krav paper

Abstract

This paper examines the military industrial complex and analyzes some effects the

defense industry has had on the growth of government, primarily within the Cold War and post

Cold War periods. Part one will feature an introduction, giving an overview of what the reader

should expect from the paper. Part two will be a brief history, both chronologically and

intellectually, of the military industrial complex within the United States. Part three will

examine the system, its constituent parts and how they fit together and interact to form the

complex. Part four will examine data obtained from the undersecretary of the department of

defense’s website, and based on proceeding discussion, what the reader can take away from

that data regarding government spending and trends within the complex. Last, part five will

summarize what the reader has encountered and what this information possibly means for the

future of the defense industry.

Introduction

With Washington currently embroiled in a blistering debate over the budget and the

United States entangled in a huge debt problem (some say crises), a look at the military

industrial complex and its’ effect on defense spending is very relevant. The department of

defense’s budget currently occupies close to one out of every five dollars spent by the federal

government. The defense budget itself is split into eight parts1, of which two are most

1 Those eight parts are: 1) Military Personnel Programs 2) Operation and Maintenance Programs 3) Revolving and Management Fund 4) Procurement Programs 5) Procurement Programs Reserve Components 6) Research, Development, Testing, and Evaluation 7)Military Construction, Family Housing and Base Realignment and Closure Programs 8) Other Justifications

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pertinent to the MIC2: 1)Procurement and 2) Research, Development, Testing and Evaluation

(RDT&E). Annually, these two programs constitute the second or third largest parts of the

Pentagon’s budget going back at least to the late 1940’s. Within non personnel related

spending, these two aspects of the budget constitute the largest part of defense spending for

many years over the same time period (defense.gov 2009).

The military industrial complex is a much maligned term in society today. It is many

times tinged with a negative connotation, but what exactly is the military-industrial complex?

James Ledbetter, in his book on the subject, defined the MIC as “a network of public and

private forces that combine a profit motive with the planning and implementation of strategic

policy” (Ledbetter 2011). Put succinctly, it is the interaction between the public and private

sectors in the realm of defense.

Importantly, the military-industrial complex does have real implications for the country.

It affects the political, economic and social realms of the United States, as well as permeating

global effects. This paper will look at the effects of the military-industrial complex on the

United States through an economics perspective, and how it has influenced the administrative

state. In particular, this paper seeks to examine the topic through the lens of privatization

versus nationalization of the defense industry. I seek to ask where the taxpayer will receive the

most benefit from defense spending. Would it be through a nationalized defense industry, a

privatized defense industry, or some regulatory regime combining both? In looking for

2 For the rest of the paper I will use “MIC” and “military industrial complex” interchangeably, with MIC being shorthand for military industrial complex.

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answers, the focus should not only include cost-effectiveness, but that combination which also

allows for innovation (Weber 2001).

The pressures between economic and security concerns are paramount to

understanding the MIC and the debates surrounding it. Defense policymakers’ basic bargain in

defense is to provide national security while operating within constrained budgets and within a

security environment that is never fully comprehended (Markusen and Costigan 1999). From

this central point arise several debates. How does the Pentagon maintain military superiority

through superior weapons within this constrained budget? How does the Pentagon maintain

superior weaponry within a defense industry that does not operate in a traditional economic

market that is competitive and open? Does the Pentagon need to maintain weapon superiority

given the United States great technological military advantage compared to the rest of the

world? Congruently, does the American taxpayer get maximum benefit for their money within

this system? Furthermore, what does the current system mean for arms exports? These issues

constitute major policy dilemmas for Washington and will be examined more in depth within

this paper.

History

An arms industry has existed in the United States since the Revolutionary War (Weber

2001), but more concrete consolidations of interaction between private industry and the state

were seen following the Civil War. It was then that the U.S. Navy began to modernize its fleet,

and in so doing required vast amounts of steel and iron. The steel industry was dominated by a

handful of steel barons, thus cementing the relationship between private industry, shipbuilders,

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and the Navy (Ledbetter 2011). We can see an interesting historical parallel between that time

period and the present in that the States’ dealings with private industry in the realm of defense

took place largely among a few large contractors. In the late 19th century a House Naval Affairs

Committee produced evidence that one of those contractors, Carnegie Steel, purposefully

delivered below par quality armored plates and deceived government inspectors as to their

quality (Ledbetter 2011). From the beginning, the potential for fraud and abuse by for profit

companies is seen3.

