Industrial policy is back with a vengeance in America, with a wide array of policymakers and pundits suggesting that the U.S. needs to massively ramp up sectoral targeting and taxpayer-financed support mechanisms to match Chinese and European planning efforts.
Setting aside romantic notions about the state’s supposed ability to steer sectors of the economy using wise technological forecasting and industrial planning, the world’s largest bureaucracy—the U.S. Department of Defense—offers some sobering lessons for industrial policy planning efforts. Paired with Congress and private interest groups, the Pentagon and other defense-related bureaucracies form what President Dwight Eisenhower famously referred to as the military-industrial complex (MIC). Under the MIC, which can be considered a form of industrial policy, government procurement and contracting for everything from big-ticket weapons programs to foreign nation-building has been littered with rent-seeking, cost overruns and sometimes outright corruption.
The evidence of the MIC offers a cautionary reminder of the shortcomings of government planning at a time when industrial policy proponents in Washington—not to mention those private interests that stand to benefit financially—are eager to implement the biggest industrial policy bill in American history.
The New High-Tech Pork Barrel
In a bipartisan vote, the Senate passed a 2,600-page bill last summer, the U.S. Innovation and Competition Act, with a $250 billion price tag. Of that total, $52 billion would go to the semiconductor industry alone and billions more to “regional innovation hubs” and assorted other programs. Sen. John N. Kennedy (R-LA) called the measure an “orgy of spending porn,” with members of both parties stuffing it full of goodies for their constituents.
The House recently responded by passing an even larger 3,600-page bill, the America COMPETES Act, which also includes $52 billion for the semiconductor industry, $45 billion in grants and loans to address supply chain issues and billions more for bureaucratic meddling in various other sectors and industries. The price tag is estimated at $350 billion. Meanwhile, the Biden administration had previously proposed new subsidies and released a 250-page report calling for reconfiguring industrial supply chains.
Industrial policy discussions are often teeming with machine-like metaphors, with advocates imagining state planners building or steering a large ship or using dials and levers to finely calibrate innovation and growth in certain sectors. In reality, notes Mike Watson of the Hudson Institute, “industrial policy in the United States cannot be steered by a small group of enlightened individuals, because a small group of enlightened individuals will never be at the helm. Indeed, in some sense, there is no single ‘helm’ to speak of.” The economy isn’t like a ship or a machine; it’s a much more chaotic system with variables that can’t be controlled by a single entity, no matter how enlightened.
And in fact, the government is often unenlightened in its tech-promoting policies. A 1991 Brookings Institution book, “The Technology Pork Barrel,” assembled leading scholars to review the U.S. government’s track record in promoting high-tech sectors and initiatives in the 1970s and ’80s. The contributors evaluated six major commercial R&D programs that were federally backed, including supersonic aircraft and synthetic fuels programs. The book’s editors, Linda R. Cohen and Roger G. Noll, summarized how “[t]he case studies obviously justify skepticism about the wisdom of government programs that seek to bring new technologies to commercial practice.” The political dynamics of industrial policy, they concluded, tend to exacerbate the worst types of public choice problems. Nowhere is that clearer than in the history of the MIC.
The Politics of Defense Contracting
With a budget that exceeds the GDP of many countries, the Department of Defense is, as Watson notes, “[o]ne of the most important implementers of federal industrial policy in the modern age.” It’s hardly a secret, however, that the nation’s defense bureaucracy has long been a bastion of financial mismanagement. In fact, the Pentagon has never been able to properly account for its vast assets and resources. Following congressional efforts to reform government-wide financial management practices in the early 1990s, the Pentagon told Congress its books would be auditable by the turn of the century. More than two decades later, the Pentagon still can’t pass a clean audit, and department officials now say it won’t be able to do so until the end of this decade.
Defense contracting is “plagued by the same kind of political engineering and its associated cost overruns” seen throughout American history, says Watson. Indeed, the Navy’s first six frigates authorized by Congress in 1794 ultimately required several supplemental appropriations due to cost overruns. And rather than using a single shipyard, the ships were constructed in six different locations to spread the political benefits associated with parochialism. Unfortunately, little has changed.
Take the seemingly never-ending saga of the F-35 Joint Strike Fighter, a project with roots that stretch back to the 1990s. The Government Accountability Office (GAO) calls it the “DOD’s most ambitious and costly weapon system in history, with estimated life-of-program costs exceeding $1.7 trillion” and says that it is on track to “incur $4.4 billion in costs beyond what [the Air Force] currently projects it could afford in that year alone.” This biggest-ticket weapons program has been plagued by cost overruns and performance issues since production began in the 2000s and was labeled a “rathole” by House Armed Services Committee Chairman Adam Smith (D-WA) last year. In recognizing the bigger picture, Smith noted, “We have wasted a spectacular amount of money on weapons systems that either haven’t worked at all or who have not lived up to their promise . . . The failure we wind up tolerating is failure on a massive freaking scale.”
