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Waste and Abuse in Military Spending

March 1, 1997 

 

Waste and Abuse in Military Spending, chapter in Arms Control Briefing Book, Council for A Livable World, by POGO's Marcus Corbin  The following is an overview of the state of acquisition "reform" and regulation of defense corporations in the Clinton Administration. 

 

I. Goals for 1997
  • Terminate government subsidization of defense corporation mergers.
  • End other defense corporate welfare programs, notably arms export subsidies.
  • Ensure that the Administration's contractor-friendly "acquisition reforms" preserve protections against abuse in contracting.
  • Begin the fundamental reforms required to prevent waste and abuse in military spending.
  • Halt another Congressional multi-billion dollar, waste-generating increase to the Defense Department's budget request.

II. Background and Congressional Action

The Clinton Administration has trumpeted its efforts at defense "acquisition reform." Defense leaders have stressed the importance of reform as a way to free money for other military spending, rather than as a way to reduce the taxpayer bill for defense. But the Administration has pursued a risky strategy of reform that may not save money at all. The thrust of the Administration's effort is to remove "burdensome" protective regulations and to rely on corporations and Pentagon managers to be more responsible. Unfortunately, the history of defense contracting indicates that most defense corporations have yet to earn the trust the Administration is eager to accord them. If the Administration plans to weaken oversight in the name of efficiency, other initiatives must be introduced to restore adequate protections for the taxpayer.

Trusting Corporate Mergers

Perhaps the most controversial symbol of the Administration's trusting reform plan is its new policy of allowing the defense industry to bill the government for "restructuring" costs following corporate mergers. Billable expenses include those for closing down offices and factories, paying extra, CEO compensation, and laying off workers. Members of Congress have dubbed the practice "payoffs for layoffs."

The Administration justifies the policy on the grounds that the government will supposedly save money from more efficient merged companies in the future. Despite repeated requests from Congress for information demonstrating savings, the Defense Department has issued sparse reports that only project future savings. Since it is very hard to prove that companies in fact will, or have, reduced their prices, the Administration really just trusts companies to do so, even though so many short-term profit-making incentives fight against it.

The Defense Department has made the case that the government should actively encourage defense mergers, in order to deal with a smaller defense market. The fundamental flaw with this, and claiming that the government will get savings, is that there is little evidence that government action is needed to convince companies to merge in the first place. There are strong business incentives and benefits for these mergers even without government subsidies. The current huge wave of defense mergers began before the new Clinton Administration subsidy policy.

Even if a theoretical case could be made for government subsidization of mergers, in this case the defense industry is far from hurting - profits continue to reach record levels for many firms. Workers are suffering, because tens of thousands have been fired, but executive compensation is still at extremely high levels. In 1996, this paradox helped lead an annoyed Congress to seriously challenge the "payoffs for layoffs" policy.

Legislation initially introduced as a separate bill, H.R. 4344, sponsored by Representatives Christopher Smith, Bernard Sanders, Peter DeFazio, and others, banned merger subsidies. With bipartisan support, the legislation passed unanimously as part of the House defense appropriations bill.

Senator Tom Harkin introduced a companion amendment to the defense appropriations bill in the Senate, but frantic lobbying by defense contractors - notably Lockheed Martin, which stood to gain hundreds of millions of dollars of subsidy under the policy - led to defeat. The Conference Committee settled on toothless language. New legislation will be introduced in 1997 to renew the battle.

III. Administration's Position

The Wrong Kind of Reform

The basic principle of the Administration's acquisition reform approach has been to shift from wary oversight of contractors to an attitude of friendly cooperation and trust. The approach has surface appeal, and fits in with other Administration themes of less government, more private responsibility, and making government more like the commercial sector. But military industry's poor track record on trustworthiness, and the non-commercial "market" it operates in, mean that reduced oversight may lead to greater waste of military funds.

Four years of this reduced oversight has apparently not yet produced an improvement in corporate responsibility: a report by the Project on Governments Oversight has found that since 1994 alone, defense corporations have paid back over $850 million to settle claims of fraud against the government through the False Claims Act alone. This disturbing figure presumably represents just the tip of the iceberg since most cases of fraud are never discovered or revealed to the public.

Several examples besides defense merger subsidies illustrate the Administration's willingness to give defense industry the benefit of the doubt.