Naturally, this helped form a negative reaction of the public towards the defense

industry. Long before the term “military industrial complex” came into full public awareness

with the 1963 farewell address by President Dwight D. Eisenhower4, public reactions and

intellectual writings on the subject were unambiguously negative. These writings could be

categorized into four basic theoretical categories (Ledbetter 2011). The merchants of death

theory, which said arms dealers cause and encourage war to increase profits. The war economy

theory, which stated too much of modern industry was tied to the production of weapons and

the relationship between the State and private industry is dangerous. The garrison state

theory, which held large societies of the future would be organized in a highly militaristic

fashion, curtailing individual liberties and democracy. Finally, there is the technocratic elite

theory, which held that as American society becomes more complex and reliant on technology,

it will be dominated by a class of unaccountable bureaucrats (Ledbetter 2011). Also notable

was C. Wright Mill’s seminal work “The Power Elite,” which coalesced the arguments of authors

3 As another example, in the mid 18th century there were reports of gun manufacturers providing faulty guns at inflated prices (Ledbetter 2011).4 See appendix A for excerpt from the speech pertaining to the MIC

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before him concerning the structure of the state and industry and spurred sociological research

on the subject into the future (Ledbetter 2011).

The emergence of a full scale private defense sector did not occur until World War II

(Ball and Leitenberg 1983). The defense industry before that time had been largely nationalized

(Weber 2001) and the American economy characterized by efforts to quickly increase arms

production during war times, then implement drastic cuts to this production when the war was

over (Ball and Leitenberg 1983). Ordnance departments of the Army and Navy were largely

responsible for production of their own weapons and would produce them in publicly owned

arsenals and laboratories, or enter into contracts for products mostly already commercially

available (Weber 2001). Accordingly, civilian and military technology abilities tended to mirror

each other (Ball and Leitenberg 1983).

World War II, however, changed the game as hundreds of firms were mobilized for the

war effort. With this mobilization came rapid advancements in technology that the arsenal

systems could not keep up with5. Thus, weapons production became much more privatized.

Lobbies began popping up, created by leading businesses for greater Congressional funding. In

addition, lawyers, accountants, and law firms joined in the business to help create and

negotiate the complex contracts between the State and the contractors they chose to engage

business with (Weber 2001). As a result of this increased privatization, the public sector

expected several benefits, including cost decreases per unit as a result of competition, more

innovation spurred by the potential for profit, and the ability of private firms to attract better

5 The Springfield arsenal, for example, took 17 years to develop, test, and produce the M-1 rifle. Interestingly, some technological historians have argued that in fact these arsenals demonstrated a good capacity for innovation (Weber 2001).

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talent than the arsenals due to an assumed ability to be able to pay more (Weber 2001).

Whether these benefits actually accrued is a source of ambiguity which will be looked at further

in this paper.

Following WWII, the defense budget did not recede back to prewar levels as was

anticipated, and this trend has continued to the present. While there have been valleys and

hills, the budget in constant dollars has stayed relatively high and constant since WWII. In large

part, the budget not receding to pre-WWII levels can be attributed to the Cold War. Bulges in

the budget during the Cold War period can be attributed to the Korean War, the Vietnam War,

and President Reagan’s military peacetime buildup of the mid 1980’s, respectively (Ball and

Leitenberg 1983). Even the fact that the advancement of aircraft and bomber technology post

WWII meant the seas offered less physical protection may be attributed to defense budget

growth (Gansler, 1980).

With the planting of privatization roots in the defense industry and the subsequent

institutionalized dealings formatted between the private contractors, the Department of

Defense, and Congress, we see the beginnings of the formation of the system as it is today.

The System

The MIC is a combination of forces that include the Executive branch (in the form of the

DoD), the Legislative branch, and private contractors that create the weapons (Ledbetter,

2011). In terms of supply and demand, the federal government forms the demand side and the

contractors form the supply side of the equation. Unlike normal, competitive markets however,

the defense market is generally characterized by one buyer and a few large competitors, also

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called an oligopoly market. While this is far from perfect competition, an even stricter market

is formed once a contract between the federal government and a private contractor is entered

into. Called a monopsony market, this is a market characterized by one buyer and one seller.

The Iron Triangle

A good place to begin our look at the MIC, its constituent parts, and how they interact

with each other is through the concept of the iron triangle, a term encompassing the idea of

the “revolving door” that exists between the DoD, Congress, and the private contractors.

Relating back to C. Wright Mill’s book “The Power Elite,” he noted that the same people

revolved in and out of top management of defense firms, top positions in the military services,

and sometimes Congress. These people were influenced by each other, went to similar schools

and shared similar values (Ledbetter 2011). More concretely, between 1957 and 1958 the 100

largest contractors employed 218 former generals or admirals and 768 former military officers

who had retired with at least the rank of colonel or naval captain (Sarkesian, 57). By the early

1980’s that figure had increased to over 3,000 (Boies 1994).

