about is the notion that the Defense Department recognizes that Lockheed needs some assistance or some other defense contractor needs some assistance, and, therefore, buys a weapon system that can't be justified on the basis of our national defense and security needs. Do you think that is an element?

Mr. GANSLER. I don't think that is as common an element as the other phenomena. In other words, I do believe personally that there is a great deal of thought, debate, study, analysis on the individual systems. There are certainly cultural inertia within the institution that say if you had tanks before, you should study another tank, if you had bombers before, you should look at another bomber. There is some of that. It is not because you have a company that needs business. I don't believe that this is the case.

Senator PROXMIRE. Dr. Kurth, what Mr. Gansler said has been the Pentagon's position. What proof do you have that the follow-on imperative actually exists rather than it simply being a case of the best contractor getting the business? Obviously, the ones with the most experience in certain fields tend to perpetuate their domination. Mr. KURTH. Let me say two things on that.

There are those cases where we do not know what the Source Selection Board did recommend in regard to what corporation should get the contract and where in fact the Source Selection Board was overruled by higher authority. Presumably the recommendation of the Source Selection Board was based on considerations of the technical superiority of the weapons system. In the case of the C-5A, the Source Selection Board recommended Boeing, but Lockheed got the award because Lockheed needed the contract. In the case of the Apollo program, the Source Selection Board recommended Martin, but the final contract went to North American, now Rockwell International, because the Board was overruled by higher authority. In the case of the F-111, Boeing was recommended by the Board, but General Dynamics got the contract. In these cases we know what the Source Selection Board wanted. Other cases we do not know, or at least the knowledge is not in the public domain, exactly what the Source Selection Board recommended.

So we have a few cases where the technical criteria alone predicted a certain contractor, but a different corporation eventually got the award.

A second point I want to make is that the follow-on pattern I talked about seemed to fit a large number of contracts.

Furthermore, I am not claiming the follow-on imperative actually explains every contract that the U.S. Government has allocated since 1960. I think that Mr. Gansler's argument could explain certain ones; that is to say, instead of a lazy and inefficient contractor getting a contract because they need it, I think that you can also have the situation where a lean and hungry contractor needs a contract, and they get it not because they need it, because they are lean and hungry. There will be cases like that.

And finally, there are a few contracts that I think are objectively in the national interest. I have often referred to the example of the Trident missile. It fits the follow-on pattern, but I think a person of

good will and good analysis can come up with a good defense justification for that system, purely in terms of the national interest. What I am saying in terms of the future is this: That the existence of excess capacity plus the fact that the follow-on imperative worked sometimes in the past means that there will be considerable pressure to give contracts in the future to those contractors who do need a new award, even if they are not lean and hungry and even if the new weapons system is not in the national interest. Thus, in certain cases, we will not be buying the best weapon for our money.

Senator PROX MIRE. In view of DOD's obvious reluctance to lose any industrial capacity, and in view of the phenomenal political pressures that will be brought to bear in an effort to save a threatened defense contractor, I have noticed those over and over again in the Congress, I am sure they are just as strong in the administration, is it realistic to expect any contraction in the number of suppliers?

Mr. GANSLER. I was very heartened by the recent decision on the helicopter program where, in fact, as you know, one contractor had recently won a competition and had, therefore, a production line for over 1,000 helicopters. And there was another competition taking place on essentially a similar helicopter, the LAMPS program. If you go back to the history it would clearly have indicated Vertol would have gotten the contract because they need the business very badly, they could be in the position of going out of business as a result of not getting the contract.

The economics clearly indicated that a follow-on award, adding 300 to the already existing 1,000 line should be more inexpensive than setting up a total new line for a quantity of 300. However, history would have shown the quantity of the 300 bid alone would have been very "attractive" and I am sure it was.

In other words, the Department of Defense had the guts to say we are going to award it based on the right choice for that contract and let the chips fall where they will. I think that is an example where the Department of Defense recognized they may have more contractors than are required for competition and for economic efficiency.

Senator PROXMIRE. That is encouraging. It is a fine example. I wonder how typical it is?

You say in your prepared remarks, Dr. Kurth, "the imperatives of the industrial structure," quoting, "are reinforced by the imperatives of the political system."

My experience tells me it might be the other way around.

However, I think we both recognize there will be formidable political opposition to any proposed reduction in production lines, as we have indicated.

Do you think that the affected companies and their employees, local and State officials, national representatives, Congressmen, Senators, will permit a plan that calls for extinction of a major contractor?

Mr. KURTH. I think that is an excellent question and a very serious problem, and I think there are a number of ways in which we might be able to square the circle, to perhaps meet those people's needs.

I did suggest that one method might be to gradually reduce the total amount of funds flowing through any large prime contractor. Through the proceeding of attrition, certain contractors might shrink in size.

This coupled with the allocation of a higher proportion of subcontracts to other contractors in any given prime contract, would permit a shrinkage of certain companies. Thus the denial of any one contract would not turn into a great and sudden stress and disaster. That I think would be one way of minimizing the economic and, therefore, the political difficulty.

Other methods are some of those that Mr. Gansler has recommended in his testimony and in his previous articles, and I would support those. Senator PROXMIRE. Mr. Gansler, you say there is an urgent need to modernize plants and equipment. I think there is a good case for that. But that would be expensive. If Government just goes into modernizing without being willing to correct production problems and without. rationalizing it on the basis of continued operation of some kind, it might be both expensive and inefficient.

Wouldn't it be more efficient to follow Mr. Jones, the Northrop top executive, who testified yesterday that the Government get entirely out. of the equipment and plant ownership business, or if not entirely, just mostly out of it, sell more of the plants that they have?

Mr. GANSLER. I think the answer really isn't clear. The answer is not very clear to me in terms of which are the better aproaches for each case. As I see it, very clearly in the case of an aircraft company that now comes to the DOD and says that they need to have a new plant built for their new program-and that still continues to happen-in this case, with an excess number of firms and the existing excess capacity, it certainly doesn't appear to make sense for the Government and/or even the aircraft firms necessarily to make large investments and essentially modernize all 16 different firms, say, when at the time we only need a fewer number of them to be modernized.

However, taking a different case, say the tank situation or in some other areas munitions, for example, it isn't clear to me. I would have to look at it a lot more to determine whether or not it is in the national interest to have Government ownership or private ownership in those special cases.

Right now we have both an unclear decisionmaking process, almost ad hoc in this regard, and legislation which is basically conflicting in that area.

So, if you ask what I think is the best thing, personally I think it would have to be on a case-by-case basis to analyze what may be the right thing.

I think in the long run clearly the profit incentive is the right one, and therefore we should maximize the use of the private sector.

Senator PROXMIRE. If we are going to move in that direction, don't you need a vigorous direct policy with some kind of reasonably flexible schedule of retiring plant? We were told this morning that we still have 89 plants owned by the Government, they are negotiating to retire 7, they have no notion how long it may take to retire more of them or how many more they might retire.

Mr. GANSLER. The current policy of the Department of Defense is to sell them off and try not to buy more. The major obstacle to the selloff to date has been the Congress in terms of not allowing the facilities to be sold off. That is the current situation. The Department of Defense is trying very hard to (a) sell off, and (b) not buy more.

Senator PROXMIRE. If you would get as much documentation of that as possible. I am part of the Congress. I would like to call that to the attention of my colleagues and make a case as strongly as I can where it is wise to do so, and any documentation you can give would be very helpful.

Mr. GANSLER. Fine.

[See appendix IV, pp. 181-184.]

Senator PROXMIRE. The previous witness, Dr. Kurth, yesterday suggested that excess idle capacity is not necessary, because he says surge needs can be met through adding extra shifts on the same production line. Would that in any way argue against your suggestion that we might maintain production lines for surge needs?

Mr. KURTH. I have read that statement by Thomas Jones, I think that it is an excellent statement, and I don't see any contradition between us in regard to his argument yesterday on this particular issue or for that matter any of the other issues.

Senator PROXMIRE. He indicated we shouldn't maintain production lines with a notion that we might need them for surge, and I understood you to say we should maintain that. I understood him to say we could do it by adding shifts.

