Low-Energy Fridays: What’s the Defense Production Act, and why do we care?

The Trump administration, like the preceding Biden administration, is making liberal use of a little-known Cold War law called the “Defense Production Act” (DPA). Utilization principally goes like this: The administration identifies some sort of production deficiency (e.g., minerals, solar panels, heat pumps) and then invokes the DPA, declaring it an issue of national defense in order to accelerate production. This process may seem simple, but its repeated use in recent years sows seeds for future problems. In many ways, the DPA is just a Band-Aid—it doesn’t actually address the fundamental causes of the scarcity it seeks to remedy.

Signed into law in 1950, the DPA was intended to address the market failure in which private enterprise does not provide for the common defense. This lesson was learned some years earlier during World War II, when—although the United States eventually became an industrial powerhouse churning out weapons—it took time and several laws to shift manufacturers to the more pressing (albeit less profitable) tanks, aircraft, and other materiel needed. The DPA somewhat preserves this WWII-era authority, ensuring that if the country finds itself in another major conflict, it will no longer take years to direct the nation’s industry toward war efforts.

The DPA’s authorities are somewhat expansive, falling into two broad categories. Title I authorities allow the president to prioritize activities and require private businesses to accept and fulfill contracts for that purpose. These authorities essentially permit the president to interfere with free enterprise so long as he believes the actions will support national defense.

Title III authorities allow the president to offer loan guarantees or directly purchase and subsidize industries using a DPA fund that Congress votes to replenish. Title III authorities have limits on the amount and scope of subsidy that the DPA can provide. However, Title III itself includes a provision that the president can simply waive these limitations if he deems it “necessary” to avoid a production shortfall.

What should be immediately apparent is that the DPA offers broad authority to the president to intervene in markets for the purpose of national defense. At the same time, considerable ambiguity in the definition of “national defense” essentially gives the president almost limitless opportunity to invoke the DPA to support favored projects.

While the DPA may seem like wise policy because it addresses classic market failures like providing for the common defense, a more careful read of the law shows it can be abused easily—even in cases where no market failure exists. Recent invocations of the DPA by the Biden and Trump administrations were intended to get around red tape and bureaucracy rather than to genuinely address issues of national defense.

This is where the problem lies.

The DPA is an exercise in central planning, the type of policy that failed for the Soviet Union and other communist countries who relied heavily on “five-year plans” and other exercises in centralized management of the economy. Essentially production targets set by governments and forcibly fulfilled by businesses, the five-year plans are widely regarded as failures. Even when government-sought production targets were met, the policies still failed. That’s because those who could have produced more of something else were instead producing less of what the government wanted (i.e., opportunity cost).

Put another way, every dollar of subsidy spent under the DPA or redirected to fulfill a contract represents a dollar that could have been more productive elsewhere.

Another major problem with the DPA is that, in using it to circumvent red tape, it is increasingly used to entrench a sort of political class. In a free market, profit motivates continuous improvements to productivity and delivers abundance. But under the DPA, being politically connected and receiving political favors via the DPA is more important to business profitability. Instead of encouraging productivity, the government incentivizes businesses to invest in lobbying.

Lest all this seem like wanton speculation, we should look to a real-world example: the moment the Soviet Union lost the Cold War. No, it wasn’t the fall of the Berlin Wall. It was one month prior to that, in September 1989, when Soviet legislator Boris Yeltsin took a goodwill trip to Texas to learn about National Aeronautics and Space Administration (NASA) accomplishments. But it wasn’t NASA that impressed him—it was an unscheduled trip to a nearby grocery store.

There, Yeltsin faced the stark realization that the free-market economies of the West brought abundance and choice that communism could not. There is a famous photo of Yeltsin raising his arms in wonderment at frozen pudding pops. These ordinary treats were something that denizens of communist countries could not access. In fact, they waited in lines for simpler fare that was always in short supply. Yeltsin’s own autobiography credits this moment for destroying his worldview of communism and leading him to embrace markets as Russia’s first president.

Put simply, the overarching problem with the DPA is that it takes the same economic approach that failed the Soviet Union. While the DPA may have its place in addressing genuine market failure during wartime, its expansive and ambiguous authority too often makes it the tool of first resort for politicians who can’t be bothered to address the underlying causes of scarcity in the market.

In 2022, I called the DPA the “Pandora’s Box of bad policy.” Three years and many invocations later, this is still true.