The defense and foreign aid budgets are thelargest single source of government funding forprivate corporations. More than half of U.S.weapons sales are now being financed by taxpay-ers instead of foreign arms purchasers. Duringfiscal year 1996 (the last year for which full sta-tistics are available), the government spent morethan $7.9 billion to help U.S. companies securejust over $12 billion in agreements for new inter-national arms sales. The annual $7.9 billion insubsidies includes taxpayer-backed loans, grants,and government promotional activities that helpU.S. weapons makers sell their products to for-eign customers. Also, the provision of low-costfacilities and extensive subsidies for research anddevelopment and mergers and acquisitions tomajor contractors fosters a “risk-free” environ-ment in which weapons makers have little eco-nomic incentive to produce effective systems ataffordable prices. Furthermore, a portion of the$120 billion the Pentagon spends each year oncontracts with U.S. defense contractors is beingwasted on defense pork—that is, redundant orunneeded weapons systems. Such subsidies andspending for defense pork can interfere with the

fulfillment of legitimate security needs.In concordance with a recommendation

made by the Presidential Advisory Board onArms Proliferation, government subsidies forarms exports should be phased out. Federalsubsidies to corporations in the national secu-rity sphere should be the exception rather thanthe rule. The executive branch and Congressshould establish an independent commissionto conduct an annual review of corporate-tar-geted contracts, tax breaks, and price subsidiescontained in the military and foreign aid bud-gets. Only those subsidies fulfilling importantnational security objectives that could not beaccomplished without government assistance shouldbe maintained. The overall review should besupplemented by a separate panel, modeled onthe Defense Department’s Base Realignmentand Closure (BRAC) panel, which would putforward an annual list of pork-barrel militaryprocurement projects that should be terminat-ed. To limit “horse-trading,” the list of unnec-essary projects would have to be voted up ordown in its entirety—much like BRAC proce-dure for military base closures.

Corporate Welfare for Weapons MakersThe Hidden Costs of Spending on Defense and

Foreign Aid

by William D. Hartung

___________________________________________________________________________________________

William D. Hartung is the President’s Fellow at the World Policy Institute.

Executive Summary

No. 350 August 12, 1999

Introduction

After a year of bitter partisan squabblingover impeachment, President Clinton andthe Republican-controlled Congress finallyfound something they could agree on: a mul-tiyear, multi-billion-dollar increase in Penta-gon spending. The only disagreement aboutthe budget among the major players inWashington was over how much to increase it.

The president opened the bidding onJanuary 2, when he used the occasion of hisfirst national radio address of 1999 to call forthe largest sustained increase in Pentagonspending since the Reagan era—$112 billionover six years. Three days later, the SenateArmed Services Committee upped the antewhen John Warner (R-Va.), the new chairmanof that body, joined other senior Republicanson the committee in urging the Joint Chiefsof Staff to seek the larger $150 billionincrease that they had outlined in testimonyto the Senate in September 1998.

Once the impeachment matter had beenresolved in the Senate, the bidding continued.In mid-February, the Senate rammed througha military pay increase that would cost billionsmore than the raises already in the Pentagon’sown budget proposal. And in March both theHouse and the Senate passed bills declaringthat it is the policy of the United States todeploy a National Missile Defense system—acommitment that the Congressional BudgetOffice has estimated could cost at least $18billion to $28 billion over the course of thenext decade. Meanwhile, Reps. Curt Weldon(R-Pa.) and Norman Dicks (D-Wash.) arespearheading a coalition of conservativeRepublicans and Democrats from defense-dependent districts that has pledged to workfor an increase in the fiscal year 2000 Pentagonbudget. The increase would be $8 billion morethan the $12.6 billion increase that theClinton administration has already request-ed.1 Will all of this additional funding result ingreater security for the nation?

With the prospect of large increases in thePentagon budget, it is fair to ask who will

benefit from this spending spree. Will it bethe men and women of our armed forces, asPresident Clinton and Republican congres-sional leaders have claimed? Or will it be suchweapons-making conglomerates as Ray-theon, Boeing, and Lockheed Martin? The“Big Three” weapons makers already receivemore than $30 billion per year in Pentagoncontracts—or one of every four dollars of the$120 billion per year that the Pentagonhands out for everything from rifles to rock-ets.2 Those figures could skyrocket if the pro-posed military buildup is approved in any-thing close to its current form.

The details of the Pentagon’s own six-yearbudget projections demonstrate that thelargest increases will go to arms contractors,not to the personnel of the armed forces.Spending on weapons procurement, the potof money that most directly benefits the bigcompanies, is slated to rise by 53 percentbetween now and 2005. Funding will increasefrom $49 billion per year to $75 billion peryear. Spending on personnel is slated to riseby 22 percent over that same time period—less than half the rate of increase in spendingfor big-ticket weapons systems.

Only a fraction of the increased expendi-tures for personnel will make it to those peo-ple most likely to leave the armed services.Moreover, some of the money for pay increas-es will go to top-ranking officers, includingadmirals and generals, who are already wellcompensated, and to hundreds of thousandsof civilian bureaucrats. Those bureaucrats,under the current Pentagon proposal, wouldget the same 4.4 percent annual increase aswould troops, who could potentially be sentinto conflict.3

Before Congress and the public sign offon the largest peacetime military buildupsince the Reagan administration, it is appro-priate to know how much of our military andforeign aid budgets is being spent on corpo-rate welfare for weapons manufacturers. Areall of these subsidies necessary for defendingthe country, or are some of them being usedprimarily to maintain or expand the profitmargins of the Big Three weapons makers?4

2

Federal subsidiesto corporationsin the nationalsecurity sphere

should be theexception rather

than the rule.

What Is CorporateWelfare?

Where you stand on corporate welfaredepends on where you sit. Or, as WillardWorkman of the U.S. Chamber of Commerceput it, “One man’s corporate welfare is anoth-er man’s paycheck.”5 At a July 1998 CatoInstitute Forum, Joel Johnson, vice presi-dent–international of the Aerospace In-dustries Association, similarly described thebillions of dollars in well-documented govern-ment subsidies for U.S. arms-exporting firmsas nothing more than “payment for goods andservices.” If you take the positions ofWorkman and Johnson to their logical con-clusions, no form of government support forindustry—no grant, no industry-specific taxbreak, no targeted regulatory relief, no market-distorting price subsidy—would be classifiedas corporate welfare.

Luckily for the taxpaying public, suchextreme positions don’t hold up to scrutiny.There have been numerous independentstudies in recent years that have documentedmassive corporate welfare programs in thefederal budget. The estimates of the total costof those programs range from tens of billionsof dollars to more than $150 billion a year.6

All forms of government interaction withcorporations are not illegitimate, of course.When there are specific national objectivesthat can be most effectively advanced by con-tracting with the private sector, it may makesense to use taxpayer funds to pay qualifiedcompanies for necessary goods and services.Which payments are necessary investmentsand which are corporate welfare? To cite anoft-used phrase, “the devil is in the details.”

It may be difficult to establish hard-and-fast rules for determining which governmentexpenditures are corporate welfare. However,clear cases would include buying unnecessaryor excess goods and services as a result of spe-cial-interst lobbying, overpaying for widelyavailable equipment, and providing taxbreaks or subsidies to “encourage” or “sup-port” activities that would occur withoutthose subsidies.7 The best policy would be to

make government subsidies to corporationsin the defense sector the exception rather thanthe rule. Exceptions for corporate-targetedpayments, subsidized loans, carefully target-ed tax breaks, price subsidies, and preferen-tial regulatory relief should be permitted onlywhen they can be demonstrated to fulfill animportant national security objective thatcould not have been fulfilled without governmentassistance. As part of such a policy, all subsi-dies for the defense sector should be reviewedannually to see if they are meeting their stat-ed objectives. If they are not, the subsidiesshould be repealed.

We have a long way to go before corporatewelfare becomes only an occasional tool offederal government policy instead of “busi-ness as usual.” A review of the corporate sub-sidies in the Pentagon and foreign aid bud-gets provides a good indication of how far wehave to go.

Some recent analyses of corporate welfareexcluded national security programs entirely,either because national security is considereda “special case” or because taking on thePentagon budget was seen as too controver-sial.8 Those sentiments, while understand-able, are not justifiable. If corporate welfareconsists of inefficient subsidies for unneces-sary goods and services, then it is especiallyimportant to ensure that funds for thenational defense are not squandered on ques-tionable pork for private companies.

This paper is an attempt to describe thebillions of dollars of corporate welfare thatare in our military and foreign aid budgets. Itis hoped the paper will be a starting point fora serious national debate on reducing corpo-rate welfare in the military and foreign aidbudgets and on finding more efficient meth-ods for accomplishing national securityobjectives.

Welfare for WeaponsDealers

One of the most lucrative sources of gov-ernment support for arms contractors comes

3

One of the mostlucrative sourcesof governmentsupport for armscontractors comesin the form oftaxpayer-backedloans, grants, andpromotional activ-ities that help thecontractors selltheir wares to for-eign customers.

in the form of taxpayer-backed loans, grants,and promotional activities that help the con-tractors sell their wares to foreign customers.Many of those U.S. arms clients, such as

Turkey, Colombia, and the now-defunctMobutu regime in Zaire, could never haveafforded to buy costly armaments from U.S.companies without U.S. government support.

4

More than halfof U.S. arms sales

are now beingfinanced by U.S.

taxpayers—not byforeign arms

clients.

