Presentation to the Air Force Association 2006 Air & Space Conference
Thank you for inviting me to participate in today’s forum on the defense industrial base.
I want to start by commending the Air Force Association for sticking with the term “industrial base” at a time when policymakers under the spell of transformation have come to regard the very word “industrial” as retrograde and irrelevant.
Seven years ago, in the biggest defense speech of his first presidential campaign, candidate George Bush complained that America’s military was organized for “industrial-age operations rather than for information-age battles.”
That was the same speech in which Bush promised he would empower his defense secretary to fashion a “new architecture of American defense,” and recommended skipping a generation of military technology.
Bush’s point was that threats to national security had changed, a view soon proven all too valid.
But in describing industrial-age operations as a vestige of the past and information-age battles as the future of warfare, Bush embraced a trendy theory of conflict that neglected the economic foundation of American military power.
That foundation was an industrial system that Franklin Roosevelt had called “the arsenal of democracy” — a system already beginning to slip away when Bush took office.
By proposing to skip a generation of technology, Bush was signaling that he would be no more attentive to the nation’s military-industrial sinews than his predecessor had been.
And sure enough, that is what we have seen during Donald Rumsfeld’s tenure as defense secretary.
If Mr. Rumsfeld and his advisors have their way, every major production line currently manufacturing fixed-wing military aircraft in the United States will be shut down by early in the next decade.
They don’t seem to care.
It’s true that the defense sector has been a big beneficiary of the global war on terror, but that boost is the result of increased spending rather than any deliberate policy for protecting the industrial base.
Perhaps you saw Secretary Rumsfeld’s comment in the current issue of Air Force magazine, that he has “fifty million things” on his desk, and management of acquisition programs isn’t one of them.
That remark aptly captures his attitude towards weapons programs and the industrial base.
He doesn’t think they are part of his job — they aren’t important enough to merit his attention.
Against that backdrop, I would like to spend the next fifteen minutes discussing three aspects of the defense industrial base.
First, I want to examine what the continuous erosion of U.S. manufacturing means for future military preparedness.
Second, since I have just credited increased spending rather than industrial policy for the health of the defense sector, I want to explain why spending on weapons is likely to decline steeply in the future.
Third, I would like to describe the military-space portion of the industrial base to illustrate why even high levels of spending don’t assure a healthy sector in the absence of coherent policymaking.
The Decline of American Manufacturing
Beginning with the decline of American manufacturing, it seems to me that there is an important fact about our defense industrial base that tends to elude people who came of age during the Cold War.
For most of our history, the weapons needed in wartime were produced by retooled commercial plants rather than dedicated military facilities.
It’s true there were always Navy shipyards and Army cannon foundries, but with defense spending historically averaging one-percent of the economy in peacetime, the military didn’t generate enough demand to sustain a big defense industry.
So the typical pattern from the beginning of the republic until about 1950 was to mobilize private manufacturing plants for war production when a threat arose, and then revert to commercial production when the threat had passed.
You’ve all seen the pictures of auto plants turning out tanks and bombers during World War Two, so you know what the traditional production model looked like.
But that model changed in the mid-twentieth century, because a threat arose that persisted much longer than previous dangers had — in fact, for about forty years.
During the Cold War, the nation spent six to ten percent of gross domestic product on defense every year, so there was continuous demand for military goods that enabled a dedicated private-sector defense industry to flourish.
Because the sector thrived for two generations, debates about industrial preparedness came to focus mainly on the defense industry rather than the state of the broader economy.
However, once the Cold War ended, defense spending began declining to historic levels and the industry shrank accordingly.
Frankly, there wouldn’t be much left of the defense industry today if Osama bin Laden’s atrocities hadn’t arrested the downward drift of military spending.
The Clinton Administration saw where military demand was headed in the early 1990s, and tried to find a way of sustaining military production capabilities in the commercial economy.
For example John Douglass argued long and hard in favor of a mixed-use shipbuilding industry that could sustain key skills through both military and commercial work.
In general, though, the locus of technology innovation and development shifted out of the defense sector after the collapse of communism, and the military now looks to commercial enterprise for new ideas.
So what does it mean that our commercial manufacturing capacity is withering at precisely the time the military has become more dependent on it for future warfighting technologies?
Let me cite a few indicators to make my point…
— In 1976, manufacturing was 22 percent of the economy; today it is 11 percent.
— The U.S. trade deficit, which results mainly from a negative flow in manufactured goods, has increased from $100 billion ten years ago to $400 billion in 2000, $600 billion in 2004, and $800 billion this year.
— During the 6 years of the Bush Administration, the nation has lost an average of 43,000 manufacturing jobs every month.
— And while the pace at which old factories are closing is pretty much the same as in the past, the rate at which new ones are opening is at historic lows.
