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Curtains For The U.S. Military Industrial Base?

The failure of the so-called super committee to agree on other spending cuts has finally brought the axe down on U.S. defense spending, and it's really going to hurt this time.
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I'm going to turn most of my column today over to a friend of mine, Richard McCormack of Manufacturing & Technology News, who has written an exceptionally important article.

Basically, after years of making economic decisions that we were warned were short-termist, the long term has finally arrived. The failure of the so-called super committee to agree on other spending cuts has finally brought the axe down on U.S. defense spending, and it's really going to hurt this time.

Oddly enough, I'm not talking about national security disasters in the immediate term. I'm talking about the fact that we are going to cut our defense spending to the point that our defense industrial base will start to lose capability. This, in the long run, is more important than how many tanks or planes the U.S. fields on a given day.

Every war the U.S. has won since the North defeated the South in 1865 has turned on industrial capacity. Even before then, the U.S. arguably only survived because Congress in 1801 had the foresight to finance an American copper industry in the form of a company, Revere Copper and Brass, that still exists -- and is run by Brian O'Shaughnessy, another friend of mine. (Thanks to Revere Copper, we were able to make the copper sheathing for the bottoms of our naval vessels that protected their wooden hulls from being devoured by shipworm.)

This is all no accident.

China, of course, knows exactly what it's doing. Running down U.S. industrial capacity by means of predatory trade surpluses is a quintuple play for Beijing: it makes an immediate cash profit, builds up China's productive abilities for the future, reduces a competitor's abilities, chokes off our tax revenues, and undermines our military power.

One almost has to admire the sheer elegance of their strategy. Didn't Sun Tzu say that to subdue an enemy without fighting him was the acme of skill?

Anyway, here's the excerpt:

The U.S. defense industrial base is on the verge of being irretrievably harmed if the Department of Defense budget is cut by any more than already planned, according to top executives of U.S. defense and aerospace companies. The industry is on the cusp of losing the ability to design and produce future weapons and space systems, due to $480 billion in cuts that have already been approved. "This is simply more than we can sustain," says Marion Blakey, President and CEO of the Aerospace Industries Association (AIA). "Our position is no more cuts. No more. We believe that defense has been cut into the bone with the Budget Control Act" signed by President Obama on August 2, 2011. "We cannot have that continue."

If the congressional super committee can't agree on a deficit reduction plan by Nov. 23, the Pentagon's budget will be automatically reduced by another $600 billion over 10 years. Such a cut would result in the loss of one million jobs in the defense sector, increase the unemployment rate by one percentage point and reduce GDP growth by 25 percent, according to AIA. "You cannot assume the defense industrial base will be there if there is no investment in R&D and no significant investment going forward in acquisitions and new programs," says Blakey.

If the Pentagon's budget is severely cut, there will be no peace dividend, say aerospace industry executives. "Not to be too black and white about it, but is a healthy industrial base critical to the security of the U.S. and the economic viability of the country?" asks Boeing CEO James Albaugh. "That is a question that the super committee has to answer."

Defense contractors are currently laying off employees and have stopped investing in R&D and new production equipment, according to industry executives. "If we had additional cuts of $600 billion over the next 10 years, I would question whether or not we have a fighting force that was capable or an industrial base left," says Albaugh. "We will wake up one morning having not addressed the indusial base issue and call for a capability and find that the contractors do not have the ability to provide the capability."

Boeing knows all about this problem. The company experienced serious problems gearing up production of its new Dreamliner 787. "One of the reasons we had issues with that airplane was the fact that we hadn't designed an airplane since the 777, and we lost the ability to do design," says Albaugh. Boeing had not been engaged in a new aircraft development program since the early 1990s. "We forgot how," says Albaugh. Without new program starts, the Department of Defense and its contractors will be engaged in sustaining equipment already in the field. This was Boeing's role between the 777 and the 787.

"Doing sustaining engineering is very different from development engineering, where you have to take the requirements, decompose those down to the smallest element of work and the smallest piece part and then you validate and verify that and build it up to the finished product," says Albaugh. "We were too busy doing sustaining engineering. For me to be a viable [defense] contractor, you have to do R&D and detailed design. You have to transition detailed design into production. You need to do production, and you need to support the products in the field. If you lose any point on that continuum, you will have a very difficult time reconstituting it. Right now, there are very few new starts and active design teams supporting our United States Department of Defense." A number of companies are building military aircraft, "but that doesn't mean they have the capability to develop a new airplane if they are called upon to do it," says Albaugh.