_____________________________________________________________________________________________

Agency Expenditure

Financing and Aid Programs

U.S. Department of Defense

Foreign military financing 3,317.8

Defense Export Loan Guarantee funda 16.7

Forgiven/bad loans 1,000.0

Excess defense articles/emergency drawdowns 750.0

No-cost leases of U.S. equipment 63.2

Repeal or waiver of recoupment fees 200.0

U.S. Agency for International Development: Economic Support Fundsb 2,042.3

Export-Import Bank Loansc 33.7

________

Subtotal 7,423.7

Promotional and Support Programs

U.S. Departments of Defense, State, and Commerce

Government personnel costs for promotion/supportd 410.0

Government support for air shows/weapons 34.2

______

Subtotal 444.2

Total: All U.S. government support for arms sales 7,867.9

_____________________________________________________________________________________________

Sources: U.S. Departments of Defense, State, and Commerce; U.S. Export-Import Bank; U.S. Agency for

International Development; and the Congressional Budget Office. For further details on sources and methodology for

Table 1, see William D. Hartung, Welfare for Weapons Dealers 1998: The Hidden Costs of NATO Expansion (New

York: World Policy Institute, March 1998), www.worldpolicy.org.a Subsidy value of loans guaranteed to date.b The figure cited represents only $2 billion of the $2.3 billion in Economic Support Funds for 1996. The remainder

of that aid was not an offset for the costs of weapons purchases by major buyers of U.S. arms, such as Egypt and

Israel. c Represents the subsidy value.d To support 6,300 personnel at the Pentagon and State and Commerce Departments.

Table 1U.S. Government Subsidies for Arms Exports, FY96(annualized average, in millions of dollars)

In fact, during FY96, the government spentmore than $7.9 billion to help U.S. companiessecure just over $12 billion in new internation-al arms sales agreements. Table 1 gives figuresfor FY96, the last year for which data on all cat-egories of subsidies were available; figures inthe text for some of the categories may bemore recent. Thus, more than half of U.S. armssales are now being financed by U.S. taxpayers—notby foreign arms clients.9 That directly contradictsclaims by U.S. arms-exporting firms thatweapons exports provide a significant benefitto the U.S. economy.

As Table 1 shows, the U.S. governmentsupplies arms export subsidies through vari-ous programs administered by separate agen-cies. Those subsidies are frequently listedunder innocuous budget titles that don’tseem to have anything to do with weaponsexports: excess defense articles, emergencydrawdowns, and Economic Support Funds(ESF), for example. That budgetary sleight ofhand has made it difficult to keep track ofU.S. arms export subsidies, much less reducethem. As a step toward introducing greatertransparency and accountability to the gov-ernment’s arms export subsidy programs,this paper will examine the details of the pro-grams, beginning with those at the Pentagon.

Financing Weapons Exports: PentagonGrants, Loans, and Giveaways

Of the $7.9 billion in arms export subsidiesprovided by the U.S. government, only a tinyfraction comes out of the Pentagon bud-get—about $1.2 billion. That sum consists of$400 million per year for the promotion ofarms exports plus about $800 million in freeleases and giveaways of surplus weaponry. The$3.3 billion Foreign Military Financing (FMF)program is administered by the Department ofDefense, but the funds come out of the foreignoperations budget. The Defense Department’sannual $1.2 billion costs for arms export loansthat were written off and royalty fees for armstechnology (known as “recoupment fees”) thatwere waived are charged against the federal gov-ernment’s general accounts, not the Penta-gon’s budget.

As a result of those budgetary anomalies,the Pentagon uses billions of taxpayer dollarson behalf of U.S. arms-exporting firms butrarely pays a price (nor do the exporting firmsthat benefit from those subsidies) when anyof those subsidized arms deals goes bad. Infact, to finance the budget of the DefenseDepartment’s Defense Security CooperationAgency (DSCA), formerly known as theDefense Security Assistance Agency, thePentagon takes a percentage off the top ofmajor arms deals brokered through thedepartment’s Foreign Military Sales pro-gram. An analysis by the Office of Technolo-gy Assessment has charged that such anarrangement gives the Pentagon an un-healthy economic incentive to promote majorweapons exports to fill its own coffers,regardless of the effects of those sales on U.S.security.10

A key question throughout the analysis ofcorporate welfare programs for arms makersis whether current financing arrangementsfor weapons development, procurement, andexport provide adequate incentives for thePentagon and its contractors to make pru-dent choices about how to spend taxpayerdollars. Have the financing arrangementscreated a “risk-free” environment in whichneither the government nor the corporatebureaucracies involved have any economicincentive to seek effective solutions at anaffordable cost? The arms export financingprograms administered by the Pentagon pro-vide a good case in point.

The Foreign Military Financing Program. Thelargest single subsidy program for U.S.weapons exporters is the Pentagon’s ForeignMilitary Financing (FMF) program, whichreceived $3.35 billion in taxpayer funds in theFY99 budget to support grants and loans forthe provision of U.S. military equipment andservices to more than two dozen countries.Although the bulk of the FMF funds goes toEgypt and Israel, which received $3.16 billionof the program’s total allocation of $3.35 bil-lion in FY99, other recipients of FMF grantsand loans during the past few years haveincluded Albania, Bulgaria, Cambodia, the

5

Since 1991U.S. taxpayershave been forcedto pick up thetab for roughly$10 billion inloans for armssales and militarytechnology.

Czech Republic, Estonia, Georgia, Greece,Hungary, Jordan, Kazakstan, Kyrgyzstan,Latvia, Lithuania, Macedonia, Moldova,Poland, Romania, Russia, Slovakia, Slovenia,Turkey, Turkmenistan, Ukraine, and Uzbe-kistan. In addition, regional funds were allo-cated for the Caribbean and Africa.

The FMF programs outside of the MiddleEast are relatively modest in size, rangingfrom $450,000 for Turkmenistan to $15.7million for Poland. However, once the aidspigot is opened, it can be extremely hard toturn it off.11 NATO politics, pressure fromethnic and military lobbies, and the desire ofambassadors and State Department deskofficers to “please” their client states can allcombine to turn a modest new program intoan expensive, long-term commitment. Forexample, the $3 billion-plus annual FMFcommitments to Israel and Egypt, initiallyset two decades ago at the time of the CampDavid peace accords, are maintained to thisday.

Of the new commitments undertaken bythe FMF program, those most likely to grow inthe coming years involve support for new andprospective members of NATO. In FY96through FY98, the U.S. government autho-rized over $1.2 billion in grants, loans, andfinancing for military training and exercisesdesigned to prepare allied nations in Easternand Central Europe and the former Sovietrepublics for possible entry into NATO. Thebulk of those funds came from the Pentagon’sFMF program, including $187 million ingrants and $644.5 million in lending authorityunder the newly created Central EuropeanDefense Loan fund. That fund was created to“assist in the gradual enlargement of NATO byproviding FMF loans to creditworthy CentralEuropean and Baltic states for acquisition ofNATO-compatible equipment.”12 To accom-modate the Central European Defense Loanprogram, loans under the Pentagon’s FMFprogram increased from $544.1 million inFY96 to $657 million in FY98. The share ofFMF loans allocated for prospective NATOmembers rose even more dramatically, fromnothing in FY96 to 61.2 percent in FY98.13

Because of congressional concerns aboutthe creditworthiness of loan recipients andthe soundness of requirements for borrowersto obtain credit in the FMF program, newfunding for the loan portion of FMF is sched-uled to be phased out in the FY 2000 budget.(But key states in Eastern and Central Europewill still have access to the hundreds of mil-lions of dollars in lending authority that havebeen built up in the Central EuropeanDefense Loan fund over the past few years.)In place of the loan funding, prospectiveNATO member states are slated for anincrease in grant funding—up to $81 millionfor FY 2000 alone. That sum represents near-ly half of the grant funding allocated to thosecountries during the three years from 1996 to1998.14

At a time when new NATO membersPoland, Hungary, and the Czech Republichave been lagging behind in their commit-ments to bring their forces up to NATO stan-dards and have put off major weapons pur-chases for 5 to 10 years, it is questionablewhether maintaining the Central EuropeanDefense Loan fund is desirable. What goodpurpose is being served by stockpiling subsi-dized loans to help NATO members and can-didates upgrade their armed forces whenthose nations are not ready to commit theirown resources to meet that objective? Does itreally make sense to use U.S. taxpayers as thelenders of first resort for weapons sales toEastern and Central Europe?

The Defense Export Loan Guarantee Fund–Onthe Brink. The Defense Export Loan Guar-antee (DELG) fund is a stand-alone programthat is authorized to make up to $15 billionin U.S.-government-guaranteed loans to overthree dozen nations in Europe and Asia.DELG has long been viewed by the armsindustry and the Pentagon as an addedsource of subsidized loans for countries thatare not serviced by the FMF program. In June1997 Deputy Under Secretary of Defense forInternational and Commercial ProgramsPage Hoeper underscored the potentialimportance of DELG in financing NATOexpansion: “We see a tremendous opportuni-

6

During FY97,under its ExcessDefense Articles

program, thePentagon gaveaway military

equipment withan original acqui-

sition value of$973 million.

ty in using this facility to help ease some ofthe financial and tax flow burdens of enlarg-ing NATO.”15 In reality, the impact of DELGhas been modest. In its first two years in oper-ation, DELG guaranteed one loan of about$17 million (subsidy value) to support a saleby the U.S.-based AAI Corporation ofunmanned aerial vehicles to Romania. UnderDELG’s original authorizing legislation, thecosts of operating the program were sup-posed to be financed by fees charged to clientcountries that were using the fund’s services,not by general tax revenues. But the original$500,000 that Congress appropriated to startthe fund has been exhausted. Absent anunlikely rush of new loans for arms exportsunder the program, the only way to keepDELG running is by providing an infusion oftaxpayer funds to cover administration andstaff costs.16

The DELG fund has been used sparinglybecause skeptics like former senator DaleBumpers of Arkansas and Sen. Paul Sarbanes(D-Md.) inserted a requirement that coun-tries using the program would have to paythe “exposure fees” on DELG loans. The cal-culations of exposure fees, which help pro-vide a reserve against future defaults or delaysin loan payments, were based on the credit-worthiness of the client nation. Most of theeligible countries chose not to pay the poten-tially significant exposure fees up front,which is why the program is in its currentpredicament.

