22 February 2011

Economics And Pentagon Budgeting

Forbes has an interesting economic article on defense budgets, claiming that Adam Smith isn’t welcome in the defense industry.

General Electric and partner Rolls-Royce Group suffered a major setback last Wednesday when the House of Representatives voted not to fund a high-performance jet engine the two companies are developing for use on the Pentagon’s F-35 Joint Strike Fighter. GE’s engine is designed to compete with a propulsion system that the Pratt & Whitney unit of United Technologies has already developed to equip 2,400 single-engine F-35s being bought by three U.S. military services and thousands more being bought by overseas allies. The company contends that competition would reduce the price and improve the performance of both engines over the life of the program. But 123 House Democrats joined with 110 Republicans to remove funding for fiscal 2011, meaning that the GE-Rolls engine is in jeopardy if the Senate fails to provide funding and then prevail in a conference between the two chambers to reconcile spending measures.

The setback hardly comes as a shock. Pentagon policymakers have argued every year since 2007 that GE’s “alternate engine” is a waste of money that would duplicate efforts already made to develop the Pratt & Whitney propulsion system without providing corresponding benefits. No other item on the F-35 is being competed, and no other military aircraft developed in the last 30 years has utilized engines from multiple sources. Still, it is somewhat surprising that the Pentagon’s opposition to the purchase of competing engines won the support of so many Republicans. Aren’t Republicans supposed to be big believers in competition and the discipline that market forces can impose on buyers and sellers alike? Why would they pass up the opportunity to have competing engine sources for the military’s biggest aircraft program — and instead choose to rely on a single company to build and support F-35 engines over the next 40 years?

When you get beyond the immediate concerns with deficits and jobs, the real reason the GE engine was rejected is that many members just don’t believe competition works in the defense business the way it does in normal markets. And why should it? There’s only one buyer in the market — the government — and that monopsonistic customer is often motivated mainly by non-economic considerations. Modern weapons are often so complex that there are only two or three competent suppliers for any given system, and once a major award is won, the company that prevails becomes a monopoly supplier of the system in question. Barriers to entry are very high, with a handful of participants dominating the market. This is not the sort of setting in which Adam Smith’s invisible hand is likely to play much of a role. In fact, it’s the closest thing America’s economy has produced to socialism.

By: Brant

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