Day: October 20, 2025

During his farewell address in 1961, President Dwight D. Eisenhower expressed his concerns about the growth and political power of the American military-industrial complex. Fueled by massive federal spending in the years following WWII, defense contractors dominated an entire sector of the American economy, created tens of thousands of jobs, and generated billions of dollars in revenues and profits. The defense industry became not a wartime necessity, the so-called “arsenal of democracy” during WWII, but a permanent addition to the national security state that emerged during the Cold War.

The end of the Cold War, however, never yielded a “peace dividend” from reduced defense spending. The US defense budget, $295 billion in 1991, now tops $841 billion—more than the next nine countries’ defense outlays combined. American procurement contracts, financial assistance, and research and development in FY25 total more than $300 billion. While defense spending as a percentage of GDP has declined, it remains the single largest discretionary outlay of government funds.

Today, US defense procurement is expensive, increasingly concentrated, strained, and inefficient: dogged by schedule delays, saddled with legacy platforms, and unable—perhaps unwilling—to adapt to the changing nature of modern warfare.

Costs, Delays, and the Cost of Delay

Defense procurement across several sectors is concentrated in a handful of major corporations (i.e., Boeing, General Dynamics, HII, Lockheed Martin, Northrop Grumman, RTX). Normally, concentrated manufacturing creates specialization, resulting in greater economy and efficiency. This has not been the case for US defense procurement. Both cost overruns and scheduling delays are common. Acquisition of major weapons systems and upgrades to existing platforms are stalled and overbudget. A few examples show these problems well.

For a variety of reasons, CVN-79—the new USS John F. Kennedy aircraft carrier—will not join the fleet until at least March 2027. This is two years later than the first re-scheduled date, and nearly three years later than the original delivery date of June 2024. Every planned delivery of future Gerald R. Ford-class nuclear-power supercarriers has been delayed, and costs are climbing. The Navy has already requested an additional $2.75 billion in cost-to-complete funding for Ford-class carriers.

The program to re-engine the US Air Force’s aging (one might say ageless) B-52 Stratofortress bombers is also behind schedule. Construction of the original 744 bombers took ten years (1952–62). New engines (and electronics) for the remaining 76 B-52H bombers were to be built and installed over a fifteen-year period, with full conversion completed in 2030. Now the target date is 2036, and the cost has risen from eight to nine billion dollars.

In a similar vein, replacements for the Minuteman III—first fielded in the 1970s and now the oldest deployed strategic ballistic missile in the world—are more than a decade behind schedule. The new LGM-35 Sentinel missiles are also coming in over budget; the original 2020 cost of $78 billion has ballooned to $160 billion.

The issues here are not simply those of delay and cost overruns in Major Defense Acquisition Programs (MDAP). Years-long delays force the military to fall back on older equipment and compromise operational readiness. This degrades the nation’s ability to quickly respond with full force to the exigencies of contingencies, crises, and war. Aging weapons and platforms that outlive their supplies of maintenance and replacement parts undercut the strength, readiness, and capabilities of combat units.

In addition, the ability to project power and the deterrent value of forward-deployed forces is further compromised by failures to bring replacements into service. With continued delays to the completion and delivery of Ford-class carriers, for example, the Navy will eventually be forced to conduct operations with only ten carriers. Navy planners have argued (and statute, 10 USC 8062, requires) that a minimum of eleven aircraft carriers must be maintained.

Procurement delays also undermine America’s alliances and partnerships. The latest AUKUS (Australia, United Kingdom, United States) agreement, for example, calls for a British-Australian partnership to build a new class of nuclear-powered submarines beginning in 2032. Before those new subs come on-line, the United States agreed to sell second-hand Virginia-class attack submarines to Australia. Production of Virginias, however, has fallen behind schedule to complete two boats a year. The shipyard is straining to produce just more than one submarine a year. This shortfall casts into doubt plans to sell submarines to Australia, shakes confidence in the AUKUS partnership, and jeopardizes Australian and Indo-Pacific security. 

