Changes in the Navy's Buying Power: Evidence on Basic Questions

This study examined the trends in the Navy’s budget and prices of its platforms (ships and aircraft) to understand why the Navy cannot buy as many platforms as it used to. We found that the Navy had less to spend on procurement than before and that the Navy’s platforms cost more now than before, leading to the erosion in the buying power. The major reasons for the Navy’s having less funding available for procurement are: the overall budget is not high by historical standards; the R&D expenditure is at a historic high; and the Military Personnel and the Operations and Maintenance appropriations, while below the historic average, have not come down as much as endstrength and force size. The major reasons for the Navy’s platforms costing more than before are: the Navy is buying a richer mix of platforms, leading to higher average cost; individual platforms are more capable than their predecessors and the additional capabilities cost more; the inflation experienced by the defense manufacturers are higher than the general inflation; the Navy is buying smaller quantities of platforms causing higher unit costs; and the defense industry consolidation may have changed the price behaviors of the remaining contractors.