ARGUMENT: INDUSTRIAL NETWORKLeveraging U.S. Capital Markets to Support the Future Industrial Network

Published 13 January 2023

$56 trillion is nearly three times the size of the U.S. economy.  This vast pool of capital in U.S. capital markets — $46 trillion in public capitalization and another $10 trillion in private money – dwarfs that of China. Tapping U.S. equity and debt markets would enable the Department of Defense to remedy current capability shortfalls, fund technological advances from leading private-sector innovators, invest in generational transformation efforts across the military services, and upgrade antiquated global infrastructure to sustain U.S. forces.

In June 2022, Joseph Votel and James Geurts wrote in the National Interest that “Harnessing our collective capabilities, talents, and innovations into such a dynamic and aligned network will help overcome the limitations of linear thinking that have impaired the nation’s competitive position in an increasingly challenging world.”

They added:

The might of the U.S. industrial base over the last eighty years has served the country well. The “Arsenal of Democracy” led the Allies to victory in World War II, led to the conclusion of the Cold War, and has enabled the United States to promote peace and security since. But the global order is changing, and competitors have emerged. What made the United States so effective since Pearl Harbor cannot guarantee such continuing success in the future.

Now Votel, with Francis A. Finelli and Samuel Cole, continue the discussion in War on the Rocks. The three write:

$56 trillion is nearly three times the size of the U.S. economy.  This vast pool of capital in U.S. capital markets — $46 trillion in public capitalization and another $10 trillion in private money – dwarfs that of China.  The New York Stock Exchange alone is four times the size of China’s Shanghai stock exchange.  America’s capital markets represent a critical, yet underutilized, strategic advantage for the Department of Defense’s ability to field new capabilities. Tapping U.S. equity and debt markets would enable the Department of Defense to remedy current capability shortfalls, fund technological advances from leading private-sector innovators, invest in generational transformation efforts across the military services, and upgrade antiquated global infrastructure to sustain U.S. forces. The Department of Defense should build upon on its participation in the venture-capital ecosystem by deepening its engagement with more commercial venture firms. It needs to reallocate research and development funding to provide more opportunities to small, medium, and large companies pursuing national security applications. Importantly, the Pentagon should adopt practices and implement programs that attract capital at scale for investment in defense, not unlike those used by the Departments of Commerce or Energy. Finally, there ought to be a comprehensive architecture of education, training, and exchange programs that builds experience and expertise amongst Defense Department professions in basic finance, capital markets, and financial engineering. The United States has no choice — America’s capital markets should be brought to bear to support critical defense priorities at scale and speed.

Conventional wisdom holds that legal, regulatory, and logistical hurdles in the Pentagon’s rigid process of annual appropriations, extended budget cycles, and complex procurement procedures make it nearly impossible for the Pentagon to access the public and private markets. The primary barriers though are neither legal nor technical. The Department of Defense has already shown an ability to be nimble in response to national emergencies. For example, when the COVID-19 pandemic erupted, it used its other transaction authority to act quickly outside the traditional contracting process to purchase vaccines and therapeutics. 

But when it comes to fiscal law and authorities, the Department of Defense tends to take a much more conservative approach, hewing closely to programs or initiatives expressly authorized by Congress in the annual National Defense Authorization Act. Changing this culture of risk avoidance will take serious effort by leaders at the Pentagon and on Capitol Hill, but it can be done. Here too, there are precedents. The Federal Ship Financing Program provided for a full faith and credit guarantee by the U.S. government to promote the growth and modernization of the U.S. merchant marine and U.S. shipyards. More recently, the Pentagon successfully dipped its toe into leveraging private capital and corporate funding to support early-stage research and technology companies. These limited venture-capital-related efforts are important but insufficient to enable the United States to retain or, in some cases, regain dominance on the battlefields of tomorrow