Elimination of Specifications

One of the key elements of the Administration's reforms has been to reduce "specifications" in contracts. In the past, the government has frequently spelled out in detail the physical specifications of supplies it purchases. However, there is good reason for the government's efforts regarding weapons and unique military equipment - without the specifications, suppliers used cheaper, low quality and improperly designed or manufactured parts and materials to boost profit margins. Detailed specifications for unspecialized products like t-shirts are obviously not needed. But the others have served an important function. It is easy for the Defense Department to boast that contract specifications for particular weapons have been reduced from thousands of pages to a few, but the consequences of letting the contractor decide what to put in the products may show up later in non- functioning weapons and equipment. We already have a long history of this problem even with the military specifications in place.

In the private sector, the system of trusting companies more or less works, because real competition exists. Car makers, for example, decide what to put in their cars - and usually put in acceptable materials and designs. The companies then stand or fall on the basis of the quality of their product. If their products don't work for long, the public won't buy them. In the military industry however, it almost never matters how badly the product performs, the military and Congress continue to buy those and other products from the same company. If liberalization of regulations is to work, another mechanism such as truly taking past performance into consideration will be required.

Loosening Contracting Regulations

The Pentagon has also announced a package of complex contracting regulation changes. The basic thrust of these reforms is to give more power to contracting officers, particularly to steer contract awards to certain competitors, supposedly the better ones. Again, this initiative sounds good at first, since it reduces paperwork and increases contracting officer responsibility and authority, but it can be used for better or worse. The reason for the regulations was that contracting officers have often been swayed by the wrong influences: the powerful bureaucracy in which Pentagon managers struggle provides tantalizing incentives for government employees to go along with abuse, and terrible punishments for trying to prevent it. If this initiative goes ahead, competition will be reduced, and it will be easier for contracting officers to steer awards to less competitive bidders for the wrong reasons.

Excessive Acquiescence to Contractors

If the Pentagon's plan of eliminating specifications is to work, it must replace the protections provided by specifications with some other method of ensuring that products work. The most obvious method - not buying any more products from contractors who build shoddy weapons or waste money - is currently not practiced seriously. The case of the A-12 Navy fighter-bomber fiasco is illustrative.

The Pentagon paid $3 billion for the A-12 but was forced to cancel the program in 1991 for technical failure and massive cost overruns. The prime contractors, McDonnell Douglas and General Dynamics, had the gall to sue the government for canceling the program, asking for an additional $1.5 billion in damages - for a program that never produced a single aircraft. Rather

than cut off corporations that showed such lack of responsibility, remorse, and concern over their failure to produce acceptable products, the Defense Department has continued sending a steady diet of new contracts to them. If the Department couldn't exert the pressure required to get these corporations to back off in this egregious case, it is hard to imagine that contractors face much incentive to produce quality products out of fear of losing future business.

Corporate Welfare

The Administration's excessively obliging practices towards defense contractors have led to other costly and unneeded subsidies at taxpayer expense. The World Policy Institute reports that subsidies to defense corporations for arms exports alone amounted to $7.6 billion in 1995, a subsidy program second only to agricultural price supports in cost to taxpayers.

IV. Recommendations

  • Legislation to ban merger payments will be introduced again in Congress this year. Passage of this legislation would be a key first step to reining in the Administration's excessive acquiescence to corporate interests. Since billions of dollars are at stake, it is to be expected that the defense industry will repeat the intense lobbying that helped defeat the measure in the Senate last year.
  • Legislation to reduce the huge subsidization of arms exports would not only stop the waste of taxpayer dollars, but also limit the Administration's misguided promotion of weapon proliferation, which aggravates conflicts and endangers U.S. troops.
  • To correct the system of wasteful acquisition, fundamental reforms are still needed. If the executive branch fails to undertake these useful reforms, legislation will be required to:

- slam shut the continuing "revolving door" of government officials retiring and working for contractors with whom they worked while inside the government;

- make contract managers accountable by overseeing military and civil service promotions and ensuring that successful contracting officers are promoted and those who permit waste are not;

- trim the number of generals and admirals in the bloated officer corps, and reduce the number of officers serving as public affairs officers, lawyers, Congressional liaison, arms export salespeople, and other non-combat roles;

- reduce secrecy in military spending;

- replace the Defense Department's broken accounting system with one that works.

  • Most importantly, halting Congressional add-ons to the Pentagon's own budget request would give the Department a stronger incentive to root out unnecessary spending on its own.

V. Resources

Marcus Corbin, Project On Government Oversight, investigates on waste cases, military reformers in the Pentagon, acquisition reform, military spending.

Chris Hellman, Center for Defense Information, 202-862-0700, chellman@cdi.org Weapon costs, military budget.

Dr. Lawrence Korb, Brookings Institution, 202-797-6270. Former Defense official - acquisition process, military spending, military strategy.  


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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