Save the Military–Industrial Complex

By Jerry Hendrix

Thursday, November 30, 2023

 

The United States faces an imminent threat to its national security. Two authoritarian great powers, China and Russia, are actively moving to undermine its position as the leader of the free world, a phrase that once had real meaning but is now at the edge of black comedy. Additionally, despotic powers such as Iran and North Korea are launching small- and large-scale attacks against the American alliance system even as all the members of this modern version of the World War II Tripartite Pact between Germany, Italy, and Japan seek to sow conflict and diminish domestic support for the alliance system. Finally, there are rising concerns about the ability of the United States to meet its own defense needs even as we grant military aid to Ukraine and Israel.

 

In a recent Oval Office address to the American people, President Biden stated that we are ready to serve as “the arsenal of democracy” for the world. This is laughable. The nation’s defense-industrial base has shrunk considerably, and weapons that are being shipped to friends and allies cannot be replaced in the U.S. inventory for years to come. How did we land in this sorry state, and what should we do about it?

 

In 1993, the leaders of the nation’s main defense companies were summoned to the Pentagon for a dinner with Secretary of Defense Les Aspin and his able deputy William Perry. The topic under consideration was kept secret until the dinner began. After soup was served, Perry, who had first risen in the Carter administration as the Pentagon’s chief technologist, stated that the nation’s shrinking defense budgets could no longer support the industrial base and that the CEOs in attendance faced a decision: consolidate or die. Spoons dropped into soup bowls, and all small talk suddenly, awkwardly died.

 

Over the next decade, 107 defense companies merged into five major defense firms: the “primes.” These companies were larger, less flexible, not interested in innovation and technological advancement, and more focused on production stability, maximization of profits, and consistent shareholder dividends. Over the next 30 years, the American economy evolved away from industrial manufacturing and toward electronics and service industries. Today, when the nation does attempt to pour more money into the defense-industrial base so as to ramp up production rates of ships, aircraft, or advanced weapons, we find that our once-great industrial engine will not, and perhaps cannot, go any faster.

 

To address this strategic shortfall, America must begin at the foundation. We need a larger industrial base. Given the government’s role in deflating defense-manufacturing capacity during the 1990s, it should have a role in expanding that capacity today. This is a hard thing for conservatives to accept, given their belief in free markets, but the defense-industrial base is in most ways a monopsony — a market in which the Department of Defense is the only buyer. There just isn’t a civilian market for products such as tanks, stealth bombers, and hypersonic boost-glide missiles.

 

It’s not a good economic practice for a single buyer to depend upon a single seller. Many major defense programs during the Cold War were structured in such a way that there were at least two producers, and sometimes as many as three or four, of major ship, aircraft, or missile systems. This included weapons as complex as intercontinental ballistic missiles. Additionally, there were policies established to ensure that multiple manufacturers of small components for these systems were available. These arrangements provided both competition and duplication in the military-industrial base.

 

But during the 1990s, when the teachings of W. Edwards Deming held sway, older industrial concepts such as redundancy and resilience became synonymous with inefficiency and excess. Massive warehouses of spare parts for military systems were done away with, in favor of “just in time” delivery schedules. This is the biggest reason why, having given large numbers of major missile systems to Ukraine, we now find ourselves with so few remaining for our own needs and those of other allies such as Taiwan. Whereas in the past the U.S. military maintained a year’s worth of reserve supplies, today we measure key supplies in terms of weeks or even days.

 

Today the nation’s challenges are of similar magnitude to those of the Cold War, but different in that our defense economy is much more fragile. We simply don’t have the manufacturing base we once had, and we are no longer a primarily industrial power. Many voices in Washington and other capitals are now arguing that we should partner with nations that offer cheaper labor or more automation and can supply us with ships, aircraft, or missiles. This approach assumes that most of these economies, as in the case of South Korea and Japan, would remain industrially intact following the commencement of hostilities with China, Russia, or North Korea. Europe could provide safer options. However, such actions would also signal additional erosion of not only our nation’s sense of sovereignty but its actual sovereignty as well. A nation so committed to a globalized economic system for its national defense is also committed to globalized governance. It would be wiser for the United States to rebuild its own defense-industrial base, even if the cost is high.

 

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The process of rebuilding should begin by assessing where a skilled workforce is located. One does not look for welders in Silicon Valley or electricians in Westport, Conn., and Americans today are less willing to move for work. Some voices, especially those associated with the Chamber of Commerce, suggest that the recent flood of immigrants across the southern border would be a good source of new workers, but the new arrivals are not American citizens, few will be eligible for citizenship in the future, and jobs in the defense industry require both citizenship and the ability to work with classified components. As a result, expansion of the defense-industrial base will, of necessity, occur where American blue-collar workers currently live: around the southern Atlantic and Gulf Coasts, along the Mississippi and Ohio River Valleys, and around the five Great Lakes. Some of these locations are in conservative-led “right to work” states with incentives to avoid unionization. Some are in progressive pro-union states with organized-labor pools. All local workers must be fully involved regardless of the local political governing philosophy.

 

Next, the nation must incentivize the growth of small and medium-size businesses. Some in government suggest breaking up the prime defense companies, but this is not necessary. If small and medium-size companies are encouraged through targeted contracts to achieve redundancy and resilience in the industrial base, then the older, larger, and less nimble primes will face the choice of either buying their newer, more agile competitors, which can and should be discouraged through regulation, or becoming smaller and more agile themselves by selling off less competitive components. Market forces should provide sufficient motivation for the primes to reform themselves. Every action should be taken with the intent of expanding the industrial base and increasing competition. To be clear, building inefficiency back into the defense marketplace would be a desired feature, not a bug.

 

Throughout, there must be government direction in this process. In 1940, before the United States entered World War II, Franklin D. Roosevelt summoned William S. Knudsen, a senior corporate executive with experience at Ford and General Motors, to oversee the Office of Production Management. After Pearl Harbor, Knudsen was commissioned as a three-star general in the Army and appointed the director of production under the secretary of war. From that perch, he helped convert America’s broader industrial base, including its automobile and aircraft factories, to wartime roles. If there was a parts supplier in the nation that could help with the war effort, Knudsen directed resources to retool it and retrain its workforce. Today the government should re-create the Office of Production Management within the Office of the President, staff it with individuals familiar with the nation’s industrial base, and empower them to use aspects of the Defense Production Act of 1950 as well as existing executive authority to meet the United States’ defense needs.

 

There is no magic market force, no invisible hand from either Adam Smith or Dwight Eisenhower, that will reignite the defense-industrial base. To repeat, this sector of our economy is a monopsony in which the government is the only customer. Even those who are skeptical of industrial policy in general — most conservatives among them — should be able to recognize that defense manufacturing is different. We find ourselves today facing a significant probability of global military cataclysm, and we are not ready. We need a strong and unassailable military-industrial capacity to deter war; if deterrence fails, we will need that same capacity to avoid disaster and survive as a great power. We need ships. We need aircraft. We need missiles. But more fundamentally, we need to be able to build them in much larger numbers.