Last week, the top executives of the U.S. defense industry met with defense secretary Robert Gates and his key subordinates to discuss Pentagon plans for reducing the cost of doing business. Gates told the assembled captains of industry that while he could live with the budget guidance coming from the White House, the Department of Defense would need to become much more efficient in order to keep up with its rising personnel and procurement costs. He also warned that in the absence of evidence the department is becoming more efficient, Congress might arbitrarily cut the defense budget.
That was not an idle threat. The federal government is borrowing $4 billion per day — over 40 percent of its budget — and voters are demanding that the deficit be reduced. As the largest component of discretionary spending in the federal budget, defense is an obvious target for cutbacks. After all, the Red Army is long gone and Al Qaeda hasn’t launched a successful terrorist attack in America in nearly ten years. So why is five percent of the world’s population (us) generating nearly fifty percent of global military outlays, especially at a time when our economy is steadily losing ground to other nations?
Defense executives know all this. They understood that the Bush defense buildup would eventually come to an end, and many were pleasantly surprised that it survived into the first two years of the Obama era. But now that the long anticipated downturn has materialized, they are constantly being reminded that their main customer is a political system rather than a for-profit enterprise. That means that in addition to coping with hundreds of billions of dollars in weapons cuts, they also have to deal with other developments that no profit-based enterprise would undertake in a period of budgetary stress.
For example, Pentagon policymakers have decided to hire thousands of new civil servants in the acquisition bureaucracy, even though the volume of transactions is projected to decline markedly in the years ahead as the joint force departs Iraq and Afghanistan. The military services are also abandoning performance-based logistics support provided by contractors in favor of more in-house support, a move that cannot be justified using cost-benefit analysis. And the department continues to layer unnecessary costs onto next-generation weapons programs to satisfy bureaucratic constituencies, as in the decision to delay development of the F-35 fighter so that thousands of redundant test flights can be conducted.
Few people in the defense industry doubt the sincerity of the Pentagon’s senior political appointees when they say the goal of the efficiency drive is to save money rather than reduce profits. But military contractors have been through cost-cutting campaigns before, and they know how the best intentions of political leaders can become pretexts for destructive behavior in the bureaucracy. They also know that the last thing likely to be cut is the bureaucracy itself, even though that is where much of the waste occurs. So while the industry executives at last week’s meeting were pleased to hear Secretary Gates say the government will work to preserve a reasonable level of profitability among its suppliers, the summer of 2010 is shaping up to be the most unsettling season the industry has seen since the days before 9-11.
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