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Cities and the National Defense Industrial Strategy

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.


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March 7, 2024

Note: A version of this newsletter was initially published by Governing Magazine on March 5, 2024

It is a rare occurrence when I bookmark a government white paper as a must read. Such reports tend to be dry, jargon-rich, bureaucracy-deadening affairs, more likely to induce a state of somnolence than impart knowledge or catalyze action.

The National Defense Industrial Strategy is an exception.

In January, the U.S. Department of Defense (“DOD”) released its inaugural National Defense Industrial Strategy (“NDIS”). The NDIS is intended to “create a modern, resilient defense industrial ecosystem … to deter U.S. adversaries and meet the production demands posed by evolving threats.”[1]

The urgent need for the NDIS is clear. As a Financial Times editorial recently summarized,

“The world is at its most dangerous since the second world war. The war in Ukraine will soon enter its third year, with Russian President Vladimir Putin vowing to intensify attacks. The Israel-Hamas conflict is already into its fourth month, and clashes in the Red Sea, Lebanon and Iran raise the risk that hostilities could spill over into an all-out regional war. China’s economic rise has come with greater military assertiveness too.”[2]

A “more belligerent world” has led to a revival of the defense industry, particularly in the US and Western Europe. Part of this revival is to keep Ukraine armed in the face of renewed Russian assault. As Jonathan Caverley of the US Naval War College notes, “Munitions are like cement. Consumers do not always need them but require massive amounts when they do.”[3]

But the revival is also meant to align the defense industry with the changing nature of warfare. As the Economist reported last summer[4], the war in Ukraine, the largest in Europe since 1945, “points to a new kind of high intensity war that combines cutting-edge tech with industrial scale killing and munitions consumption, even as it draws in civilians, allies and private firms.” The Ukraine conflict is “making [first-person view] drones and their maritime cousins ubiquitous,” illustrating “a shift towards small, cheap and disposable weapons; the increasing use of consumer technology; and the drift towards autonomy in battle.”[5]

As “technology transforms the battlefield,” a new crop of companies, firms and investors are starting to occupy a space long dominated by large defense contractors. Consequently, the traditional way of doing things is being gradually disrupted. As the New York Times reported last year, “After decades in which the Pentagon has focused on buying hardware built by traditional contractors like Lockheed and Boeing, the emphasis is shifting to software that can enhance the capabilities of weapons systems, creating an opening for newer technology firms to grab pieces of the Pentagon’s vast procurement budget.”[6]

What, if anything, does this have to do with cities and metropolitan areas? Quite a bit it turns out.

The revival of the defense industry is likely to have a defense dividend for those metropolitan economies that house military bases, command centers, manufacturing facilities, innovation hubs and research and development. As I’ve written before,

“At its most basic level, the defense dividend comes from additional spending for contracts and personnel, resources which then get recycled in the metropolitan economy. Yet smart communities can go further, leveraging defense spending to grow quality jobs, equip workers with the skills they need, fund local suppliers, redevelop central business districts with excess office capacity, accelerate the clean energy transition and drive the formation and expansion of innovative technology companies.”

The defense dividend will be particularly pronounced in communities that concentrate production and innovation activities. The NDIS provides a mini treatise on how the decline of US manufacturing has impaired the ability of the United States to build an industrial ecosystem that provides a sustained competitive advantage over our adversaries. The facts are sobering: 7.1 million fewer people in U.S. manufacturing jobs since 1979, or 36% of the industry’s workforce; 1.9 million fewer people employed in Defense Industrial Base companies since 1985, a 63.5% reduction. Decades of excessive offshoring and outsourcing has weakened the ability of the United States to expand the secure production of essential systems and technologies expeditiously.

To remedy this, the NDIS prioritizes four key areas critical to building a modernized defense industrial ecosystem: resilient supply chains, workforce readiness, flexible acquisition, and economic deterrence.

For each priority, the NDIS walks through a series of actions, illustrative outcomes and outputs and, chillingly, the risks of not achieving clearly set objectives. The NDIS, in other words, has an internal logic that is compelling and concise. It speaks a language that translates well to the individuals and institutions that steward urban and metropolitan economies.

The “resilient supply chains” priority, for example, is defined as follows: “The [Defense Industrial Base] can securely produce the products, services, and technologies needed now and in the future at speed, scale and cost.” That means having a wide array of suppliers across a broad range of industries, technology areas and socio-economic groups.  Many of these suppliers, particularly in technology areas such as artificial intelligence, advanced computing, and biomanufacturing, will have had no previous engagement with the defense establishment.

