Insiders: Pentagon should not bail out defense contractors

By Sara Sorcher

February 14, 2012

National Journal’s National Security Insiders said the Pentagon should not offer bailouts to keep defense companies or capabilities afloat, despite defense-budget cuts and shrinking military markets.

The Defense Department’s top weapons buyer said last week that defense companies feeling the pinch of budget downsizing could receive a Pentagon bailout to keep some key weapons-development and manufacturing capabilities alive. Frank Kendall, the acting undersecretary of Defense for acquisitions, technology, and logistics, did not explain how the government would assist failing defense companies, but said, "We have to be prepared to intervene where it makes sense, where we have to.”

Yet 73 percent of Insiders said this was a bad idea. “A little Schumpeterian creative destruction will be good for the moribund Cold War-era defense-industrial base,” one Insider said, referring to the theories of economist Joseph Schumpeter.

If the Obama administration is serious about preserving the industrial base, one Insider said, it will protect critical parts of defense industry even if it means touching “the third rail” of entitlements. “We should not engage again in ‘bailing out’ another industry,” the Insider said.

A few Insiders insisted that this era of budget austerity must run its natural course. “Profitability of defense companies over the last 10 years has been staggering. Time now for a reckoning,” one Insider said. “Darwin should rule here,” another added. One Insider would not support a bailout, but would endorse support for at least two firms doing “at least R&D in all critical areas.” As another Insider said, “Bailouts, no. Investments to sustain an adequate strategically grounded defense-industrial base, yes.”

Yet 27 percent of Insiders said the Pentagon should consider offering bailouts – with a few caveats. “Only if a loss of a unique capability will jeopardize national security should this even be considered,” one Insider said.

Few companies will need this, one Insider asserted. “The big ones have already begun to discount the build down, and will survive,” said an Insider who did not support bailouts for the companies. “Virtually everyone else is already a commercial-technology provider and integrated into the global economy. This is not your grandfather's industrial base. Weep no more.”

Meanwhile, Russia sent its foreign minister to Syria in an effort to stop the bloodshed there as Syrian President Bashar al-Assad continues to crack down on protesters. But 96 percent of Insiders said Moscow’s pressure on its ally would not be enough to end the escalating crisis in the country. “This one will run its bloody course. Outsiders cannot do much to stop it. Outcome is unpredictable,” one Insider said. “Pray for the Syrian people.” “There is a systemic reason why Russia fails in this high-stakes diplomacy: It has little hard or soft power to bring to bear,” another said. “Russia is not wealthy or generous or trusted, and it lacks the ability to project military power over long distances. Today Russia is a paper tiger in the Middle East.”

Russia, along with China, vetoed a resolution in the United Nations Security Council that would have called for Assad to step down. One Insider said Moscow’s diplomatic move signals to Assad it is willing to split from the Security Council majority. “[The Russians have] put themselves in a situation where they are losing leverage by their lack of support for the resolution,” the Insider said. “Serious miscalculation by Russia.”


By Sara Sorcher

February 14, 2012

http://www.govexec.com/contracting/2012/02/insiders-pentagon-should-not-bail-out-defense-contractors/41200/