John McCain is not the only new chairman of a congressional armed service’s committee. Texas Republican Mac Thornberry took over as chair of the House Armed Services Committee at the beginning of the 114th Congress, replacing the retiring Buck McKeon. Rep. Thornberry, like Sen. McCain, has identified reforming the Pentagon’s acquisition as a top priority.
According to a story in Breaking Defense from November, Rep. Thornberry is a “dynamic legislator” who helped spearhead creation of the Department of Homeland Security. But what does he have in mind for changing the way the Department of Defense buys weapons?
A January profile in Breaking Defense suggests that his efforts there will not be nearly as revolutionary as creating a new cabinet-level agency. In a speech at the American Enterprise Institute, Sydney Freedberg of Breaking Defense reports, “The famously thoughtful Thornberry promised he won’t drop any blockbuster legislation. Instead, he’ll work with appropriators, the Senate, and the administration on a slow, steady, and consensus-seeking effort that can be sustained year after year.” Rep. Thornberry believes that between himself; chief Pentagon weapons buyer Frank Kendall; new Secretary of Defense Ashton Carter (who previously held Kendall’s position); and Sen. McCain – who in Freedberg’s word has a “burning hatred of Pentagon waste” – acquisition reform is within reach.
So what does Rep. Thornberry’s “slow, steady, and consensus-seeking effort” entail? According to Freedberg’s report, it mostly involves repealing old laws and reducing the amount of regulation in the Department of Defense acquisition system. Thornberry plans to work with Kendall to eliminate “duplicative overlapping regulations.” By doing so, he expects better performance in the defense industry because contractors will be able to develop weapons more quickly as a consequence.
But will that be enough?
Eliminating red tape is certainly a useful activity. Even when not slowing down existing defense companies, it acts as a barrier to entry for new suppliers who might offer a better product or one produced more efficiently. But reducing the amount of regulation will not necessarily have the salutary effects on problems such as cost overruns, about which Rep. Thornberry—like Sen. McCain—is most concerned.
The defense market is monopsonistic, where multiple sellers interact with one buyer. With only one buyer, there is a great deal of risk for companies in the defense industry. As J. Paul Dunne explained in the Handbook of Defense Economics, that risk tends to produce to things: government subsidies for research and development and elaborate regulations to assure public accountability. Cost overruns are a product of that risk when, instead of bearing the cost of R&D, the government allows companies to lowball initial bids during the acquisitions phase and then recoup costs during production. Growth in the cost of a weapons system in later stages acts as a subsidy to the company for the early risk.
As costs go up, Congress demands accountability. Absent a market mechanism, the result is most likely a growth in the number of regulations—as was the case following the military spare parts scandal of the 1980s that inspired at least some of the regulations Rep. Thornberry now hopes to repeal.
The defense monopsony can never be broken, but it might be possible to ameliorate some of its more pernicious tendencies by decentralizing acquisition. Increasing the number of buyers through increased competition among the military services will mitigate—though not eliminate—some of the risks defense contractors face. While some projects by their nature have only a single buyer, when programs that can be sold to multiple services are instead develop jointly, the increased risk not only incentives lowball initial bids that produce cost overruns but also mitigates against a contractor challenging military preferences even when they are infeasible. As Harvey Sapolsky, Eugene Gholz, and Caitlin Talmadge explain, “sellers, no matter how numerous, will not stray at all from the preferences of the single buyer, no matter how inappropriate strategically or misdirected technologically.”
Representative Thornberry is right to want to lower the barriers to entry in the defense industry. But if he is really interested in better acquisition outcomes he should do what he can to increase the number buyers, not just the number of sellers.