In other words, Franklin Roosevelt’s arsenal of democracy — that vast industrial colossus that made victory possible in World War Two — is disappearing.
But I didn’t need to tell you that, because you see it every time you stand on a corner and watch what kinds of cars go by, or walk down an aisle at Best Buy.
The United States is de-industrializing.
The trend isn’t confined just to cars and electronics: the U.S. has exactly one billion-dollar chemical plant on the drawing boards for the years ahead, while China has fifty — that’s five-oh — fifty plants it plans to build.
Even La-Z-Boy has closed its domestic plants and moved furniture production to China.
The consequences of collapsing commercial manufacturing capacity for our trade balance are bad enough, but when you combine that with the current administration’s indifference to the defense industry, you really have to wonder how the nation would mobilize for a sustained conflict.
Whatever the benefits of military transformation may be, the Pentagon’s current obsession with networks has distracted policymakers from the security implications of de-industrialization.
We really don’t know what would happen if a new peer competitor such as China emerged that could deny America access to its industrial suppliers in the Western Pacific.
What we do know is that the last time we were in a really big war, the nation relied very heavily on an industrial infrastructure that will be largely gone in the future.
Decreased Defense Spending
I could go on talking about de-industrialization for the rest of the day, but since I’ve allotted only five minutes for each of my topics, let’s move on to the next one — the impact of future decreases in defense spending on the industrial base.
I said at the outset that the current health of the defense sector is a by-product of increased Pentagon spending rather than industrial policy.
I’ve also said that the commercial sector is losing its capacity to support industrial mobilization for a prolonged war.
It follows from those two points that if we are to retain an adequate defense industrial base, then we must sustain high levels of demand for military goods.
I don’t think that’s going to happen in the absence of some timely market stimulus from the likes of Osama.
Those of you conversant with the Air Force’s proposed spending plan for 2008 and beyond know that budget cuts are coming for E-10, F-35, Space Radar and any number of other investment programs.
The cuts will continue for some time, because the White House Office of Management and Budget is projecting that defense spending will decline from four percent of GDP today to three percent at the end of the decade.
But there’s a much bigger budget story to tell here, and I’d like to present it in terms of four structural constraints on weapons expenditures.
First of all, defense spending is the only major component of the U.S. economy driven mainly by non-economic factors.
Military spending rises or falls in response to perceived threats — threats that often cannot be predicted in advance.
In the current decade, defense companies have benefited hugely from a surge in military demand associated with the global war on terror and the campaign in Iraq.
But if the 9-11 attacks had been averted by some timely police work, neither the counter-terror effort nor the Iraq campaign would have occurred.
Thus, demand for military goods in this decade could easily have matched the depressed levels of the last decade.
Going forward, we need to recognize that threats don’t just arise unpredictably, they also recede unpredictably.
Despite all the talk of a long war against terrorism, we can’t really know how long the current threat posed by Al Qaeda and its ilk will persist.
Some experts think it is already fading fast.
Since memories of 9-11 are fading just as fast, it’s quite possible that the political will to sustain the current defense program will crumble in the face of competing domestic needs during the balance of the decade.
A second structural constraint on weapons outlays concerns how the character of perceived threats shapes defense spending priorities.
You know, we faced terrorists and insurgents during the Cold War too, but policymakers were preoccupied with the nuclear and conventional capabilities of the Soviet Union and so it was the latter threats that shaped our military posture.
Defense demand during the remainder of this decade may prove to be a mirror image of the Cold War priorities — in other words, we may focus mainly on unconventional threats rather than more traditional dangers.
That certainly is the preference of the crew currently running the Pentagon, and if the same preference persists into the next administration there will be little demand for many of the competencies at the core of the defense industrial base.
We could end up pouring money into counter-insurgency warfare and language skills rather than satellites and tactical aircraft.
A third structural factor at work in the defense budget is what I will call the “trading range,” the propensity of spending to oscillate within well-defined boundaries.
If you trace U.S. annual defense outlays back to 1950, you find that in constant 2006 dollars they have never fallen far below $300 billion and have never risen much above $500 billion.
That pattern persisted through the Korean and Vietnam Wars, through the Reagan defense buildup, and into the global war on terror.
I am not going to propose an iron law of defense spending, but when a market has never exceeded half a trillion dollars despite testing that limit four times in fifty years, you have to ask yourself whether the pattern will be broken this time around.
The answer is that in the absence of some hugely traumatic attack by terrorists, it probably won’t be.
If past is prologue, the “technical chart” calls for a top in the buying power of the defense budget this year or next followed by a decline on the order of 25 percent over the following ten years — almost exactly what OMB is projecting.
That decline doesn’t necessarily have to devastate the industrial base, but it probably will because of a final structural factor at work in the budget that I call the “elasticity” of accounts — in other words, how readily they rise or fall in response to the shifting availability of resources.
