Last year I discussed whether defense acquisition was a cost disease sector, just like healthcare, education, and some areas of construction. I evaluated three methods of measurement: cost growth, input-output, and econometric, with the conclusion that nominal prices were growing 7 to 11 percent annually, while some forms of quality adjustment could bring that figure to about twice the rate of general economic inflation (4 to 6 percent).
Here’s another way of taking a stab at the input-output method: Take the inflation-adjusted budget authority for an entire service and divide it by the active inventory. It’s a crude metric, for sure, but in a sense there’s no where to hide. The annualized real price growth comes out to about 2.8 percent, which translates to a nominal figure about twice the rate of inflation.
The chart comes from the Mitchell Institute paper, “Arsenal of Airpower: USAF Aircraft Inventory 1950-2016.” The paper provides a bit more fidelity as well:
The average cost of a flying hour in 2016 was around $45,000 (in constant FY17 dollars) compared to about $12,000 in 1985 and roughly $5,300 in 1970.
Using these figures, we find an inflation-adjusted growth rate of about 4.8 percent. That’s more like three times the inflation rate in nominal terms (7.8 percent over the time frame).
To put this in context, if real prices were growing at the lower 2.8 percent figure, then with the same real budget we can afford half the aircraft every 26 years that go by. (Total active aircraft in 2016 have actually fallen to 30 percent their level in 1960, from 18,301 to 5,369.)
If real prices were growing at the higher 4.8 percent figure, then the cost-per-system would double every 15 years. In just 30 years time, the inventory could be slashed by three-quarters.
The really hard part to measure, however, is what is happening to capabilities. However, at some point you cannot make a single most-flexible weapon system. Usually some kind of product or process innovation intercedes, should it be allowed to.
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