More worrisome is the outright degradation of the US nuclear deterrent. Be it a shortage of submarines, benched nuclear-capable bombers, or aging intercontinental ballistic missiles—all point to real strategic vulnerabilities that will be exploited by America’s adversaries. While US nuclear weapons delivery capabilities atrophy, China is committed to a long-term plan to grow its nuclear arsenal and modernize its nuclear delivery systems. Beijing plans to double its number of warheads from 300 to 600 in 2025 and to 1,000 by 2030. Most recently, at its Victory Day Parade, China displayed its air-launched, subsurface-launched, and land-based intercontinental missiles. This purposefully staged demonstration showcased the modernization and diversification of Beijing’s nuclear triad and unveiled a new ICBM intended to stock the network of hardened, below-ground missile silos in Western China.

Legacy Platform Deadweight

For the better part of eight decades, American aircraft carriers conducted missions in support of the national interest in largely uncontested waters. That all changed beginning in 2023 when Houthi rebels, armed by Iran, targeted commercial and naval traffic in the Red Sea, the Gulf of Aden, and the Bab el-Mandeb Strait. Houthi forces have since launched drones, anti-ship cruise missiles, and ballistic missiles at US Navy ships and claimed to have targeted the carrier USS Harry Truman.

This is a foretaste of things to come. In future wars, American aircraft carriers will face adversaries, like China, loaded with anti-access and area denial (A2AD) missiles and drones. Those A2AD weapons cost a small fraction of the $13 billion cost of a Ford-class supercarrier. The asymmetrical advantage now belongs to nations that can mass-produce and equip their forces with these weapons and arm their proxies. Ukraine, for example, sank 15 of 36 Russian vessels (including the guided missile cruiser Moskva) with anti-ship missiles and naval drones. With no fleet of its own, the Ukrainians drove the Russian Navy from the Black Sea.

The US Navy’s response to this changing threat environment, backed by corporate lobbying, has been to double down on legacy systems and capabilities. For example, the Navy’s efforts to develop robotic and autonomous systems (RAS), which include surface and subsurface drones, took a back seat to continued procurement of existing surface platforms. RAS, until recently, was aligned to a single Program Executive Officer (PEO) for both unmanned and small combatants. Critics say that the Navy’s troubled littoral combat ship and frigate programs drained time, attention, and resources away from RAS, and set the unmanned vehicle program back years. Now Navy is scrambling to reset RAS development with a new PEO and a temporary halt to all acquisition and contracting.

It’s also telling that shortly after successful aircraft carrier trials of the Northrup Grumman X-47B in 2013, the Navy scrapped plans for further development of this unmanned strike aircraft. Instead, the service placed its bets on an unmanned aerial tanker (Boeing’s MQ-25A Stingray) to increase the range of manned aircraft launching from ever-increasing stand-off distances outside A2AD envelopes. Production delays have pushed the operational debut of Stingray to 2026.

If the supercarrier has become too big and too expensive to risk in war at sea against missiles and drones, the death knell is also tolling for large (and costly) armored vehicles on the battlefield. In less than six months, 20 of the 31 Abrams M1A1 tanks that the US furnished to Ukraine were lost in battle. Both cheap anti-tank missiles and camera-operated drones (first-person view, FPVs) on kamikaze missions proved successful in crippling or destroying the 63-ton, eight-million-dollar-a-piece Abrams tanks. Now, France has developed an autonomous anti-tank vehicle that can launch missiles outside the line of sight to the target; no FPV needed.

Despite these rapid advances in anti-tank capabilities, the US Army intends to keep the Abrams production line operating even as it plans a new armor design with features for upgraded “survivability.” These new tanks will likely not replace all existing Abrams tanks until at least 2030.

Building a New Arsenal

The United States is in a defense spending trap of its own making. Lack of competition, a powerful lobby with entrenched political constituencies, years of risk-adverse leadership, and even federal law, encourage resistance to change and discourage innovation. As a result, defense procurement is locked into buying ever more expensive but modest, linear improvements to increasingly vulnerable legacy weapons systems and platforms. Moreover, the lessons of modern battlefields and the innovations fielded there—from Ukraine to Iran—are not shaping new defense acquisition plans.

