The Department of Defense is in no position to help rebuild the U.S. industrial base, and is likely to aid its continued decline, according to a professor at the National Defense University. “I am not sanguine that defense can, in any serious way, lead a revitalization of U.S. manufacturing,” says Dr. Gerald Abbott, professor of acquisition at NDU’s Industrial College of the Armed Forces.
If past is prologue, then defense contractors will soon be going through some tough times. The current increase in defense spending has been the longest in the history of the country. But when defense budgets have entered periods of decline, the biggest cuts have been made in the procurement account.
When the military budget fell by 36 percent between 1985 and 1998, the procurement account dropped by 66 percent.
“When the defense budget declines significantly, the procurement account is the easiest to cut and becomes the bill payer,” says Abbott. “I believe we are about to enter another period of a significant defense budget decline and history will repeat itself particularly in the procurement account. This does not bode well for either the manufacturing base or the defense manufacturing base,” he told a recent audience at the AFL-CIO in Washington, D.C. Over the past 48 years, defense spending was either in decline or not growing during half that time (24 years). The budget storm approaching “may be the most significant percent decline since the Korean War,” says Abbott.
Federal spending on defense weapons systems, R&D and military operations and maintenance account for a small part of the total U.S. GDP, Abbott points out. In order for defense spending to increase total U.S. goods production by 1 percentage point, the military would have to increase outlays by $40 billion. “There seems little hope of this occurring,” he adds.
The potential impact of the current defense decline could be far greater than in previous downturns because there are far fewer military programs to cut than there were in the 1990s, Abbott notes. Between 1986 and 1996, the military had 19 significant aircraft programs in various stages of production (A-6, A-V8, B-1B, B-2, C-130A/H, C-17, C-5B, E-2, F/A-18A/D&E/F, F-22, F-117, F-14A/D, F-15A/D&E, F-16, P-3). Now there are only four significant aircraft programs (E-2D, F/A-18E/F, F-15E, F-35). By 2013, there will be only three aircraft programs in production (E-2D, F-35, KC-46A).
There also will be fewer companies to absorb the cuts since so many large defense firms are now gone, such as McDonnell Douglas, Litton, Hughes, Loral, Fairchild, LTV, Gould, General Instruments, Westinghouse, TRW and Vought, among others. The only remaining large manufacturers are Boeing, Lockheed Martin and Raytheon.
“There are few large defense programs available to cut and few defense firms in a position to merge,” Abbott notes. “Indeed, future mergers, should they happen, may well dash any hope of competition helping to contain costs and spur innovation.”
The coming drawdown in defense raises some difficult questions that will soon be answered:
- How many defense manufacturers are needed to support U.S. military needs?
- To what extent should the survivability of firms be taken into account in deciding which defense programs to pursue or curtail?
- Which aspects of the defense industry are really unique and vital to production of needed defense equipment?
- How can or should competitiveness among defense contractors be maintained with fewer firms?
- Should foreign sales of U.S. military hardware be factored into decisions on which defense programs to pursue?
- How might decisions on defense programs affect U.S. export earnings and international competitiveness of the U.S. defense industry?
There are no easy answers,” says Abbott. What is needed but is not guaranteed is a “well-ordered downsizing plan to separate ‘needs’ from ‘wants’ to protect the present and future force and the industrial base.” But what is likely to occur — based on history — is a case-by-case reaction “to opportunities to make budget cuts in ‘problem’ programs,” says Abbott. “This effort might best be titled ‘shoot the wounded.’ ”
Absent a strategy to deal with the defense industrial base during the downturn, Abbott questions whether the United States will be able to address the overall health of the U.S. manufacturing sector, a sector that is essential to economic survival. He comes to a similar conclusion: The country has no strategy for a sector that contributes 11 percent to the nation’s GDP and accounts for 8 percent of its employment. By contrast, the agricultural sector employs 1.2 percent of Americans and accounts for only 1.2 percent of GDP. Yet the country has established a vast infrastructure to support the agricultural sector, with about $142 billion in federal support in 2010. “Budget support, in my view, is a major indicator of political support,” says Abbott. “For example, the Agricultural Extension Program budget is about $528 million while the Manufacturing Extension Program in the President’s 2012 budget submission was $143 million.”
Any federal support for U.S. manufacturing is spread throughout different agencies, is small and fragmented and total spending “is difficult to obtain,” he adds. Agriculture has had its own cabinet department since 1887. No such federal agency exists for manufacturing. “Manufacturing has great difficulty obtaining significant national government support.” Agriculture has had a “disproportionate” amount of political power, since there are so many U.S. senators representing low-population density agricultural states, making for a powerful farm caucus. These interests have aggressively pursued the opening of foreign markets for their products, which can only be produced in the United States. Those efforts have helped lead to the destruction of American industry, which is highly mobile.
States can’t compete to attract agriculture, but they do compete to attract manufacturers. As a result, manufacturing has been subject to cannibalism within the United States, with states offering incentives for manufacturers to move, paying workers less, reducing tax revenues and leading to less economic prosperity for the country as a whole. Compounding the problem: foreign countries continue to siphon off American producers with active government policies and programs. The U.S. government has embraced the ideology of free trade but it has ignored the “distortive power of the widely used VAT, currency manipulation” and other tactics foreign nations are employing to attract American industry, says Abbott. “If there is a lesson from this apparent avalanche of foreign competition, it is that economic theory is largely based on firms competing and we are now in an age where governments compete,” says Abbott. “To put this in military terms, the enemy has concentrated their forces and ours is in disarray. We need to ask ourselves when we as a government hear the battle raging are we marching to the sound of the guns or sitting by awaiting the outcome? In my view, concerted government action is necessary, for there is much at stake in the current fight.” Abbott says the “essential question” concerning the U.S. manufacturing “crisis” that must be answered, is this: “How will the United States maintain an autarkic defense industrial base within an increasingly globalized manufacturing base?”