In early 1999, on the basis of the pro-gram’s performance and a critical review bythe General Accounting Office (GAO), UnderSecretary of Defense Jacques Gansler decidedto terminate the DELG program. Represen-tatives of the arms export lobby, includingthe director of the Aerospace IndustriesAssociation and officials of several majorexporting firms, objected strongly andargued that it would be better to “fix” theprogram than to eliminate it. The “fix” thatthe industry had in mind would allow gov-ernments that use DELG loan guarantees topay their exposure fees out of the money theyreceive from their U.S.-government-guaranteed

loans. Although that arrangement would nodoubt make the fund more attractive topotential borrowers, it would also increasethe risk of default on those loans. If countrieswith risky credit ratings are allowed access toguaranteed loans without risking their ownfunds, a flood of questionable loans couldcome back to haunt U.S. taxpayers.

At a recent meeting with the DefensePolicy Advisory Committee on Trade (a panelof weapons industry executives that providesconfidential advice to the secretary of defenseand the U.S. trade representative on defenseexport policy), Secretary of Defense WilliamCohen indicated that he would try to accom-modate the industry’s demand that DELG be“fixed” instead of terminated.17 Such a moveto loosen the criteria for providing loans forarms exports could end up costing U.S. tax-payers billions of dollars.

Covering Bad Loans—Bailing Out ArmsCompanies and Their Clients. Since 1991 U.S.taxpayers have been forced to pick up the tabfor roughly $10 billion in loans for arms salesand military technology that have been eitherforgiven for political reasons or written offfor financial reasons. That sum represents asignificant hidden cost of the government’sloan programs for arms sales. The most cost-ly episode occurred when the Bush adminis-tration forgave $7 billion in outstandingForeign Military Sales (FMS) loans to Egyptto reward Cairo for providing political sup-port to the U.S.-led coalition that fought the1991 Persian Gulf War. Other major write-offs included roughly $2 billion in govern-ment-guaranteed loans that were provided toIraq to buy technologies related to arms pro-duction prior to the Gulf conflict and $7 mil-lion each for bad loans to the West Africannations of Niger and Senegal.18

To address the chronic problems associat-ed with loans for arms exports—in which pol-itics often trumps sound economic analy-sis—Congress voted last year to close downthe Pentagon’s FMF loan program and offerall future FMF assistance only in the form ofgrants.19 The FMF decision, the troubles inthe DELG program, the stockpiling of large-

7

Taxpayers end uppaying twice:once for forgoneproceeds fromthe sale to foreignnations of thestill-useful equip-ment and a sec-ond time for thepurchase of evencostlier replace-ment items.

ly unused lending authority in the CentralEuropean Defense Loan fund, and the longhistory of bad loans for foreign arms sales allsuggest that the U.S. government shouldeliminate its exposure in arms export lend-ing. U.S. taxpayers should ask why arms deal-ers and foreign nations are being subsidizedto conduct arms transfers, some of whichcould cause regional conflicts or instability.In the interests of a sound foreign policy anda sound fiscal policy, the era of “creativefinancing” and back-door, off-budget sup-port for arms exports should be brought toan end.

Surplus and Leasing—The Pentagon’s WeaponsGiveaway Programs. In addition to financingarms exports through grants and loans, thePentagon has also been leasing or giving awaymassive quantities of highly capable U.S.weapons that have been declared “surplus”relative to current needs. According to a path-breaking report in 1996 by the Arms SalesMonitoring Project of the Federation ofAmerican Scientists, from 1990 to 1995 theUnited States gave away (or sold at a steepdiscount) weaponry that had originally beenpurchased by the U.S. government for a totalof $8.7 billion. Not only are those items beingdumped on the market at much less thantheir actual value, but, as the report states,“the services appear to be giving away stilluseful equipment to justify procurement ofnew weaponry.” As a result, taxpayers end uppaying twice: once for forgone proceeds fromthe sale to foreign nations of the still-usefulequipment and a second time for the pur-chase of even costlier replacement items. Forexample, the Air Force and the Navy are buy-ing expensive new fighter aircraft (the F-22and the F-18E/F, respectively) to counter theproliferation of advanced fighter aircraftsuch as the U.S.-built F-15, F-16, and earliermodel F-18, some of which the armed ser-vices are now in the process of giving away assurplus.20

A cheaper and smarter alternative wouldbe to keep planes like the F-15, the F-16, andthe current model of the F-18 in service foranother decade or so, which could easily be

done without threatening U.S. air superiori-ty. The GAO estimates that with modestupgrades, current-generation F-15s are morethan adequate to defeat any likely U.S. adver-sary until at least 2014.21 Keeping existing air-craft in the inventory instead of retiring themprematurely would allow the Pentagon toslow down or cancel manufacture of the cost-ly F-22 and F/A-18E/F fighters and concen-trate its resources on the next-generationJoint Strike Fighter. That approach couldsave tens of billions of dollars and would alsoslow the pace of conventional weapons pro-liferation by reducing the stockpile of com-bat fighters the Pentagon has for the worldmarket.

During FY97, under its Excess DefenseArticles program, the Pentagon gave awaymilitary equipment with an original acquisi-tion value of $973 million. Those giveawayswent to 24 countries. The recipients of thelargest giveaways were Turkey ($271 million),Jordan ($183 million), Greece ($100 million),Morocco ($91 million), Israel ($68 million),and Argentina ($66 million). Even allowingfor depreciation, the Pentagon estimates thecurrent value of those weapons at $309 mil-lion. Given the Pentagon’s well-documentedhistory of underestimating the current valueof surplus weapons, the true figure could be25 to 50 percent higher. In addition to thosegrants of surplus weapons, the Pentagon sold14 nations over $526 million worth of sur-plus weapons at a steep discount (at pricesaveraging 85 percent lower than the originalacquisition value of the weapons). The recip-ient of most of those discounted weaponswas wealthy Australia, which receivedweapons originally worth $483 million forroughly one-tenth of their original price.22

Another way the Pentagon unloads sur-plus U.S. weaponry is through leasingarrangements. In FY97 the Pentagon leasedto 13 countries equipment with an originalacquisition value of over $103.4 million. Therecipient of most of that weaponry wasTurkey, which received equipment originallyvalued at over $54 million for a rental priceof $19.9 million.23

8

In additionto providing

grants and subsi-dized loans toU.S. weapons-

exporting firms,the Pentagon and

the State andCommerce

Departments pro-vide extensive

marketing assis-tance to those

companies.

It would seem that surplus giveawayswould undercut U.S. arms exporters by pro-viding free or deeply discounted equipmentto countries that might otherwise buy newweapons from U.S. firms. The actual effectsare more complex. In some cases, surplussales or leases can serve as “loss leaders” thatare used to introduce cash-strapped foreigncustomers to U.S. equipment and set themup for possible sales of new weaponry inthe future. For example, the hotly contestedrace to see which U.S. fighter manufac-turer—Boeing or Lockheed Martin—can getPoland to lease its aircraft (either theLockheed Martin F-16 or the Boeing F-18) isa first step toward selling Warsaw advancedcombat aircraft.

After making exaggerated claims a fewyears ago about the possibility of buying asmany as 200 modern Western combat air-craft, the Polish government has recentlytaken a much more deliberate attitudetoward modernizing its air force. Poland maybegin by entering into a $100 million leasingarrangement for about a dozen surplus U.S.F-16 or F-18 aircraft. The lease could be fol-lowed by purchase of a few dozen new com-bat aircraft in 5 or 10 years’ time. Similar leas-ing deals are being offered to Hungary andthe Czech Republic, but Poland is closer tomaking a decision.

The fighter lease for Poland, which isworth next to nothing in its own right, hassparked an aggressive competition betweenBoeing and Lockheed Martin to see whichcompany can “get its foot in the door” of thePolish arms market. Each company hopesthat once Poland becomes familiar with thefirm’s equipment, the firm will be in astronger position to make a sale of largenumbers of new aircraft to Poland early inthe next century. When Polish defense minis-ter Janus Onyszkiewicz visited Washingtonin January 1999, he was courted by U.S. armsmakers. His official schedule included meet-ings at Boeing, Lockheed Martin, Pratt andWhitney (which makes engines for fighteraircraft), and the U.S. Committee to ExpandNATO (whose president, Bruce L. Jackson, is

also Lockheed Martin’s vice president forstrategic planning). Boeing used its meetingwith Onyszkiewicz as an opportunity to offera major arms package, which included thelease and sale of F-18 fighter aircraft, Polishparticipation in the L-159 trainer aircraftproject (which Boeing is carrying out with itsCzech partner, Aero Vochody), licensed man-ufacturing of Boeing’s Hellfire II anti-armormissile, and a new avionics package forPoland’s Soviet-built Mi-24 helicopters.Boeing spokesman Jim Schleuter describedhis company’s rationale for this impressivepackage as follows: “We are committed tobeing a strategic partner for Poland rightacross the military aerospace spectrum. Wesupport their military modernization pro-cess.”24 Boeing is obviously willing to investtime and resources now to lock up a chunk ofthe Polish arms market in the future. IfBoeing can use free surplus fighters from theU.S. government as part of the bait, so muchthe better.