Simply expanding, modernizing, and making the existing defense industrial base more efficient will not resolve its systemic problems. What is needed is a comprehensive approach that can only be accomplished with leadership, legislation, innovation, and oversight.

To that end, there are signs that changes are forthcoming. President Trump’s executive order Restoring America’s Maritime Dominance, calls for a Maritime Action Plan to revitalize the US maritime industry and enhance national security. More recently, Secretary of War Hegseth issued his own memorandum to leadership. This unambiguous and overdue directive, “Unleashing US Military Drone Dominance,” recognizes “modern battlefield innovation demands a new procurement strategy.” Battlefield innovation today will also increasingly rely on expanded and integrated AI in weapon systems and platforms, adding another dimension to defense procurement.

These changes to policy ought to be coupled with reviews of current MDAPs and existing Multiyear Procurement (MYP) vehicles to free up defense spending for new initiatives. This “divest to invest” strategy has been endorsed by the Defense Innovation Board. Efforts to amend procurement contracts for aircraft carriers, tanks, planes, and other weapons—much like long-overdue Base Realignment and Closing (BRAC) proposals—however, always face stiff “pork barrel” opposition. Congress also needs to rescind laws and modify budgetary provisions that force the War Department to maintain legacy systems in the face of growing obsolescence and, worse, new technologies that render US platforms defenseless.

Congress must reaffirm its “power of the purse,” and demand accountability and performance for every MDAP. The Nunn-McCrudy Act (1982)—intended to put the brake on defense acquisition program overspending—brings to bear too little oversight too late. Congressional notification is only triggered when an MDAP is 15 percent over budget (for a $13 billion Ford-class carrier, this is already a $1.5 billion overrun), and can only be cancelled when it runs 25 percent over budget. A revised act with real teeth would require notification anytime an MDAP is over budget and suspension of that program until it is reauthorized by Congress.

All these efforts will come to naught, however, unless US leadership also recognizes the global nature of supply and innovation. Current law that requires US defense products to consist of 50 percent wholly American-made parts is misguided protectionism. The United States can no longer be the sole arsenal of democracy. What is needed are strong partnerships with allies to build and maintain mutually supporting arsenals of democracies.

NATO, for example, has long maintained standards for small arms ammunition. The looming shortfall of munitions in Western nations, occasioned by the massive consumption of ammunition in Ukraine, can be a strategic opportunity. The reduction of ammunition stockpiles in the United States and Europe ought to be leveraged to recapitalize and modernize common ammunition production capabilities on a multinational level. This could be the prototype for geo-political partnerships and defense alliances to build a broader and more cost-effective defense industrial base for development and production of everything from drones to fast combat support ships.

All these initiatives should be launched with wartime urgency; the rehabilitation and revitalization of American defense procurement is overdue. The sluggishness, inefficiency, and resistance to change that hamstrings procurement have been more than 60 years in the making. Today, this legacy military-industrial complex puts at risk America’s nuclear deterrent and the warfighting and war-winning capabilities of its air, land, and sea forces.

These are risks the United States cannot afford to take.

Matthew Lynn has written a powerful essay in which he chastises the economics profession for being so clearly wrong when it came to the effects of Donald Trump’s tariffs. According to him, when President Trump imposed sweeping and massive tariffs in April, the “mainstream economic establishment” predicted inflation would surge, supply chains would crash, and the economy would be plunged into a deep recession. The world would “resemble a post-apocalypse Netflix series, with survivors dodging zombies and fighting one another for the last few items at the mall.”

Six months later, Lynn argues, none of this came to pass. Inflation is around 3 percent, the stock market hasn’t tanked, and we’re not rationing toilet paper or fending off zombie hordes at the grocery store. For our sins, Lynn insists that we economists must repent, acknowledge our mistake, and address why we “big thinkers got this one wrong.”

