US gets an ‘F’ for erratic, unfocused funding of defense innovation, says Reagan Foundation

Despite efforts from the Pentagon, such as the Air Force’s Kessel Run software office, innovation in the US is lagging behind, a new report warns. (U.S. Air Force photo by Richard Blumenstein)

WASHINGTON — Despite spending over $800 billion a year, the Defense Department chronically under-invests in cutting-edge technology and struggles to leverage the even greater investments being made by private-sector innovators in fields from AI and networks to space and biotech.

That’s the verdict of a new report by the Reagan Foundation and Institute, released Monday. But there’s good news: Both in the report and at a conference the foundation hosted Tuesday, experts from the Pentagon, Capitol Hill, and industry were full of ideas for improvements.

The central insight from the report and morning panels: For all the reforms of recent years, the US government as a whole — not just the Defense Department — is still an unappealing customer for the most innovative firms in the economy. Even a modest government investment in a nascent, promising technology at a critical, early phase could encourage matching or even greater investment from the private sector, but the government isn’t good at making those targeted investments. So Congress needs to provide more stable, flexible funding, freed from the restrictions and delays of a frequently gridlocked appropriations process — and bureaucrats need the courage to use the authorities Congress has already granted.

“What happens many times is those tools are there, [but] they don’t get used,” said Rep. Rob Wittman, R-Va., chairman of the tactical land and air forces subcommittee. “There are OTAs and MTAs — Other Transaction Authorities and Mid-Tier [Acquisition] — that aren’t used enough.”

“The problem is sometimes, too, Congress says, ‘whoa, whoa, wait a minute’… because we like to have the control,” Wittman continued. That forces Pentagon programs to slow down and wait for a budget cycle that takes a year to grind through Congress, on top of years of planning and infighting at the Pentagon.

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“It’s the culture, it’s the incentives,” emphasized retired House Armed Services Committee chairman Mac Thornberry, who advised on the scorecard. “It’s not just the Pentagon. It’s Congress too.”

Structured like a report card, the Reagan report grades the government in 10 major areas and dozens of subcategories, all related to what it calls the “National Security Innovation Base” — a construct carefully crafted to include innovative companies, laboratories, and universities outside the traditional defense industry. The scorecard is actually somewhat sanguine about America’s overall technological leadership in the world, giving it an A- despite a surge of patents, PhDs, and tech investment in China. But it all goes downhill from there.

Along with a bunch of Bs and Cs, the Reagan scorecard gave the country as a whole a D+ when it comes to fostering top-flight technical talent — a complex issue tied to education and immigration policies like the H-1B visa. Still worse, it gave the US a blunt D in what it calls “customer clarity”: In essence, how well the government connects to industry, not just through issuing policy statements and publishing strategies, but, most importantly, by providing tangible funding that gives innovators an incentive to work on tech the military wants.

A section of the Reagan Institute’s “scorecard” (Reagan Institute graphic)

That D for being a lousy customer breaks down into three subcategories, the scorecard continues. The government gets a C+ for patchy communication of policy, hampered by many agencies’ slowness in issuing public strategies and Congress’s slowness to confirm key officials, leaving key leadership slots vacant. The government gets a C- for making only limited use of streamlined acquisition processes that bypass the sclerotic traditional system. And it gets an F — the only failing grade in the entire report card — for providing erratic and ill-focused funding, with Congress routinely passing appropriations weeks or months late and frequently plussing-up traditional programs instead of new technology.

“The big companies have this problem with this inconsistent demand signal from government,” making it hard to plan long-term investments, said Eric Fanning, former Army Secretary (and Acting Air Force Secretary) who’s now CEO of the Aerospace Industries Association. “The smaller companies have all sorts of other barriers,” especially with the administrative overhead necessary to meet government requirements. And, he said, innovators whose technology has wide commercial applications — like drones or artificial intelligence — can afford to give up on government sales if the bureaucracy proves too difficult a customer.

Being a good customer is crucial, agreed Sreenivas Ramaswamy, a senior advisor at the Commerce Department. “I’ve been in this role for two years,” he said, “and one of things I’ve seen … is how much people underestimate the role of the Defense Department in issuing the demand signal.”

A Government Solution

So how to fix this? The government needs to make “bigger, bolder, more flexible bets” on emerging, high-potential technologies, the report recommends, and it needs to “foster stronger relationships” with the private-sector investors that drive most innovation in the modern economy, using government funding as seed money to draw larger private investments.

This does not require massive government purchases to build up entire industries, Ramaswamy emphasized. Instead, he argued, the government can help kickstart new sectors by buying a relatively small amount of new technology early on, when the price is still too high for most commercial applications.

But encouraging and exploiting private-sector investment is not something the government usually thinks about. “It wasn’t until I became chairman that I became focused on outside investment and talked to investors,” said Thornberry, “[because] we don’t vote on that.”

“Government… as a whole does not understand the private capital that is leveraged by the Department of Defense,” said Fanning. A modest Pentagon purchase can incentivize the private sector to make its own investments in the hope of landing future sales — if those investors feel they can rely on that future government funding to materialize.

So what mechanisms would work for this kind of funding? Congress and the Pentagon have enacted significant reforms, like Mid-Tier Acquisition — although there’s been recent pushback about MTA on Capitol Hill — and the Software Pathway. But for both fiscal and cultural reasons, the experts said at today’s conference, it’s been a struggle to scale these up to have a major impact.

“The government is not an easy customer to move from prototype … to production,” said Fanning, “especially if you’ve developed it yourself” outside the government’s R&D pipelines.

“Starting prototype programs has never been easier. This is a good thing,” said assistant Army secretary Douglas Bush, the service’s chief acquisition officer. “[But] it’s still difficult to just carve out the money to take those prototypes and put them into production because again, when you get to that stage, you’re now competing with everything else, fighting for those limited production dollars… It’s a shark tank.”

“Congress often does some of the hard work of pushing innovations and innovative solutions on the Department,” Bush added. “That’s good, [but] we need to do a better job on that on our own.”

“There’s no question, there is a cultural challenge [about] being able to take a risk,” Thornberry said. But often, he said, Congress reinforces bureaucratic over-caution by hammering officials who tried something new that didn’t work out, or by imposing strict controls up front.

“We need to do our funding a little differently,” he said, “so that there is a pool of money for a particular purpose” — for example, artificial intelligence — that isn’t tied to a particular program, so Pentagon officials can rapidly respond to emerging opportunities in fast-paced tech sectors.

That way, “you can move fast [without] asking ‘Mother may I?’ two years in advance,” Thornberry said. “There’s got to be parameters around it, but I’d really like to give Doug [Bush] some pots of money for a purpose and then let him make the adjustments as the technology is developed.”

“That would be amazing,” Bush said. The audience burst into laughter.