Targeted Tax Breaks for Weapons Contractorsand Their Foreign Clients. Although U.S.weapons manufacturers often claim thattheir appeals for new government subsidiesare required to “level the playing field”between defense exports and other products,the reality is that arms producers receive asteady stream of government support forresearch, development, and production farexceeding what the government provides forany other industry or product. If the govern-ment wanted to level the playing fieldbetween the weapons industry and other sec-tors, it would have to reduce weapons subsi-dies, not increase them.

Despite the weapons sector’s obvious advan-tages over industries that have to finance mostof their own research and development andtailor their products to the needs of a diversecustomer base, the weapons industry has fre-quently succeeded in winning new favors fromthe government on the specious grounds thatcertain government practices “discriminate”against arms manufacturers.

“Recoupment fees” are charges to buyersof U.S. arms to help reimburse the U.S.

9

The Clintonadministration isfollowing its pre-decessor not onlyin pressingembassy person-nel into serviceon behalf of U.S.weapons export-ers but also inpromotingweaponry at airshows.

Treasury for a portion of the “nonrecurringresearch and development costs” incurred bythe government for major systems like theF-16 fighter or the M-1 tank. The debate overrecoupment fees is an example of how thearms industry has managed to win favorabletreatment for itself and its clients by misrep-resenting the facts about government subsi-dies. As far back as November 1988, theindustry-dominated Defense Policy AdvisoryCommittee on Trade broached the subject ofpursuing changes in the prices of weaponsexports that “would have reduced or elimi-nated research and development surchar-ges.”25 The industry followed up that sugges-tion with a multiyear lobbying effort thatconvinced the Bush administration to elimi-nate the recoupment fees for R&D on com-mercial arms sales, which involve sales ofitems on the U.S. munitions list that arelicensed for export by the U.S. Department ofState. Commercial arms sales have been anaverage of roughly 25 percent of U.S. armsexports over the past decade.

The arms industry also successfullysought repeal of recoupment fees for armssales under the Pentagon’s FMS program.But since the fees on those deals were writteninto law, it took longer to get them repealed.Because the other 75 percent of U.S. armssales are supplied through FMS channels,repealing recoupment fees on FMS sales wasa particularly lucrative accomplishment.26

In FMS deals the Pentagon acts as a bro-ker (in commercial sales, the supplier sells tothe buyer without a broker). The Pentagon’sresponsibilities in an FMS deal include nego-tiating the terms of the deal with the foreignclient, collecting funds from the foreignclient, disbursing them to U.S. contractors asthe work proceeds, and supplying logisticsand spare parts for the weapons system.

As a first step toward eliminating thecharges on FMS deals, the arms industry wassuccessful in obtaining a provision thatallowed the president to waive recoupment feeson FMS sales to close allies—NATO members,Japan, Australia, and New Zealand. From 1991to 1994, over $773 million was waived in fees

that would have gone to the U.S. Treasury toreimburse the taxpayer funds that went intodeveloping U.S. weapons systems.

In 1996 the industry finally won congres-sional approval for a provision that wouldallow the president to waive recoupment feeson any FMS sale, as long as provisions weremade to find an alternative source of revenueequivalent in value to the fees that werewaived. The first installment of those alter-native revenues was provided by WilliamCohen. Prior to assuming his current post assecretary of defense, Cohen was a pro-defensesenator from Maine who regularly went tobat for the interests of weapons makers in hishome state. Late one night in the summer of1996, Senator Cohen quietly slipped a provi-sion into a defense bill that authorized theDepartment of Defense to sell items from thestrategic stockpile, a Pentagon-administeredreserve of critical raw materials that wasestablished during the Cold War, and to usethe proceeds to offset the costs of waivingrecoupment fees on foreign arms sales.27

A recent GAO report demonstrated thateven when recoupment fees had not beenwaived, the Pentagon had been remiss in col-lecting them. The report identified $183 mil-lion in uncollected recoupment fees on FMSdeals administered by the Air Force and theNavy, including a case involving the deliveryof 48 F-16 aircraft to South Korea for whichno fees were collected.28

The cumulative result of waiving (or failingto collect) recoupment fees has been a loss tothe U.S. Treasury of hundreds of millions ofdollars per year. And even those arms deals forwhich forgone recoupment fees were “offset”—by selling off materials from the strategicstockpile—represented a transfer of wealthfrom the taxpayers to particular companies.Because arms manufacturers are rarely askedto open their books to public scrutiny, there isno way of knowing for sure whether thosereduced fees have resulted in lower prices forthe buyers of U.S. arms or higher profits forU.S. weapons exporters. What is clear is thatthose fee reductions were not needed to “levelthe playing field” for U.S. manufacturers. New

10

Three-quartersof the federalgovernment’s

R&D budget isdevoted to mili-

tary projects. Thebulk of those

funds goes to pri-vate contractors.

figures from the Arms Control and Disarm-ament Agency suggest that the U.S. share ofthe global arms market in the mid-1990s—55percent—is greater than the shares of all othersupplier nations in the world combined.29 ThePentagon predicted a few years ago that U.S.companies are likely to dominate the worldarms market for years to come with or withoutspecial government financing arrangements or taxbreaks:

The forecasts support a continuingstrong defense trade performance forU.S. defense products through theend of the decade and beyond. In alarge number of cases, the U.S. is clear-ly the preferred provider, and there islittle meaningful competition withsuppliers from other countries. Anincrease in the level of support theU.S. government currently providesfor arms exports is unlikely to shiftthe U.S. export market share outside arange of 53 to 59 percent of world-wide arms trade.30

Despite the U.S. arms industry’s domi-nance of the global market (and corre-sponding lack of need for special taxbreaks), its advocacy of the repeal of recoup-ment fees received support from at least oneindependent source: the Presidential Advis-ory Board on Arms Proliferation Policy. Inits 1996 report to Congress, the board,which was chaired by Janne E. Nolan of theBrookings Institution, expressed sympathywith the industry’s arguments that R&Drecoupment fees are “discriminatory.” Theboard argued that the fees “have no suchparallel in other industries where the U.S.government has made major R&D invest-ments in developing and purchasing capitalequipment—for example, power generation,telecommunications, computer systems,and nuclear reactor technology.” The boardalso agreed with the suggestion by U.S. armsmanufacturers that the fees could be a “clearand significant price discriminator against[U.S. arms manufacturers] as they compete

for sales in third countries against foreignproducers” who have “no equivalent addedcosts.”31

Although other U.S. industries have beengiven some funding by the government overthe years, no industry has received the consis-tent level of support received by the weaponscompanies. As we will see, U.S. weapons man-ufacturers are the major recipients of govern-ment R&D funding, and arms exporters havebeen major beneficiaries of this generousR&D funding policy.

To cite just two examples: the Boeing F-15fighter, which has been the subject of multi-billion-dollar export packages to Israel andSaudi Arabia, received $2.9 billion in govern-ment R&D support; and the LockheedMartin F-16, which has been one of the mostsuccessfully exported fighters in history, gar-nered $1.8 billion in Pentagon R&D supportduring its development phase.32 Most privatecompanies must fund their own R&D of newproducts. U.S. weapons manufacturers re-ceive huge R&D subsidies from the govern-ment for items that they are then permittedto sell on the world market for a substantialprofit. Is it really so unfair to ask thatweapons manufacturers and their buyersreimburse the U.S. Treasury for a small por-tion of the R&D funds that made those sys-tems possible? The alternative is for the U.S.government to require defense contractors tofund their own R&D, as former chief of navaloperations Mike Boorda advocated.

In arguing against the repeal of recoup-ment fees, the Congressional Budget Officehas suggested that the industry’s argumentsfor repeal of the fees be put in the context ofall the other advantages those firms receivefrom the government:

U.S. defense industries have signifi-cant advantages over their foreigncompetitors and thus should notneed additional subsidies to attractsales. Because the U.S. defense pro-curement budget is nearly twice thatof all Western European countriescombined, U.S. industries can realize

11

The tens of bil-lions of dollarsthat majorweapons makersreceive in govern-ment R&D fund-ing provide themwith an exclusiveadvantage overboth U.S. com-mercial firmsand foreignweaponsmakers.

economies of scale not available totheir competitors. The U.S. defenseresearch and development budget isfive times that of all Western Euro-pean countries combined, whichensures that U.S. weapon systems areand will remain technologically supe-rior to those of other suppliers. Themilitary and political ties with theUnited States associated with thesales are also an important benefit tomany foreign countries.33

The Congressional Budget Office’s argu-ments against repealing R&D recoupmentcharges could be applied equally to a new taxbreak that is being sought for U.S. weapons-exporting firms in Rep. Sam Johnson’s(R-Tex.) “Defense Jobs and Trade PromotionAct of 1999.” Johnson’s bill, which has thestrong support of the Aerospace IndustriesAssociation, would permit weapons-export-ing firms to set up foreign sales corporations.The corporations would allow U.S. armscompanies to shield a portion of their exportprofits from U.S. taxes. The tax benefit wouldensure that U.S. firms would not be at a dis-advantage compared with European armscompanies, which pay a value-added tax ongoods sold domestically but are not taxed ontheir exports. The Aerospace IndustriesAssociation estimated that taking full advan-tage of foreign sales corporations could saveits member companies 15 to 30 percent ofthe current federal tax burden on their exportprofits—a move that the Congressional JointCommittee on Taxation estimates couldresult in $350 million in lost tax revenuesover the next five years.34

Furthermore, asserting that “puttingdefense and non-defense companies on thesame footing would encourage defenseexports that would promote standardizationand interoperability of equipment amongour allies,” Deputy Secretary of Defense JohnHamre has supported Johnson’s approach.35

Like recoupment fees, the fundamental issueraised by Representative Johnson’s bill iswhether—as Hamre put it—defense and non-

defense exporters are “on the same footing”in terms of their treatment by the U.S. gov-ernment. A cursory look at the facts suggeststhat the answer is a resounding no. There areno other commercial enterprises that receivethe massive R&D and procurement contractsthat arms manufacturers receive. Unlikemany weapons producers, no commercialfirms receive free or low-cost productionequipment and facilities from the govern-ment. And only the arms industry receives$7.9 billion per year in grants, subsidizedloans, and promotional support to help sellits wares on the international market.Considering those massive subsidies toweapons manufacturers, granting additionaltax breaks to an industry that is being sopampered by the U.S. government makes nosense. As the Presidential Advisory Board onArms Proliferation Policy recommended, atop priority of U.S. arms export policy shouldbe to “support the goal of reducing or elimi-nating subsidies on a global basis.”36 Changesin policies on recoupment fees or the taxtreatment of arms sales should be dealt withas part of a larger review of U.S. governmentsubsidies for military exports.