The Department of Defense and its interactions in the triangle is most visible. The

department needs a weapon and thus acquire their needs through contracts with private

contractors. A budget will be submitted to Congress including provisions for the weapons they

want to acquire in the next budgeting cycle and Congress will approve or disapprove it. One

interesting interaction is between the branch services themselves. Their bureaucratic

competition for a portion of the DoD’s total budget results in redundancies in weapons systems

over the military as a whole (Markusen and Costigan).

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The Department of Defense, owing to the fact that there are few large, primary

contractors, comes to rely heavily on them for defensive needs. Indeed, starting in earnest in

the mid to late 1960’s, a high level of concentration in defense production was seen (Boies

1994). This trend continued into the early 1990’s, when the end of the Cold War signaled

declining defense budgets. In response, the defense industry collapsed even more. These few

big firms then essentially became “national assets” that, like the big banks, became too big to

fail (Boies 1994). The DoD will and does give “bail outs” in the form of unnecessary contracts to

suffering defense suppliers (Boies 1994).

Further hurting the Pentagon is the fact that defense weapons exist as a very inelastic

demand market (Weber 2001). The prices can rise6 dramatically and still the Pentagon will pay.

Price is not the driving factor for the Pentagon in choosing weapon systems. However, in

developing weapons systems, profit is the primary motive of private contractors.

Congress plays a unique role in this triangle. They are not as directly involved as the

DoD and the contractors in the requirements of what is made and how, but they ultimately

hold the purse strings. In addition, Congress is a secondary, more minor purchaser of weapons

systems. They do not request systems, but instead will include the purchase of weapons within

legislative bills.

Two key practices of note that occur in Congress are “pork” spending and “logrolling.”

Pork spending is the inclusion by a Congressman of a provision in legislation, usually with no

relevance to what the bill is actually designed for, that strictly benefits that Congressman’s

6or fall, but this historically is not the trend

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represented constituents. The defense industry will lobby hard to members of Congress that

represent districts where they have manufacturing facilities about the importance of a

particular program they have, not just in terms of national security, but also in terms of jobs

and stimulation to the local economy. Logrolling refers to the practice of Congressman to vote

on legislation that they do not care about as a favor to another Congressman, and in turn

expect that Congressman to return the favor. In this way, Congressman can cull support for a

vote that, for example, keeps an unneeded military base operational in their district. These

practices help explain some of the results of the interaction between Congress and the defense

industry. As a concrete example, under the Clinton administration, the Air Force seldom

requested F-16’s in their annual budget submission, knowing that the “strong Texas delegation

on the Armed Services Committee” would always add at least a dozen as pork for Lockheed

(Markusen and Costigan 1999).

The primary strategy the defense industry uses for trying to tap this Congressional

market is garnering political support for their weapons systems to continue being funded. In

peacetime, this is an especially effective way for the defense industry to conduct business as

Congress is more politically powerful than the military (Markusen and Costigan 1999). In times

of war, when the nation feels a threat, the military becomes more politically powerful and

Congress cedes more to their judgment for procurement needs, allowing the military to choose

favorite contractors and squeeze others out (Markusen and Costigan 1999). However, in

peacetime Congress becomes more narrowly focused, primarily on jobs for their respective

districts (Markusen and Costigan 1999). Thus, Congress purchases weapons to keep production

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lines running and employment higher, making the defense industry an employment asset as

much as a national security asset.

This line of thought leads to the fact that weapons systems, once started, tend to take

on a life of their own. Because of the enormous resources poured into major weapons systems,

once in full production they gain powerful Congressional support (Markusen and Costigan

1999). One example (and a prime example of logrolling in action) is the B-1 and B-2 bombers.

The air force admitted the bombers limited utility, yet over a twenty year period the aircraft

was kept alive, ultimately costing the taxpayer $44.4 billion by the time the program was

halted. However, senator Sam Nunn of Georgia and several members from the southern

California delegation, where the B-2 was produced, continued to fight to keep the program

alive. In return for the support Nunn gave the southern delegation, the delegation members

supported the “expensive and troubled” C-17 transport aircraft, which was manufactured

primarily in Nunn’s state of Georgia (Markusen and Costigan 1999).

Technological sophistication

It is high technology that has defined the defense industry since the beginning of the

Cold War. This is a product of Cold War military planners who maintained a strategy of military

superiority through continual technological innovation. As a result of its monopsony buying

power, the government requires exacting specifications for its weapons (Ball and Leitenberg

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1983)7. Accordingly, few new defense companies can enter into the market. The political and

capital requirements remain too large for most companies.

