Opinion

Felix Salmon

When the Pentagon is captured by its vendors

By Felix Salmon
May 24, 2011

Companies from General Motors to Coca-Cola have long had a complex relationship with their suppliers — it’s important for those vendors to do well, but at the same time no one likes getting ripped off to the point at which the vendors are doing spectacularly well and the big organization doing the buying is seeing its expenses rise dramatically year after year.

Unless, of course, you’re the Pentagon:

The Pentagon is very encouraged by Wall Street’s response to aerospace companies and arms makers, even as U.S. defense spending flattens, the top U.S. weapons buyer said on Tuesday.

“We are monitoring the health of our industry as it is seen by the financial community,” said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. “And the information there is very encouraging to us.” …

The median stock price for the industry’s to 20 aerospace and defense contractors is about 92.5 percent of their 52-week trading highs, he said.

Trading at this level, Carter said, shows “continuing confidence in the health of our industry that is higher than it is for global information, automotive, steel, energy, telecom and information technology sectors.”

Carter is the man in charge of spending a huge chunk of the Pentagon’s mind-bogglingly huge $750 billion budget. It’s his job to get value for money; if defense-contractor stocks are rising even in the face of defense spending which is purportedly flattening, alarm bells should be ringing. But Carter seems to be mistaking them for some kind of congratulatory jingle.

Brett ArendsMW-AI615_dfense_20110211154303_MD.jpg had a good column on this in February, which included the chart at right. We’re spending more on defense than at any point in US history, bar the height of WWII — and even that level isn’t far off now.

In 1960, when President Dwight Eisenhower was leaving office, military spending in today’s money totaled just $350 billion.

Half of what we spend today.

In 1970, when the Vietnam War was raging, we spent $450 billion. The most Ronald Reagan spent on defense was about $550 billion. Even in 1942, the year after Pearl Harbor, we only spent $350 billion.

Today, $750 billion.

Actually, the figure is much higher if you include veterans’ benefits, the cost of the wars in Afghanistan and Iraq, and the interest on the debt to fight those wars. As Arends notes, even the most fiscally conservative lawmakers seem incapable of suggesting that America’s current defense spending is out of control, or even needs any cuts at all. After all, it would be downright unpatriotic were America’s arms manufacturers to make anything other than record profits this year and for years to come.

But one can’t help but hold out some wistful hope that the people spending the billions don’t consider excess profit at defense contractors to be a point of pride. Was it ever thus? Or is this new?

Comments
5 comments so far | RSS Comments RSS

I would also add that a number of defense contractors have received pension relief in the form of favorable liability discount rates, so a good number of large contractors may have potentially large pension contributions lurking in their future.

Posted by chappy8 | Report as abusive
 

Another rather small bit in the great money pile is that a big chunk of foreign aid is actually subsidy to our defense contractors; the money is distributed in the form of credits held by the Treasury that are then paid to our companies. This is one reason the talk about cutting foreign aid tends to die out; you can’t really start cutting only the humanitarian part of foreign aid without bringing out the defense industry’s part.

Posted by jomiku | Report as abusive
 

“But one can’t help but hold out some wistful hope that the people spending the billions don’t consider excess profit at defense contractors to be a point of pride. Was it ever thus? Or is this new?”
This is the result of Bush’s policy of the outsourcing of military tasks to private contractors.. He and his cronies felt that it was the duty of the Government to provide profits to industry even (or especially) in times of war, “because who decided that government is the only agent capable of fighting those wars”
To quote something from a speech Rumsfeld gave on 9/10/2001, which was pointed out to me by Naomi Klein in The Shock Doctrine: “The topic today is an adversary that poses a threat, a serious threat, to
the security of the United States of America. This adversary is one of the world’s last bastions of central planning. It governs by dictating five-year plans. From a single capital, it attempts to impose its demands across time zones, continents, oceans and beyond. With brutal
consistency, it stifles free thought and crushes new ideas. It disrupts the defense of the United States and places the lives of men and women in uniform at risk.
Perhaps this adversary sounds like the former Soviet Union, but that enemy is gone: our foes are more subtle and implacable today…. The adversary’s closer to home. It’s the Pentagon bureaucracy.”
‘Rumsfeld wanted to know, “Why is DoD one of the last organizations around that still cuts its own checks? When an entire industry exists to run warehouses efficiently, why do we own and operate so many of our own? At bases around the world, why do we pick up our own garbage and mop our own floors, rather than contracting services out, as many businesses do? And surely we can outsource more computer systems support.”‘

I suspect that this is your answer, as it seems quite likely to me that in the 10 years since, budget and appropriations directors have been installed by the Bush administration that buy into this line; and moreover, I suspect that Obama does not disagree with this mindset, or at least that he can’t be bothered to change it.

Posted by Foppe | Report as abusive
 

The Arms Manufacturers prefer an easily manipulated fearful public living in a state of fear so thrived under the neocons that swept Bush II into power. Every time there was an announcement of an ‘Orange Alert’ the arms industry rubbed their hands together in glee at the thought of selling yet more stuff as public resistance to spending increases fell.

The shareholders of the arms makers probably fell about laughing at Bush’s gullibility for believing Iraq had anything to do with 911 – and then went on to make even more money, so much that Halliburton (the Vice-President’s company) made so much that a refund of overspending came to $66 million!

Link Arms Spending with Patriotism, and you lock in a self-destructive cycle of more and more government money being spent along Keynsian lines – with one difference: the money is spent on things to be destroyed; at least infrastructure stays around for decades as an investment in your country.

It would be nice to think that the 90s were such a boom time because of Democrat policies under Clinton, but it probably had a lot more to do with the ‘swords into ploughshares’ post-cold war policies that reduced arms spending so much. This money could then be used productively, not destructively.

Follow the money. How much of the dividends of the arms companies goes into the pockets of people who give large donations to political parties who increase military spending? How much do the companies give directly to those parties? How many members of government – or staff at the Pentagon – are associated with the arms companies?

As you say, Felix, the Pentagon HAS been captured by its vendors.

Posted by FifthDecade | Report as abusive
 

Um, Felix, want to run the numbers again using % GDP?

Using the inflation adjusted GDP from 1945, $750b of military spending would be 25% of GDP. We’re at around 5% right now.

These are just first numbers I could find on the web.

Do I have this wrong? Because this seems to me to be the exact kind of statistical shenanigan that, when done by others, drives you crazy.

Posted by AndyGarbage98 | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •