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The Wrong Defense Industrial Policy: Op-ed by Marcus Corbin, POGO's Sr. Defense Investigator

September 1, 1996 

 

Defense corporate mergers - such as the huge proposed merger of Boeing and McDonnell Douglas - are proceeding at record rates despite the threat they pose to high-wage jobs. Yet a misguided Clinton Administration defense industrial policy subsidizes the mergers, contributing to the $40 billion worth of mergers announced in 1996. In Congress - where the policy is known more bluntly as "Payoffs for Layoffs" - legislation has been introduced again to reverse the unnecessary subsidies. A new policy that focuses on helping workers when they are laid off from defense firms would be far preferable to one that causes more layoffs by subsidizing mergers while doing little for the laid- off workers.

The costly merger policy is the result of a spectacular display of influence by corporate CEOs like Norman Augustine, who requested the policy change in 1993 from then-Under Secretary of Defense John Deutch - a former business associate. Shortly thereafter, Augustine's Martin Marietta Corporation merged with Lockheed, and submitted bills to the government for $855 million for post-merger restructuring costs, with more expected to follow. Former Martin Marietta executives were to receive $31 million, and Augustine alone, an astounding $8 million. A few months after the merger Lockheed Martin announced layoffs of 19,000 workers - payoffs for layoffs.

Augustine has claimed publicly the policy helps "ease the disruption of lay-offs" and "also provides for severance and relocation benefits to employees whose jobs are no longer supportable." But according to Defense Department's figures on the first merger cases, less than 10% of the money demanded from the public treasury has gone to laid-off workers. The rest of the government money helps the corporations either move or shut down offices, plants, and jobs.

Deutch justified the industrial policy by saying that (a) defense companies needed assistance and subsidies to merge and downsize or they wouldn't do it, and (b) the government would save money in the future because smaller and fewer corporations would produce cheaper weapons. Deutch's policy pushed private companies to do things they had concluded were not in their financial interest. As an example, CEO Augustine testified before Congress that his company would not have acquired General Dynamics Space Division were it not for the government subsidy - because it would have been "a bad business decision." In fact most companies have found plenty of reasons to merge without the need for government's heavy hand.

Since companies merge and downsize naturally, Deutch's second argument for subsidies is moot: even if companies merge on their own, the government should be able to obtain the increased efficiency benefits without having to pay needless costs. Furthermore, the assumption that mergers produce savings is questionable since the merger policy is leading to extreme defense industry concentration. The government has touted reports of short-term savings, but has failed to adequately explore whether competition will be reduced and prices will rise in the long run.

The merger subsidies are the worst kind of industrial policy - they are unneeded, unlikely to work as advertised, and they add to the real national economic problem of high-wage job loss. Instead of mitigating the elimination of tens of thousands of high-tech jobs at corporations whose CEO salaries are ballooning, the policy adds to the problem by promoting more mergers, downsizing, and firing than would happen naturally. It ends up looking like another case of "corporate welfare."

What is needed is not demobilization, but re-mobilization. It has become clear that the most fundamental political issue of our day is not just "jobs," but high-wage jobs. The politicians who recognize this - and do something about it - will be the ones celebrating on election nights in the coming years. During the first presidential campaign and early into his Administration, President Clinton championed re-investment and transition initiatives. A second-term Clinton Administration should be able to rediscover its early enthusiasm without having to dig too deep into its soul.

A constructive, new "re-mobilization" policy could replace the current corporate welfare policy with a well-funded national program to assist the transition of workers out of defense industry - not into lower-paying service sector jobs, but into other high-wage, high-growth industries.

Where will the funds for a national transition program come from? Most logically, from defense. Defense spending is still at Cold War levels, staying "off the table" in recent budget cutting debates - and even enjoying billions of dollars of Congressional add-ons. Reduced defense spending can liberate large resources to fund transition efforts handsomely, which will be required economically and politically if such a policy is to succeed. The beauty of putting real money into transition programs for workers is that it will, in turn, ease politicians' efforts to make difficult, but much needed, reductions in continued Cold War levels of military spending.
 


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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