The defense industry is in a more difficult situation today than when the Cold War ended in 1989. When DOD's budget began to drop in the 1990s, a lot of military equipment was new: F-16, F-15, the B-1 bomber and Abrams tank. More than 700,000 military personnel retired from service. Today, the United States is fighting wars in Iraq and Afghanistan, along with dealing with cyber warfare and terrorism. The country is not taking people out of uniform. Equipment is old and needs to be reset. "It's a very different time," says Albaugh. Without cuts in personnel, health care and benefits, it means that most cuts to the military will be made in R&D and procurement.

"In my mind, it's ironic right now that there is not enough talk about the industrial base," says Albaugh. "There has to be more. It really is the arsenal of freedom, and the first question we have to ask is: Is it strategic to the economic viability of our country? The answer is yes. I know the answer to that in the Pentagon is yes. I'm not sure what it is on Capitol Hill."

The industry is also different from the one described by President Eisenhower in the late 1950s, adds Blakey of AIA. "It is very fragile," she says. The industry has already consolidated from 130 major companies to only seven, notes David Hess, President of Pratt & Whitney, a division of United Technologies Corp. "Rather than having four or five or six suppliers that might have a technical capability, there might be one that has that capability. If they elect to pursue other markets because defense isn't viable, we will lose that capability altogether. We have shrunk to the point where there is little margin in these key technologies."

Hess says: "It's the first time in history that we haven't had a new start on any kind on a helicopter or a fixed-wing program. As that capability atrophies, it is very hard to reconstitute and get it back. This is not a discussion about the commercial viability of the companies involved here. It's really a discussion about being able to maintain the industrial base that is absolutely critical to our national security."

The issue of de-industrialization is even more pronounced in the space sector. For the first time since the space era began, the United States does not have ability to put men into orbit. The country now relies on the Russians for all manned launches, at a cost of $60 million per launch. A new launch program is still not underway. When the Apollo program was ending, the Space Shuttle program had already been funded.

"There may have been a gap in launches but there was no gap in the work on the manned space flight program," says Hess. "All the intellectual capital that was working on Apollo naturally moved to the Shuttle program. But today, we have a gap in manned U.S. launches now that the Shuttle program has ended. That is why we have seen hundreds of layoffs at Pratt Whitney Rocketdyne as well as other companies across the industry and across the country."

NASA has announced a new space launch system, but funding is not assured. "This tremendous intellectual capital that took decades to develop and took us to the moon and back, once it is dissolved it will be extremely hard to reconstitute if and when we decide to return to space," says Hess.

Funding for the Next Generation Air Transportation system is also in jeopardy. The country is still dependent on radar and radio technology deployed in the 1960s. Completing NextGen by 2025 would generate $320 billion in benefits to the U.S. economy, according to an AIA study conducted by Deloitte Touch. It would increase the number of flights by 20 percent and cut fuel burn and CO2 emissions by 12 percent. Yet, it is another aerospace program that is threatened.

AIA President Blakey says the debate over the national debt needs to take these issues into consideration. The U.S. aerospace industry is now competing with well-financed programs in Russia, China, Brazil, Canada, Europe and Japan. All are pushing to topple U.S. dominance in the sector. "It is our duty now to speak out," says Blakey.

None of this should have been hard to predict.

This is all, in fact, the ultimate fruit of what we can call the "neocon-tradiction." Since the end of the Cold War, neoconservatives have espoused simultaneous free trade and global American military predominance.

But the one tends to undermine the other, as the British learned 100 years ago. Even Adam Smith warned that the logic of free trade didn't apply to the sinews of military power.

We were warned by many people (including some wise non-neo conservatives) that this would happen. We did it anyway. There were no solid reasons to expect we would escape the consequences, just happy-talk, twisted theory, and short-term greed.

Friends, we have gotten what we deserved.

At this point in time, it probably isn't possible to avoid some defense cuts. The best we can hope for, with respect to the defense industrial base, is probably some version of the hunker-down strategy the Russian Federation has been using for some time. As recently as 1990, they had the #2 military industrial base in the world (it was the only part of the Soviet economy that worked), but they haven't been able to afford to keep it running full tilt for a very long time. As a result, they've focused on preserving capability, rather than production, by, in essence, building small numbers of very advanced hardware. As a result, they have preserved far more advanced capabilities -- which could be ramped up in future -- than any other economy their size. We won't be in straits quite as extreme as theirs, but that looks to be the direction we're headed in now.

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