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Military Defense Spending - Research Paper Example

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The American administration spends extensively on defence related projects. The total defence budgetary outlay is about five percent of the gross domestic product (GDP). This is a significant amount since there are minimal returns from this industry. …
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Military Defense Spending
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Military Defense Spending

Download file to see previous pages... It is imperative to reduce the defence expenditure since it has minimal contribution to the economy. The decline in defence allocations will result in lower incomes for firms that operate in this industry. The reduction in defence budgets will lead to reduction of operations in the defence-contracting firms. Consequently, such entities will retrench employees to an extent that suit their income levels since they are profit oriented. The reduction in budgetary allocations will result in merging of firms as they attempt to consolidate their operations to reduce their overheads. The reduction in defence spending will result in contraction of the defence industry. Additionally, the reduction in defence spending will result in reduced foreign earning form this industry. The defence industry has few players. As such, the industry has few buyers and contractors. The main contractors include Lockheed, General Dynamic and Boeing. This implies that the industry is monopolistic and inelastic. This state is due to the nature of their merchandise. Additionally, the above contracts are shrouded in secrecy due their sensitive nature. Thus, customers in this industry prefer certain contractors. (Burns). Evidently, the market forces that characterize other industries are absent. Thus, the cost of products in this industry is dependent on other factors rather than market forces (Dwivedi 54). Such factors include duration of executing the contract, the sensitivity of the technology and global alliances. The factors that drive prices in this industry are different since arms trade is a sensitive industry monitored globally. As such, governments do not licence many firms in this industry. The state of the current industry has benefits and disadvantages. First, the industry deals in sensitive merchandise hence, most governments prefer to keep the deals confidential. Additionally, proliferation of some of the weapons would lead to destabilization of global peace. Therefore, having few firms in this industry helps deal with black-market dealers. Having few firms in this industry implies that the present corporations will always get contracts. This means that there is minimal competition among the firms involved. The American government has made efforts to maintain competition among players in this industry by barring any merger of large defence firms since this would turn the industry into a monopoly. As such, the American government barred proposed unification between Boeing and Lockheed (Krieg). This would have resulted in the unification of the two principal aerospace contractors. The intervention of the American government was timely since these are the two leading firms in the industry. Therefore, allowing such a merger would have eliminated competition in totality (Krieg). Evidently, this sector ought to have additional players to make it more competitive. This applies to the large contracts that require massive capital outlay. However, this does not apply to smaller contracts since numerous firms have the capability to bid for such contracts making it competitive. However, competition does not vary cost of contracts. This is a key feature of this industry that will not change since defence-contracting firms use specialized ...Download file to see next pagesRead More
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