To better understand this pricing shakedown, I connected with my colleague, Julia Gledhill, an analyst at POGO’s Center for Defense Information.
“Companies have been price-gouging the Pentagon for decades,” Julia told me. “POGO actually got its start exposing $7,600 coffee pots and $435 hammers in the ’80s, and unfortunately not much has changed for the better. In fact, things have gotten worse because lawmakers have created so many loopholes in the regulatory framework.”
In 1993, in an effort to cut costs for themselves, the Pentagon urged defense companies to merge — an effort that completely reshaped the industry and provided us with the five major contractors that dominate the defense industry today: Lockheed Martin, Raytheon, Boeing, General Dynamics, and Northrop Grumman. Because the industry is so small and consolidated, the Pentagon is often tied into sole-source contracts with these companies. Since these companies are the only ones making certain parts, they’re at liberty to set prices however they’d like, and the Pentagon has no choice but to pay.
Who is the onus on here: maybe the contractors for engaging in such crude business practices, or the Pentagon for failing to do more to negotiate fair contracts?
“The onus is on Congress,” Julia argues. “It’s the lawmakers who’ve made contracting regulations almost entirely ineffective by creating so many loopholes that the law is essentially a shell of its original intent. Sadly, many members of Congress are unwilling to scale back these loopholes and strengthen contracting regulation because of conflicts of interest.”
While demanding ever more of our tax dollars, the giant military-industrial corporations are spending all too much of their time simply stuffing the pockets of their shareholders rather than investing in the tools needed to actually defend this country. A recent Department of Defense report found that, from 2010-2019, such companies increased by 73% over the previous decade what they paid their shareholders. Meanwhile, their investment in research, development, and capital assets declined significantly. Still, such corporations claim that, without further Pentagon funding, they can’t afford to invest enough in their businesses to meet future national security challenges, which include ramping up weapons production to provide arms for Ukraine.
In reality, however, the financial data suggests that they simply chose to reward their shareholders over everything and everyone else, even as they experienced steadily improving profit margins and cash generation. In fact, the report pointed out that those companies “generate substantial amounts of cash beyond their needs for operations or capital investment.” So instead of investing further in their businesses, they choose to eat their “seed corn” by prioritizing short-term gains over long-term investments and by “investing” additional profits in their shareholders. And when you eat your seed corn, you have nothing left to plant next year.
SHAREHOLDER VALUE!
Corporations are able to increase shareholder value by taking over congress via campaign contributions in effect turning representatives into employees of corporations.
No wonder the next year’s defense budget will likely exceed $1 trillion dollars.
