The Pentagon is to blame for industrial base failures

In April, the Department of Defense released a report on the financial health of the defense-industrial base , spelling out three key findings: the defense industry is financially healthy, the DoD does not need to change its profit and incentive policy, and the Pentagon can procure the goods and services that the American warfighter needs to effectively defend our nation.

Talk about missing the forest for the trees.

The report’s finding should have instead been that America’s defense-industrial base is failing our warfighters and taxpayers, as the Pentagon has willfully and with foresight created today’s monopolistic, overregulated and costly defense marketplace. That marketplace has left the DoD without the ability to procure at scale the goods and services it needs to fight a major war, demonstrated by munitions shortfalls from the conflict in Ukraine . It’s also left the Pentagon in need of a change to its profit policy as CBS’ “60 Minutes” segment on price gouging in the defense-industrial base recently showed.

The origins of today’s defense marketplace are as follows: First, the leadership of major defense primes are mostly compensated with stock awards , which, while substantial, are expected within our capitalistic system. Wall Street then rewards these companies with higher share prices based upon their ability to provide profits for dividends and stock buybacks. But thanks to the Pentagon, these returns are less a result of competitive market forces and more a result of industry consolidation.

In the 1950s and in the 1980s, the Pentagon’s spending power created a healthy, competitive marketplace where defense firms competed on both price and innovative capabilities. This marketplace fostered free and open competition, equipping the United States with the best military in history. Despite this success, the Pentagon killed the proverbial golden goose by consolidating the defense-industrial base in the 1990s, leaving fewer suppliers and, therefore, little competition.

Industry consolidation is but one piece of the puzzle when it comes to how the Pentagon has elevated prices for taxpayers. Another is the Pentagon’s misguided divest-to-invest strategy, which devotes an ever-greater share of the department’s investment dollars to research and development rather than adequately funding procurement. R&D has thinner profit margins , meaning that for every dollar the government spends on R&D, few are able to become profit for contractors.

As the prices for weapons and components increase, the Pentagon orders less of each. With less purchased, the primes are poised to negotiate harder for higher prices so that they can maintain or increase their total profits, further raising the price of their products and leading to even fewer purchases. This means that, in effect, the divest-to-invest strategy is a pricing-to-procurement death spiral , threatening readiness and fair prices.

Elevated prices are also a consequence of the interactions between prime contractors and their array of subcontractors. Not subject to the same payment terms or timely cash flow from the government as the primes, the subcontractors receive less cash themselves. This squeezes the suppliers, already often sole- or single-source , leading to less redundancy and less capacity. The suppliers left standing then become economically powerful, as “60 Minutes” correctly noted.

But what’s most important here is that this results in a lack of surge production .

An inability to surge production is also a product of rosy planning assumptions where the Pentagon’s leaders essentially assume away the problem. The defense-industrial base is healthy if you assume only one very quick war. If this assumption isn’t correct, the Pentagon then believes that allies will pick up the slack, but their weapons’ cupboards are barer than ours.

In short, forced consolidation, faulty Pentagon planning assumptions, a focus on R&D at the expense of procurement, and the cash flow structure of the major defense primes have led us to the situation that we find ourselves in today: We’re in need of warfighting capabilities — a lot of them — but cannot produce them at scale and at prices that a functioning capitalistic market would allow.

Thankfully, the Pentagon can start to turn this around. First, when starting the acquisition of new weapons systems, it should err on the side of not developing them as joint programs, which are essentially a synonym for “contract-to-monopoly.” Consolidation of buying power into the purchase of one system kills off competitors and creates a monopoly; the market for fighter jets shows this to be true .

Secondly, the Pentagon should procure much more, and it should do so by making multiyear procurement contracts and block buys the rule rather than the exception.

Lastly, the federal government can break open the doors to competition by eliminating unnecessary regulations that make it difficult and costly for emerging startups to do business with the DoD.

Failing to take these actions will mean that we’ll be stuck with a defense-industrial base that’s unhealthy, not meeting the needs of the warfighters and, on the most basic level, not providing the American taxpayer with a fair deal. And that’s an industrial base that we shouldn’t accept.

Retired U.S. Army Maj. Gen. John Ferrari is a senior nonresident fellow at the American Enterprise Institute think tank. Ferrari previously served as a director of program analysis and evaluation for the service. Charles Rahr is a research assistant at AEI.

