Defense procurement pushed commercial companies out of the market

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 1:15:26

   realize that monopsony, the government as a sole buyer, is actually the problem. That's how we got into this problem to begin with. The world used to be very different when the Berlin Wall still stood, just came down. Only 6% of major weapon system spending went to defense specialists. The other 94% went to what I call as dual purpose companies. Too much is said about dual use. You know, a missile is single use. You know, you need Palmer to build lethal effects that only the government is the buyer of, but dual purpose. Chrysler used to build cars and missiles.

2. 1:15:59

   Ford built satellites until 1990. General Mills, the cereal company, built torpedoes and inertial guidance systems in their mechanics division. No shit. Everything they learned about building machinery to process cereal, they were able to leverage in the service of national security to make our warfighters more lethal. And what happened was that over time, the government became such a difficult buyer to work with, all sorts of esoteric rules that only matter for the government, all sorts of auditing, all sorts of bureaucracy, that people tried to figure out how to exit that business.

3. 1:16:36

   And that started in the 70s, boardroom started talking about it, it accelerated in the 80s, and then when the Last Supper happened in 1993, there was this dinner in the Pentagon. We used to have 51 major defense primes. Well, they got the 15 largest together, they had a dinner, and they said, we need a peace dividend. We've won the Cold War. We're going to slash defense spending. So for every dollar we used to spend, we're going to spend 33 cents and it's going to happen all at once. You guys are not all going to survive. You have our permission to consolidate, to merge, to try to find commercial lines of business, like do what you need to do. And we let that happen until 1999 when we blocked the merger of Lockheed and Northrop. That was the last, we said, okay, this is too much. So we went from 51 down to five. The popular narrative-

4. 1:17:21

   What are the five? Northrop, Lockheed, GD, Boeing. and Raytheon. The popular narrative is this is when we lost competition in the industrial base. 51 down to five, you have less people to pick from. That definitely happened, but I don't think it's the dominant problem. The dominant problem is you lost, that is really that the consolidation bred conformity. You had companies that were, you know, almost like test tube babies, artificial mergers, no single unified culture. They became essentially almost like state-owned enterprises, extensions of the government, just doing the government's bidding. And there was not enough heresy, not enough crazy ideas that pushed the envelope, not enough Kelly Johnsons of the world.

5. 1:18:11

   It drove out the founders. Founders cannot work in a conformist environment. They are heretics by their very nature and drove the founders to other industries like tech. The reason for immense optimism in this moment, so that 6% today is 86%. So the 6% that used to go to only defense specialists has ballooned into 86% that go to defense specialists. So these companies have very little commercial business.

6. 1:18:37

   They are kind of on the Galapagos Islands. They've built specialist entities that only know how to sell and interact with the government. And this is part of our- So that's the key. The key is to learn how to sell and go through all the red tape to sell to the government. You compare that to China. So in China, their primes, their equivalent of our big five, only 27% of their revenue comes from the PLA, the People's Liberation Army.

7. 1:19:04

   The rest comes from commercial things they're selling, unfortunately to us. So that cheap crap we're buying on Amazon is subsidizing lethality against potential lethality against future U.S. service members. Wow. Wow. That's just, that's enraging. So let me give you a cause for optimism. More than $120 billion of private capital has been deployed in the last three years in the service of national security, in the national interest.

8. 1:19:41

   You know, the founders are back. Palmer Luckey is an archetypal example of this. You talk about a heretic, right? We have people who are hardheaded, who are doing this more with a horizon that is beyond just what's going to happen this quarter. They have a vision of what they're trying to create in the world. And there are hundreds of them. and the department is open to working with them. There's a whole sea change, particularly with this administration, of recognizing the need for this reformation.

9. 1:20:06

   And so we're starting to embrace that. I think we should, to the point of the ketchup bottle, it is coming out all at once right now,