In many instances, the monopsony market pervades even after the production contract

has been fulfilled, due in large part to the fact that defense weapons now are so technically

sophisticated only one company has the knowledge, facilities, and expert staff capable of

producing a given single weapon (Markusen and Costigan 1999, Weber 2001). In line with this,

the research that goes into these weapons and the time to production makes it very difficult,

economically and politically, for a more competitive market to arise.

Many defense planners and analysts wonder if the high technology approach is the

correct one. Post Cold War defense planners have put great emphasis on maintaining superior

military ability through world-wide force projection (Markusen and Costigan 1999). This ability

is largely focused on an ability to continually innovate technologically.

Yet, the Cold War is over and the United States still maintains complete technological

military dominance the world over. Is it necessary for the United States to continue this

strategy when the world is far from catching up to our technological abilities, especially in light

of severe budgetary problems? Moreover, there is no great power struggle anymore. The

world, though it is changing, is still uni-polar. By many accounts, China will overtake the U.S.

economy in the coming decades, but this is not a certainty nor does it have to mean certain

conflict.

7 One administrative consequence of this situation is large defense contractors have specialized staffs that deal strictly with the complex paperwork necessary for the procurement process (Ball and Leitenberg 1983). Indeed, in 1980 DoD procurement regulations included over 16,000 pages of text, in addition to hundreds of pages of appendixes (Gansler 1980).

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During his administration, President Clinton issued his analysis of the defense industry,

known as the Bottom Up Review (BUR). Among its most important contributions, arising from

thinking about the first Gulf War, was a prescription for a military with a force structure capable

of unilaterally fighting two wars simultaneously and winning both (Markusen and Costigan

1999). This is a policy still in force (Quadrennial Defense Review 2010) and controversial. It

remains unlikely that two regional wars will break out simultaneously requiring the forces of

the United States military (Markusen and Costigan 1999). Yes, the U.S. is currently involved in

two wars, but one of them was, in strict defensive terms, unnecessary to engage in.

This begs the question what might alternative defense budgets look like. After all, the

philosophy behind security needs is one of the biggest drivers of the defense budget (Markusen

and Costigen). Writing in the late 1990’s, Greg Bishak analyzed several defense budgets put

forth. He analyzed the Bush/Cheney proposal, the Clinton/Perry proposal, a proposal put forth

by Michael O’ Hanlon of Brookings Institute, and one by Randall Forsberg, director of the

Institute for Defense and Disarmament. The Bush and Clinton proposals cost $293 and $266

billion (in 1993 dollars) respectively, while the O’Hanlon proposal cost $163 billion and the

Forsberg proposal $87 billion (Markusen and Costigan 1999). The purpose of introducing these

figures is to highlight that with each lessening budget cost, there was a concurrent lessening of

force projection expected8. From a lessened force projection would come a relaxed standard of

technological specification.

8 The Forsberg proposal in particular relied heavily on military alliances and cooperative effort, through organizations like NATO. While this would not sit well with foreign policy realists it is one avenue that needs to be seriously explored and is continual rhetoric brought up in defense publications i.e. Quadrennial Defense Reviews, DoD annual budget listings etc.

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Many economic benefits are associated with this development, were it to occur. One is

the chance for greater civil-military integration as less exacting requirements would allow more

commercial firms to enter the market (Markusen and Costigan 1999). With the increased

competition should come decreased cost to the taxpayer. This strategy could potentially

reduce economies of scale and scope9, as new firms with less physical capital and process

knowledge aggregation enter the market, negating some savings10. Still, combined with

procurement savings coming from contracts less likely to be subject to cost overruns, intuitively

it seems civil-military integration would provide net savings. It is a possibility for future

research.

Additionally, looking at new security frameworks is necessary as the DoD’s acquisition

budget likely will only increase in the coming future. The departments focus in the future is on

the concept of “netcentric warfare.” As an example, the Army is in the midst of implementing a

new Future Combat System (FCS) program which will integrate 14 systems that include

unmanned ground and air systems as well as unattended sensors and munitions to be

implemented in new combat brigades (Government Accounting Office 2009). The program

costs as of 2007 (in 2009 dollars) totals close to $130 billion, and the program is not fully

implemented yet (Government Accounting Office 2009). This example is amplified when seen

in light of the trend of growing DoD acquisition programs. In 2000, the departments’ portfolio

of acquisition programs totaled 75. By 2007 that number had grown to 95 (Government

9 Economy of scale is the average decrease in cost of units produced through increased production by a firm. This is a result of fixed costs being spread out over more units (investopedia.com)Economy of scope is the average decrease in cost of units produced due to a greater variety of units being produced within one firm. This is a result of cost of production of different units being combined within one facility.10 There are arguments (J.S. Bain 1956) that call into question the efficiency claimed of achieving economies of scale (Gansler 1980).