Although budget experts often refer to entitlement outlays as “mandatory” and defense outlays as “discretionary,” there are some types of defense spending that might as well be entitlements in terms of how hard they are to cut.
Compensation for military personnel, healthcare benefits, and some operations accounts are almost impossible to cut, so when the buying power of the defense budget starts eroding, other areas tend to take the brunt of the reductions.
Because the political and operational consequences of cutting weapons programs are far less immediate than the consequences of cutting pay, it is usually the investment accounts that get cut first and cut deepest.
That’s what happened after Vietnam, and after the Cold War, so we can probably assume a similar pattern if the global war on terror unwinds.
Even if the buying power of the defense budget stabilizes rather than declines during the balance of the decade, we will likely see substantial cuts to investment accounts to compensate for the continuous rise in military healthcare and retirement benefits.
I’m sorry to report that none of the structural factors I’ve cited are mutually exclusive so they all may come into play between now and the end of the decade.
The likelihood they all can be held at bay is very small.
So the bottom line on budget trends is that they are likely to take a considerable toll on the industrial base during the rest of the decade, even if we get an administration more interested in the well-being of the base.
Space Industrial Base
That brings me to my final topic, the industrial base supporting our national-security spacecraft.
As you know, the Air Force is lead service for providing the joint force with orbital communications, navigation, reconnaissance and weather systems.
That’s an even bigger deal today than it was during the Cold War, because the Bush Administration’s approach to military transformation stresses the unique leverage provided by space systems.
So I thought it would be useful to talk for a moment about the industrial base supporting those systems.
It isn’t very big — about 100,000 people scattered across a handful of system integrators and several dozen key suppliers.
The dollar value of what they produce only totals about one-tenth of one-percent of GDP, but without their products we wouldn’t have global connectivity, we wouldn’t have missile warning, and we wouldn’t have GPS.
Unfortunately, we haven’t treated that vital national asset very well in recent years.
The Clinton Administration made a series of ill-conceived changes aimed at saving money that deprived the space sector of critical management and technical talent.
Then the Bush Administration came along determined to leap ahead to transformational capabilities, providing a lot more money but also a lot more turmoil in the sector.
Some insiders will tell you what really went wrong is that expectations of robust commercial demand melted down with the dot.com boom, so the government had to rethink its plans for piggybacking next-generation satellite work on surging private-sector demand.
But that’s only part of the story, and most of the rest is plain old bad management by NRO and its white-space counterpart in California.
I don’t think we can blame the dot.com bust for the fact that every national-security spacecraft currently in development is over cost, behind schedule, and facing unanticipated technical challenges.
Take the example of cost overruns.
Several years ago Booz Allen Hamilton analyzed the sources of unplanned cost growth in several big military satellite programs, and here’s what they found…
— 21 percent of cost growth was due to demanding performance requirements.
— Another 21 percent of overruns was caused by funding delays and cutbacks.
— 18 percent of overruns resulted from inaccurate government cost estimates.
— 15 percent of overruns reflected flaws in the acquisition process.
— 13 percent resulted from distortions caused by the competitive dynamic among contractors.
— 10 percent of cost growth was caused by high turnover or inadequate skills in the public and private-sector workforce.
— And the remaining two percent resulted from “industrial base” considerations.
What these numbers reveal is that no more than a quarter of the unplanned cost growth is attributable to industry, while most of the problem originates in government mismanagement.
One consequence of this mismanagement is that we are operating no more national-security spacecraft today than a decade ago, but we are spending a lot more money on building them, and there are a lot more people involved at every step of the process.
All the second-guessing and instability has to be bad for the industrial base, because so much money gets wasted on activity unrelated to production.
Nonetheless, for all the administration’s efforts to fix the problems inherited from the Clinton years, it can’t seem to change its ways.
Just look at the Air Force’s 2008 spending plan…
— Funding for a third SBIRS geosynchronous missile-warning satellite is deferred even though the existing constellation is aging rapidly and no alternative is waiting in the wings.
— The next-generation AEHF communications satellite is funded for premature termination so we can leap ahead to TSAT — so instead of spiraling our existing technology into new capabilities we’re going to have to start over with all the additional costs and time that implies.
— And money for the next-generation NPOESS weather satellite is so poorly distributed across the spending plan that it’s likely to see another totally avoidable cost overrun — just like the last one, which resulted mainly for accounting changes rather than performance problems.
Let’s face it folks, the way we buy military satellites is a disgrace, squandering money and talent while failing to meet the needs of warfighters in a timely fashion.
We really need to get more stability in the requirements process, the annual budgeting cycle, and the federal workforce before we destroy the industrial base that builds our satellites.
This is another topic I could talk about for the rest of the day, but I’ll do the audience and my fellow panelist a favor by stopping here.
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