we just averted a government shutdown. So the cr, the continuing resolution, has taken over everybody's minds in the last couple weeks here and sort of the next big fight is the Budget reconciliation process. I'm sure listeners are familiar with that if they listen to this podcast. It is also a mechanism through which to avoid regular order and thereby the filibuster in the Senate and add potentially hundreds of billions of dollars to the military budget. And then after that, we have the National Defense Authorization act, the annual defense defense policy bill that sets the top line for military spending in this country. It is just whammy after whammy in 2025. I sort of can't believe that it's only March because it feels like it has been months since this year began. But, you know, we have a couple things going on. We have a fight for incredible military budget increases through reconciliation. And then in the defense policy bill in the ndaa, we have a pretty coordinated effort industry wide that is supported by many members of Congress to essentially gut the weapon acquisition process. Now, why would contractors want this?

[Joe Weisenthal]

Yeah, explain that.

[Julia Gledhill]

Yeah, it's part of a decades long effort to eliminate oversight guardrails in the budgeting and acquisition process at dod. And the justification for it is we need to prepare for a war with China, which if you subscribe to that frame of foreign policy, which I consider to a bit reactive, why would we base our foreign policy on another country? Right. Why would we do that? Wouldn't we want a positive vision of what the US Wants and how we are going to navigate the world? But if you subscribe to that vision, then it makes a lot of sense. Okay, we're going to lift the pesky red tape so that industry can better sell weapon acquisition programs to the Pentagon, do it faster and more, and sort of eliminate the milestones at which the DoD is able to decide, hey, do we really need this? Are we going to need it in five years? Is it cost effective? Is it filling a capability gap? Could we do it cheaper? Is there competition? And there are a couple ways that they're doing this. But, you know, acquisition reform writ large is sort of, I think, another big fight. And it's interesting because the Silicon Valley tech firms have actually jumped on board with this as well.

[Joe Weisenthal]

Yeah.

[Tracey Alloway]

What would be your recommendation for reform of defense spending? Like, imagine you're hegseth. What would you like? What's number one on your list?

[Julia Gledhill]

Gosh, this is hard. I think I will pick an area that I think Trump could be instinctually open to, and that is reining in nuclear expansion. And I say expansion rather than nuclear modernization because I think that's a mischaracterization of what's going on. About a month ago, you saw President Trump say, I want to pursue arms control agreements with Russia and China and with the ultimate goal of cutting our respective military budgets in half. Now, I think that his heart was in the right place, if only for a moment, because of course a week later nuclear modernization, as I mentioned before, was exempted from the potential budget reductions that Hegseth talked about. It's not a reduction of the military budget top line, but rather a reshuffling of funds. That area was protected against potential reshuffling. But what I would do is reign in nuclear expansion spending. I do not think that we need to be investing in the modernization of all three legs of the nuclear triad. I would argue for just the sea leg of the nuclear triad. There's no reason we need to be doubling down on the land based leg of our nuclear arsenal, the Sentinel program for a bunch of reasons, not least of which is the fact that the program has experienced 81% cost growth since 2020. It's not the most accurate nuclear weapon we have in our arsenal anymore. And the program just has a bunch of issues that the DoD has not been able to resolve. And so if I could say one thing, I would probably say cancel the Sentinel program, which would save a lot of money. And you could argue that it's helpful in terms of de escalating tensions with other nuclear powers. I will just wrap this by saying that our pursuit of nuclear expansion across the board and our nuclear enterprise has inspired other nuclear powers to do the same.

[Joe Weisenthal]

I just have one last very quick question. Do you think it is plausible that in the next four years the Pentagon will pass an audit? Is it conceivable?

[Tracey Alloway]

Don't they have a target by like 2028 or something?

[Joe Weisenthal]

Do you think, do you see it happen?

[Julia Gledhill]

I'm not optimistic, no.

[Joe Weisenthal]

Why?

[Julia Gledhill]

They have 11 components of the DoD that have received unmodified opinions and it has been a painstakingly slow process. I am not terribly optimistic that they're going to bring that number to 100% of components audited at DoD in addition to the agency wide audit. I would love to be wrong.

[Joe Weisenthal]

Well, we'll see. Maybe we'll have you back on in four years or as soon as we get the next. When we get a pass, we'll chat with you and we'll see what they did to accomplish that. Julia Gledhill, thank you so much for coming on Odd Lots. Really appreciate you taking your time.

[Julia Gledhill]

Thank you for having me.

[Joe Weisenthal]

Tracy. I'm really glad we did that episode. You know, like when I hear those Defense Specialists, like, rattle off the names of the different weapons programs or the different legs of the nuclear triad. I have, like, no idea. You know, I really lose it. So it's this enormous, complex thing. But I thought that was just, like, really helpful in getting a sort of simple answer to a basic question. Particularly like, things like, you know, the fact that. That the government doesn't know what's in its own warehouses.

[Julia Gledhill]

Right.

[Tracey Alloway]

Well, Julia explained everything really well, but I still find it slightly unbelievable that there's all this money going in and out of the Pentagon and we seem unable to track it, and no one really knows where it is. No one really has a full picture of the assets, the stuff sitting in warehouses, as you just mentioned. It's kind of crazy.

[Joe Weisenthal]

Do you keep a really good personal budget?

[Tracey Alloway]

Oh, no.

[Joe Weisenthal]

So can't you, like, sort of sympathize with the Pentagon?

[Tracey Alloway]

I don't need to because I can just look at, like, my one bank account. Right.

[Joe Weisenthal]

Yeah, that's true. I guess. I'm not totally surprised. Right? I mean, it is insane to me. It's also just very interesting, too, the sort of interplay with all that and just the incredible infrastructure around lobbying and, oh, we have manufacturing in all 50 states. Or maybe it's 48 states. Or maybe it's 46 states. Like how complete of a package the defense contractors have put together to make it so politically difficult to really meaningfully turn the dials on either the volume or just the approach to procurement.

[Tracey Alloway]

Yeah. And on that note, the unfunded priority list, like the extra budget on top of the existing budget, is kind of funny, fascinating.

[Joe Weisenthal]

There's plenty more to dive into. I thought this was a great entry point. Yes.

[Tracey Alloway]

More to come. Shall we leave it there for now?

[Joe Weisenthal]

Let's leave it there.

[Tracey Alloway]

This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracee Alloway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our guest, Julia Gledehill. She's Julia Gledehill. Follow our producers, Carmen Rodriguez Ermenarmon, Dashiell Bennett at dashbot, and Cale Brooks. Al Brooks. For more Odd Lots content, go to bloomberg.com oddlots where you have all of our episodes in the daily newsletter. And you can chat about all of these topics with fellow listeners in our Discord Discord GG oddlots.

[Tracey Alloway]

And if you enjoy Odd Lots, if you like it when we dig into the defense industry, then please leave us a positive review on your favorite podcast platform. And remember if you are a Bloomberg subscriber you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions instructions there. Thanks for listening.

[KPMG]

KPMG makes the difference by creating value like developing strategic insights that help drive M and a success or embedding AI solutions into your business to sustain competitive advantage. KPMG make the difference. Learn more at www.kpmg.

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