Similarly, the “workforce readiness” priority is broadly defined: “A skilled and sufficiently staffed workforce that is diverse and representative of America.” The numbers are staggering; it is estimated that the Submarine Industrial Base alone will need to hire nearly 100,000 trained workers over the next decade.

For cities and metropolitan areas, the NDIS has three major takeaways.

First, the success of the NDIS is fully dependent on mobilizing the market energies of cities, metros and states and the networks of public, private and civic entities that make up our decentralized and distributed economic development system. As the NDIS clearly states:

“We need to build a modernized industrial ecosystem that includes the traditional defense contractors – the [Defense Industrial Base] primes and sub-tier defense contractors who provide equipment and services – and also includes innovative new technology developers; academia; research labs; technical centers; manufacturing centers of excellence; service providers; government-owned, contractor-operated (GOCO) facilities, and finance streams, especially private equity and venture capital.”

The NDIS, in essence, embraces the maxim that “Militaries very rarely decide outcomes, they win battles. [In attritional conflicts such as Ukraine], it’s economies that win wars.”[7]  The NDIS accepts that the power of the US economy, and the places where it agglomerates, emanates from bottom-up advanced institutions and companies, organic networks and multi-sectoral collaboration rather than top-down planning. The lines between the military industrial complex and the civilian economy have been blurred, if not erased.

Second, as a direct corollary, cities, metros and states are increasingly dependent on the Department of Defense to build out their distinct competitive advantages. To its credit, the Department of Commerce has expertly guided the nation’s industrial restructuring over the past several years by, among other things, identifying the technology areas that are critical to natural security and overseeing a series of ½ billion-dollar competitions (e.g., Build Back Better Regional Challenge, Regional Tech Hubs) that have galvanized metropolitan communities.

But appropriations for the next round of place-focused competitions are unclear. Going forward, therefore, DOD’s backing of the industrial transition will be critical.  And that is already happening. In September 2023, for example, DOD allocated nearly $240 million to eight regional innovation hubs, part of a new Microelectronics Commons designed to put “cutting edge microchips into systems our troops use every day – ships, planes, tanks, long range munitions, communications gear, sensors and much more ….”[8] Beyond funding for research and development, DOD is investing in universities and community colleges through the National Defense Education Program Cooperative Agreements. In September 2022, for example, DOD invested upwards of $55 million in STEM related workforce efforts in such higher education institutions as Lorrain County Community College and Sinclair Community College.

Finally, the NDIS embraces Diversity, Equity and Inclusion (DEI) efforts as an economic and national security imperative. This is pure commonsense. The nation’s manufacturing workforce simply does not tap the talents or potential of the nation’s diversity at a time when that workforce needs to scale quickly and effectively. To help remedy this, the DOD is smartly investing in Historically Black Colleges and Universities and Minority Serving Institutions.

So, where now?  The NDIS is not a government report designed to sit on a shelf. As DOD clearly recognizes, delivery of the National Defense Industrial Strategy is too important to leave to the traditional military industrial complex, given the magnitude of the threats facing the country and the changing nature of warfare.

DOD fully intends to put forth an implementation plan in the next month or so. That plan, to be successful, must involve concrete steps for harnessing the full economic power of cities, metropolitan areas and states, co-designed with representatives from those communities. The National Defense Industrial Strategy requires a close, working relationship between our metropolitan economies and our defense establishment.

As described above, some steps are already underway, but need stable funding and sustained outreach to reach the necessary impact. But other actions need to be conceived and deployed. What if DOD, for example, worked with cohorts of cities that already produce major components of next generation submarines on integrated workforce and economic development strategies? What if DOD expanded the network of applied R&D hubs that can work closely with companies to improve technologies and prototype new products?  What if cities, for their part, articulated their own view of what improving national security might entail and require?

As President Roosevelt famously said: “We must be the great arsenal of democracy.” That was true in 1940 and, unfortunately, it is true again.

[1] Joseph Clark, “DOD Releases First Defense Industrial Strategy,” DOD News 1/12/2024

[2] Editorial, “The revival of the defense industry,” Financial Times, 1/20/2024

[3] “Ypres with AI,” The Economist, 7/8/2023

[4] “The Future of War,” The Economist, 7/8/2023

[5] “Killer Drones,” The Economist, 2/10/2024

[6] Eric Lipton, “A.I. Brings the Robot Wingman to Aerial Combat,” New York Times, 8/27/2023

[7] Christopher Miller and Ben Hall, “Lessons from the Summer Offensive,” Financial Times, 9/15/2023

[8] Deputy Secretary of Defense Kathleen Hicks Announces $238M CHIPS and Science Act Award, Department of Defense, 9/20/2023