Strong “Defense” Wins in Corporate Welfare Battles

September 26, 1996 • Commentary
By Dean Stansel

Two years ago a congressional investigative team found that several defense contractors had been sending federal taxpayers the bill for millions of dollars in entertainment, recreation and party expenses. Defense contractor Martin Marietta, for instance, charged the taxpayers $263,000 for a Smokey Robinson concert, $20,000 for golf balls, $13,000 for volleyball and softball officials, and $7,500 for a Christmas party.

Since then Martin Marietta has merged with Lockheed to form Lockheed Martin. Now they want the taxpayers to ante up another $850 million to offset the costs of that merger, such as severance pay, moving machines and equipment, and retraining and relocating employees.

Believe it or not, they will probably get their wish. The policy of the Pentagon since 1993 has been to grant such subsidies to defense contractors that choose to merge. Thus far, the Pentagon has agreed to pay $300 million to offset the restructuring costs involved with four different mergers or acquisitions. They are currently considering reimbursement requests from about half a dozen additional companies. According to the General Accounting Office, that could cost taxpayers several billion dollars.

Proponents of subsidizing defense contractor mergers say that they will save the taxpayers millions of dollars. With the demand for military planes and ships falling in the post‐​Cold War era, many defense contractors are faced with too many workers and factories and too little for them to do. By merging half‐​capacity factories, they can reduce overhead, the savings from which, proponents say, could be passed on to the taxpayers. Those arguments fall short on several counts.

1. Claims of taxpayer savings are dubious. The claim that defense‐​merger subsidies will save millions of taxpayer dollars ignores a key factor. As former undersecretary of defense Lawrence Korb put it, “By its policy of subsidizing [these mergers], the Clinton Administration has created megacompanies that will stifle competition and wield tremendous political power.” Does anyone believe that the Pentagon will be able to get better value for the taxpayers’ dollars if there are only six companies from which to purchase planes and ships rather than 10?

2. Good business decisions should not require subsidies. In this age of corporate downsizing, military contractors should not be exempt from marketplace pressures to keep overhead costs low. If market conditions truly require defense contractors to merge in order to survive, then they should do so. It is nonsensical to argue that because those mergers may save taxpayers money, taxpayers should subsidize them. What proponents of such subsidies are essentially saying is that taxpayers should be forced to pay private firms to make the good business decisions necessary to keep their companies afloat.

3. Current policy subsidizes bad business decisions. Subsidies of defense contractor mergers provide yet another example of how government meddling can adversely influence decisions in the private marketplace. If two defense contractors decide that merging makes sense economically and is in their shareholders’ interest, then the government certainly should not stand in their way. However, if those two firms conclude that merging would be unwise because, for example, they would face a loss of $850 million, then they should not merge. Instead, the Pentagon’s policy says to those two companies, go ahead and merge, we’ll make the taxpayers pick up the tab.

Martin Marietta’s 1993 acquisition of General Dynamics Space Division is a case in point. Norman Augustine, then CEO of Martin Marietta, admitted in a congressional hearing that if the Pentagon had not subsidized that acquisition, “we would not have made the purchase, certainly not because of spite, but simply because it would have been a bad business decision.” Using taxpayers’ money to encourage bad business decisions is an indefensible policy.

4. Subsidizing mergers gives scarce taxpayer dollars to huge corporations. Americans pay more today in taxes than they do for food, clothing and shelter combined. Nevertheless, the Clinton administration and others insist that we “cannot afford” tax cuts. If we cannot allow taxpayers to keep more of their own earnings, how can we possibly afford to give away hundreds of millions of their tax dollars to huge corporations when they decide to merge?

The Pentagon’s policy of subsidizing defense contractor mergers is yet another example of corporate welfare. The billions of dollars in reimbursement requests currently under consideration should be denied and this outrageous waste of taxpayer dollars should be put to an end.

About the Author
Dean Stansel is a fiscal policy analyst at the Cato Institute.