The $1.5 trillion budget is the carrot. The executive order is the stick
In the past week, the Trump administration has made waves in the normally staid defense contracting universe. The President announced he is pursuing a $1.5 trillion defense budget for 2027 and unveiled a new executive order titled “Prioritizing the Warfighter in Defense Contracting.” The carrot of increased defense spending is welcome, and so is the stick of defense contracting accountability.
The executive order states plainly that “while the United States produces the best military equipment in the world, we do not make enough of it quickly enough to meet the needs of our military and our partners.” It also identifies part of the problem. Too much capital is being returned to shareholders instead of invested in production capacity, workforce, tooling, and throughput.
This diagnosis aligns with a deeper structural failure in how the United States has run its defense industrial base since the end of the Cold War. For decades, the system has been optimized around new starts, exquisite platforms, small lot procurement, uneven funding, and long development timelines, rather than around sustained production, iterative upgrades, and industrial scale. The result is a force that is technologically impressive but thin, slow to regenerate, and fragile under stress.
To remedy this, the President proposes to give the Secretary of War real leverage over defense contractors whose performance lags. Firms that fall behind on cost, schedule, or production capacity can be placed under review. If they fail to provide a credible remediation plan, the Secretary is empowered to insert clauses into future contracts barring share buybacks or dividends until deficiencies are corrected. If executed properly, the combination of more money and harder discipline could begin to restore American deterrence and provide a path to victory if deterrence fails.
Identifying the Problem
For decades, the United States has been getting more for less from its defense industrial base. The result is hollowed-out fleets, thin magazines, and aircraft older than the pilots who fly them. Much of this traces back to a dysfunctional acquisition system whose roots stretch at least to the McNamara era, while post–Cold War spending cuts and industry consolidation tightened the noose.
In the years since, inconsistent appropriations, byzantine development processes and timelines, and broken contracting incentives have produced a perverse result. The Pentagon has repeatedly shut down viable production lines in order to chase revolutionary replacements that take decades to arrive and often arrive in too-small numbers to matter. Meanwhile, industry has rationally adapted to a world in which sustained volume production is the exception, not the rule.
In that environment, defense firms increasingly behave as if capital is better returned to shareholders than invested in their own future capacity.
Share buybacks and dividends are not inherently evil. They are often a signal that a firm believes the future will not be better than the present and that internal investment opportunities (think R&D) are less attractive than external ones, what shareholders can do with the money outside of the firm. That may make sense for companies like Apple or Google who reap monopoly profits from iPhone and Search. But for defense primes that routinely deliver late, over cost, and under scale, it looks more like running a victory lap after finishing fifth.
Today, the defense industrial base suffers from a structural moral hazard. Once a company “wins” a program of record, it behaves less like a competitor and more like a protected incumbent. The real competition is not for the next U.S. contract, but for global industrial relevance in an era of sustained military competition, and there America is losing ground.
The executive order does not punish profitability or name companies. Instead, it flags misaligned priorities and makes something more important clear. Performance determines privilege.
This Is Pro-Market, Not Anti-Business
Reforming the defense enterprise does not require abandoning capitalism. It requires better capitalism.
Healthy markets reward execution, scale, and reinvestment. The defense market has done the opposite. It has insulated incumbents from consequences while starving the industrial base of reinvestment. The result is visible everywhere, with arsenals stretched thin, surge capacity constrained, and production timelines measured in years instead of months.
Recent wars have made the lesson unavoidable. Wars last longer than planned. Industrial capacity matters. And systems that exist can be produced, and can be upgraded, beat notional systems that are always many years away. Yet the U.S. system still systematically privileges replacement over iteration and novelty over scale.
By enforcing discipline, the administration is not picking winners and losers. It is forcing clarity. If a company wants to behave like a financial services firm, it can exit defense work. If it wants the benefits and stability that come with long-term government contracting, it must behave like a long-term industrial steward.
Newer entrants like Anduril reinvest aggressively, prioritize speed, and treat production scale as a strategic advantage. Unsurprisingly, Anduril’s leadership has expressed support for the order because they already behave the way the system is now being designed to reward. Even some incumbents are moving. Lockheed Martin, while not immune to criticism, has recently made visible investments in missile production capacity, automation, and workforce expansion. Companies that demonstrably plow profits back into throughput will remain compliant and will likely receive a larger share of the growing funding the administration plans to push into the industrial base.
The Basket of Solutions
Share buybacks are not the only problem and probably not the primary one. They are one symptom of a system that does not consistently reward staying in production, investing in tooling, or expanding capacity. The executive order should not be viewed in isolation from Secretary Hegseth’s acquisition reform package or from the promised defense spending increases. Together, they represent a coordinated attempt to realign resources, incentives, and authority around warfighting output.
Why do this all at once? Because the administration wants leverage if more money does not produce more weapons, faster.
A $1.5 trillion defense budget is a bet that America can deter conflict and win if deterrence fails. Like any serious investor, the administration is also hedging against downside risk, namely that new money will be treated as a one-time bonus instead of a long-term production mandate.
Trump’s order is blunt because the problem is blunt. In a world of industrial competition with China and sustained risk of major war, the United States cannot afford a defense industry that optimizes for financial extraction instead of physical output. This is not an attack on industry. It is a reminder that defense contracting is not an entitlement but a conditional license to serve national security.
Companies that understand that will comply easily. Those that do not may finally discover that defense contracts, like wars, are governed by results.
Major General Ferrari is a Senior Fellow at AEI and previously served as the director of program analysis and evaluation and the commanding general of the White Sands Missile Range. His work has featured in War on the Rocks, The Hill, and RealClearDefense. Dillon Prochnicki is a research assistant at AEI.