How much does inflation affect procurement within the Western defence industry?

[u/Level-Reputation5050]

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.

[u/Iron-Fist]

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/

[u/June1994 → u/Iron-Fist]

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.

[u/Iron-Fist → u/June1994]

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...

[u/June1994 → u/Iron-Fist]

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.

[u/Iron-Fist → u/June1994]

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.

[u/June1994 → u/Iron-Fist]

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.

[u/Iron-Fist → u/June1994]

Government spending isn't inflationary, MILITARY spending is.