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Accounting Office 2009). Undoubtedly, this can be attributed to the United States being

involved in two wars. Whether these kinds of unilateral world projection forces can be

sustained economically is a serious concern for the future.

The Procurement Process

The procurement process is what links together all players in the MIC. Its

strongest linkage exists between the Department of Defense and the private contractors, as

DoD is the one who actually procures new systems. Congress doesn’t procure and specify new

systems, but can include in the budget systems already in existence, even if the service

associated with a particular system has no need for it, as touched on earlier.

The procurement process itself has changed over time. In the 1950’s contracts were

changed from fixed price contracts to negotiated price contracts (Weber 2001). There is a big

difference in the two forms of contract, one that has contributed to the rise of acquisition costs

in recent decades. With fixed price contracts the government pays a contractor a fixed, pre-

negotiated price regardless of profitability or workability of the program. Alternatively,

negotiated price contracts mean the state pays a contractor for costs incurred plus a negotiated

profit margin. In this case, a contractor has nothing to lose except the time spent preparing the

bid and performing the research.

One of the main reasons for the shift to the present form of contract “negotiation” is

that, as was mentioned earlier, pre WWII acquisitions were mostly made for commercially

available technology. Once the technology ante was upped, companies no longer found it

profitable to bid on contracts because of the risk involved that the technology would fail

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(Gansler 1980, Weber 2001). So risk of failure was shifted to the state while potential for profit

was kept with the company (Weber 2001).

The current procurement process is divided into four parts (Weber 2001). First, the

concept formulation phase where a branch voices a need for a system and Pentagon employees

devise estimates of cost, schedule and technical risk. Second, the concept demonstration and

validation phase where the service takes bids from potential contractors. The contract is

awarded to the company that will engineer preliminary designs or is awarded to a few

contractors who will compete for the chance to develop the system. Third, the full scale

production phase where prototypes are tested and the system is finalized and prepared for

deployment. Assuming the system is built, the contractor receives a guaranteed production

contract. Last, the final production and deployment phase where the contractor builds a small

number of units and transitions into full scale production (Weber 2001). Taking the process as

a whole, we can divide it into two parts. The first two phases combining to a research and

development phase, and the last two combining for a development phase. The government

takes bids for both phases, but rarely does a contractor who received the research contract not

receive the development contract also. Again, the technological sophistication of the projects

many times dictates this outcome.

There are a few problems with this system that cause costs to overrun. First, awards are

based more on their technical promise than price (Gansler 1980). Second, mechanisms built

into the system give contractors the incentive to underbid the initial research phase because

they know the government will reimburse them for most costs. Even if they do take a small loss

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on that phase, they are virtually guaranteed a production contract, which prove far more

lucrative (Markusen and Costigan 1999).

Most programs change their scope due to the length of time it takes to go from the

drawing board to deployable in the field. From 1962 to 1976, a program was likely to grow by

at least 45% over its duration (Gansler, 1980). From 2000 until 2007, the change in total

acquisition cost of the DoD’s total weapons procurement portfolio grew from 6% to 26%

(Government Accounting Office 2008). Additionally, adjusting for inflation and change in

quantity ordered, the cost of military equipment rose from 1940-1980 at about 5% per year

(Gansler 1980). Finally, in 2007 the share of programs with a 25% or more increase in program

acquisition cost was 44% of programs (Government Accounting Office 2007). All of these

figures highlight from different angles the fact that acquisition costs have risen over periods

since negotiated price contracts have been in force.

Arms Exports

A last part of the system we will briefly look at is arms exports. After the Reagan arms

buildup in the mid 1980’s, and the subsequent end of the Cold War a few years later, the

United States found itself with a large excess capacity of weapons. Compounding this was less

procurement spending, which meant firms began looking abroad to help boost sales (Markusen

and Costigan 1999).

Whether arms exports help or hurt an exporting country is a subject of significant

debate. For the state there are macroeconomic arguments that arms exports help stimulate

economic growth through employment and income and help balance trade deficits (Markusen

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and Costigan 1999). Microeconomic arguments include exports help open up new markets,

thus allowing more revenue to spread over fixed costs, reducing per unit costs for the importing

and exporting countries (Markusen and Costigan 1999).

