Industrial base study to be briefed in 2004.

• Author: Fein, Geoff S.
• Position: Washington Pulse

The Center for Strategic and International Studies plans to brief senior Pentagon officials on its most recent research work on the defense industrial base.

CSIS is hopeful that this study, unlike many other studies produced in recent decades, will have an impact on policy making.

Leading the CSIS research work is Pierre Chao, a top defense industry expert. "All the good ideas are out there. We just have to get them implemented," Chao told senior defense executives.

There are serious misunderstandings about the defense industry, he said, most notably the assumption that the massive budget increases in recent years have boosted spending on new weapons systems. That is not the case, said Chao. "It's the first time in 60 years that the defense budget is going up, but the investment accounts are not keeping up." The procurement, research and development budgets have become "bill payers" for more pressing needs, such as personnel, operations and maintenance.

R&D investments, for example, are down from 4 to 2 percent of the defense budget. "We are eating our seed corn," he said. These are not "happy fat times" for the industry.

Another concern is Social Security and Medicare, he said. "To cover the baby boom generation benefits will cost $35 trillion to $45 trillion. It's the biggest threat to defense spending."

Chao also cautioned industry executives that the defense sector could be vulnerable in the future, if government spending declines, because contractors tend to be purely focused on military work, rather than diversified into commercial areas.

"From 1880 to 1990, the industry has been fairly well integrated with the commercial sector," said Chao. In the past 10 years, there has been consolidation, and the message from Wall Street has been to "stick with what you know."

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