Mr. KURTH. If I left the impression that I thought we should maintain them for surge capacity, I didn't mean to do so. I think Mr. Gansler may have suggested that at one point or another. No, that is not my argument. I have not dwelled upon the question of the surge capacity. Insofar as I have a position on surge capacity, it is the same as Thomas Jones; that is, it is much better to multiply through additional shifts the production in an existing plant, one which is already operating well, than it is to keep some other plants operating at very low efficiency, such as Vought or Lockheed-Georgia today, for the purpose of somehow suddenly expanding them at a time of emergency. So I would associate myself with the Jones position on the particular question of the surge capacity.

Senator PROXMIRE. Mr. Church testified this morning that no more than 25 percent of the increased cost associated with excess capacity can be attributed to idle facilities.

The rest, according to his statement, results from overstaffing and engineering, marketing and administrative departments. Mr. Gansler, do you agree with that?

Mr. GANSLER. The statement was based upon a study of the aircraft industry, so it couldn't be generalized, but the analysis definitely did show that the major costs of inefficiency in the aircraft industry were associated with labor costs, not associated with the excess plant and equipment.

Senator PROXMIRE. What do you think can be done to reduce this? Mr. GANSLER. One step that would probably be very worthwhile is a much tighter reign on the overhead not only in terms of percent but also in terms of the type of charges that are allowable against it. That is in terms of the labor portion of the costs we are talking about.

In terms of facilities, that already is being looked at carefully now, but that only addresses the bottom 25, not the top 75 percent.

Senator PROXMIRE. Dr. Kurth, among your principal recommendations are that we reduce the number of prime defense contractors.

Supposing that recommendation is implemented, what role would you recommend the Federal Government play? Should it provide aid to affected contractors and communities, some kind of special addition to unemployment compensation, or should it follow a policy of just letting the free market take care of it?

Mr. KURTH. I personally believe it should follow the first policy. Senator PROXMIRE. How do you do that? People are laid off. With the B-1 bomber overnight 9,000 people were out of work. It has, of course, a terrible effect in the local community. What should be done in that kind of circumstance by the Federal Government?

Mr. KURTH. Well, there are a number of other contracts which could be awarded for research and development on either new aircraft in the future or new weapons beyond aircraft in the future. In this particular case, given the fact that Rockwell International is a major space contractor, and also has a major avionics capacity, it seems to me that much of the managerial and engineering staff might be preserved by pursuing more technically advanced contracts in the research and development line.

Senator PROXMIRE. Aren't those completely different divisions and different plants? The company might be in fairly good shape but the individual person who worked on the B-1 bomber would still be out of work.

Mr. KURTH. That is correct, and it is a serious problem with many contractors. I think it is not a serious problem in this particular case. Senator PROXMIRE. Not a serious problem as far as Rockwell is concerned?

Mr. KURTH. NO.

Senator PROXMIRE. The stockholders. How about the employees? Mr. KURTH. The problem would be less serious in this particular case, that is, for Rockwell International in a transition from the B-1 to alternative contracts, because much of Rockwell's operations are located in southern California. The employees might move out of one division to another, although I understand Rockwell is now reorganizing its divisions. They might move from one division to another, from one plant to another, even from one southern California community to another southern California community. This would be a cost to them. On the other hand, they would still have what is most important to them, and that is jobs. Furthermore, Rockwell International, of course, is not just a California contractor. It has many facilities in the Northeast, including Pennsylvania, and if worse came to worse I think there would be jobs available elsewhere in the country. Or if worse comes to worse, I would advocate a generous severance allowance that would be sustained by the Federal Government.

Senator PROXMIRE. Mr. Gansler, you refer to the cascading effect on the defense industry of declining procurement budgets, in terms of purchasing power, at the same time that real unit costs increase. Do you believe that the industrial base would be in better shape if the Government were to stress lower cost, less sophisticated aircraft, missiles, electric systems, and sacrifice state of the art performance in order to obtain higher production rates? The question I asked before of the previous witness about the gold plating that we have and the tendency we have to produce enormously expensive weapons systems with very, very small numbers, fine quality but almost no quantity.