Defense Industrial Policy Myths Debunked

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. It is also a cyclical business. There are large, often unexpected increases and decreases in demand as wars begin and end. And it works mostly on expensive and exotic technologies with a taste, for example, for $2 billion destroyers and missiles that can hit a target with precision 5,000 miles away.

When the defense budget declines it is obvious then that the government has to assure the viability of important sectors of the defense industrial base. As Watts and Harrison point out, without contracts for new systems or other financial sustainment, key defense firms will fail, potentially losing for the nation in the process vital weapon design and manufacturing skills that in the past were maintained in public arsenals between wars. But what industry sectors are crucial to national security and, thus, what firms need to be preserved? Watts and Harrison provide no guidance other than to say hard choices have to be made.

But some preservation choices have already been made by agencies worried about their own futures. At the end of the Cold War the Department of Energy worked to preserve the capability to design and build nuclear weapons even though none have since been produced. At the same time the submarine force in the Navy took the initiative to assure that capabilities were retained in both public and private facilities to acquire new torpedoes and nuclear submarines while the force, itself, was shrinking. Subsequently, the Air Force, Navy and NASA have tried a variety of schemes to keep the rocket motor and satellite businesses alive. It is clear that agencies have been willing to invest their own resources to sustain capabilities, including keeping firms in business that have no commercial alternatives, in order to hold onto core competencies.

In addition, commercial markets will sustain other defense needs without government intervention. Although the Joint Strike Fighter is currently the military’s only fighter aircraft project, America will long be able to design militarily useful airframes and engines because of a thriving aviation industry that is competitive internationally. Make-work projects are not needed to have the capability to build combat aircraft. It is also true that growing commercial interest in robotics will likely sustain domestic capabilities that are easily transferred back to military use if military demand for robots were to slacken. Similarly, we should expect that non-defense markets will give the Defense Department access to advances in computers, bioengineering, and nanotechnology. The Pentagon needs only to maintain strong research interests in these fields to be able to tap into these technologies for military purposes.

It is important also to recognize that America is still the largest manufacturing nation in the world. We make nearly everything or could if needed. Modern warfare has moved beyond mass production contests, but no nation would likely win such a competition with the United States. Lost capabilities could be reconstituted rather quickly.

Regardless of coming budget cuts, surely the United States will have the largest defense budget in the world. Research, development and procurement equal about a third of total defense expenditures. In the worst budget case being considered, the Defense Department will still be investing $150 billion to $160 billion a year in the defense industrial base.

Nevertheless, there will be hard-to-recover industrial capabilities at risk of being lost because of the tight budgets and canceled programs that lie ahead. Most of these capabilities are likely to be in small firms or in hidden corners of the big ones that are surrounded by layers of classification. It is the Defense Department’s job to sustain them. But as Watts and Harrison stress, the policy danger is that too much of the industry will seek and be given protection. Arsenals, public or private, have only one customer and can lobby for work.  Each assembly line, sector and region has its own set of congressional advocates. Because of this, the defense industrial base is likely to suffer from too much capacity rather than too little.

The industrial base policy that is needed is one that deals with the dependencies. Downturns in defense budgets are opportunities to reduce capacity as well as times to preserve vital segments. There should be a BRAC-like process created that closes private arsenals by buying out the companies, workers and communities to reduce the political demand for continuing unneeded projects.

Harvey M. Sapolsky is a professor emeritus at the Massachusetts Institute of Technology, where he taught defense and health policy courses and was until recently the director of the MIT Security Studies Program. He also is an occasional consultant to defense firms.

Topics: Defense Contracting, Defense Department, DOD Policy