Managing the Defense Industry: Stalinism or Smart Business?
Erwin, Sandra I., National Defense
* America's arms manufacturers are asking the Pentagon to step up and protect the industry from an imminent collapse. The way they see things, budgets for new weapons systems are drying up, big-ticket programs are few and far between, and many of the military's top suppliers soon could be shoved off the proverbial cliff.
Chief executives of major Pentagon contractors contend that now is the time for the Defense Department to do what it hasn't done since World War II: "manage" the weapons-making industry to ensure that critical skills and facilities don't wither away in the coming defense downturn.
Such cries for industrial policy--which come after every post-war builddown--have fallen on deaf ears at the Defense Department. The Pentagon 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 with. The government finally drew the line in 1997 when it stopped the merger of industry giants Lockheed Martin and Northrop Grumman.
Industrial policy mandates have existed since the 1950s but most administrations have ignored them, particularly in the post-Reagan era when even the suggestion that the government should manage the private sector is laughed off as a grandiose Stalin five-year plan.
But as the current wars wind down and the military prepares for an era of restrained spending, the alarms about the future of the defense industry are ringing louder than ever.
A recent study by the nonpartisan Center for Strategic and Budgetary Assessments predicts an "erosion of design capabilities for military-unique products" and calls for the Defense Department to actively protect segments of the defense industrial base that are "truly important to retain," such as tactical aviation, nuclear submarines and spy satellites. "It is not unrealistic to foresee a day in which the U.S. defense industry no longer possesses the design or production capabilities for certain weapons systems," says the study.
The prevailing attitude that the defense industry is a free-market, Darwinian system is a myth, CSBA analysts contend. They note that the defense industry is a highly regulated sector of the U.S. economy in which the government is both the sole customer and the regulator. It is a "serious misunderstanding of the realities of weapons acquisition in the United States to think that the U.S. defense industry operates like a normal free market," says the study.
Defense policymakers assume that the industry has the ability to automatically resize as demand changes and still maintain competitiveness, but that is not how it works, says Marty Bollinger, director of Booz 8l Company's aerospace and defense practice. …