Magazine article Regulation

The Defense Industry's New Cycle. (Defense)

Magazine article Regulation

The Defense Industry's New Cycle. (Defense)

Article excerpt

THE AMERICAN DEFENSE INDUSTRY IS ready for the new war. In fact, it has been ready since the late 1980s when the Cold War petered out. The 40-year-long Cold War convinced industry leaders that war (or, at least, the preparation for war) was a solid if cyclical business. Vietnam followed Korea, and the Reagan buildup followed Vietnam -- about every 15 years the spending cycle peaked with a Cold War crisis, but the demobilizations from the crises were never complete. Weapon acquisition spending including research investments rose and fell within a $90 -$150 billion band. In the late 1990s, even without a clearly designated enemy, weapon purchases began to climb from their post-Cold War lows. The savage September 11 attacks on America assure the development of a full new cycle of buying military hardware.

Decisions The autumn of 2001 was fraught with realignment in the defense sector. Before the attacks, some key decisions about the future had been scheduled for the fall. The Quadrennial Defense Review (QDR) report, intended to set the overall national security strategy, was due at the beginning of October. The Department of Defense was expected to decide whether it would object to the proposed acquisition of Newport News Shipbuilding by its competitors. And the military services were scheduled to choose between proposals from Boeing and Lockheed Martin for the winning version of the richest aircraft program in history, the Joint Strike Fighter (JSF).

Along with those decisions, several new ones were made in direct response to the terrorist attacks. The defense budget environment changed immediately, superseding much of the analysis in the QDR and truly starting the new uptick in the budget cycle. Decisions on specific programs were accelerated, including the purchase of two aerial refueler versions of Boeing's commercial 767 jet transport. The four key decisions made since the September 11 attacks -- on the level of the defense budget, the consolidation of the shipbuilding sector, the JSF procurement, and the 767 tankers -- give indication of problems that lie ahead in America's defense industrial policy.

Those problems may lead to a substantial waste of American taxpayers' resources. The short-term decisions since September 11 have continued a trend towards wasteful "jointness" without any budget constraints. But there is hope for a solution to the new defense pork barrel: The United States could remember the way that President Eisenhower managed the first great spending surge of the Cold War era, and we can apply its lessons now. Capping the topline level of defense spending -- that is, imposing a budget constraint on the military services and defense contractors -- can lead to military innovation if competition is allowed to flourish under the cap. The United States should not seek to plan a particular, unified response to national security problems, just as we do not seek to plan the details of the national economy.

THE DEFENSE BUDGET ENVIRONMENT

Defense is a highly politicized business. The federal government, through several purchasing agencies, is the industry's only buyer, and it is a quirky one. Money for projects must be authorized and appropriated by Congress, where local interests predominate. Government policies determine the industry's market structure, conduct, and performance. There can be no foreign sales without the government's approval. The industry's prices and profits are regulated, as are the types of information that firms can provide to shareholders, employees, and foreign customers.

When nearly every issue in an industry is a federal case, politics becomes crucial to nearly every industry decision. And the politics that count the most in weapon purchases are often influential politicians' desires to support hometown jobs and local companies' profits -- "pork," in the vernacular.

Needed: a threat But the desire for pork can be trumped. …

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