Along with lowering costs, industry contractors argue that exports are necessary to keep

production lines running. Once shut down, they say, it is hard to get running again in a timely

fashion because of high start up costs (Markusen and Costigan 1999). Thus, should a surge in

weapons be needed, they will be ready for production instantly.

Policy shifts within the United States have been seen over subsequent presidential

administrations. Under President Carter, policy was substantially in favor of restricting arms

exports. Under Reagan and Bush those restrictions were lessened, and even more so under

Clinton (Markusen and Costigan 1999). In fact, Clinton justified arms exports and the United

States increasing share11 of that market by focusing on the economic benefits more than

previous administrations had (Markusen and Costigan 1999). In response, a Clinton Presidential

advisory board designed to look at the issue stated, “Industrial base issues should be treated

separately from arms exports and the best solution to overcapacity…is to reduce supply rather

than increase demand” (Markusen and Costigan 1999).

In addition to economic arguments, other factors should be weighed when considering

arms export policy. Foremost, is the potential of advanced weaponry to be sold and used at a

later date against soldiers of the very country who exported the weapon. As export markets

11 It was estimated the U.S. controlled 64% of global arms trade in 1993. In addition from 1986-1994, foreign U.S. military exports were up 140%.

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become more competitive and countries rely on these markets as sources of economic benefit12

their standards of who will qualify as a customer necessarily declines. Furthermore, sellers of

advanced weapons may have it come back to hurt them in more subtle ways. For example, in

the first Gulf War, the French Air Force could not fly its French Mirages because the radar could

not tell the difference between the French version and the one the Iraqis were flying (Markusen

and Costigan 1999). In some cases a country may find itself having to upgrade a system or keep

a system that could otherwise be scrapped because other countries can challenge that system

due to sells13. In an extreme case this could cause a country to be in an arms race with itself

(Markusen and Costigan 1999)!

As the preceding material has shown, the MIC is a very complex system with many

revolving parts interacting with each other, often with ambiguous consequences for the

taxpayer and nation as a whole. Let us now turn to data compiled from the department of

defenses’ website and see what this can add to the discussion.

Data (provided in appendix B)

I have provided four tables for analysis to reinforce the preceding material and provide

figures for trends that extend beyond what much of the reviewed material covered. The data is

presented in five tables. Table one lists DoD spending as a percentage of GDP. Table two lists

DoD spending as a percentage of the federal budget. Table three provides statistics on the DoD

labor force. Table four presents the DoD total budget, procurement budget, and research,

development, testing, and evaluation (RDT&E) budget in real dollars. Table five presents the 12 Because of a lack of good data to use, it is very hard to say to what extent, and even if, economic benefits due accrue ((Markusen and Costigan 1999).13Another benefit of arms exports to the buying country is the potential for technology transfer.

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same parameters as table four but in constant (2005) dollar terms. All tables measure data

from the years 1950 to 2010. This time frame was chosen for a few reasons. One, it starts with

the beginning of the Cold War, which provides good proximity to the defense industry

becoming significantly more privatized. Second, it goes through the Cold War and through the

1990’s when the defense industry merged and consolidated. Last, it goes through the first

decade of the 21st century, which saw the United States engaged in two simultaneous wars for

most of the decade. All three of these time periods represent shifts in defense policy and

spending.

Tables one and two (DoD spending as % of GDP / Federal budget) mirror each other in

that there is a sharp rise from 1950 to the mid 1950’s where the figures peak. From there they

gradually decline to the present with sharp declines from the early to mid 1970’s. Bulges can

be seen from the mid 1960’s until 1970 and again from the early to mid 1980’s. The sharp rises

seen in the early 50’s can surely, largely, be attributed to the start of the Korean war and the

decline starting in the mid 50’s to its armistice resolve. The early 1960’s signaled the real

escalation of troops in Vietnam, but interestingly we only see a rise in both graphs starting in

the mid 60’s and continuing until the early 70’s. After this time a rapid decline is seen in both

graphs as the United States cut defense spending after it ended its involvement in Vietnam.

The bulge of the 80’s can be attributed to the Reagan administrations arms buildup.

Furthering the trend of the first two tables, table three (DoD labor) shows the same

characteristics, peaking in the mid 1950’s and declining ever sense, even more dramatically

than the first two. Of note, the civilian labor force stayed fairly constant from 1955 until 1990,

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and then declines by close to 40% in the 2000’s. While defense spending ebbed and flowed

during this time period, DoD civilian employment stays relatively stable. This possibly reflects a

reality that weapons spending and employment within the department are not tightly linked.