The hard truth is the “failure” isn’t just tolerated; it’s supported by Congress. That’s because policymakers see a second role for national defense spending beyond actual national defense: jobs for constituents and support for local industries. Perversely—but rationally from a politician’s standpoint—perpetual cost overruns mean even more taxpayer dollars flowing back to facilities in the politician’s district or state. And it is no accident that production for weapons programs is spread across the country: The more districts or states that have a facility linked to a program, the deeper the support for the program—and the greater the tolerance for cost overruns.
Lockheed Martin’s F-35 website’s “economic impact” page illustrates this spread-the-taxpayer-wealth strategy. One can click on each state and see the number of supplier locations, direct and indirect jobs attributed to those locations, and an economic impact figure. Only two states (Hawaii and South Dakota) do not have an F-35-related facility. The F-35 is hardly alone. Watson points out that “Today’s aircraft carriers are built and maintained by over 2,000 firms scattered across 46 states . . . [and] Lockheed Martin sourced parts for the F-22 stealth fighter from over 1,000 suppliers across 44 states.” As a former staff director for the Senate Armed Services Committee told The Washington Post, “[Y]ou can’t even get rid of the guy serving butter in the chow hall in a local district, much less tens of thousands of jobs.”
The Pentagon serves as a federal jobs program in other areas, too. For example, Congress sometimes demands that the military purchase weapons that the armed services themselves say are not needed. Even though the Pentagon proposed suspending production of the M1 Abrams tank in 2011, which would have saved $3 billion, Congress proceeded to fund excess tank production in the years following. When in 2014 Congress gave additional funding for unwanted tanks, Rep. Mike Turner (R-OH) justified it on the grounds that it “keeps the production lines open in Lima, Ohio, and ensures that our skilled, technical workers are protected.” As one defense analyst noted at the time, the tanks were “just one example and not unique to this year.” Indeed, last year Congress authorized five more ships than the Pentagon wanted, five more F-15EX jets than the Air Force wanted and 12 F/A-18E/F Super Hornet jets that the Navy didn’t ask for.
Never Waste a Crisis
For much of the past two decades, the “war on terror” held center stage following the attacks on September 11, 2001. Unfortunately, this so-called war also showcased the pathologies associated with the MIC. In his 2004 book “The Wastrels of Defense,” long-time Senate aide-turned-whistleblower Winslow Wheeler recounted numerous examples of Congress using the “opportunity” of 9/11 and consequent warfare to fund parochial pet projects under the dubious guise of national security.
To provide just one example, a military construction appropriations bill sent to the president a little more than a month after 9/11 contained funding for two new training facilities and a security-related construction project. The other 117 projects in the bill included “plans for a new museum, a new chapel, gyms, warehouses, fire stations, water towers, land acquisition, day care centers, National Guard armories, and much else.” And according to Wheeler, “the top eleven benefactors for their states and congressional districts were senior Democrats and Republicans in the House or Senate who just happened to be the sitting chairmen or ranking minority members of the Appropriations and Armed Services committees and subcommittees that handled the Department of Defense and its military construction budgets.”
A popular fairy tale is that elected officials are selfless servants of the public and its collective interest. The reality, as Wheeler’s firsthand experience demonstrates, is that political actors are no different from the rest of us: They are motivated primarily by self-interest. He elaborates:
[I]n some cases, even the members and staffers pushing the items barely understand what they are pressing. In most cases, they will know only the arguments for the item, having been fed that side only by the advocates. Members and staff will rarely know what case might exist against the items. They also believe it means a certain amount of jobs or corporate cash flow in their state or district as well. However . . . these data often vastly overstate whatever economic benefit might pertain. In short, virtually no one on Capitol Hill has rigorously been through the pros and the cons. Some items may have merit; some already have a few strikes against them and probably would flunk another review, but no one really knows.
What Wheeler observed wasn’t new. During debates over the writing of the Constitution, James Madison cited three motivations for seeking office: “ambition,” “personal interest” and “public good.” Historian Jack Rakove says that Madison’s legislative experience “proved that the first two predominated, with woeful results.” Quoting Madison, Rakove writes that “[a]rtful legislators ‘with interested views’ could always find ways to sacrifice ‘the interest, and views, of their Constituents’ for their own purposes, and then to have their ‘base and selfish measures, masked by pretexts of public good and apparent expediency.’”
But what has changed since the time of the nation’s founding is the massive scale of these programs and their corresponding potential for abuse. The defense bureaucracies and contractors that form the MIC with Congress particularly deserve scrutiny and criticism.
For example, coinciding with the U.S. military’s withdrawal from Afghanistan in August 2021, the Special Investigator General for Afghanistan Reconstruction published a lengthy report on the lessons to be learned after two decades of reconstruction efforts in Afghanistan. The report painted an ugly picture of how, “[i]n too many cases, the amount of money spent became the main metric for success.” “As spending increased,” the report continued, “the United States initially failed to recognize the existential threat that corruption posed to the reconstruction effort, missing an opportunity to make anti-corruption efforts a central part of its strategy.”
