Strong “Defense” Wins in Corporate Welfare Battles

This article originally appeared in the Washington Times.
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Two yearsago a congressional investigative team found that several defensecontractors had been sending federal taxpayers the bill formillions of dollars in entertainment, recreation and partyexpenses. 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 softballofficials, and $7,500 for a Christmas party.

Since then Martin Marietta hasmerged with Lockheed to form Lockheed Martin. Now they want thetaxpayers to ante up another $850 million to offset the costs ofthat merger, such as severance pay, moving machines andequipment, and retraining and relocating employees.

Believe it or not, they willprobably get their wish. The policy of the Pentagon since 1993has been to grant such subsidies to defense contractors thatchoose to merge. Thus far, the Pentagon has agreed to pay $300million to offset the restructuring costs involved with fourdifferent mergers or acquisitions. They are currently consideringreimbursement requests from about half a dozen additionalcompanies. According to the General Accounting Office, that couldcost taxpayers several billion dollars.

Proponents of subsidizing defensecontractor mergers say that they will save the taxpayers millionsof dollars. With the demand for military planes and ships fallingin the post‐​Cold War era, many defense contractors are faced withtoo many workers and factories and too little for them to do. Bymerging half‐​capacity factories, they can reduce overhead, thesavings from which, proponents say, could be passed on to thetaxpayers. Those arguments fall short on several counts.

1. Claims of taxpayer savingsare dubious. The claim that defense‐​merger subsidies willsave millions of taxpayer dollars ignores a key factor. As formerundersecretary of defense Lawrence Korb put it, “By itspolicy of subsidizing [these mergers], the Clinton Administrationhas created megacompanies that will stifle competition and wieldtremendous political power.” Does anyone believe that thePentagon will be able to get better value for the taxpayers’dollars if there are only six companies from which to purchaseplanes and ships rather than 10?

2. Good business decisionsshould not require subsidies. In this age of corporatedownsizing, military contractors should not be exempt frommarketplace pressures to keep overhead costs low. If marketconditions truly require defense contractors to merge in order tosurvive, then they should do so. It is nonsensical to argue thatbecause those mergers may save taxpayers money, taxpayers shouldsubsidize them. What proponents of such subsidies are essentiallysaying is that taxpayers should be forced to pay private firms tomake the good business decisions necessary to keep theircompanies afloat.

3. Current policy subsidizesbad business decisions. Subsidies of defense contractormergers provide yet another example of how government meddlingcan adversely influence decisions in the private marketplace. Iftwo defense contractors decide that merging makes sense economicallyand is in their shareholders’ interest, then the governmentcertainly should not stand in their way. However, if those twofirms conclude that merging would be unwise because, for example,they would face a loss of $850 million, then they should notmerge. Instead, the Pentagon’s policy says to those twocompanies, go ahead and merge, we’ll make the taxpayers pickup the tab.

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

4. Subsidizing mergers givesscarce taxpayer dollars to huge corporations. Americans paymore today in taxes than they do for food, clothing and sheltercombined. Nevertheless, the Clinton administration and othersinsist that we “cannot afford” tax cuts. If we cannotallow taxpayers to keep more of their own earnings, how can wepossibly afford to give away hundreds of millions of their taxdollars to huge corporations when they decide to merge?

The Pentagon’s policy ofsubsidizing defense contractor mergers is yet another example of corporatewelfare. The billions of dollars in reimbursement requestscurrently under consideration should be denied and thisoutrageous waste of taxpayer dollars should be put to an end.

Dean Stansel

Dean Stansel is a fiscal policy analyst at the Cato Institute in Washington, D.C.