While these tables show a decline of spending in relation to other factors, tables four

and five show actual spending figures by the department. These trends do not mirror the

trends of the first three, in fact taking a much more upward slope than downward. This is

merely a reflection of how much the American economy was growing in relation to defense

spending over the time periods observed.

As stated, tables four and five show actual spending by the department split up into

three categories: Total budget and then the two most pertinent to the military industrial

complex in procurement and RDT&E spending. Table four is shown in real dollar terms and

table five is shown in constant dollar terms. Looking at spending in constant dollar terms allows

for a more nuanced and complete picture of defense spending over the time periods presented

as it compares the spending accounting for inflation/deflation. For example, we see that in real

dollar terms from 1970-75 there was a slight increase in spending. Holding the dollars constant

however, we see that money spent over that same time period actually purchases less, as

spending decreases.

The trends noticed in these tables are, most strikingly, spending has increased overall.

Indeed, in 2010 it was higher than any previous time observed in real and constant terms.

Another striking feature is that procurement spending mirrors total spending almost perfectly.

In every period of rising total budget there is a corresponding rise in procurement spending and

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likewise for decreases. The same trend is not seen with research and development,

demonstrating its looser correlation with department spending and less impactful nature on

Pentagon budgets. As stated earlier, procurement contracts are where the big business is at.

Again the war trends are noticed. In constant dollar terms, the Pentagon escalated spending at

the start of the Korean war. However, there is not the same decrease in spending as seen in

the first three graphs, and in fact a continued increase. Cold War spending is the culprit for that

trend. Again there is a rapid drop off in spending after the Vietnam war back to Korean War

level spending. Notably, when Reagan assumed office, as reflected in the graphs, there is a

large jump in defense spending. In constant dollar terms, procurement spending peaked at its

historical high at this time, in the mid 1980’s. The end of the Cold War shows a decrease in

total spending (constant dollars) falling back to the first years of post Vietnam spending and at

least a 50% cut in procurement spending. Again, this coincides with major mergers of the

defense industry as a strategy to combat this loss of funding. Beginning in 2000, we again see

rapid rises in total spending to its present all time high14. Except for the mid to late 1980’s,

procurement spending has seen the same. One curious trend that would be interesting for

future research is the historical closeness that procurement spending and RDT&E spending

have seen since the mid 1990’s. Indeed, research and development spending has been higher

over the past 10 years than at any other time these graphs show.

14 The stocks for the major contracting corporations during this decade have done extremely well also. Lockheed Martin, Boeing, Raytheon and Northrop Grumman all saw their stocks hit peaks in the late 2000’s. From 2000 until the present, Boeing stock has doubled, representing the smallest increase of the large contractors during this period. Lockheed Martin’s quadrupled, representing the largest. Also noteworthy, every company but Boeing saw their stocks rise dramatically from the early 90’s on, coinciding with the large defense mergers post Cold War. Boeings stock had been rising since the 70’s. All facts gathered: (http://finance.yahoo.com/)

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One other angle of analysis the graphs show is the ratio between procurement and total

spending. During the 50’s it stays close to one to three (one dollar spent on procurement to

three for total). The decade of the 60’s saw a decline in that ratio that fluctuates between 1 –

3.5 and 1 – 4. In the mid 80’s there is a rise back to a 1 – 3 ratio until a decline beginning in the

mid 90’s to the present, where we see about a 1-6 ratio.

Conclusion

This paper has covered a quantitative overview of the military industrial complex, and

hopefully a qualitative one as well. I have highlighted a brief history of the complex, in terms of

government/private industry interaction as well as intellectual influence and public reaction to

this concept. We then turned to the system where I showed how the constituent parts work

together and some of the trends that have existed in the defense industry since the Cold War

began and some of the evolution the industry has taken as well as problems associated with it.

Throughout I have attempted to present the material with a lens towards the economics of the

industry and the taxpayers’ money in sight, focusing on such topics as the procurement

process, national security philosophy, the role technology plays within the MIC, and arms

exports. We have seen the procurement process is in need of reform, technological

specifications drive the industry, and that the peculiar relationship the players have with each

other and the markets that are thus created constitute less than optimal efficiency for not just

the taxpayer, but sometimes the nation as a whole.

So what may be some solutions for greater efficiency for the industry going into the

future? One solution, as has been touched on, could be for greater civil-military integration in

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the defense sector, allowing for a more competitive, classical economics free market (of course

the Federal government constitutes the main purchaser, so it will never be a “free market”).