Financing and Aid Programs of OtherGovernment Agencies

In addition to Pentagon programs, otheragencies provide subsidies for sales ofweapons.

Economic Support Funds: Indirect Subsidies forArms Exports. After the Pentagon’s FMF pro-gram, the second-largest stream of subsidiesfor U.S. arms makers and their clients comesfrom the ESF program. The program isadministered by the Agency for InternationalDevelopment and funded out of the interna-tional affairs budget (which is distinct fromthe Pentagon budget). ESF, which has beenfunded at over $2 billion per year throughoutthis decade, provides to major U.S. securitypartners cash assistance, financing forimports of commodites, and a small amountof funding for specific projects. Because 90percent of ESF funding goes to majorimporters of U.S. arms, such as Israel, Egypt,

12

Major contractorsoften receivegovernment-

built plants andequipment at

little or no costthrough govern-

ment-owned,company-operatedfacilities.

and Turkey, the principal effect of the pro-gram is to help those nations defray the costsof purchasing weaponry from U.S. compa-nies. As a matter of U.S. law, Israel is allowedto use ESF funding from the United States towrite down its outstanding loans from theU.S. government for purchasing arms. In thecase of Turkey, virtually all of its ESF fundingover the past decade has come in the form ofcash payments in amounts that correspondalmost exactly to the level of that nation’soutstanding military debt to the U.S. govern-ment. And even in Egypt, where some ESFmoney is earmarked for specific projects orimports of commodities, the funding still hasthe effect of freeing other government fundsto be used to sustain Egypt’s ongoing pro-gram of purchasing major weapons systemsfrom U.S. companies.37

In the FY99 budget ESF funding was set at$2.4 billion. In recent years 23 countries havebeen served by ESF. For FY99 major recipi-ents include Israel ($1 billion), Egypt ($775million), Jordan ($150 million), and thePalestinian Authority in the West Bank andGaza Strip ($75 million).38 (In Table 1, onlyabout 85 percent of the total ESF funds werecounted as subsidies to U.S. arms exportersbecause approximately 15 percent of the aidwas not an offset for the cost of weapons pur-chases by major buyers of U.S. munitions.)

“Dual Use” Funding: Military-Related Loansby the Export-Import Bank. Another source offunding for military exports is the U.S.Export-Import Bank (Ex-Im Bank). For overtwo decades, the bank was prohibited fromfinancing military exports. That ban resultedfrom abuses of the agency’s loan programsfor military purposes during the VietnamWar. But starting in the late 1980s, armsindustry lobbyists succeeded in getting Ex-Im Bank back into the business of financingarms sales.

The bank’s funding of military exportshas included a $1.3 billion loan for the sale ofSikorsky Black Hawk helicopters to Turkeyand a $1.4 billion loan for Raytheon’s SIVAMradar project in Brazil. Other significant Ex-Im Bank loans in recent years have included

$44 million to Indonesia for spare parts forU.S.-supplied military transport aircraft andTextron Bell 205A helicopters. The biggestcommitment in recent years was a $90 mil-lion loan to Romania for the purchase of fiveLockheed Martin FPS-117 radar systems.39

For the four years from FY95 through FY98,Ex-Im Bank also approved loans worth atotal of $326 million for civilian items thathad a military use. The taxpayer subsidiesused to float those loans totaled more than$33 million.

Arms Sales Promotion at the Pentagonand State and Commerce Departments

In addition to providing grants and subsi-dized loans to U.S. weapons-exporting firms,the Pentagon and the State and CommerceDepartments provide extensive marketingassistance to those companies.

At the Pentagon, promotional activitiesfor arms sales are centered in the DSCA,which is involved in promoting, brokering,administering, and financing billions of dol-lars’ worth of arms sales annually under theFMS program. In FY96, the agency and themilitary services had 5,877 personnel involv-ed in those activities at a cost of $378.2 mil-lion. As noted above, the Pentagon’s armssales activities are funded by a surcharge onFMS deals brokered by the agency. As thepost–Gulf War boom in U.S. arms sales hasdied down, U.S. exports have settled into arange of roughly $12 billion to $15 billionper year—down from the near record level of$33 billion in 1993. That lower sales volume,combined with a move by some companiesand countries to buy major weapons on thecommercial market, has led to a sharp dropin the value of the FMS surcharges that havetraditionally been used to finance DSCA. Asa result, DSCA is now in a budget crunch,which has prompted the Pentagon to consid-er restructuring the agency and the FMS pro-gram. In any restructuring, DSCA should befunded out of the budget instead of beingfinanced from fees on FMS sales. Thatreform would facilitate congressional scruti-ny. The change might also make it easier to

13

Subsidies for mil-itary contractorsto defray thecosts of mergingwith or acquiringother firms havecost taxpayersover $1 billion.

separate the appropriate regulatory aspectsof the FMS program (for example, makingsure U.S. sophisticated weapons are not soldto outlaw states) from the promotional, pro-sales activities that have been encouraged inpart because DSCA’s entire budget is depen-dent on posting a relatively high volume ofFMS sales every year.40

The State Department, which is supposedto be the lead policymaking body in the fed-eral government on arms sales, has a splitpersonality concerning military exports. Thedepartment’s bureaus on human rights andarms control are often voices for restraint onsales of particular dangerous technologies oron exports to particularly repressive regimes.But the department’s Office of DefenseTrade Controls, which oversees the licensingof commercial export of items on the U.S.munitions list, was “retooled” during theBush administration to be more “transparentand user-friendly.” The new openness re-dounds to the benefit of U.S. arms-exportingfirms—not to the average taxpayer, who mayhave concerns about the kinds of regimesthat are getting U.S. military technology.Ever since the Bush administration, StateDepartment personnel at overseas embassieshave been graded for promotion in part onhow helpful they are to U.S. defense firms.Furthermore, the department coordinatesthe Defense Trade Advisory Group—a panelmade up almost exclusively of executivesfrom weapons-exporting companies—whichhas had great influence in recent years onsuch issues as lifting the ban on sales ofadvanced U.S. combat aircraft to LatinAmerica (just one of many matters on whichthe Clinton administration took the DefenseTrade Advisory Group’s advice). A conserva-tive estimate of State Department resourcesdevoted to arms export promotion is $3.7million and 75 personnel.41

The Commerce Department also plays asignificant role in pitching U.S. defenseequipment to foreign buyers. Since the lateRon Brown took over as secretary of com-merce in the first Clinton term, promotingsales of U.S. defense equipment has become

part of the secretary’s job description and animportant item on the agenda of many of thedepartment’s foreign trade missions. Thedepartment’s Office of Strategic Industriesincludes a “defense advocacy” function thatpromotes arms exports both within the U.S.government and with potential foreign buy-ers. The office has also published a series of“defense market assessments,” which giveU.S. firms detailed data on the state of thearms market in key regions such as Europe,Asia, and Latin America. The assessmentsalso provide step-by-step instructions on howto do business in those regions. The follow-ing excerpt from the department’s descrip-tion of “How to Do Business in Indonesia”gives a flavor of the agency’s attitude towardforeign arms sales:

Sales to the Indonesian militaryrequire the use of a local agent. . . .Companies will need to identify anappropriate military products man-ager, often a retired military official.. . . The local representative or agentcan set up appointments with pro-jects officers, and market, promote,and demonstrate defense products onbehalf of the manufacturer. Selectingthe right agent is a critically impor-tant step for your company, and assis-tance with preliminary selection canbe provided by the USF&CS [theCommerce Department’s U.S. For-eign and Commercial Service].42

Given recent revelations about the levels ofcronyism and corruption in Indonesia prior tothe downfall of the Suharto regime in 1997, thematter-of-fact tone of the Commerce Depart-ment’s advice on finding former Indonesian mil-itary officers to help U.S. weapons exporters mar-ket their wares in Jakarta is stunning. TheCommerce Department’s dismissive attitudetoward human rights in Indonesia is equally trou-bling:

Instances of human rights abuseshave given rise to concern in the U.S.

14

Over the past fouryears, Congress

has added a cool$30 billion tothe Pentagon

budget—mostlyfor big-ticket

weapons systemsbuilt in the dis-

tricts or states ofcongressional

leaders.

from time-to-time, the most signifi-cant being the decision of Congressto suspend military training assis-tance in 1992, but the overall relation-ship provides opportunities for U.S.defense companies to benefit from the paceof economic growth and concomitantdefense needs of the Armed Forces of theRepublic of Indonesia (ABRI).43

In short, the Commerce Department’smessage to arms exporters is to not worryabout congressional human rights concernsbecause money can be made in Indonesia.Now that the Suharto regime’s persistentcorruption and repression have resulted in afull-fledged political and economic crisis inthat country, the Commerce Department’simplication that U.S. companies doing busi-ness there should essentially go along withthe atmosphere of influence peddling andrepression looks painfully shortsighted.

