The Defense Industrial Base

Strategies for a Changing World

Nayantara Hensel

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317036159
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Military Science & Technology
• Index: Technology & Engineering

The US and international defense industrial sectors have faced many challenges over the last twenty years, including cycles of growth and shrinkage in defense budgets, shifts in strategic defense priorities, and macroeconomic volatility. In the current environment, the defense sector faces a combination of these challenges and must struggle with the need to maintain critical aspects of the defense industrial base as defense priorities change and as defense budgets reduce or plateau. Moreover, the defense sector in the US is interconnected both with defense sectors in other countries and with other industry sectors in the US and global economies. As a result, strategic decisions made in one defense sector impact the defense sectors of other countries, as well as other areas of the economy. Given her academic, corporate, and Department of Defense experience as a leading economist and policy-maker, Dr. Nayantara Hensel is perfectly positioned to examine the interrelationship between these forces both historically and in the current environment, and to assess the implications for the future global defense industrial base.

Chapter 1
The Evolution and Challenges of the US Defense Budget and the Tradeoffs Impacting the Defense Industrial Base

Economic growth in the United States, as measured by Gross Domestic Product (GDP), has varied over the past 50 years and has impacted federal spending, as well as defense and non-defense spending as a share of GDP. Nevertheless, as more government programs were developed and expanded (such as Social Security and Medicare), spending in those areas steadily increased as a share of GDP. Military expenditures, on the other hand, despite procurement and development of new types of equipment, as well as expenses from operations and maintenance and the rising costs of military healthcare and retirement, declined as a share of GDP. Within the context of this overall trend, military expenditures fluctuated over various periods (the Korean War, the Vietnam War, the Cold War, and the War on Terror) due to the assessment of global challenges and opportunities, shifting defense priorities, and the types of equipment and manpower that were necessary.

The current fiscal constraints and shifting defense priorities provide a variety of tradeoffs in the budget. This chapter will first examine the historical trends in the defense budget relative to the broader federal budget and then will discuss the DoD budgets in recent years. It will provide perspective on the recent defense budgets in terms of:

a. challenges due to fiscal constraints and sequestration;

b. challenges due to evolving defense strategies and priorities; and

c. challenges within various budget categories and by service (Army, Navy, Air Force, and Marine Corps).

The chapter examines the recent developments in DoD budgets and in DoD monthly expenditures in various categories and by service. In addition, it discusses the impact of sequestration on budgets and outlays for DoD and for the services. Finally, it concludes with a discussion of the difficulties and tradeoffs faced by each of the services in various areas of the budget, especially the difficult choice of modernizing equipment or sustaining current capabilities at the risk of sacrificing research and development for future technologies.

Historical Trends in Defense Budgets in the Context of the Federal Budget

The historical trends in US government expenditures, defense spending, and other areas of the budget provides perspectives on the broader federal budgetary demands in the context of economic growth.

Figure 1.1 below shows US government expenditures as a share of GDP over the past 50 years, as well as Social Security/Medicare and defense spending as a share of GDP. The figure indicates that government expenditures, as well as Social Security and Medicare, have increased as a share of GDP over the past 50 years, but defense spending as a share of GDP has declined over that same period, especially relative to the Korean War and the Vietnam War.

Government expenditures were about 17.2% of GDP in 1948, following World War II. By 1952, they were over a quarter of GDP and remained in that range, reaching about 30% of GDP in 1968, during the height of the Vietnam War. Government expenditures as a share of GDP continued to trend upward, reaching 37% in 2009, dropping to 35–36% in 2010 and 2011, and then dropping to 33.7% of GDP in 2012 and 32.3% in 2013.

Figure 1.1 US Government Expenditures as a Share of GDP: 1948–2013

Source: The President’s Budget FY 2015, Table 15.5. See http://www.whitehouse.gov/omb/budget

Medicare and Social Security as a share of GDP have steadily risen over the past 50 years. Although the Medicare program was not implemented until 1965, the Social Security program had increased from 1.1% of GDP in 1955 to 2.1% in 1960. By 1967, Social Security and Medicare had risen to almost 3% of GDP. Between 1967 and 1976, they rose to between 3% and 5% of GDP. During the period from 1982–1990, they ranged between 5.8% and 6.3% of GDP and they ranged from 6.2% to 6.7% between 1991 and 2001. Most recently, between 2009 and 2013, they were between 8.1% and 8.4% of GDP.

Defense expenditures as a share of GDP, on the other hand, trended downwards over time. Although they were only 5.2% of GDP in 1948 at the end of World War II, they peaked out at 14.4% of GDP in 1953, during the Korean War. Between 1956 and 1963, they ranged from between 9.5% and 10.6% of GDP. By 1970, defense expenditures had dropped to 8.2% of GDP, and, as the Vietnam War wound down, fell to 5.8% in 1975, and then as low as 4.8% in 1979. Beginning in 1982 and throughout the 1980’s, defense spending as a share of GDP rose to a range of 5.6%-6.3% of GDP. Indeed, in 1989, they were at 5.6% of GDP, but, as the Cold War ended, defense spending continued to drop, reaching 3.8% in 1995. By 2001, defense spending was 3% of GDP, but, with the beginning of the War on Terror following 9/11, it increased to 5% of GDP between 2009 and 2011, but then fell to 4.5% in 2012 and 4.1% in 2013.

