Current Challenges

The defense industrial base (DIB) in the United States is grappling with significant output challenges. According to National Security Advisor Mike Waltz, the scale of the largest shipyard in China dwarfs that of all U.S. shipyards combined. This disparity highlights the pressing need for increased production capacity across the DIB to ensure the nation’s security.

Current Solutions and Limitations

To address the lack of output, Congress is allocating billions of dollars to enhance the submarine industrial base. While such capital investments can yield immediate results, they do not address the underlying economic incentives that deter industries from investing in permanent production capacity. Long-term solutions must focus on establishing sustainable policies that reduce uncertainty and enhance the DIB’s overall appeal.

Sustainable policy approaches should include:

• Implementing output capacity-based grants.
• Expanding multi-year contracts.
• Allowing immediate expensing for capital investments.
• Reforming procurement budgeting to prioritize production.
• Strengthening the labor pool through targeted educational initiatives.

Proposed Policy Reforms

Output Capacity-Based Grants

Establishing a grant program funded through a budget reconciliation bill could provide DIB producers with necessary financial support during uncertain procurement cycles. This would allow companies to maintain desired output levels, which they might not achieve through market-driven funding alone.

Multi-Year Procurement and Block-Buy Contracts

Utilizing multi-year contracts can significantly increase predictability for manufacturers. These contracts facilitate bulk procurement, which not only stabilizes the production output but can also reduce overall costs by achieving economies of scale. Research indicates that these methods can cut procurement expenses by up to 15%.

Tax Reforms

Introducing full and immediate expensing for capital expenditures could be transformative. Currently, U.S. tax regulations impose double taxation on investments in new production capabilities. By allowing immediate deductions for the cost associated with equipment and facility construction, the tax burden could be alleviated, thereby encouraging businesses to invest in their output capabilities.

Reforming Interest Deduction Limits

Current restrictions on interest deductions for financing capital expansion hinder investment. Adjusting the calculation methods and removing caps on interest deductions could promote broader capital investment, particularly within the DIB.

Ending the Davis-Bacon Act

The Davis-Bacon Act mandates prevailing wage rates on federal projects, often inflating costs and limiting contractor participation in federal contracts. Repealing this act could lead to more competitive wages that accurately reflect local market conditions, reducing overall project expenses.

Addressing Regulatory Barriers

Streamlined Permitting Processes

Manufacturers face significant delays due to cumbersome federal permitting processes. Streamlining this system would enhance operational efficiency and reduce costs. Implementing a one-stop-shop permitting approach could expedite project initiation and improve timelines for manufacturers in the defense sector.

Utilization of DOD Land

The Department of Defense possesses vast tracts of land, much of which remains underutilized. By assessing and leasing this land to private industry, the government could facilitate the establishment of new production sites, fostering industry growth while simultaneously reducing maintenance costs associated with unused facilities.

Investment Prioritization

Congress should recalibrate fiscal priorities, directing a higher ratio of spending to procurement in comparison to research, development, test, and evaluation (RDT&E). Historically, funding for procurement has diminished relative to RDT&E, which has exacerbated production capacity issues within the DIB. As global military tensions increase, adjusting this funding balance is crucial.

Enhancing Foreign Military Sales

Reforming the International Traffic in Arms Regulations (ITAR) is essential for boosting Foreign Military Sales (FMS). Simplifying the compliance process for allies can enhance cooperation and interoperability among U.S. allies, while simultaneously encouraging defense production growth by creating a larger demand signal. Streamlining processes for the Five Eyes allies could serve as a pivotal step toward advancing strategic collaboration and technology sharing.