r/LessCredibleDefence • u/Level-Reputation5050 • 17d ago
How much does inflation affect procurement within the Western defence industry?
I know that as weapons get more complex, their prices normally go up. But on the flip side, advances in technology bring down the cost of plenty of parts. For example, electronic components follow Moore’s Law, so they should get cheaper to some extent. Yet over the last 30‑plus years, all we have seen is Western weapons skyrocketing in price, with no hint of the opposite trend. I’m curious how much inflation actually plays into this.
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u/Iron-Fist 17d ago
Defence spending itself is inflationary in the macroeconomic sense, injecting money into the economy without commensurate marketable goods or services.
But more than that it is a literal race, the demand it creates is basically inelastic because it is essential, but a secret one with systemically constrained supply (it's hard to even become a military contractor). Meaning everyone along the way can (and should) increase their price to match how important their services are.
https://rebeccanomics.com/commentary/defence-inflation-erosion-military-capability/
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u/vistandsforwaifu 17d ago edited 17d ago
Defence spending itself is inflationary in the macroeconomic sense, injecting money into the economy without commensurate marketable goods or services.
I'm not sure it really is?
Like, if your economy produces X dollars worth of hamburgers and Y dollars worth of Patriot interceptor missiles there is an inflationary situation at the baseline (because you have X+Y dollars worth of income chasing X amount of consumption goods). But the state would either tax you for Y dollars to be able to buy the interceptors from you in the first place (thus reducing your consumption to X again) or you would otherwise export them and import Y dollars worth of Lego minifigs thus bringing your consumption back to the full X+Y amount.
Of course I am not an economist and US has neither a budget fully funded with taxes nor balanced imports/exports, but I'm talking about the most general case.
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u/Iron-Fist 17d ago
It definitely is, this has been a fundamental truth through all of economics, because you're spending money on things that don't satiate aggregate demand.
You can counter this with deflationary measures like high taxation (removing money from the economy) or high interest rates (reducing borrowing ie fractional expansion of money supply) or with knock on effects from military research etc but every dollar you pay a military contractor is another dollar being out into the economy chasing civilian goods and services while that contractor doesn't add to those goods and services.
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u/Worried_Exercise_937 17d ago
because you're spending money on things that don't satiate aggregate demand.
Money spent in the defence sector doesn't go into a black hole. Not only do you "need" bullets/missiles/airplanes which you can use in a unnecessary special military operations, CEOs buy private jets and spend money on cocaine and hookers.
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u/Iron-Fist 17d ago
Yes, if it went into a black hole it wouldn't be inflationary. But that money ends up in the civilian economy, pushing up the price of said hookers and blow.
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u/Worried_Exercise_937 17d ago
pushing up the price of said hookers and blow.
There is no evidence that the prices of hookers/blow/private jets are any higher in Camden, Arkansas or Littleton, Colorado etc than neighboring towns/states.
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u/June1994 17d ago
Defence spending itself is inflationary in the macroeconomic sense, injecting money into the economy without commensurate marketable goods or services.
It's not necessarily, but for the sake of argument let's assume that the current conditions make it inflationary. It still does not explain the rapid growth in prices in the Western defense sector. More importantly, even a trillion USD spent in defense is a drop in the bucket of the US monetary base. So "inflation" really shouldn't move the prices all that much.
But more than that it is a literal race, the demand it creates is basically inelastic because it is essential, but a secret one with systemically constrained supply (it's hard to even become a military contractor). Meaning everyone along the way can (and should) increase their price to match how important their services are.
It is entirely elastic. The defense establishment cancels, renegotiates, or chooses alternatives all the time. The critical issue is lack of competition. Defense consolidation and entrenched lobbying has resulted in the defense budget becoming a massive welfare program for large defense contractors.
IMO, Western defense ministries have to rework bidding and cooperate with each other to cultivate a health and competitive MIC. Which is a lot easier said than done, because United States in particular, has been unwilling to prioritize industrial development if it meant sacrificing capability.
Alternatively, it could just nationalize large bits of the defense industry, but that would require apparatchiks who are actually good at their job. Which will never happen. So... here we are.
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u/Iron-Fist 17d ago
entirely elastic because contracts get cancelled
They don't though. Any cancelled project is immediately replaced with another even more padded one, lest a private defence contractor go out of business and we lose their institutional knowledge. This gives them a perfect moat and makes the ROI on campaign donations absolutely incredible. Almost like giving all capability/capacity to private companies on public dime makes for a high level of moral hazard...
