Defense budget: industrial policy debate: should the Pentagon pick winners and losers?

• Author: Erwin, Sandra I.

The last time the United States drastically cut spending on new weapons systems, defense contractors were told to merge of else they would perish.

The industry over the past two decades consolidated into a handful of mega-corporations. Now, a new drawdown in big-ticket weapon spending is approaching, and companies are wondering what will be the survival strategy this time around.

Industry executives and trade associations have called for the Defense Department to take preemptive action to protect key sectors that are considered of strategic importance to national security. That would require the Pentagon to continue to fund selected research-and-development programs even if those systems were not likely to be needed in the near future. Advocates of centrally planned industrial policy contend that unless the Pentagon decides ahead of time what sectors of the industry should be kept alive, budget cutbacks in major weapon systems will jeopardize portions of the industry that, once vanished, cannot easily be reconstituted if the United States needed to mobilize for a major war.

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U.S. Code Title 10 requires that the Defense Department consider the industrial implications of its major weapons program decisions, says defense industry analyst Joachim Hofbauer in a Center for Strategic and International Studies report. "Developing and collecting standardized metrics to measure the value of individual defense programs to the industrial base constitutes a crucial prerequisite for complying with this regulation. Yet, today the Department of Defense largely lacks such metrics," says Hofbauer.

But despite an abundance of laws that require defense industrial planning, the Pentagon historically has shown little appetite for picking winners and losers, and has been more comfortable with a laissez-faire approach.

After the Cold War ended, the Defense Department stepped out of the way and for five years let contractors consolidate at will. The Pentagon finally drew the line in 1997 when it stopped the merger of industry giants Lockheed Martin and Northrop Grumman.

A repeat of the mergers and acquisitions frenzy of the 1990s is improbable, considering how much smaller the industry is now. But the Pentagon still should be prepared to cope with the "industrial consequences" of future budget decisions, says Undersecretary of Defense for Acquisition, Technology and Logistics Ashton Carter. "We'd be fools to not pay attention to that," he says during a recent Council on Foreign Relations talk in Washington, D.C.

Industrial policy mandates have existed since the 1950s but most administrations have avoided picking...