The trends in defense spending as a share of GDP suggest that the importance of defense priorities have historically impacted defense spending to a greater degree than the trends in the overall government expenditures as a share of GDP and the federal budget. Nevertheless, both forces have played a valuable role in defense spending in recent years and will likely do so in future years. Moreover, the volatility of defense spending as a share of GDP relative to the increasing trend of Social Security and Medicare as a share of GDP highlights the tradeoffs between defense and other areas of the budget, as well as the challenges faced by DoD when it needs to expand again, following earlier contractions.

Recent DoD Budgets and Challenges Faced by Budget Cuts and Shifting Defense Priorities

The most recent developments in the defense budget indicate the likelihood for changes in subsequent years, due to the need for the defense budget to contribute to restraining the rising federal budget, as well as to handle the shift in defense priorities, away from Iraq and Afghanistan, and toward a balance between expanding our military presence in the Asia-Pacific region, as well as maintaining the US military presence in the Middle East.

In November, 2013, Secretary of Defense Hagel announced the six priorities which had been developed from the Strategic Choices and Management Review, which had ended in July 2013. These priorities are likely to impact the size and importance of various categories of the defense budget in the upcoming years. These six focus areas included:

a. balancing between capability and capacity;

b. institutional reform;

c. re-evaluation of the force planning construct (which includes the assumptions establishing the planning of organization of troops, acquisition of equipment, and training of the military);

d. protecting investment in newly developing military capabilities;

e. compensation and personnel policy; and

f. preparing for a prolonged military readiness challenge.

Secretary Hagel noted the importance of DoD protecting investments in “emerging military capabilities, especially space, cyber, special operations forces, and intelligence, surveillance and reconnaissance …”¹

Secretary Hagel also observed that “the military would have to come to grips with much smaller budgets and reset expectations as the nation moves ‘off on a perpetual war footing.’” On the other hand, he also noted, in his speech at the Center for Strategic and International Studies in November 2013, that “even after a retrenchment, the United States alone will still account for nearly 40% of all military spending in the world.” Secretary Hagel suggested that there will be a move toward “a smaller, modern, and capable force” relative to “a larger force with older equipment” and that the conventional land forces will continue to shrink, while Special Operations and weapons with new technologies will be expanded. Finally, he suggested that DoD “needs to rely more heavily on allies, and should play a supporting role, not a leading role, in US foreign policy.”²

As defense priorities evolve, DoD is also faced with fiscal constraints. The Budget Control Act, passed in August 2011, required $487 billion in defense cuts over the next 10 years, portions of which were reflected in the subsequent budgets. Due to the Super Committee’s lack of success in developing a blueprint to reduce federal budget deficits by $1.2 trillion in November 2011, the Budget Control Act called for sequestration to begin in January 2013.³ It was deferred and partially took effect on March 1, 2013. Department of Defense, under full sequestration, would bear an additional $500 billion of the discretionary spending cuts over the next 10 years. Under full sequestration, DoD would have to cut $52 billion in spending each year through FY 2021.

Figure 1.2 DoD Outlays as a Share of Total US Government Outlays: October 2011–June 2014

Source: Department of the Treasury, Bureau of the Fiscal Service, Monthly Treasury Statement of Receipts and Outlays of the United States Government, October, 2011–June, 2014, p. 2 and p. 8.

The share of monthly DoD outlays relative to US government outlays in FY 2012, FY 2013, and the first nine months of FY 2014 is illustrated in Figure 1.2 and suggests the impact of upcoming fiscal constraints and shifting defense priorities. DoD outlays peaked in September 2012 – the end of the fiscal year for FY 2012 – at 27% of US government outlays. During FY 2012, DoD outlays varied between 15.5% and 27% of US government outlays. In FY 2013, DoD outlays peaked as a share of federal government outlays at 24.9% in June, 2013. During FY 2013, DoD outlays varied between 13.3% and 24.9%. During the first nine months of 2014, DoD outlays varied between 13.1% in February 2014 and 21.7% in December 2013 and ranged between 14% and 18% in six of the nine months.

Defense expenditures were affected by the uncertainties in FY 2013 regarding sequestration. Indeed, defense expenditures were as low as 13% of federal outlays by February 2013 and remained between 15% and 18% throughout the rest of the year, except for June, 2013 (24.9%) and September, 2013 (21.1%). This was a slightly lower range than in FY 2012. The sequestration cuts, which were mandated by the Budget Control Act, resulted in the need for DoD to cut $37 billion between March and September, 2013 and included a reduction in training.⁴ Similarly, in the first nine months of 2014, defense expenditu...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• About the Author
• Introduction
• 1 The Evolution and Challenges of the US Defense Budget and the Tradeoffs Impacting the Defense Industrial Base
• 2 The US Defense Industrial Base
• 3 Defense Industry Consolidation
• 4 Defense Industrial Alliances
• 5 Globalization and the US Defense Industrial Base: A Case Study of the Tanker Competition between Boeing and Northrop Grumman/EADS
• 6 The Role of the US in the International Defense Market
• 7 The Global Defense Market
• 8 Global Arms Deliveries
• Conclusion
• Index