Budgets Are Moral Documents

What running the Army’s $125 billion budget taught me about the world we’re living in now.

An old proverb says when you teach, you learn twice.

I’m back at Wharton tomorrow with the Penn Wharton Budget Office, doing a lunch-and-learn with students and community members at the Fels Institute of Government (Zoom link here to join). One of the things I’ll discuss is the idea of budgets as moral documents.

Nowhere did I learn this more clearly than ten years ago, when I served as Acting Secretary of the Army — just seven weeks into the job — and testified four times before the Senate and House Armed Services and Appropriations Committees to make the case for allocating $125 billion across 1.3 million soldiers, civilians, and their families—more than 200,000 of them deployed across Iraq, Afghanistan, and elsewhere. Both houses were Republican controlled at the time, just like today. Years earlier, I sat on those same committees as a member of Congress.

It’s not just about knowing where every dollar is being spent. It’s about being able to communicate the why. And the why, in the Army’s case, was that our most solemn duty is to fight and win our nation’s wars and keep our families safe here at home. Everything else follows from that.

The Budget Process

The painstaking work of building a budget isn’t what captures public attention. But that is where leadership happens, often, behind the scenes and away from the cameras. We all know there are showhorses and workhorses.

The budget had been built over months, line by line, each allocation representing a judgment about which threats were real, which were overblown, and which were still years away from mattering. I was ultimately accountable for those judgments. What struck me then, and has stayed with me in the decade since, is how different that kind of thinking is from almost everything that happens in the private sector when it comes to geopolitical risk.

Here is what we knew in 2016 that most boardrooms didn’t: the stable world that had underwritten thirty years of globalization was already ending. Russia was reasserting itself in Eastern Europe in ways that had direct implications for energy markets, alliance commitments, and the security of supply chains that American companies had spent decades building on the assumption of a cooperative international order. China was constructing islands in the South China Sea as leverage. Cyber operations were already functioning as instruments of state power, used to steal, destabilize, and coerce in ways that left no fingerprints and created no legal tripwires - a gray zone in warfare. The world was, in other words, already telling us exactly what it intended to become. Most folks in the private sector were just starting to pay attention.

Throughout my testimonies, I carried with me the soldiers I had just visited at Fort Hood, Fort Sam Houston, Iraq, and Afghanistan—many of them the same ones I had deployed with years earlier, now on their fifth or sixth deployments.

I made the argument that readiness wins wars—that our warfighters had to be ready to fight and win tonight.

That was at the heart of every line of the budget.

There’s an old Army saying, the six P’s: proper preparation prevents piss poor performance. It sounds like a bumper sticker until you’ve watched what happens to units that ignored it.

All of this shaped how I think about capital allocation in general. The discipline the Army demands is about the intellectual posture required to make consequential decisions. You don’t get to tell the Joint Chiefs or the Armed Services Committee that you’ll sort it out when things clarify. Clarity is a luxury that threat environments don’t provide, so you build flexibility into the structure from the beginning, because the one thing you know for certain is that the situation will change.

That lesson is overdue for the private sector.

Most corporations have spent the last thirty years building for efficiency, allocating capital on the assumption that the world would remain stable.

So much of our world has changed since 2016. The post-Cold War order that made globalization feel permanent has fractured in ways that would have seemed extreme even to the pessimists in those Pentagon conference rooms. Energy prices are a function of conflict now, not just supply and demand. We see that with the current war with Iran, which has closed the Strait of Hormuz, which accounts for 20% of the world’s oil supply, and our two closest Asian allies, Japan and South Korea, depend on 70% of their oil coming through that Strait. Insurance markets have repriced risk in shipping lanes that companies assumed were permanently stable. A conflict in one region propagates through supply chains, financial systems, and regulatory environments in ways that are genuinely difficult to model in advance because most organizations were never looking for them. And because they weren’t built to see these risks, they didn’t allocate capital for them.

The cyber dimension is where this gets most acute, and where I see the largest gap between how companies think about risk and how it actually works. There is still a tendency to treat cybersecurity as a technology problem—much like CEOs once treated accounting and financial reporting before Enron and Sarbanes-Oxley. Today, many still defer cyber to the IT department, measuring it in firewalls and incident response times.

That framing misses what cyber has become.

State-sponsored actors don’t use cyber operations because they’ve run out of other options. They use them because they work: to steal intellectual property, destabilize financial systems, probe our critical infrastructure and create leverage before any kinetic action begins. The digital infrastructure connecting a portfolio company in Ohio to its suppliers in three other countries is part of the same contested environment as the physical supply chain. When people talk about interconnected risk, that interconnection is what they mean.

There is a concept in military planning called adaptive posture— the ability to adapt and overcome to win. The idea is that you don’t build your force structure around a single anticipated scenario. You build it to be functional across a range of scenarios, including ones you haven’t fully imagined, because the enemy, and by extension, the environment, will always find ways to surprise you. Strategy is often the first thing you throw out the window when you get punched in the face (trust me, I learned that lesson the hard way dozens of times growing up in Northeast Philly). As a leader, you pre-position resources. You preserve optionality. You don’t concentrate in ways that eliminate your ability to respond when conditions change. It is, in some ways, the opposite of optimization. It accepts a degree of inefficiency as the price of remaining viable when the situation shifts.

The companies that come through the next decade well won’t be the ones that predicted every disruption correctly. Nobody will do that. Successful ones will build flexibility into their capital structures, stress-test their supply chains and liquidity positions before the disruption rather than after, and treat geopolitical risk as a first-order planning variable. That is a different kind of preparation than scenario modeling. It’s structural, baked into how the organization allocates capital, not bolted on as a contingency plan.

Ten years later, that question has migrated from the Pentagon to the boardroom. The organizations that are asking it honestly, before the pressure arrives, not after, are the ones that will still have options when it does. The ones that aren’t are making the same mistake that most of the private sector was making in 2016, when the world was already changing and the signals were already there, for anyone paying close enough attention.

Budgets Show Everyone Your Priorities

Whether it’s the car you personally drive or the budgets your nation passes, both reveal your priorities. In 2010, when asked what keeps him up at night, the Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, testified, “The most significant threat to our national security is our debt.” That debt is now up to $39 trillion. Each year, we spend over a trillion dollars just to pay the interest on this debt. Our debt-to-GDP ratio is over 100%, a level not seen since after WWII. Each year, including this one, our deficit spending is getting worse, which is why the Penn Wharton Budget Model Office is so important.

The Penn Wharton Budget Model provides nonpartisan, research-based analysis on the fiscal impact of public policy. Whether it’s the real-time budget tracker, tariff simulations, current tax rates and revenues, or long-term Social Security updates, it gives elected leaders in Washington a clearer picture of the tradeoffs they face.

Basically, it’s a bunch of sexy nerds trying to get politicians to understand that their decisions today cannot be put off any longer.

So tomorrow when I’m doing Q&A with these graduate students, we’ll be talking about what our budgets reveal about our priorities and what those choices say about what we’re preparing for.