If the government
cuts projected growth in the portion of the defense budget devoted
to developing and purchasing new weapons and equipment, it will be
investing too little in future defense capabilities. This general
conclusion is what Congress needs to focus on as it turns to
defense acquisition reform. Cutting the modernization budget,
something encouraged by Congress's current narrow approach to
reform, could actually exacerbate the acquisition system's biggest
problems-high unit costs for weapons and equipment and diminished
competition in the defense industry due to consolidation. Rather,
Congress should increase the modernization budget, which will help
reduce unit costs for expensive systems and boost competition among
Problem: Reduced Budgets for Modernization
Nobody doubts that
there are systemic problems with the way the Department of Defense
buys weapons and equipment. Congress is dissatisfied.
Department of Defense officials are dissatisfied.
Industry is dissatisfied.
While the problems with the defense acquisition system are
numerous, it is important to separate the broad and systemic
problems from the narrow and symptomatic ones.
There are two
broad problems with defense acquisition at the present time. The
first is high unit costs for weapons, particularly the major
systems. For example, the Space-Based Infrared System-High
(SBIRS-High), which is the next generation of early warning and
tracking satellites, has exceeded cost projections multiple times
in recent years. The second problem is extensive concentration in
the defense sector, particularly at the prime contractor level. The
defense sector saw a raft of mergers and acquisitions during the
The common source
of these problems was the "procurement holiday" taken during the
1990s. By 1997, the overall modernization budget fell by over 50
percent in real terms from the 1985 level (see Chart 1). The
procurement budget in particular fell by roughly 65 percent. While
there has been some recovery in the modernization budget (the sum
of the budgets for researching and developing new weapons and
equipment and for procuring them) since 1997, it has been only
partial. Meanwhile, the portions of the defense budget devoted to
military pay and operations and maintenance (commonly called the
"operations and support budget") have enjoyed a full recovery. The
modernization budget consumed slightly less than half of the total
defense budget in 1985, but today modernization receives only about
a third of the defense budget (see Chart 2).
history, it is not surprising that unit costs have risen. In 1985,
the Department of Defense purchased 585 aircraft, 2,031 combat
vehicles, 24 ships, and 32,714 missiles.
Currently, defense production is at 188 aircraft, 190 combat
vehicles, eight ships, and 5,072 missiles.
These low rates of production deprive the defense industry of the
economies of scale it leveraged in the 1980s.
The same history
has driven the industry to consolidate, primarily through mergers
and acquisitions. In 1985, there were 20 prime defense contractors
with broad expertise in defense systems.
Today, there are just six.
In the 1990s, it became a losing proposition for a prime defense
contractor to carry excess production capacity. The rational
alternative was to merge and strip away excess capacity in the
process. This left the Department of Defense with a less
competitive supply network, but the alternative was to allow a rash
of bankruptcies and liquidations in the contractor base and an
equally less competitive network.
Is No Excuse for Cuts in the Modernization Budget
By focusing on
narrow aspects of the problems with the defense acquisition system,
some in the Bush Administration and, more particularly, in Congress
run the risk of reaching the wrong conclusion. For example, it is
easy to argue that each DD(X) destroyer is too costly and that the
proper response is to punish the contractors by cutting funding for
the program. Combined with similar conclusions about other
programs, the result is a ready-made argument to cut the
modernization budget as a whole.
however, will exacerbate, not remediate, the problems of increasing
unit costs and supplier consolidation. Cutting the modernization
budget would be an even more damaging replay of the 1990s, as the
number of systems built shrinks still further and more suppliers
merge. This was the point made by the Chairman of an internal
Department of Defense panel that reviewed the options for reforming
the defense acquisition system. Lt. General Ron Kadish, USAF
(Ret.), stated in announcing the summary findings of his panel:
I would like to make sure that people
understand we're not at all suggesting that if you take these
recommendations, you can take X billions of dollars out of the
budget. If that occurs, we have failed in reducing instability
because that's more of the same.
As well, by
compounding the existing problems in defense acquisition, a
decision to cut modernization spending will deprive the military
services of the weapons and equipment they will need to remain the
best-armed force in the world. If an argument can be made that
defense spending is now too high-which should be an untenable
argument for a nation at war-then the belt-tightening should take
place in the operations and support budgets. This category of
spending now accounts for more than 60 percent of the total defense
Six members of the
Senate, led by Senators Jim Talent (R-MO) and John Warner (R-VA),
propose a better approach. In a recent letter to President Bush,
they urge the Administration to maintain the planned modernization
budget of $158.3 billion for fiscal year 2007.
The letter, however, does not look beyond fiscal year 2007.
Ultimately, Congress should look to adopt a general goal of $200
billion (in current dollars) for the modernization budget by the
middle of the next decade.
approach should remedy the two most pressing problems in defense
acquisition today. The increased budget would allow the purchase of
larger numbers of each model of weapon and equipment. Over time,
this should slow the growth in unit costs. Sustained growth in the
modernization budget could also encourage firms currently outside
the defense market to enter. This increase in competition and
diversity in the supplier network should result in a more
responsive, flexible, and efficient defense industrial base.
Congress faces a
choice between two general approaches to addressing problems in
defense acquisition. It could opt to address each shortcoming in
the acquisition system individually and fashion numerous narrowly
drawn remedies. The problem with this approach is that it is biased
in the direction of reducing funding for individual programs and,
cumulatively, the modernization budget as a whole. This approach is
also self-defeating because it fails to account for recent
reductions in modernization funding and their negative impact on
the defense acquisition system.
approach is to understand the negative impact of earlier
modernization funding cuts and improve the defense acquisition
system by restoring funding in this area. While this approach will
not solve all the existing problems with the defense acquisition
system, it will help to ameliorate the broadest and most pressing
Spring is F.M. Kirby Research Fellow in National Security
Policy in the Kathryn and Shelby Cullom Davis Institute for
International Studies at The Heritage Foundation.