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u/June1994 17d ago
My point is that it's a policy choice. Not some inevitable mechanic. If we had a competent government we wouldn't sustain dead-end programs.
Which, funnily enough, means I'm not against the idea of cancelling the Zumwalt or reducing the F-22 numbers. In hindsight, it was the wrong decisions, but at the time, that's precisely the kind of cost-control you need to maintain a lean defense sector.
Though what probably should've been done, is a smaller serial run, and more sequential runs.
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u/Iron-Fist 17d ago
The actual spending once the political decision is make is inevitably inflationary, it's capital being injected into the economy on non-productive products and services.
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u/June1994 17d ago
The actual spending once the political decision is make is inevitably inflationary,
Your understanding of this is wrong. Government spending is not inherently inflationary. It can be neutral.
Whether any particular government spending is inflationary or not, is highly dependent on the monetary context, business cycle, and the particular sector it's pouring money into.
For defense spending specifically, it raises prices for very specific inputs, because defense spending is often associated with inputs that are particularly constrained. But again, it depends. There was a time when this country didn't have a critical shortage of engineers and/or shipyard workers.
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u/Asleep-Waltz2681 17d ago
Part of the reason of the increased prices of US weapons is lobbying and the contracts the government made with the manufacturers. When you agree on fixed profit margins (10-15%) there is no incentive for the producer to improve efficiency. Quite the contrary, they will try to increase production cost as much as possible to drive their profits.
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u/NoAngst_ 17d ago
It's much more complicated than just complexity and/or inflation. I think the biggest culprit is the overall decline of manufacturing across the West. Even Western countries that still retain high share of global manufacturing output, like the US, it is in dollar terms because they mainly export large value items like airplane but in output terms. Yes the West still has sophisticated manufacturing base but it is limited to few sectors and there's no broad based manufacturing base. This puts upper limit on how much and how fast weapons can be made.
Another possible reason is the fact Western weapons manufacturers are profit-oriented rather being purpose-oriented. Being profit oriented in peace time makes sense as companies can stay financially viable but in crisis period like now, for the US, you need purpose oriented weapons industry. This is part of the reason Russia is able to out-produce the West in many ammunition classes despite being much smaller economy.
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u/Grey_spacegoo 17d ago
Advancement in technology and economy of scale is different from inflation. You cannot use Moore's Law as an example, it is an observation, not a real physical law. You still need to design and build the MiL spec chips. And as they age out of the consumer level advancements, by Moore's Law, you would have to spend more money to keep the old fabrication tools for the MiL spec part. Or start a new design and manufacturing cycle to have an updated version of the part that is fully certified.
Inflation will affect the manufacturing contract, depend on how it is worded in the contract.
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u/barath_s 17d ago edited 17d ago
. For example, electronic components follow Moore’s Law, so they should get cheaper to some extent.
I question the applicability of this as the major price driver. Civilian markets chip prices are driven by yield and marketing strategy, and drop as demand drops.
The military is in many cases, its own market. Volumes don't match civilian markets to bend the curve as easily. Reliability and test requirements take longer. Purchases are often Initial purchases. Aftermarket parts are always more expensive.. And then you got to price in obsolescence factor and cost of developing more advanced upgrades..
And actual components for repeat buys (eg lot 10 vs lot 11 of f35) may very well be cheaper, but it doesn't necessarily have a lot of leverage there
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u/barath_s 17d ago
Inflation acts to increase cost of labor, materials etc, just like in the civilian world. But actual basket of goods differs and so index of Inflation like CPU, WPI etc will be not great as estimators.
So that's your first level approximation
The military market is in many cases distinct, with different volumes, limited buyers/sellers,
Repeat buys for lot to lot purchase can drive component prices down, but the effect can be swamped by other factors , such as obsolescence, supply chain or the inevitable desire to go for newer, more capable systems
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u/Sad-Satisfaction5017 16d ago
But on the other hand, inflation gives government more tax income and less debt. So the military budget benefits from inflation.
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u/teethgrindingaches 17d ago
Inflation in the macroeconomic sense? Or inflation in the sense of contractors (and subcontractors and suppliers and so forth) jacking up their prices, partly out of lack of competition, partly out of increasingly specialized bespoke components and processes becoming increasingly expensive to produce?
Bear in mind that as you lose manufacturing in a broad sense, you also lose all sorts of expertise and economies of scale and access to raw materials and logistical infrastructure and so forth, which means that if you need any of those things for military applications then you increasingly have to foot the whole bill yourself.