This would allow more firms to enter the defense market and should help drive down costs. It

could also allow for the Pentagon to once again design more systems and subsystems from

commercially available products, reducing the need for regulations that come with the current

acquisition process. For greater civil-military integration to occur however, there must be a

philosophical shift away from constant technological innovation within weapons systems that

causes defense technology to run far ahead of private sector technology. As mentioned

previously, this causes companies to incur too much risk to profitably be able to produce all of

the next generation weapons the military wants, thus causing the state to take on the risk itself.

Of course, this approach would mean implications for U.S. force structure and possibly force

projection throughout the world, but I see no reason why American vital interests could not be

maintained through a more commercialized defense industry, especially when combined with

more effective and vigorous diplomacy. In this line of reasoning, the U.S. should use some

funds saved through lower costs as a result of this restructuring and put them to use in the

State Department, helping build more effective defensive coalitions through multilateral

platforms.

Another possibility for the industry is nationalization. This has the effect of aligning the

interests of Congress, the DoD and the weapons industry more soundly than presently exists.

Taking a profit motive out of weapons development effectively ceases lobbying. Yes, Congress

would still have narrow interests in considering jobs and economic benefit to their constituents,

and weapons systems would most likely still have a tendency to garner powerful political

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support once in production, but the acquisition process would be virtually eliminated, reducing

overhead, excess capacity and controlling cost overruns. Plus, with negotiated contracts, the

defense industry is already nationalized in terms of taking on the risk of failure.

One common contention with this approach is that the government would not be able

to innovate or come up with proper technologies in a timely manner. This is a valid concern

with historical perspective, though one could make the argument to a certain degree this is true

of the defense industry as is presently configured.

Perhaps another solution would be to nationalize the production side of the defense

industry while maintaining a robust, privatized research and development side. In this way the

benefits of negating procurement cost overrun and fraud as well as better defense industry

alignment of interests among players could be maintained while providing innovative, dynamic

technological research, testing, and even prototype development. If the government needed to

offer negotiated contracts to make this profitable business for private firms to engage in, it

would be much more acceptable as RDT&E costs substantially less in procurement contracts

than does the production side, for obvious reasons.

One downside of this approach would be that production lines would not be as “hot.”15

In my estimation, this is acceptable for two reasons. First, excess capacity develops with hot

lines, encouraging arms sells. Economically, the funds used developing excess weapons could

be put to use manufacturing civilian goods for export. Moreover, as mentioned earlier, the

15 Keeping a production line “hot,” “warm,” or “cold” refers to how often the production assets (facilities, materials, labor) are used in producing the weapon system in question. If a production line is not kept in use (hot or warm), the argument goes, it makes it harder to produce the systems when needed as the assets needed for production have been turned to productive pursuits, making it difficult to quickly mobilize them back to the weapon system in need.

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economic benefits commonly associated with arms exports’ is in doubt. Morally, arms sells are

ambiguous. On the one hand I see the need for some arms sells in helping certain allies

maintain adequate defense they otherwise could not produce for themselves, as well as

maintaining regional balances of military power. And not to be misunderstood, a nationalized

production side defense industry could still produce enough for that very purpose. On the

other hand however, the very arms we sell if done too liberally could obviously come back to

harm deployed soldiers in future combat. Second, hot lines of production aren’t necessary

because the Cold War is over. The United States does not need high weapons production

because it is not in an arms race with anyone and likely will not be in the foreseeable future.

Our current fiscal problems preclude such a measure anyway. Again, some might say what

about China. I would argue any war with China is unlikely for several reasons. They have a

more vested interest than the Soviet Union did in integrating into the world order. China’s

economic system is much like ours and their political system is showing creeping signs of

becoming less centralized and more democratized. If history is an indicator, after adopting a

capitalist economic system, this democratization trend will only continue. These shared values

would help alleviate mistrust of the other sides’ intentions as well as alleviate ideological

tensions, which were such underlying driving forces of the Cold War with the Soviet Union.

Regarding a more classical, hot war if you will, China has nowhere near the capability to engage

the United States through military power, and beyond that our economies are so intertwined it

would be crippling to both countries to engage in a war. These factors are unlikely to change

anytime soon.

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Here then, are three suggestions for creating a more efficient and ultimately taxpayer

friendly Department of Defense. It is imperative for the United States to get its budget in order,

and lowering Pentagon expenditures is one place that must be addressed.

Last, the military industrial complex offers almost unlimited areas for future research.

Production, research and development, procurement, technology, arms exports, and the

continued interaction among the DoD, Congress, and private contractors are just some of the

areas which could be more deeply investigated.

Mark Brisson

Senior Seminar

Dr. Kravchuk

May 3rd, 2011

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