The Commerce Department’s most im-portant role in the marketing of U.S.weapons systems, though, is as the lead orga-nizer for U.S. participation in overseas armsshows such as the Paris, Farnborough, andSingapore air shows and the FIDAE (Chile)and IDEX (Abu Dhabi) weapons exhibitions.But since the agency receives important sup-port in those efforts from the Pentagon andthe military services, the issue of U.S. govern-ment participation in weapons exhibitionsdeserves separate treatment.

Promotion of U.S. Weaponry at AirShows and Military Exhibitions

The Clinton administration is followingits predecessor not only in pressing embassypersonnel into service on behalf of U.S.weapons exporters but also in promotingweaponry at air shows. The 1991 Paris AirShow (held just three months after the end ofthe Persian Gulf War and one month before amajor meeting at which the “Big Five”weapons-exporting countries were to discusslimits on arms sales to the Middle East)marked the first time in years that the U.S.government sent large numbers of military

personnel and government-owned weaponryto an overseas air show. That practice—known as “direct Pentagon participation”—has since become routine. U.S. fighter planes,helicopters, and even F-117 stealth fightersand the B-2 bombers are now frequently sentto foreign air shows at taxpayer expense.Accompanying the aircraft are large delega-tions of U.S. military pilots, security person-nel, and government public relations repre-sentatives. As Charles Sennott documentedin the Boston Globe, U.S. pilots who are sent tooverseas weapons exhibitions testify abouthow well an aircraft or helicopter performedin combat, which is an invaluable marketingboost to U.S. weapons makers.44

During FY96, the Pentagon sent equip-ment and personnel to 19 overseas weaponsshows at a cost of more than $5.1 million.But many of the costs of U.S. participationare hidden. For example, the price of trans-porting weaponry and replacing lost or dam-aged equipment is routinely excluded fromthe cost estimates that the department sub-mits to Congress for military participation inweapons shows. But even a rough estimate ofthe full costs of fuel, transport, insurance,and salaries of personnel suggests that thePentagon’s projections of its participationcosts in such shows are off by a factor of atleast twenty.45

Absorbing Risks: Government Fundingfor R&D, Factories, and Equipment

As noted in the previous section, U.S.weapons makers benefit from massive gov-ernment subsidies well before the firms are ina position to offer finished weapons systemson the world market. The subsidies begin atthe earliest stages of R&D. Three-quarters ofthe federal government’s R&D budget isdevoted to military projects. The bulk ofthose funds goes to private contractors.During the 1990s Pentagon spending onresearch, development, testing, and evalua-tion of weapons systems has averaged inexcess of $35 billion per year. Since 1981 thegovernment has spent over $500 billion onmilitary R&D.46 In addition to those gener-

15

Defense porkwastes billions ofdollars that couldbe put to moreproductive uses,such as returningsome of the fundsto the publicthrough a tax cut.

ous R&D subsidies, major contractors oftenreceive government-built plants and produc-tion equipment at little or no cost throughGovernment-Owned, Company-Operated(GOCO) facilities. So when a major firm likeLockheed Martin or Boeing undertakes amajor weapons program, the company canrely on the taxpayers to shoulder virtually allthe major financial risks involved in develop-ing that system.

Government Funding of R&DMilitary R&D is a big business for military

contractors. In FY98 each of the Big Threeweapons makers received over $1 billion inR&D funding—Lockheed Martin led at $4.8billion, followed by Boeing at $2.2 billion,and Raytheon at $1.1 billion.47 No other pri-vate company could even dream of receivinganywhere near those levels of governmentsupport for basic research and product devel-opment.

Some level of government support forR&D of defense equipment may be appropri-ate. But when the government begins invest-ing billions of dollars in a project, an irre-sistible political momentum to build anddeploy that system can be created, even if thesystem does not meet an urgent securityneed. For example, the Air Force’s state-of-the-art F-22 fighter plane (a $64 billion pro-gram) has built up such a strong congres-sional constituency during its extended andcostly R&D phase that it will be extremelydifficult to eliminate, even though the air-craft is redundant and not needed in the cur-rent benign international security environ-ment.48 As noted above, the U.S. armed forcesare developing three new fighter projects (theF-22, the F/A-18E/F, and the Joint StrikeFighter) at a time when many analysts believethat current U.S. fighters are more than ade-quate to defeat any likely adversary for atleast another 15 years.

Similarly, the staying power of thePentagon’s ballistic missile defense effortsmay have been partly the result of the hugequantities of taxpayer funding that havegone into those programs: an average of $3

billion to $4 billion annually in recent yearsand a total of $55 billion since Reagan’sMarch 1983 “Star Wars” speech. Little evi-dence suggests that the recent upsurge insupport for missile defenses is based on anygreat technical breakthrough in this area—85to 90 percent of the tests of missile intercep-tors conducted during this decade havefailed. In one high-profile project involvingLockheed Martin’s Theater High AltitudeArea Defense system test failures haveoccurred in six out of seven attempts. Theproblems with the project have been so severethat the Pentagon considered removingLockheed Martin as the prime contractor ormerging the Theater High Altitude AreaDefense program with the Navy’s TheaterWide Missile Defense effort.49 The R&Defforts for missile defense are so sizable thatCongress and the taxpaying public haveinherent difficulty sorting out the pork fromthe useful research.

At a minimum, the sheer size (and decid-edly mixed results) of the Pentagon’s multi-billion-dollar annual R&D effort suggests aneed for greater scrutiny of private contrac-tors’ spending of taxpayer money. One usefulstep would be to give more clout to thePentagon’s independent Office of Opera-tional Testing and Evaluation, which hasprovided extremely useful critiques of majorprograms like the ballistic missile defenseeffort.50 Another step would be to fund small-er firms to do simulations of potential newsystems and evaluations of the R&D effortsof military behemoths like Lockheed Martin,Boeing, and Raytheon. And when a project isplagued by repeated failures and cost over-runs, the public should put pressure onCongress and the executive branch to cancelthe program.

However the Pentagon approaches man-agement and oversight of R&D, one point isclear: the tens of billions of dollars that majorweapons makers receive in government R&Dfunding provide them with an exclusiveadvantage over both U.S. commercial firmsand foreign weapons makers (which receivenowhere near the same levels of R&D sup-

16

U.S. taxpayersshould ask why

arms dealers andforeign nationsare being subsi-

dized to conductarms transfers,some of which

could causeregional conflicts

or instability.

port from their own governments). ThatR&D advantage should be factored in whenCongress and the executive branch considerrequests from the arms industry for addi-tional favors from the government, such astax breaks or export subsidies.

Government Funding for Factories andEquipment

Major military contractors like LockheedMartin and General Dynamics also benefitfrom low- or no-cost government-suppliedequipment and factories. In some cases, thegovernment-owned facilities, known asGOCOs, have their origins in the transfer ofgovernment-built plants to private contrac-tors during the demobilization that occurredafter World War II. Beyond providing fourwalls and a roof, the Pentagon often picks upthe tab for complex pieces of productionequipment, such as multiple-axis machinetools or automated painting machines. Thelargest GOCOs are Air Force Plant 6, whichforms part of Lockheed Martin’s F-16 pro-duction complex in Fort Worth, Texas, andthe two massive M-1 tank plants run byGeneral Dynamics in Warren, Michigan, andLima, Ohio. In exchange for the use of gov-ernment-furnished facilities and equipment,the contractors pay modest leasing fees. As ofthis writing, a full accounting of the numberand cost of GOCOs that are being providedto private military contractors is not avail-able. However, in 1981, the last time a fullaccounting was done—in Gordon Adams’sThe Iron Triangle, a classic account of the poli-tics of Pentagon contracting—GOCOs werewidespread and encompassed over a dozenmajor facilities with hundreds of thousandsof feet of floor space.51

In any comprehensive review of govern-ment subsidies for weapons makers, thePentagon should provide Congress and thepublic with an accounting of government-provided plant and equipment, including anestimate of the value of those assets to theprivate contractors that benefit from sucharrangements. The availability of govern-ment-furnished production resources might

make more difficult the closure of unneededproduction lines and the reorientation of thedefense industrial base to the demands of aninformation-based “revolution in militaryaffairs.” If the contractors had to assumemore of the costs of those facilities, theymight be less resistant to changes in con-tracting patterns and more amenable toembracing the next generation of weaponry.

Further Risk Absorption:Pentagon Subsidies for

Defense Industry Mergers

One of the most blatant federal subsidiesfor military contractors is a relatively newphenomenon: the provision by the Pentagonof so-called restructuring costs to weaponscompanies to help them defray the costs ofmergers and acquisitions with other defensefirms. Over the past several years, this newsubsidy for consolidation of an oversizeddefense industrial base has cost taxpayerswell over $1 billion. But such consolidationcould have been carried out without govern-ment financial assistance.52 Mergers andacquisitions occur naturally in any industrywith declining demand (the budget forweapons procurement has declined since theend of the Cold War) because companiesprofit from economies of scale, taking overnew lines of business or reducing overhead byeliminating redundant production capacity.Such consolidation usually increases marketcapitalization (stock price x shares outstand-ing) for the companies involved, whichresults in a bonanza for the shareholders,without a dime of federal subsidies.

The notion that taxpayers should directlyshoulder the burden for merger-relatedexpenses—such as bonuses for top executivesor the costs of shutting down factories andmoving equipment—was the brainchild ofthen Lockheed Martin chief executive officerNorman Augustine. In the summer of 1993Augustine raised the idea in letters to WilliamPerry and John Deutch, who were at that timethe second- and third-highest officials, respec-

17

Although otherU.S. industrieshave been givensome funding bythe governmentover the years, noindustry hasreceived the con-sistent level ofsupport receivedby the weaponscompanies.

tively, at the Pentagon. Unbeknownst toCongress and the public, Perry and Deutchsigned off on Augustine’s suggestion in timefor the new policy to apply to the merger ofLockheed and Martin Marietta.

