Cato Policy Analysis No. 350 August 12, 1999

Policy Analysis

Corporate Welfare for Weapons Makers The Hidden Costs of Spending on Defense and Foreign Aid

by William D. Hartung

William D. Hartung is the President's Fellow at the World Policy Institute.


Executive Summary

The defense and foreign aid budgets are the largest single source of government funding for private corporations. More than half of U.S. weapons sales are now being financed by taxpayers instead of foreign arms purchasers. During fiscal year1996 (the last year for which full statistics are available), the government spent more than $7.9 billion to help U.S. companies secure just over $12 billion in agreements for new international arms sales. The annual $7.9 billion in subsidies includes taxpayer-backed loans, grants, and government promotional activities that help U.S. weapons makers sell their products to foreign customers. Also, the provision of low-cost facilities and extensive subsidies for research and development and mergers and acquisitions to major contractors fosters a "risk-free" environment in which weapons makers have little economic incentive to produce effective systems at affordable prices. Furthermore, a portion of the $120 billion the Pentagon spends each year on contracts with U.S. defense contractors is being wasted on defense pork—that is, redundant or unneeded weapons systems. Such subsidies and spending for defense pork can interfere with the fulfillment of legitimate security needs.

In concordance with a recommendation made by the Presidential Advisory Board on Arms Proliferation, government subsidies for arms exports should be phased out. Federal subsidies to corporations in the national security sphere should be the exception rather than the rule. The executive branch and Congress should establish an independent commission to conduct an annual review of corporate-targeted contracts, tax breaks, and price subsidies contained in the military and foreign aid budgets. Only those subsidies fulfilling important national security objectives that could not be accomplished without government assistance should be maintained. The overall review should be supplemented by a separate panel, modeled on the Defense Department's Base Realignment and Closure (BRAC) panel, which would put forward an annual list of pork-barrel military procurement projects that should be terminated. To limit "horse-trading," the list of unnecessary projects would have to be voted up or down in its entirety—much like BRAC procedure for military base closures.

Full Text of Policy Analysis No. 350 (PDF, 26 pgs, 144 Kb)

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