'Corporate Welfare for Weapons Makers: The Hidden Costs of Spending on Defense and Foreign Aid' by Willian D. Hartung

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U.S. defense

subsidies for the seven mergers to more than

mergers have proceeded without government

$1.3 billion. If the costs of subsidizing other

subsidies? The authors of the restructuring

industries have

major mergers were similarly understated, the

policy have argued that the combinations

significant advan-

full price tag to the taxpayer could be $1.8 bil-

might not have occurred. In a number of

tages over their

lion or more.

instances, the government was locked into

Advocates of subsidizing mergers in the

fixed-price, long-term contracts with both

foreign competi-

Pentagon and the arms industry argue that

sides of a potential merger. According to that

tors and thus

paying restructuring costs actually saves taxpay-

argument, the companies benefiting from the

ers money in the long term by encouraging

fixed-price arrangements would not have

should not need

weapons manufacturers to dump unproduc-

much incentive to merge. Even if the compa-

additional subsi-

tive assets and lower their overhead costs, there-

nies did merge, they would not necessarily

dies to attract

by providing cheaper weapons to the

close redundant facilities if they had to relin-

Pentagon. But according to Lawrence Korb,

quish a steady flow of government revenue

sales.

the current director of studies at the Council

under a fixed-price contract. The validity of

on Foreign Relations and a former top official

that argument is difficult to determine, but

in the Reagan Pentagon, no evidence suggests

even if true it speaks more to the need to

that the unit costs of any major weapons sys-

reform the Pentagon's contracting procedures

tem have gone down as a result of subsidizing

that lock the government into those costly,

mergers. In its recent survey of restructuring

long-term, fixed-price deals than it does to the

costs, the GAO made the same point, albeit in

value of subsidizing mergers.58

a more understated fashion:

In summary, although the costs of subsi-

dizing mergers in the defense industry are

While we determined that selected

clear, the benefits of doing so are not support-

restructuring activities had lowered

ed with anything more than undocumented

the operational costs of the business

assertions on the part of the Pentagon and

combinations by hundreds of millions

the major weapons manufacturers. Unless

of dollars, it was not feasible to develop a

there is evidence that those subsidies hold

benefits for taxpayers, the subsidies should

methodology for precisely determining how

contract prices were affected.56

be eliminated.

The GAO is confident that the companies

Military Pork: The Waste

have saved money as a result of the recent spate

That Keeps on Wasting

of industry mergers, but it has no way of deter-

mining how much of those savings have been

passed on to the Pentagon in the form of lower

The main reason that the Pentagon bud-

prices. And according to economist Ann

get has been plagued by pork-barrel spending

Markusen, the consolidation of the U.S.

in recent years is straightforward: that's

defense sector into essentially three big firms--

where the money is. Although the military

Lockheed Martin, Boeing, and Raytheon--

budget has declined to 16 percent of the total

could easily result in higher costs to the Pentagon

federal budget, it is still very large in absolute

and the taxpayers in years to come. Those three

terms--current spending on defense is rough-

massive industrial combinations might use the

ly 85 percent of the average expenditures dur-

Pentagon's dearth of alternative suppliers, as

ing the Cold War. Expenditures for defense

well as their political clout on Capitol Hill, to

remain at about 50 percent of federal discre-

press for higher prices.57

tionary spending (spending that is not

locked in each year by legislative mandates).

Whether any portion of the cost savings

Once major entitlement programs like Social

from mergers is being passed on to the

Security and Medicare are factored out, the

Pentagon and the taxpayers is secondary to a

Pentagon remains the "king of the hill" when