By Heidi Peltier
July 12, 2020 "Information
Clearing House" -
Military contracting was sold to the
American people as a way to reduce
the cost of military operations, yet
the result has been quite the
opposite. Recent
research of mine has shown that
rather than reduce costs, military
contracting — or what I call the
“Camo Economy” because it
camouflages human and financial
costs — has resulted in higher costs
to taxpayers. It has also distorted
labor markets and contributed to
rising inequality, as military
contractors earn excessive profits
that enable them to pay their
employees and particularly their top
executives much more than their
counterparts in the public sector
and most other private sector jobs.
In 2019, $370 billion — more than
half of all Department of Defense
(DOD) spending — went to
contractors. While contracting is
sometimes called “privatization,” I
think this is an inaccurate
description, since military
contracting serves a public purpose
and uses public funds, while
contractors earn profits at the
taxpayer’s expense and are often not
subject to the competitive pressures
of private markets.
Many contractors operate more as
monopolies than as competitive
firms. Last year, 45 percent of DOD
contracts were classified as
“non-competitive.” And even among
competitive contracts, many of these
are “cost-type” contracts, which
means that the firm will be
reimbursed all its reasonable costs,
and therefore has no incentive to
reduce costs as competitive,
non-monopolistic firms would.
Additionally, firms such as Lockheed
Martin have created monopolies for
themselves by selling weapons
systems (like the F-35 fighter
aircraft) and other equipment to the
DOD that come with “lifetime service
agreements” in which only Lockheed
can service the equipment.
Military contractors, then, act
more as commercial monopolies than
as competitive private firms. And
using their monopoly powers they are
able to earn excessive profits. In
2018, Lockheed Martin Corporation
earned $8 billion in profits. About
85 percent of their business was
government contracts.
High profits allow military
contractors to pay high wages, which
contributes to rising inequality.
While the average wage across all
occupations in the U.S. last year
was about
$53,000, at Lockheed Martin the
average wage was about $115,000,
over twice as much. KBR, a
contractor that provides various
services in the Middle East, had an
average wage of $104,000, nearly
twice the national average. The CEO
of Lockheed earned nearly $2 million
in base pay, well above the national
average of $193,000 for CEOs; once
we include stock options and other
compensation, however, Lockheed’s
CEO earnings shoot up to over $24
million.
The Camo Economy has made war
more politically palatable by
camouflaging its various costs.
Contractors now outnumber troops in
the Central Command (CENTCOM) region
that includes Iraq and Afghanistan,
53,000 to 35,000. Deaths of U.S.
contractors since September 2001 are
approximately 8,000, compared to
7,000 troops. Yet contractors
receive neither the public
recognition nor the honor of serving
abroad, despite the increased risks
they face. The Camo Economy is
politically useful, as the White
House can claim troop reductions
while at the same time increasing
U.S. presence abroad by relying more
heavily on contractors.
The financial costs of military
contracting are also opaque. While
we know some top-line numbers, we
know very few details about where
our tax dollars go once they are
paid out to contractors. We do know
that contracting is more expensive,
as contractors have limited
incentives to reduce costs and they
build profits into their contract
agreements. As contractors then use
sub-contractors, who also build in
profits, there can be multiple
layers of guaranteed profits built
into a contract between the
sub-contractors performing the work
and DOD paying the prime contractor.
Add in the waste, fraud, and abuse
in addition to the excessive
profits, and the costs to government
quickly balloon.
It will not be easy to reform the
Camo Economy. Firms such as Lockheed
Martin, Northrop Grumman, and
Raytheon each spent about $13
million on lobbying last year.
Political connections operate
alongside high profits and paychecks
to keep the Camo Economy entrenched
and growing. But reforms can be
made. Reducing the size of the
military budget is a vital first
step. The
National Priorities Project at
the Institute for Policy Studies has
detailed various ways to do this.
Next, the portion of military
spending that is paid to contractors
should be reduced and some services
should be brought back in-house,
including those on and near the
battlefield. And third, the
contracting process itself should be
reformed, so that more contracts are
legitimately competitive and create
incentives for firms to reduce
costs.