The Congressional Budget Office, July 2012 “An Analysis of the Navy’s Fiscal Year 2013 Shipbuilding Plan” (pdf), has an interesting sidebar, that applies to the Coast Guard as well as the Navy. It confirms what we have noted before (“Comparing Apples and Oranges-Ships and Cars”) The cost of ship building in the US is going up at a faster rate than inflation in general.

“Inflation in Shipbuilding

“An important factor affecting the Navy’s and the Congressional Budget Office’s (CBO’s) estimates is assumptions about future increases in the cost of building naval ships. The Department of Defense (DoD) has an overall estimate of future inflation (known as an inflator) that it uses to project increases in the costs of its procurement programs. However, according to the Navy, DoD’s inflator is lower than the actual inflation that occurred in the naval shipbuilding industry in the past decade. The Navy provided CBO with a historical shipbuilding index for 1960 through 2011 that incorporates the growth in the costs of labor and materials that the industry has experienced in the past. To project ship inflation for 2012 through 2018, the service extrapolated from that historical experience, using a weighted composite of annual percentage changes in the costs of labor and materials specific to shipbuilding. Those data are based on information provided by the shipyards about labor costs in the past, as well as on advance pricing agreements, vendor surveys, and projections of the cost of materials from the Bureau of Labor Statistics.

“From 2012 through 2018, the Navy projects, the index will grow at an average annual rate of 2.9 percent. By comparison, the gross domestic product (GDP) price index, which measures the prices of all final goods and services in the economy, will grow at an average annual rate of 1.6 percent between 2012 and 2018, in CBO’s estimation. The difference between the two rates implies that annual inflation will be 1.3 percentage points higher for shipbuilding programs during that period than for the economy as a whole.”

This suggest a number of things.

To some extent, this additional inflation, combined with low production rates, explains growth in the cost of the Coast Guard’s recapitalization over and above normal inflation rates.

We can expect additional actual cost growth in the future. Since cost will be compared to overall inflation rates the Coast Guard can expect more criticism as the project is dragged out.

Since the 10 and 20 year treasury bond rate (about 2.2%) is actually less than the inflation rate in the ship building industry (2.9%), the government would actually save money borrowing to pay for the accelerated construction. In addition construction at a higher rate and possibly multi-year procurements might save as much as an additional savings, possibly as much as 30%.