March 5, 2016
The Defense Economics of John McCain, Part 2
How more of “Economics 101” would slowly restructure the US armed forces
By James Hasik
Blank checks provide bad incentives. The senator is still irritated about that cost-plus development contract for the B-21 bomber, even as his office more recently told Defense News that he “will carefully consider his legislative options to address those concerns.” As our friend Andrew Hunter at the Center for Strategic and International Studies stressed to me the other week, the history of fixed-priced weapons development contracts in the United States is not good. But whatever the workability of those, McCain is probably even more angry about abuse of fixed-cost production contracts. As reported by the Government Accountability Office last week, the Navy has been paying shipyards to fix problems on the ships they’ve built under fixed-price contracts—and then paying them a profit margin atop that. As the auditors put it, this is “essentially rewarding the shipbuilder for delivering a ship that needed additional work.” This is no way to run a business—even a governmental one.
Monopolies are even worse. As Sandra Erwin of National Defense reported from a SASC hearing last month, McCain senses that “monopolies and cost-plus contracts… seem to go hand in hand.” He specifically cited the Air Force’s “paying ULA $800 million a year to stay in business”—the “launch capability contract” under which the service has been funding United Launch Alliance to stand by in case it needs to put a big satellite into high orbit. The USAF is now considering ending that early, after the company declined to bid to launch GPS III satellite. McCain also singles out the Navy’s supercarrier program as endlessly providing a multi-billion-dollar sinecure to whoever owns Newport News Shipbuilding. If the Navy bought more, smaller carriers, different shipyards could compete for the work.
Buying more often lowers the unit price. The quality of quantity is a frequent theme in McCain’s thinking. As he went on, “when you cut acquisitions to less than optimal numbers, you end up costing more in the long run. That’s just economics 101.” He was mostly complaining about the Defense Department’s track record of cutting ambitious production programs after badly underestimating the production costs. That recurring budgetary trainwreck can be substantially attributed to entering into long-term production programs before the costs are well understood. Then, even if it’s not actually the F-35 quantities dropping, other parts of the portfolio get cut, and towards marginally higher production costs.
Most weapons aren’t perfect substitutes. About that Joint Strike Fighter—when USAF Chief of Staff General Mark Welsh told the SASC that “the A-10 will not be replaced by the F-35” but rather by similarly old F-15s and F-16s, McCain assailed his remark as “unfortunately disingenuous.” As Dave Majumdar of the National Interest reported, McCain argued that the USAF wouldn’t be using the A-10C now for ground attack if those other aircraft were actually better suited for the role. The “one plane to rule them all” approach hasn’t actually monopolized production at Lockheed Martin—the Long Range Strike Bomber competition saw to that—but its pursuit has severely constrained the Pentagon’s options for the past decade.
These four lines of thought in McCain’s “Economics 101” are straightforward orthodoxy, but they’re also mutually reinforcing. Launching more modest development efforts makes cost-plus contracts are less alluring. Starting more programs, more frequently, to meet disparate war-fighting objectives, naturally leads to weapons with lower and more certain unit costs. Terminating failing programs quicker, so that the department and its suppliers fail faster, leads to shorter cycle times that better support innovation in the force and competition for its material needs. But perhaps most essentially, all of these efforts would slowly restructure the armed forces towards lesser dependence on high-value platforms, which would provide the security of quantity against opponents with growing abilities to target American assets.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.