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America's Incredible Shrinking Defense

IT seems anomalous to worry about the adequacy of the defense industrial base when the military budget is declining rapidly. Yet several stubborn facts cannot be ignored: the United States continues to live in a dangerous world and a historically high level of defense spending is likely in the years ahead - although down very substantially from recent peaks.

Under these post-cold-war circumstances, the nation requires a viable group of experienced companies and highly skilled people to meet future defense needs. Moreover, the major defense contractors and subcontractors constitute a key part of our capability for industrial innovation. That is no argument to subsidize them. It does lead, however, to rethinking the traditional Pentagon attitude toward its contractors.

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We tend to forget that, during the 1980s, Congress and the Pentagon changed many procurement procedures and substantially reduced the profitability of the defense business. Tens of thousands of subcontractors subsequently left the military market, even when the volume of defense business was growing.

The quaint notion of producing more weapon systems by paying defense contractors less is wishful thinking. The only sensible approach is to reduce the military's demand to match the limited dollars available. A period of tight federal budgeting underscores the need to overhaul the costly and burdensome acquisition process of the Department of Defense. The resultant cuts in overhead costs will enable the companies to produce more equipment and become more competitive in civilian markets.

Efficiency will be served by stripping out special contract provisions. These require military producers to act more like government bureaus, doling out benefits, than private enterprises delivering innovation and technological progress.

The effectiveness of military procurement can be improved by removing the myriad directives imposed by members of Congress anxious to protect defense jobs in their states or districts. Forcing the military to buy weapon systems they do not need is the most inefficient way of providing benefits to constituents.

The federal government should follow the example of private business. Many firms have downsized and changed their institutional cultures, which although often painful, have paid off in terms of lower cost and improved efficiency.

A strong supporting industrial base is essential in case the direction of military policy changes quickly. Because of the uncertainties that surround national security policy, a future period of sustained reductions in defense spending underscores the importance of a healthy defense manufacturing capability and an ongoing research and development effort.

That does not mean every weapon system or military supplier should be maintained. But the defense industry's ability to reverse itself and expand quickly should national security dictate points up the need for an adequate array of strong prime contractors and subcontractors that can compete effectively for the design and production of equipment.

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The defense industry is coming off an all-time peak in activity. From the contractors' viewpoint, downsizing is the only response to the greatly reduced military market. The sooner they trim excess capacity - through restructuring, mergers, sales of assets, or closing down unneeded facilities - the stronger will be their ability to withstand the competitive rigors of the new military market place. Since many military production facilities are ancient by the standards of the commercial economy, the opport unity to phase them out should be welcomed. Significant competition among the defense producers must also remain. The government should not become too reliant on any one of them for any major category of weaponry.

It is vital that the remaining defense suppliers in the aggregate be financially viable and able to meet design and production needs of the military establishment in the years ahead. The challenge for the US is to maintain the industrial base needed for national security in a post-cold war period.

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