When this quiet policy shift was revealedto Congress in the summer of 1994 (nearly afull year after it was implemented), manyeyebrows were raised. Some members ofCongress lampooned the merger paymentsas a boondoggle that benefited weaponsindustry shareholders and executives at theexpense of taxpayers and those defenseindustry workers who lost their jobs in thedownsizing that accompanied the merger.Rep. Bernard Sanders (I-Vt.), who joinedwith Rep. Chris Smith (R-N.J.) in an effort tocurb the merger payments, dubbed the sub-sidies “payoffs for layoffs” because theirmain effect was to finance special compensa-tion packages for defense industry executivesand board members, while doing little ornothing for production workers who losttheir jobs in the mergers. (For example,Lockheed Martin announced 19,000 layoffsin conjunction with the Lockheed–MartinMarietta merger.)53

Among the more embarrassing revela-tions in the payoffs for layoffs fiasco wasthat $31 million of the $92 million that exec-utives and board members of MartinMarietta was to receive in special mergercompensation would be paid by thePentagon as part of the new policy of subsi-dizing “restructuring costs.” Norman Au-gustine, who went from chief executive offi-cer of Martin Marietta to the top job atLockheed Martin within a year and a half ofthe merger, received $8.2 million in merger-related bonuses—of which $2.9 million wasdirectly paid for by taxpayers. And LamarAlexander, who ran as a populist, anti-Washington candidate in the 1996 presiden-tial election, received a $236,000 bonusfinanced by the government in compensa-tion for giving up his position on MartinMarietta’s board as a result of the merger.Fiscal hawks have long criticized govern-ment spending that subsidizes inactivity,

such as the practice of paying farmers not togrow crops, but Alexander may be the firstperson in American history to receive a gov-ernment subsidy for not attending the boardmeetings of a major corporation.

The aura of impropriety surrounding themerger payments was further underscoredwhen Newsday’s Patrick Sloyan revealed thatboth Perry and Deutch had been grantedwaivers from government conflict-of-interestrules in order to rule on Lockheed Martin’srequest for merger subsidies. The waiverswere necessary because both men had lucra-tive financial ties to Martin Marietta prior tojoining the Clinton administration in Jan-uary 1993. Under normal circumstances,they would have been required to wait at leasta year before ruling on any matter that woulddirectly benefit their former employer. Perryand Deutch have since left government ser-vice and continue to profit from the merger-and-acquisition trend in the weapons indus-try that they helped finance while at thePentagon. They have joined several of theirother former Pentagon colleagues in a ven-ture called Global Technology Partners,which provides advice and financing to com-panies interested in selling or acquiring mili-tary and high-technology firms.54

Although government subsidies for defensemergers have clearly been a bonanza forLockheed Martin, Perry, and Deutch, it is hardto determine exactly how much the policy hascost the taxpayers. According to a December1998 report by the GAO, the Pentagon esti-mates the costs of subsidies for seven mergersin the defense industry at $856.2 million.55 ThePentagon’s figure was undocumented andalmost certainly too low. According to an arti-cle by Norman Augustine that ran in the“Outlook” section of the Washington Post,Lockheed Martin alone has already receivedover $850 million in merger-related paymentsfrom the federal government. But the unsub-stantiated Pentagon estimate calculated pay-ments to Lockheed Martin at less than halfthat amount—$405 million. SubstitutingLockheed Martin’s figure for that of thePentagon would raise the estimate of the total

18

Only the armsindustry receives

$7.9 billion peryear in grants,

subsidized loans,and promotional

support to helpsell its wares on

the internationalmarket.

subsidies for the seven mergers to more than$1.3 billion. If the costs of subsidizing othermajor mergers were similarly understated, thefull price tag to the taxpayer could be $1.8 bil-lion or more.

Advocates of subsidizing mergers in thePentagon and the arms industry argue thatpaying restructuring costs actually saves taxpay-ers money in the long term by encouragingweapons manufacturers to dump unproduc-tive assets and lower their overhead costs, there-by providing cheaper weapons to thePentagon. But according to Lawrence Korb,the current director of studies at the Councilon Foreign Relations and a former top officialin the Reagan Pentagon, no evidence suggeststhat the unit costs of any major weapons sys-tem have gone down as a result of subsidizingmergers. In its recent survey of restructuringcosts, the GAO made the same point, albeit ina more understated fashion:

While we determined that selectedrestructuring activities had loweredthe operational costs of the businesscombinations by hundreds of millionsof dollars, it was not feasible to develop amethodology for precisely determining howcontract prices were affected.56

The GAO is confident that the companieshave saved money as a result of the recent spateof industry mergers, but it has no way of deter-mining how much of those savings have beenpassed on to the Pentagon in the form of lowerprices. And according to economist AnnMarkusen, the consolidation of the U.S.defense sector into essentially three big firms—Lockheed Martin, Boeing, and Raytheon—could easily result in higher costs to the Pentagonand the taxpayers in years to come. Those threemassive industrial combinations might use thePentagon’s dearth of alternative suppliers, aswell as their political clout on Capitol Hill, topress for higher prices.57

Whether any portion of the cost savingsfrom mergers is being passed on to thePentagon and the taxpayers is secondary to amore fundamental question: could those

mergers have proceeded without governmentsubsidies? The authors of the restructuringpolicy have argued that the combinationsmight not have occurred. In a number ofinstances, the government was locked intofixed-price, long-term contracts with bothsides of a potential merger. According to thatargument, the companies benefiting from thefixed-price arrangements would not havemuch incentive to merge. Even if the compa-nies did merge, they would not necessarilyclose redundant facilities if they had to relin-quish a steady flow of government revenueunder a fixed-price contract. The validity ofthat argument is difficult to determine, buteven if true it speaks more to the need toreform the Pentagon’s contracting proceduresthat lock the government into those costly,long-term, fixed-price deals than it does to thevalue of subsidizing mergers.58

In summary, although the costs of subsi-dizing mergers in the defense industry areclear, the benefits of doing so are not support-ed with anything more than undocumentedassertions on the part of the Pentagon andthe major weapons manufacturers. Unlessthere is evidence that those subsidies holdbenefits for taxpayers, the subsidies shouldbe eliminated.

Military Pork: The WasteThat Keeps on Wasting

The main reason that the Pentagon bud-get has been plagued by pork-barrel spendingin recent years is straightforward: that’swhere the money is. Although the militarybudget has declined to 16 percent of the totalfederal budget, it is still very large in absoluteterms—current spending on defense is rough-ly 85 percent of the average expenditures dur-ing the Cold War. Expenditures for defenseremain at about 50 percent of federal discre-tionary spending (spending that is notlocked in each year by legislative mandates).Once major entitlement programs like SocialSecurity and Medicare are factored out, thePentagon remains the “king of the hill” when

19

U.S. defenseindustries havesignificant advan-tages over theirforeign competi-tors and thusshould not needadditional subsi-dies to attractsales.

it comes to federal spending. The Depart-ment of Defense is also by far the biggestsource of federal funding for private compa-nies. The department writes contracts forroughly $120 billion per year to purchasegoods and services for everything from cruisemissiles to paper clips.59

The sheer size of the Pentagon’s budgetfor contracting virtually ensures that militaryspending will be a political football. Com-panies, constituencies, and members ofCongress attempt to tilt the department’sbudget toward programs that benefit them.The pork-barrel politics of defense spendinghas been particularly egregious since theRepublicans took control of both houses ofCongress in January 1995. Over the past fouryears, Congress has added a cool $30 billionto the Pentagon budget beyond what thedepartment requested—mostly for big-ticketweapons systems built in the districts orstates of congressional leaders or members ofkey committees.60

The most conspicuous examples of pork-barrel spending are congressional add-ons andearmarks. An add-on is a project that theDepartment of Defense or the military serviceshave not requested but is included in thedefense budget at the request of a specificmember of Congress. Add-ons often appear aspart of catchall supplemental appropriations;for example, the $8.3 billion that was added tothe Pentagon budget as part of the omnibusappropriations bill agreed upon by the WhiteHouse and congressional leaders in October of1998. An earmark is a project that is usuallyinserted by a senator or representative in anarmed services or appropriations committeemarkup of the Pentagon budget. The main dif-ference between an earmark and an add-on isthe effect on the rest of the Pentagon budget:an add-on is added to everything else for whichthe Pentagon has requested funding; an ear-mark usually comes at the expense of otherPentagon projects.61

At a time when the Pentagon and thearmed services are seeking additional fund-ing for military pay, increased training, andother expenditures to improve military readi-

ness, earmarks and add-ons can be particu-larly controversial. They take money thatmight have been used for readiness and allo-cate it instead to the pet projects of particularmembers of Congress and companies. Thecontradiction between congressional prerog-atives and the priorities of the armed forceserupted in a congressional hearing in the fallof 1998. Gen. Henry Shelton, the head of theJoint Chiefs of Staff, chastised members ofCongress for forcing the military to buy air-craft and ships that the Pentagon had notrequested in lieu of other higher-priorityitems.62

Now that President Clinton has agreed toadd at least $112 billion to the Pentagon bud-get over the next six years, public bickeringbetween the Joint Chiefs and key members ofCongress has subsided for the moment. Butthe question raised by General Sheltonremains a valid one: does it make sense to letmembers of Congress front for their favoritehome-state contractors in the Pentagon bud-get process? And—to go beyond GeneralShelton’s point—if a program is inserted in thebudget primarily to help the fortunes of a par-ticular company, is that not corporate welfareat its worst?

