The U.S. defense industry is adjust~g to the end of the cold war far more rapidly and effectively than was generally expected. Many of the changes to date have been painful and the end of the adjustment process is not yet in sight. But while today’s national security decision makers can count on the presence of a strong defense industrial base, that positive situation cannot be taken for granted in the years ahead. This article offers one economist’s evaluation of the challenges facing the U.S. military establishment and the private-sector companies on which it so strongly relies.

To judge the adequacy of the future defense industrial base in an uncertain post-cold war environment is indeed a challenge. It requires dealing simultaneously with a set of paradoxical needs: to develop an international orientation at a time when the nation is focused on domestic concerns, to consider expanding military outlays in a period of budgetary austerity, and to worry about the adequacy of competition for the production of weapon systems when the economy is in the midst of a wave of mergers, consolidations, and downsizing.

This is a tall order, so let us begin with fundamentals. As an ex-defense industry planner, I instinctively start by examining the major threats to the national security. To state the obvious- although it may not be so clear to all Americans-the United States continues to exist in a dangerous world.

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