At a time when experts have been called into question on many fronts, it’s a compelling indictment. There’s just one problem. It’s built on a foundation of selective reading, convenient timing, and a fundamental misunderstanding of what economists actually said and what the evidence actually shows.

First, let’s look at Lynn’s accusations more closely. The Goldman Sachs report that he provides was issued on April 17, 2025, says “we … see a 45% probability of a recession over the next 12 months” [emphasis added]. Being that it is October, there are still six months to go before this particular prediction expires. Likewise, the Torsten Sløk analysis he is likely pointing to, which claimed a 90 percent probability of a “Voluntary Trade Reset Recession” over an unspecified timeline, was released on April 19, 2025.

It’s useful to keep in mind the context within which these were written. April, which already feels so long ago, was a busy month in terms of international trade policy. We saw the “Liberation Day” tariffs announced, stock markets around the world crash, retaliatory tariffs announced by countries around the world, and the famed 90-day pause. It was also right at the beginning of the short-lived but seriously damaging United States-China “trade war” which saw tariff rates as high as 145 percent, grinding trade between the two nations almost to a halt.

Second, Lynn fails to acknowledge that both Goldman Sachs and Torsten Sløk have since revised their recession predictions. In June, Goldman Sachs revised their recession probability downward to 20 percent between June 2025 and June 2026. Similarly, in September, Sløk noted that “recession probability [is] declining” and put the odds of a recession over the next 12 months (September 2025 to September 2026) at 30 percent.

Upon closer inspection, Lynn’s accusations about economists’ predictions simply do not hold water. But what of his specific claims about the efficacy of tariffs?

Year-over-year inflation is indeed at about 3 percent, which is markedly lower than it was during the Biden administration. But notice that the inflation rate is ticking upward, not downward, and that this still remains well above the Fed’s 2 percent target and is drifting further away from it. Still, trotting out “inflation” is odd. Economists have been very clear that tariffs don’t cause inflation the same way that printing money, which consistently pushes prices higher month after month, does. Instead, tariffs cause what’s known as a “level effect” in that they work like a sales tax that gets added to the price tag once and stays there until it is changed. The washing machine that used to cost $500, for example, now costs $625 thanks to a 25 percent tariff. Technically, this isn’t “inflation” by the Fed’s definition, but tell that to the family looking to replace their broken washing machine and is out an extra $125. “Actually, that’s not inflation,” is not only insensitive but also unnecessarily obtuse.

Looking at more granular data than the BLS does reveals a more detailed picture, and one that comports with the lived experiences of everyday Americans. Harvard’s Pricing Lab analyzed 350,000 different products. Their findings are stunning. Not only are imported goods getting more expensive, but so are domestically produced goods. Coffee prices, for example, are up almost 9 percent relative to their pre-tariff trend. Furniture, almost 6 percent, and that’s before the new 25 percent tariff on furniture takes effect.

Manufacturing, while rebounding in some sectors, remains depressed and particularly so in sectors most exposed to the tariffs. Reports from the Federal Reserve branches, usefully summarized and collated in the Federal Reserve Bank of Boston Beige Book, are all pointing in the same direction: tariffs are not helping the American people. While these aggregate statistics are alarming enough, the specific examples tell the story in ways that numbers alone could never do. The Federal Reserve Bank of Richmond provides the example of a glass manufacturer whose supplier was driven out of business because of the tariffs. Their remaining suppliers have all consolidated, eliminating jobs in the region and driving their prices higher. In Cleveland, “some manufacturers and auto dealers reported passing along 100 percent of tariff increases to customers, while others said they were slowly raising prices in response to tariffs,” and are thus eating the tariffs in the form of reduced profits. In Chicago, “manufacturers attributed higher raw materials prices to tariffs and several said that they had passed on those increases to customers.”

Lynn would have us believe that tariffs are being paid almost entirely by foreign countries. He writes, “the extra $30 billion a month in revenue the tariffs are already generating is not exactly ‘free money.’ But it’s as close to it as anything we have seen for a long time.” The problem with his analysis is that this claim was not true during the first Trump administration, and it’s not true during the second, either.

