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The National Security Industrial Base: A Crucial Asset of the United States, Whose Future May Be in Jeopardy

INTRODUCTION

It seems hard to believe: at a moment of historic highs in defense spending, there is growing concern about the future of American defense industry as well as the national security industrial and scientific base more generally.  How can this be so?  Of all the economic sectors in the United States, how could the very sector that has benefitted from a trillion dollars of war spending over the last decade and that is presently enjoying the fruits of a cumulative defense budget 50 percent greater in real-dollar terms than the Cold War average, truly be in trouble?

But the cold, hard reality is that there are serious causes for concern. It was with this in mind that over the course of 2010, Brookings convened a working group of top public and private leaders and thinkers, across the political spectrum, representing a variety of firms, the Pentagon, and think tanks as well as the Congress to explore the key issues facing the defense industrial base in the years and decades ahead. The intent was to move past the “bumper sticker” discussion that usually surrounds the issue, of focusing on the implication of single programs at single firms in single budget cycles, and instead look at overall trends and futures of the industrial base as a whole. The seminars explored everything from likely Pentagon buying plans in the years ahead, and the ability of the American education system to supply the needed human capital, to Wall Street’s investment plans relating to this sector.

When one takes a look at the big picture, moving beyond a focus on the implications of a program buy or cut for a single firm or individual congressional district, it becomes clear that the underlying strength, health, flexibility, and dominance of a prized national security asset for the country is facing deep and significant challenges, arguably more so than perhaps ever before in its post-World War II history. 

The significance of this runs counter to how issues in security are often framed. We are accustomed in the American public debate to praising men and women in uniform and yet we often ignore or even pillory those who equip and support them—the scientists, engineers, industrialists, investors, and workers who make the equipment that has allowed the United States to dominate most forms of warfare for the last few decades.  To be sure, there have been abuses in the defense corporate sector, as well as an absence of adequate regulation for many of the overseas operations of contractors.  But the fact remains that American troops have been successful in the field wielding the weapons of war manufactured for them primarily by U.S. firms. And an additional reality looms—many of these firms, and thus many technology areas of excellence for the nation, could soon be in serious trouble.

High defense budgets are good for the defense industry and defense investors at one level.  They are dangerous, however, at another level.  The stock market does not treat firms well when their sector of the economy is expected to go into significant decline in the coming years, as is the case with defense—even if current spending is reasonably robust.  Companies do not enjoy laying off workers and shutting down facilities in communities that have been loyal to them.  The workers and communities obviously enjoy the process even less.  And in a free-market system, beyond these painful realities of the bust-and-boom cycle of industries that are vulnerable to such roller-coaster dynamics, there is also the concern that cutbacks will be uncoordinated and unpredictable in effect.  The national asset represented by research, development, and production capabilities at not just the prime contractors, but also their many subcontractors could be jeopardized.  Capabilities could be lost, and once lost, could be difficult, costly, and slow to replace if and when they are needed again.  The future taxpayer could suffer.  Even more to the point, the nation’s future security could be jeopardized, especially in an environment where rising powers and entrepreneurial adversaries will be constantly attentive to any American weaknesses.

We must also remember that the defense industry also is a key engine in the American economy, most specifically as an engine of trade and innovation. To use just one example, if it was not for the defense industry’s role in everything from Global Positioning System (GPS) to the Internet to the jet engine, we would not have global trading networks or the “Just In Time” strategy that has raised so many organizations' returns on investment, quality, and efficiency. Indeed, each of the major firms in this sector spin out literally thousands of copyrights and inventions.

Put more specifically, and numerically, the dilemma might be described in this way:  Current American defense spending including war-related expenditures totals more than $700 billion a year.  Of that amount, just over $100 billion is normal procurement, about $80 billion is normal research, development, testing and evaluation, and another $80 billion or so sustains acquisition costs related to the war budget. The overwhelming share of these combined amounts, totaling more than a quarter trillion dollars a year, is directed to American firms. In addition, defense companies garner several tens of billions of dollars a year more from accounts in the operations and support budgets—most notably, operations and maintenance—in the war theaters and at home. All told, American defense companies have gross revenues of well over $300 billion a year from Department of Defense (DoD) contracts. And yet, all the analysis and data points to a current industrial base at a crossroads.

Even more, in the coming years, two separate and powerful dynamics are expected to push these numbers significantly downward.  First, war costs are likely to decline dramatically—quite likely by 80 percent or more--as American troops are further reduced in Iraq and begin to decline in Afghanistan. Second, as part of the country’s efforts to reduce enormous budget deficits, other defense accounts (from the base or “peacetime” budget) might decline by 5 to 10 percent given the most current ideas and plausible projections now available. Taken together, these two effects could reduce funds directed to American defense companies by well over $100 billion a year, or at least one third. These are admittedly rough predictions, but as of this writing they seem well within the realm of the plausible and certainly constitute a realistic scenario that planners in and out of government and industry need to consider.

Transitions of this scale are inherently difficult. That is true even if much of the recent increase in spending was unexpected, and in some ways a boon to parts of the industry—and even if the end of such a period of largesse is to be expected at some point. It is also true even if the likely remaining funds available to industry will be substantial in historical perspective. Many of today’s weapons systems are inherently more complex, and thus inevitably more expensive, than those of previous eras, so the same number of real dollars does not guarantee the same health of the industry. To be sure, industry has some hand, and some responsibility, in driving up the unit costs of weaponry. But much of this is desired by the customer, and most of it does in fact provide a war fighting advantage for American GIs even if at times it arguably goes too far. The key point, though, is that whether one welcomes or opposes likely steep cutbacks in defense funding, the health of the nation’s research, developmental, and production sectors in the defense industry will not stay healthy automatically through the process.

This paper proceeds as follows. First, it briefly reviews the nation’s science, engineering, and industrial state of health, with an eye towards identifying ongoing American strengths as well as weaknesses. The message here is mixed—despite an ongoing process of industrial decline, the United States remains a formidable technological power with key areas of strength including in aerospace and related fields. This suggests that the nation’s defense industrial base, while at some risk, is hardly on an inevitable path towards demise or fundamental weakening—meaning that good policy should be able to do a great deal to keep it solid and healthy, if that good policy can be adopted and sustained. The paper then hones in more directly on defense issues, attempting to identify both future requirements for the U.S. defense establishment and also likely future resources available to it. Finally, the paper hazards some preliminary thoughts on steps that might be taken—or at least seriously explored—in the coming years to ensure the future health, strength, excellence, and flexibility of the American national security industrial base.

SERIES: National Security Industrial Base | Number 11