Much has been made lately about the damage that the Obama regime is doing to the American economy through its Peronist shakedown of Chrysler’s secured creditors. As recounted in Mario Rizzo’s recent review of Raymond Moley’s old book, After Seven Years (Harper & Brothers, 1939), it’s not a wholly new problem from Washington. Moley was a conservative Democrat who quit working for FDR—the first guy in the White House who thought that he could stimulate and orchestrate his way out of a downturn—after the guy really started to go off the reservation in the mid-1930s. Or, as Robert Higgs put it, “insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.” Government provides the legal certainty that business needs to operate; regime uncertainty, on the other hand, can be devastating to innovation and initiative.
Plenty of businesses and their enthusiasts like certainty—particularly those who benefit from existing ways of doing things. In an essay in the May issue of Armed Forces Journal, "Let's make a deal," Harvey Sapolsky of MIT argues that the US federal government should seek
to reestablish a buyer-seller collaboration in most segments of the industry. The government would guarantee a level of employment and profitability for the firms. The firms would collaborate with the government on the design and production of new systems... Dynamic segments of defense such as UAVs and sensors, where the technology is changing rapidly and economies of scale of not important, can be left open to competition.
It is important to note that the 2010 Pentagon budget does this to some extent, though on a program-by-program basis. While ending purchases of F-22 Raptors, MQ-1A Predators, and Zumwalt-class destroyers (er, battlecruisers), the Defense Department is putting its chips on the F-35 Lightning II, the MQ-9 Reaper (and MQ-1C Sky Warrior), and Arleigh Burke-class destroyers. Termination of the alternatives provides a credible commitment that partly forecloses options for future governments. Another regime in Washington could theoretically dump the Lightning II for the Rafale or the Typhoon, but this is rather unlikely.
However, Harvey’s deal, if more broadly brought about, would be a profoundly bad deal for taxpayers. To understand why, let’s revisit some specific goings-on about combat aircraft. While the F-18E/F and the F-35C competed for attention in the budget, the competition for further upgrades of older F-16s and F-15s was more new MQ-9s. Harvey admits that drone aircraft is a dynamic business, but he errs in calling it a market segment. If you’re wondering about this, open one of your old marketing textbooks. Ground attack could be called a market segment, in that it addresses customers’ needs for a solution to a particular problem. Any of the aforementioned aircraft can drop 500-lb JDAMs on hostile troops; the Reaper just does it more cheaply at much longer ranges.
This industrial dynamism and fungibility of firepower exists, however, well beyond UAVs. Zumwalts, it was thought, had been competing with Arleigh Burkes from much the same builders. Since the former were touted for their utility close to shore and the bombardment potential of their 155 mm guns, it’s fair to ask whether they were actually competing with Independence and Freedom-class littoral combat ships and their Netfires rockets. Is there more need for buyer-seller collaboration in the design of new heavy tanks?! Was long-term certainty so necessary to the success of MRAP program?
Harvey’s deal is thus extraordinarily unlikely to be put into practice, simply because certainty is so hard to come by in military preparedness. Peck & Scherer observed as much back in 1962. And that’s not bad, as the opportunity for risk is what creates the potential for outsized rewards. While a few contractors can probably plan for large production runs, the rest can sharpen their pencils. Now, for some regime certainty, we just need a bit less fulmination about fuzzy constructs like “windfall” profits. Yeesh.
Comments