Senators Carl Levin and John McCain this week introduced legislation to improve how the Pentagon buys things – defense acquisition reform. The President is on the same page. So chances are the Pentagon’s acquisition workforce will have a new set of rules to learn some time this year.

Here’s the bill.  Highlights: a series of new reporting requirements about systems analysis of new programs, a new official to come up with cost estimates of weapons systems, another official to oversee developmental testing, a requirement for competitive prototyping of new weapons, which can be waived, and an effort to make waiving Nunn-McCurty breaches a little more onerous (the idea was that you cancel weapons systems that experience excessive cost growth, but it never happens), plus some other minor bureaucratic changes. McCain claims that the legislation will cut back on cost plus contracts in favor of the fixed price variety, but the legislation does not address that.

At best this bill will create some marginal improvements in defense acquisition. More likely it will simply add hassle.

Acquisition reform is practically seasonal at the Pentagon, as this PowerPoint slide show comically demonstrates. And things have only gotten worse – more programs over budget and behind schedule over time. (Read this recent testimony from a Congressional Research Service expert for details.) According to another expert, former Pentagon weapons testing chief Tom Christie, the trouble is not the existing acquisition rules but the failure to use them to control costs. He says so in a chapter for the book America’s Defense Meltdown, which we will be discussing here at a forum on March 13.

The reasons for the failure of acquisition reform are complicated, but one surely is that these are technocratic solutions to political problems. The trouble is what we want, which is several technological miracles in each new platform, not how we buy it, as my professor and sometimes co-author Harvey Sapolsky explains in a recent Defense News op-ed:

The truth is you can’t fix the acquisition system. All the insiders know this…We can’t fix it because we want crazy things. We want a system that can fire missiles from a submarine hiding beneath the surface of the sea and hit a target thousands of miles away. Or we want a tank that can survive a shaped charge round, pack its own lethal punch and is airlifted by a C-130.

Systems have to perform reliably in the snow, in the mud, in the sand. They have to communicate with every friend and not reveal themselves to any foe. And we want them soon, not later.

Worse, we already have a lot of first-class ships, aircraft, missiles and tanks; proposed new weapon systems have to be a lot better than them or any obvious modification we can make. To be worthy of our approval, the advocates of the new system have to dazzle us with expectations of what will soon be in our arsenal, something no enemy can match. It will likely cost billions, but it will be great.

With that gleam in their eye, the services seek bids for the weapons that will define their futures. Only a few contractors can qualify to make offers. After all, only a few firms know the acquisition regulations well enough and have sufficient engineering talent to manage complex projects.

Moreover, government-encouraged mergers have further thinned the ranks of eligible firms. Given that new starts in most weapon lines are once-in-a-decade-or-more events, project awards are survival tests. Not surprisingly, false optimism abounds.

For more, read his recently co-authored book.

What about using more fixed price contracts and less cost-plus contracts, as McCain suggests? Isn’t it obvious that unless you pay someone a set price rather than whatever he says it costs, he will rip you off? Actually, no, not in defense contracting. Chris Preble and I addressed this in an oped last October:

In a cost-plus contract, the contractor gets paid whatever it costs to make a good, plus a profit. McCain claims that these agreements encourage contractors to spend as much possible and send the government the bill. This argument is confused. Defense contractors have essentially one customer: the Pentagon. Repeatedly gouging your only customer, one with a small army of auditors, is likely to lead to bankruptcy.

New technology is hard to price. If we used fixed price contracts— as McCain proposes—for new complex projects, like the next-generation bomber the air force will soon build, the contractors would simply ask for more money up front to limit their risks. If we force a low price on them, they will likely blow through what is allocated and ask for a new contract. Because military services badly want the weapons they contract for—and starting over would take years—Pentagon officials would then be forced to rewrite the deal.

What acquisition reform would work? It might help to increase the number of civilian acquisition overseers and pay them more, given that their workload has expanded, and to allow them more flexibility in their work, not less, as this legislation would. But these are still minor fixes. You can’t fix acquisition until you change the incentive structure that produces its outcomes. Until the services and their Congressional backers start to accept platforms that push the technological envelop less, the problems will persist.

One of the biggest pieces of news coming from President Obama’s budget preview is that he’d kill federal guaranteed student lending – in which the feds subsidize private lenders – and move everything to direct lending straight from the government. He promises that cutting out the middle man would save about $4 billion a year.

In the short term, that savings figure might be possible, though whether or not that is the case is likely to be hotly contested. Washington does spend a lot subsidizing loans so that they carry almost no risk to the lenders and are, hence, low-interest and abundant. Eliminating those subsidies could save some dough. That said, there is absolutely no reason to believe that making Washington the monopolist student lender will produce any long-term efficiencies. In fact, all it will do is ensure gigantic bloat, as is the case with any government monopoly.

A recent story in the New York Times, coupled with a blog entry I wrote in November, illustrates why neither guaranteed nor direct federal lending should ever be expected to produce efficient outcomes.

On the blog I wrote about how, in order to keep things rolling during the “credit crunch,” the Bush Administration was essentially going to buy up any student loans that lenders thought were too insecure. At the time, the Education Department kept declaring that whatever the feds ended up doing it would be “cost neutral” – we wouldn’t feel a thing as they kept banks and students in the money. I wondered, skeptically, how exactly that would be done, but couldn’t find anything explaining it. All I found were Education Department promises that it would be made clear…eventually.

It turns out, I was very likely right to be suspicious. As the Times reported on Wednesday:

The program is supposed to cost taxpayers nothing, but the Obama administration has asked for additional analysis.

“We have reviewed the analysis with the staff here, and we do not have confidence in the bottom line,” said a senior official at the White House Office of Management and Budget, who insisted on anonymity, citing administration policy. Referring to differences between agreements entered into by the departing Bush administration and public descriptions of the program, the official added, “The documents on their face raise serious questions about whether it’s cost-neutral.”

So it seems likely that the government essentially lied to America. “Oh yeah – ‘cost neutral.’ Sorry. We thought you wouldn’t notice.”

What this little episode illustrates is something we frankly already knew: Government officials will happily deceive us if that’s what it takes to enact policies that they think will make them look good, especially in the short term (meaning, until the next election). With that in mind, whether the feds are working with a middle man or giving students the money directly, it almost certainly doesn’t matter: money will be lost, and probably in much bigger amounts than the public will be led to believe.

So what is government to do about student loans? Nothing! Washington should get out of the loan business and leave promising students and profit-seeking lenders to find each other in pursuit of mutual gain. (A student with high earning potential? A bank looking to make some bucks? Why, it’s a perfect match!) Then we wouldn’t have to choose between the frying pan and the fire, nor would we continue to encourage tons of people to pursue college educations they don’t need, can’t handle, or both. In other words, we’d return both some sanity and taxpayer justice to the world of college finance.