The sheer scale of the programs and spending created massive potential for abuse. The report noted how “because contract work was often performed with little to no oversight waste and fraud often went virtually unchecked.” Worse yet, these private contractors “became dependent on ‘free money’ to sustain their profitability.” The report considered a sample of 60 infrastructure projects undertaken as part of the reconstruction efforts and found that “$723.8 million, or 91 percent, had gone toward assets that were unused or abandoned, were not used as intended, had deteriorated, were destroyed, or some combination of the above.” Of the nearly $7.8 billion spent on capital assets such as buildings, electric systems, roads and bridges, motor vehicles and aircraft, nearly 31% ($2.4 billion) “was spent on assets that were not being used as intended, remain unused, or had been abandoned or destroyed.”
Congress should have exercised greater oversight over these efforts. Alas, “the amount of money spent by a program often became the most important measure of success” for congressional lawmakers.
The Endless Plight
Over the years, whistleblowers and government officials charged with government accountability efforts have fought a lopsided battle against the MIC’s excesses. Before Winslow Wheeler, there was former Pentagon “whiz kid” Pierre Sprey—a thorn in the side of the MIC’s penchant for desiring unnecessary and expensive weaponry—and Chuck Spinney, a civilian analyst at the Pentagon who also made life difficult for the big spenders.
Sprey called the Pentagon a “self-licking ice cream cone,” while Spinney once said that “if you want to understand how the Pentagon operates—like everything else in Washington—you follow the money.” Unfortunately, following the money isn’t an easy task with defense spending, as the aforementioned failure of the Pentagon to account for its activities shows.
In 2015, The Washington Post obtained confidential information that Pentagon officials had intentionally buried an internal study that found $125 billion in administrative waste at the Department of Defense. The report was prepared by the Defense Business Board, a federal advisory panel of corporate executives, and McKinsey & Co. consultants. A confidential memo obtained by the Post found that the Pentagon didn’t “have even a remotely accurate idea of what it was paying for those operations . . . [and] that information on contractor labor, in particular, was so cloaked in mystery that McKinsey described it as ‘dark matter.’” According to the Post, “[A]fter the project documented far more wasteful spending than expected, senior defense officials moved swiftly to kill it by discrediting and suppressing the results.”
Then there’s the case of former DOD contract pricing chief Shay Assad, whom Politico labeled “the most hated man in the Pentagon.” Known for pushing heavily on defense contractors to justify costs, Assad was credited with saving taxpayers billions of dollars during his tenure. His plan to reform overly generous payments to contractors to help with their operating costs blew up following massive resistance by defense contractors and Congress. Assad subsequently found himself with the options of being demoted or retiring despite having “been decorated with a panoply of awards from the Pentagon for his work.” Assad told Yahoo News in 2019 that the “issues he brought up involved potentially billions of dollars in waste and fraud, and still aren’t being addressed”; his statement was supported by “those who worked with him at the Pentagon, as well as documents obtained through the Freedom of Information Act.”
Sadly, financial mismanagement of defense dollars is no secret. The Pentagon features prominently in the GAO’s annual “High Risk List” of government programs particularly susceptible to waste, fraud and abuse. Areas cited by the GAO include business systems modernization, contract management, financial management, support infrastructure management and weapons systems acquisition. These areas of trouble aren’t new: Weapons systems acquisition has been on the GAO list since 1990.
Lessons for Industrial Policy
Many of the same pathologies seen in the MIC are present in other large-scale government infrastructure and space programs. For example, the International Space Station more than quadrupled in cost, from the original estimate of $17 billion to $74 billion after construction was completed. Further, studies have consistently shown that “[f]or large infrastructure projects the consequences are cost overruns, benefit shortfalls, and the systematic underestimation of risks.”
Of course, a nation must ensure it can defend itself. That reality leads many to turn a blind eye to the chronic waste and mismanagement that accompany defense programs. Some industrial policy advocates seemingly view innovation policy in a similar way, mostly ignoring the more than $350 billion price tag of current measures and showing indifference to the pork barrel politics associated with them.
When the Senate was considering its industrial policy bill last summer, some of the bill’s lead sponsors worked to privilege interests in their states. Senate Majority Leader Chuck Schumer (D-NY) boasted how subsidies for the semiconductor industry would benefit companies in his state. Senator Maria Cantwell (D-WA), who chairs the Senate Commerce Committee, was criticized for introducing an amendment that could directly benefit Boeing and Blue Origin, both located in her state. Finally, that committee’s lead Republican, Senator Roger Wicker (R-MS), proudly noted that the measure included support for the Stennis Space Center, located in his home state. The much longer House measure was loaded with even more pork.
This discussion of federal defense planning offers two lessons on industrial policy. First, the larger the industrial policy programs, the more likely the potential for massive inefficiencies, cost overruns and even outright corruption. Second, even well-intended ideas will be undermined by political calculating and bureaucratic administration. And, unlike basic defense-oriented programs, most of these newer, non-defense industrial policy measures are not even needed. America remains a global leader on most technology fronts, owing to a combination of openness to talent, a vibrant venture capital market and a general embrace of entrepreneurial risk-taking. Bottom-up, market-oriented innovation is always superior to the pork-laden, wasteful, top-down planning of industrial policy schemes.