今年四月，美国国防部发布了一份关于国防工业基础财务状况的报告，阐述了三个主要结论：国防工业财务状况良好；国防部无需改变其利润和激励政策；五角大楼能够采购美国作战人员有效保卫国家所需的商品和服务。

真是只见树木不见森林。

这份报告的结论本应是，美国的国防工业基础辜负了我们的作战人员和纳税人，因为五角大楼蓄意且有先见之明地打造了如今垄断、过度监管且成本高昂的国防市场。这种市场机制导致国防部无法大规模采购应对重大战争所需的物资和服务，乌克兰冲突中出现的弹药短缺就证明了这一点。此外，正如哥伦比亚广播公司（CBS）“60分钟”节目最近对国防工业基础价格欺诈问题的报道所揭示的那样，五角大楼也亟需改变其盈利政策。

如今国防市场的起源如下：首先，主要国防承包商的领导层大多以股票奖励作为薪酬，虽然数额可观，但在我们的资本主义体系中却是司空见惯的。华尔街则根据这些公司创造利润用于分红和股票回购的能力，给予更高的股价作为回报。但由于五角大楼的存在，这些回报与其说是市场竞争的结果，不如说是行业整合的结果。

上世纪五十年代和八十年代，五角大楼的雄厚财力催生了一个健康且竞争激烈的市场，国防企业在价格和创新能力方面展开竞争。这种市场促进了自由开放的竞争，使美国拥有了历史上最强大的军队。尽管取得了如此成就，五角大楼却在上世纪九十年代通过整合国防工业基础，扼杀了这只“金鹅”，导致供应商数量减少，竞争也随之消失。

行业整合只是五角大楼推高纳税人成本的众多因素之一。另一个因素是五角大楼误入歧途的“撤资转投资”战略，该战略将部门越来越多的投资资金投入研发，而不是为采购提供充足的资金。研发的利润率较低，这意味着政府每投入一美元用于研发，承包商最终能获得的利润就很少。

随着武器和零部件价格上涨，五角大楼减少了每种产品的订单量。采购量减少后，主要供应商为了维持或提高总利润，会更加积极地谈判，以期获得更高的价格，从而进一步推高产品价格，导致采购量进一步减少。这意味着，实际上，“撤资转投资”策略会形成一个从定价到采购的恶性循环，威胁到战备状态和公平价格。

高价也是总承包商与其众多分包商之间相互作用的结果。由于分包商不像总承包商那样受制于相同的付款条件或政府及时拨付的现金流，他们自身获得的现金也更少。这挤压了供应商的生存空间，而这些供应商往往是单一来源或独家供应商，导致冗余度降低，产能下降。正如《60分钟》节目所指出的，剩下的供应商便拥有了强大的经济实力。

但最重要的是，这导致了缺乏应急生产。

无法迅速提升产能也是五角大楼领导人过于乐观的计划假设造成的，他们基本上忽略了这个问题。如果假设只有一场非常短暂的战争，那么国防工业基础是健康的。但如果这个假设不成立，五角大楼就指望盟友会弥补缺口，但他们的武器库比我们还要空空如也。

简而言之，强制合并、五角大楼错误的规划假设、以牺牲采购为代价的研发重点，以及主要国防承包商的现金流结构，导致我们今天面临的局面：我们需要作战能力——大量的作战能力——但却无法以一个运转良好的资本主义市场所允许的规模和价格来生产这些能力。

值得庆幸的是，五角大楼可以开始扭转这种局面。首先，在开始采购新型武器系统时，应该尽量避免采用联合开发模式，因为联合开发本质上就是“垄断合同”的同义词。将购买力集中于单一系统的采购会扼杀竞争对手，形成垄断；战斗机市场就证明了这一点。

其次，五角大楼应该采购更多物资，并且应该将多年采购合同和批量采购作为常态而不是例外。

最后，联邦政府可以通过取消不必要的监管规定来打开竞争的大门，这些规定使得新兴创业公司与国防部开展业务变得困难且成本高昂。

如果我们不采取这些行动，就意味着我们将不得不面对一个不健康的国防工业基础，它既无法满足作战人员的需求，而且从最基本的层面来说，也无法为美国纳税人带来公平的回报。这样的工业基础是我们绝不能接受的。

美国陆军退役少将约翰·法拉利是美国企业研究所（AEI）的高级非常驻研究员。法拉利曾任美国陆军项目分析与评估主任。查尔斯·拉尔是美国企业研究所的研究助理。