Defense Industrial Base: Lawmakers Reinventing the Wheel

The House Armed Services Committee today once again summoned analysts and industry representatives to articulate why the “defense industrial base is a national security imperative.”
The underlying theme: Impending doom awaits America’s arms manufacturers as military spending declines.
Many HASC members — Congress’ most hawkish lawmakers — worry that coming budget cuts will undermine the nation’s ability to build next-generation weapon systems if key contractors go out of business as weapons programs begin to dry up.
Some analysts like Barry Watts, senior fellow at the Center for Strategic and Budgetary Assessments, have argued that the answer is a Defense Department industrial policy that makes targeted investments in critical areas of the defense sector, such as tactical aviation, nuclear submarines and spy satellites.
Watts, who recently published a study on the subject, calls out the Pentagon for seeing the industrial landscape through rose-colored glasses. Defense Department leaders treat the industry like a free market, while in reality it is not. 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, Watts says.
The HASC hearing rehashed the same old industrial policy issues that resurface after every post-war builddown. But the Pentagon has shown little appetite for picking winners and losers, and has been more comfortable with a laissez-faire approach.
The question of whether the government should actively “manage” the private sector is a tricky tightrope for some GOP members of the HASC, who want to boost defense programs but do not want to necessarily endorse industrial policies that smack of Stalin’s five-year plans.
The answer is simple, says Fred Downey, vice president of national security of the Aerospace Industries Association. Defense suppliers fundamentally need “programs.”
Downey’s message: Without programs, industry will wither on the vine. Once Wall Street picks up signals that military procurement spending might go off a cliff, investors will take their money elsewhere, he says.
Defense is a “one-buyer market, and the buyer also is the regulator,” he says. “It is not a free market.”
In the face of a defense downturn, the industry needs a predictable forecast, Downey says. The demand is unstable, he adds. “Necessary programs in one administration or military regime become ‘nice to have’ in another. … The Pentagon has a distorted image of a free market model.”
If weapons programs vanish, technology in the future may not be available, he says.
“The industrial base should be a part of any strategic planning,” says Downey. “Seldom has it been considered in the past. … The dialogue has to go beyond theoretical concepts. You have to define what operational problems you have to solve today and tomorrow.”
Pierre Chao, a highly regarded defense industry expert and managing partner of Renaissance Strategic Advisors, points out to lawmakers that broad industrial policy cannot possibly be applied to the entire universe of defense suppliers. One-size-fits-all industrial planning would not work for the Defense Department, he says. The Pentagon in fact “makes up” an industrial base strategy every time it makes an acquisition decision.
Sometimes, however, those decisions might be questionable. “In the absence of a strategy, we focus on very strange things,” says Chao. The Pentagon has a “very specific industrial base strategy for black berets, [but not] one for semiconductors.”

Topics: Defense Department, DOD Policy