The Department of Defense has proposed a change in the way it buys goods and services that could have far-reaching and destructive consequences, not only for the nation’s warfighters but also for the global competitiveness of the U.S. economy. As reported in Defense News this week, policymakers want to narrow the definition of commercial items that the military can buy without imposing burdensome regulations. The rationale for the change is that contractors have tried to label inappropriate items like warships and combat helicopters as commercial items to escape the rules usually applied in military purchases, and that has deprived the government of information it needs to make smart choices.
If that’s true, then policymakers need to fix the problem. But the way the Pentagon proposed to do so in March has huge indirect consequences that will end up hurting everybody involved — warfighters, taxpayers, exporters and just about anyone else with a stake in the process. It would make many companies with commercial product lines comply with expensive government requirements, including supplying competition-sensitive pricing information to federal officials. Said officials do not have a great track record in protecting such proprietary information. In some cases, the contractors would have to set up separate production lines and supply chains even though they already are building what the government needs in efficient commercial facilities. The proposed regulation change is thus shaping up to be a case study in how the government distorts market forces and undermines the competitiveness of industry.
Obviously, if companies have to establish separate facilities or procedures for supplying the government with commercial products that other customers are already buying, that undermines the potential for economies of scale and other production efficiencies. And if they have to share competition-sensitive pricing data on their commercial products with federal officials, that could become a deterrent to dealing with the government at all. Although Pentagon buyers are accustomed to being the biggest customer in the room when dealing with their captive supplier base, the military’s total purchases of goods and services each year only amount to about two-percent of the economy. So demanding that companies like Apple or General Electric comply with a raft of burdensome regulations for the right to sell to the government will likely drive many of them away.
According to Defense News reporter Zachary Fryer-Biggs, the reason for the proposed rule change is that policymakers want to get the best price and performance possible from suppliers during a time of declining military outlays. That’s understandable, but trying to drag hundreds of hapless contractors into the Pentagon’s baroque acquisition system will have the opposite effect — it will reduce the number of suppliers willing to sell to the government, increase the price-tag charged for commercial products the military buys, and widen the gulf between the defense industrial base and the rest of the economy. Any chance for achieving better export performance by leveraging military demand will be lost. We can all agree that abuses of commercial purchasing rules should be stopped, but does the Obama Administration really need to harm everybody involved to accomplish that worthy end?
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