Defense Budget: Industrial Policy Debate: Should the Pentagon Pick Winners and Losers?

Article excerpt

The last time the United States drastically cut spending on new weapons systems, defense contractors were told to merge of else they would perish.

The industry over the past two decades consolidated into a handful of mega-corporations. Now, a new drawdown in big-ticket weapon spending is approaching, and companies are wondering what will be the survival strategy this time around.

Industry executives and trade associations have called for the Defense Department to take preemptive action to protect key sectors that are considered of strategic importance to national security. That would require the Pentagon to continue to fund selected research-and-development programs even if those systems were not likely to be needed in the near future. Advocates of centrally planned industrial policy contend that unless the Pentagon decides ahead of time what sectors of the industry should be kept alive, budget cutbacks in major weapon systems will jeopardize portions of the industry that, once vanished, cannot easily be reconstituted if the United States needed to mobilize for a major war.

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U.S. Code Title 10 requires that the Defense Department consider the industrial implications of its major weapons program decisions, says defense industry analyst Joachim Hofbauer in a Center for Strategic and International Studies report. "Developing and collecting standardized metrics to measure the value of individual defense programs to the industrial base constitutes a crucial prerequisite for complying with this regulation. Yet, today the Department of Defense largely lacks such metrics," says Hofbauer.

But despite an abundance of laws that require defense industrial planning, the Pentagon historically has shown little appetite for picking winners and losers, and has been more comfortable with a laissez-faire approach.

After the Cold War ended, the Defense Department stepped out of the way and for five years let contractors consolidate at will. The Pentagon finally drew the line in 1997 when it stopped the merger of industry giants Lockheed Martin and Northrop Grumman.

A repeat of the mergers and acquisitions frenzy of the 1990s is improbable, considering how much smaller the industry is now. But the Pentagon still should be prepared to cope with the "industrial consequences" of future budget decisions, says Undersecretary of Defense for Acquisition, Technology and Logistics Ashton Carter. "We'd be fools to not pay attention to that," he says during a recent Council on Foreign Relations talk in Washington, D.C.

Industrial policy mandates have existed since the 1950s but most administrations have avoided picking winners and losers when budgets have gone south, says Gerald Abbott, directory of industry studies and professor emeritus at the Industrial College of the Armed Forces. "During the Reagan administration there was a time when if you used the word 'industrial policy' you got fired," he says in an interview.

The Pentagon essentially has three choices, Abbott says. It could only award contracts to companies that it wants to keep alive, it could return to the arsenal-style government-owned industry model, or it could treat defense contractors like public utilities by guaranteeing a certain amount of work and returns for investors.

But none of these alternatives is ideal because they lock the government into a corner, says Abbott. "The trouble with industrial planning is that once the government writes up a list, it's almost impossible to change the darn list."

A case in point is the U.S. national stockpile of critical materials. "Once you put something in the stockpile it is impossible to get it out even if it is no longer needed," says Abbott. "You create a whole bunch of vested interests that want to continue to sell those materials to the government."

Another impediment to industrial planning is the power structure in Washington, he says. …