Ensuring Future Of Defense Industry

With the end of the cold war, the threats to national security surely have not evaporated, but they have changed in many significant ways. So we must update our response, especially in maintaining at moderate cost the industrial base needed for the development and production of new high-tech military systems and equipment. Many knowledgeable analysts of defense industry trends agree on these policy directions:

The conventional antitrust approach to consolidating and restructuring the defense industrial base is incompatible with the realities of the military marketplace. This expense-saving consolidation reflects a trend toward corporate restructuring.

Failing to have merged and downsized could have resulted in pressure for government support of defense firms through direct subsidy. The needed consolidation in the defense industry is not complete and therefore should not be inhibited by continuing the policies of the past. Our NATO allies also would benefit from consolidating their defense industries.

There still are defense-oriented companies - both in manufacturing and services - whose size and scope of business are insufficient to allow them to be fully competitive in the defense business in the 21st century. These smaller, less well-capitalized firms - both primes such as Northrop-Grumman as well as subcontractors - lack the resources to maintain a competitive position in the development of new technologies. There is no realistic possibility, however, that any of the remaining defense contractors will act like the monopolist that antitrust economists write about - raising profits by restricting output. That is so because the military market is monopsonistic, dominated by the one governmental customer.

The concern for maintaining adequate competition does require broadening the defense industrial base by including that vast array ofcommercially-oriented high-tech firms that can design and produce components key to weapon system innovation.

Broadening the procurement base requires shifting away from a mind-set and acquisition system designed for the cold war. Defense companies should be spared costly and counterproductive oversight and regulation. Reducing those special barriers to entry would help attract civilian-oriented companies to the military market. Lightening the burden of the defense acquisition system would be analogous to the regulatory reform movement in civilian government agencies.

Policy must shift from reliance on a tightly controlled defense industrial base to a broader national industrial base serving defense and civilian endeavors as well.

To encourage reform of the defense acquisition system, the Secretary of Defense should create a broad-based review board. Such an advisory group should consist of retired corporate executives from both defense and commercially-oriented companies as well as former government officials, plus a few specialists from the research community. This board should advise federal government policymakers with respect to the new constellation of issues arising with the simultaneous and rapid developments in technology, business management, and military policy.

To avoid repeating the history of wasteful feast-or-famine cycles in defense spending, both the administration and Congress need to achieve a stable, predictable, and adequate level of funding for defense. To properly fund continued modernization of our armed forces while keeping a tight lid on the military budget, the administration and Congress should reduce substantially the fiscal burden of the continued overhang of cold-war era investments in bases, depots, and other obsolete facilities. Closing unneeded bases and privatizing depots would free up funds to finance needed defense procurement within existing budget limits.

To sum up, the US defense industry is adjusting to the end of the cold war far more rapidly and effectively than was generally expected. Many of the changes have been painful, but today's national security planners can count on the continuing presence of a financially and technically strong defense industrial base so essential to the national security. These four recommendations would reinforce the likelihood of that desirable situation continuing in the future.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.

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