Tariff revenues come straight from the American people. In Cleveland, 87 percent of manufacturing firms report that their costs have increased because of tariffs and the surrounding uncertainty of their implementation. Looking at import shares and tariff pass-throughs, for firms that receive at least half of their materials from imports, 25 percent report that they will pass all the tariff along, 50 percent report that they will pass at least a majority along, and only 25 percent report that they plan to pass only “some” of the cost increases along to customers. None reported that they will not pass at least some of the cost along to consumers.

Unfortunately, this isn’t news, even in the White House. President Trump himself publicly chastised Walmart when they were considering raising prices in response to tariffs. Treasury Secretary Scott Bessent himself said that American firms are paying the tariffs out of their profits, which are allegedly still elevated from COVID. If tariffs are paid by foreign countries, what is there for Walmart to “eat” and why are American firms’ profits being decreased?

But even setting this aside, we still have to question the fiscal wisdom of the proposed tax rebates from all the “extra tax revenue.” Giving each of the roughly 160 million taxpayers $1,000 would cost $160 billion, which would be 40 percent of the entire projected $400 billion in revenue that tariffs could raise. It’s difficult to see how we could give up 40 percent of the revenue from tariffs in the form of rebates, bail out farmers, and still pay off the $1.8 trillion in deficit spending from 2025 alone, which would need to be addressed before the staggering $37.86 trillion in national debt could even begin to be paid down.

If economists made any mistake in the past six months, it’s that we believed that Trump was sincere in his months-long proclamation that “tariff is the most beautiful word,” that he would live up to the “Tariff Man” moniker he gave himself, and that the April 2 “Liberation Day” tariffs were just “the beginning.” As we’ve found out, between pauses, reductions, and exemptions (all of which are available to companies or countries that say big enough numbers), the tariffs are really just a sticker price, not unlike college tuition before the heavy discounts that are given to students in the form of “scholarships.”

The difference, however, is that college scholarships and aid packages are generally given out based on merit and need. Not so with tariff exemptions. Big companies, with their armies of lawyers and lobbyists who can secure meetings with top officials in the administration, will pay lower tariffs. Just look at Apple, which effectively bought an exemption from the tariffs with the promise of increased investments in American facilities. But when a small manufacturing start-up believes (rightly) that they deserve a break on tariffs, all they can do is fill out an online form and hope that some junior staffer empathizes with their application and passes it dispassionately up the chain of command. This isn’t competition, it’s cronyism, through and through.

World leaders can effectively buy their way out of paying higher tariffs, too. The European Union, for example, promised $600 billion in “extra investments” to secure a trade deal. They’ve since admitted, however, that their ability to deliver on those promises is dubious at best. The United Arab Emirates has pledged $1.4 trillion in US investments. This seems unlikely, though, seeing as their entire GDP last year was $537 billion. Should we really believe that they are going to give us almost three years’ worth of their country’s entire output as an investment?

Finally, there is also the immense legal uncertainty surrounding the implementation of tariffs through IEEPA. With the Supreme Court set to hear arguments next month, it could also be the case that tariffs have not caused pain because firms and countries are betting that they will be struck down. Still, administration officials have acknowledged that they have alternative strategies by which they could impose tariffs. As Pete Navarro said of the Court of International Trade’s ruling that the IEEPA tariffs were unconstitutional, “this did not catch us by surprise.”

These tariffs are not a “win” for the American people. Whether they will cause a recession is anyone’s guess, and Lynn is correct to point out the resiliency of the American economy, which is really a reflection of the resiliency of the American people. The American people are, on a per-capita basis, the most industrious and productive people on the planet, bar none. Even the supposed economic superpower that is China only produces three times as much output as we do, despite having over six times as many workers.

American workers do not need “protection” from the rest of the world’s economic prowess. They need empowerment in the form of deregulation, incentives in the form of reduced taxes, and opportunity in the form of lowered barriers to trade.