Magazine article National Defense

Defense Industrial Policy Myths Debunked

Magazine article National Defense

Defense Industrial Policy Myths Debunked

Article excerpt

* Looming budget austerity raises concerns about the future health of the U.S. defense industrial base. But the coming crisis also offers an opportunity to prune the deadwood, as excess capacity in the industry wastes defense dollars and delays transitions to new technologies and doctrines.

Defense leaders such as Secretary Leon Panetta, the service chiefs and defense committee chairs on Capitol Hill warn that budget cuts threaten these important capabilities. Several industry and think tank studies--the most prominent of which is Barry D. Watts and Todd Harrison's "Sustaining Critical Sectors of the Defense Industrial Base," by the Center for Strategic and Budgetary Assessments--argue that we must address directly the needs of defense firms in any budget retrenchment if we expect to protect our military edge.

To do this, two fictions need to be dispelled. The first is that we are dealing with "private enterprise" when we talk about defense firms, especially the large ones. Big defense contractors are not true private firms, but rather privately owned arsenals, having replaced over the last several decades most of the nation's public-arsenals.

Watts and Harrison have the history a little off. They have contractors mobilized for World War II when in fact they have been mobilized in all our big wars. Public arsenals nurtured military technologies and developed weapon designs between wars when we bought little for the military. Contractors filled the production gap in wars and went back to civilian production afterwards as there was no business for them.

What happened after World War II was that the United States stayed permanently mobilized because of the Cold War and the nation's new role as the manager of global security. There was then a continuing business in military equipment for contractors. And during the Cold War, the U.S. government began closing government arsenals and shifting work to contractors when there were downturns in defense budgets as after Korea and Vietnam. Since the end of the Cold War, there have been five base realignment and closure (BRAC) commission reviews, which further eliminated government owned facilities.

The contractor consolidation wave that followed the end of the Cold War eliminated many corporate logos, but kept open all of the privately owned platform assembly facilities. Today the military cannot design or build warships or aircraft without relying on private arsenals.

The second fiction is that the United States does not have a defense industrial base policy. We do, as the closure of the public arsenals and shipyards demonstrates. The question is whether the policy is a good one. Take shipbuilding as an example. The Navy has had for years six yards ultimately owned by just two firms that build large ships for the Navy and that essentially have no other customers. It is this mutual dependency that defines private arsenals. For the Littoral Combat Ship, however, the Navy sought designs and prototypes from two other privately owned yards with the intent of narrowing it down to one design, which all the yards could compete to build. But then it changed the policy by buying both designs and thus having eight yards expecting Navy business. The recent announcement that a yard in Louisiana will be closing is only partial compensation for the mistake of expanding the shipyard base when building costs are growing and budgets are tightening.

Defense is a strange business, indeed, The most important structural feature, even beyond the fact that the supply side has been almost fully privatized, is that it is a monopsony. There is only one buyer permitted, the government, a buyer that is both extraordinarily rich and, given its ever changing budget intentions, quite fickle. The barriers to entry, at least at the platform level, are high in defense because the purchase decisions are unavoidably political decisions that include local employment and national sovereignty considerations irrelevant to normal business transactions. …

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