Sen. John McCain (R-Ariz.), a decorated mil-itary veteran and a recognized expert on securi-ty matters, has provided a useful, albeit narrow,definition of military pork: anything Congressadds to the military budget that has not beenrequested by the Pentagon or the military ser-vices in their budget submissions. (That defin-ition excludes huge amounts of pork alreadybuilt into the Pentagon submissions, for exam-ple, weapons that are unneeded or left overfrom the Cold War.) McCain argued that thelast few years have been plagued by the “worstmilitary pork” that he had seen during histenure in the Senate. McCain estimates that hiscolleagues on Capitol Hill added at least $4.5billion in unnecessary spending to the FY99military budget.63

Pork-barrel politics is a bipartisan pursuit.In the deliberations over the FY99 budget,Senate Majority Leader Trent Lott (R-Miss.)inserted $94 million for a space-based laser

20

The Pentagonpredicted a few

years ago thatU.S. companies

are likely to domi-nate the world

arms market foryears to come with

or without specialgovernment financ-

ing arrangements ortax breaks.

program based in his home state of Mississippiand a $50 million down payment on a $1.5 bil-lion helicopter carrier that will be built at ashipyard in his hometown of Pascagoula,Mississippi. Former speaker of the House NewtGingrich was instrumental in adding sevenC-130 aircraft to the budget, at a cost of nearly$400 million. Senator Lott is a C-130 boosteras well; of the more than two dozen C-130sthat Congress has added to the military budgetin recent years, more than half will be basedat Keesler Air Force Base in Mississippi.64

Congressional Democrats haven’t exactly beensitting on their hands in the race for militarypork. At a cost to taxpayers of $258 million,Senate Armed Services Committee memberDaniel Inouye last year inserted in thePentagon budget 31 separate projects for hishome state of Hawaii. And Rep. John Murtha(D-Pa.) has joined with his home-stateRepublican counterparts Rep. Joseph McDadeand Rep. Curt Weldon to secure extra fundingfor Pennsylvania-based projects, including $25million for the Q-70 radar system and $78 mil-lion for the V-22 “tiltrotor” aircraft for theMarines.65

Military pork increases the revenues ofmajor contractors by extending the productionruns of weapons systems that the Pentagonhad hoped to terminate. Corporate profits areparticularly high when a “mature” productionline (production costs have been reduced overtime) can be kept open. The payback for legis-lators is twofold: not only do they get hundredsof thousands of dollars in campaign contribu-tions from the contractors, but they get toclaim credit for bringing to their states and dis-tricts high-profile contracts that produce jobs.But this self-serving process has serious costs.First, defense pork wastes billions of dollarsthat could be put to more productive uses,such as returning some of the funds to thepublic through a tax cut. Second, pork under-mines security by distorting the spending pat-terns within the Pentagon budget.

The C-130 transport aircraft illustrateshow a seemingly innocuous add-on canbecome an example of egregious waste. Since1978 the Air Force has requested a total of

five C-130s, but Congress has purchased 256.That 50-to-1 ratio of aircraft purchased toaircraft requested may well be a record in theannals of pork-barrel politics. Congress hasbeen buying C-130s at such a rapid pace since1991 that the Air Force has been forced toretire 13 perfectly capable C-130Es, each ofwhich has more than a dozen years of usefullife remaining. In addition, according to theGAO, because Congress never budgeted thefunds needed to operate the extra C-130s, thePentagon will have to come up with an addi-tional $1 billion to operate and maintainthose aircraft over the next six years.66

Unrequested fighter aircraft, helicopters,combat ships, submarines, and even ballisticmissiles can eat up tens of billions of dollarsin procurement and operations funding eachyear.

Pork-barrel politics is not limited to the rel-atively small portion of the Pentagon budgetthat is added by members of Congress. Somecritics have argued that entire programs—suchas the three new fighter projects in thePentagon’s budget—are sustained by parochialpolitics. Although a defense project can beboth necessary and lucrative, another impor-tant question must be asked: how many fight-er aircraft, bombers, attack submarines, com-bat ships, and other items are being supportedat artificially high procurement rates merely tokeep the contracts flowing to key companiesand communities? A full discussion of whatmight be called “redundancy pork”—weaponsspending that exceeds what is needed fornational defense—goes beyond the scope ofthis paper, but the concept is worth keeping inmind as Congress and the public scrutinizethe nation’s current military buildup.67

A comprehensive review of changes inPentagon contracting from the peak of theReagan buildup in 1986 through the spend-ing “trough” in 1996 suggests that steeringprojects to the states and districts of keymembers of Congress has become a drivingforce in defense procurement. Over that timeperiod, the total value of Pentagon contract-ing declined by 36 percent, but nine statesmanaged to increase the value of their total

21

U.S. taxpayersare doling outbillions of dollarsin corporate wel-fare to thedefense industryunder the veneerof nationalsecurity.

Pentagon contracts: Idaho (58.9 percent),West Virginia (48.8 percent), South Carolina(47 percent), Virginia (43.9 percent), Nevada(41.9 percent), Missouri (24 percent),Nebraska (21.5 percent), Colorado (18.7 per-cent), and Maine (5.5 percent). All of the nine“winning” states in the Pentagon contractingwars were represented by senior members ofCongress on the armed services committeesor the defense subcommittees of the appro-priations committees.

The winning states also had some of themost powerful members of Congress actingfor them: West Virginia, represented by RobertByrd, a master of pork-barrel politics whoserves on both the armed services and defenseappropriations panels; South Carolina, whichhas two senators that are members of the Sen-ate Armed Services Committee—DemocratErnest Hollings and Republican and formercommittee chairman Strom Thurmond—andthe chairman of the House Armed ServicesCommittee, Republican Floyd Spence; andVirginia, home to John Warner, Senate ArmedServices Committee chairman, and CharlesRobb, senior Democratic Armed ServicesCommittee member. The ability of those keymembers to “bring home the bacon” is a testi-mony to the power of pork-barrel politics inshaping decisions on military procurement.68

Although it would be naive to think that pol-itics can be removed from defense contracting,the distorting impact of military pork suggeststhe need for reform. One approach might be ananalogue to the moderately successful BRACprocess that has been helpful in closing unneed-ed military bases. Under BRAC, an independentcommission draws up a list of unneeded facili-ties, and then Congress is required to vote up ordown on the whole list. The process avoids thekind of congressional horse-trading (“I’ll vote tokeep your base if you vote to keep mine”) thatmade base closures so difficult in the past.Unfortunately, President Clinton violated thespirit of the BRAC process during the run-up tothe 1996 elections when he announced that hewould “privatize” bases that had been slated forclosure in the vote-rich states of California andTexas. In response to Clinton’s self-serving

actions, Senator Lott and Senate MinorityLeader Tom Daschle (D-S.Dak.) got a bill passedthat put the entire BRAC process on hold.69

Nonetheless, when it was in operation, BRACwas moderately effective in short-circuitingpork-barrel politics.

A similar principle might be applied toweapons systems: the creation of an indepen-dent panel that would take input from themilitary, the White House, and both partiesin Congress. Each year, the panel would cre-ate a list of unneeded weapons; the list couldthen be voted up or down in its entirety byCongress. The visibility of the process mightembarrass members into public votes againstweapons that they would have been willing toslip into the budget in the dead of night.

Conclusion

Weapons manufacturers are not ordinarycompanies. They operate in a very specializedmarket with one customer—the government.Given the cost and complexity of the systemsthey produce and the limited market for thoseitems, the expectation that weapons makerscould operate in a totally free market is unreal-istic. Defense companies will probably alwaysbe dependent on the government for researchfunds and procurement contracts.

The wide array of government subsidies forarms makers described in this paper raises anumber of issues. U.S. taxpayers are doling outbillions of dollars in corporate welfare to thedefense industry under the veneer of nationalsecurity. Overly generous subsidies to armsmakers actually reinforce poor performance.Ways need to be found to scale back, restruc-ture, or even eliminate government subsidiesfor weapons makers to give those companiesgreater economic incentives to produce qualityproducts at more affordable prices.

Such important issues need to be address-ed to ensure that substantial portions of thedefense budget are not squandered on politi-cally driven projects or profligate subsidies thatare not the best investments for the futuresecurity of the nation.

22

Ways need to befound to ensurethat substantialportions of thedefense budgetare not squan-

dered on profli-gate subsidies

that are not thebest invest-

ments for thesecurity of the

nation.

Notes1. Information on proposed military budgetincreases is drawn from Office of AssistantSecretary of Defense for Public Affairs,“Department of Defense Budget for FY 2000,”Press release, February 1, 1999; and PhilipFinnegan, “U.S. Lawmakers Arm for BudgetOffensive,” Defense News, February 8, 1999.

2. Data on military prime contracts are calculatedby the author and are based on statistics from theU.S. Department of Defense, Directorate ofInformation, Operations and Reports, 100 Com-panies Receiving the Largest Dollar Volume of PrimeContract Awards—Fiscal Year 1998 (Washington:U.S. Department of Defense, 1999).

3. Statistics on pay and increases in procurementin the FY 2000 budget are from “Department ofDefense Budget for FY 2000.”

4. For an overview of recent subsidies and otherfavorable policy changes obtained by militarycontractors, see William D. Hartung, “TheMilitary Industrial Complex Revisited: HowWeapons Makers Are Shaping U.S. Foreign andMilitary Policies,” Foreign Policy in Focus,November 1998, www.foreignpolicy-infocus.org.

5. Quoted in David E. Rosenbaum, “CorporateWelfare’s New Enemies,” New York Times,February 2, 1997.

6. For estimates on the costs of corporate welfare,see Donald L. Barlett and James B. Steele, “SpecialReport: Corporate Welfare,” Time, November 9,1998, www.cgi.pathfinder.com/time/magazine/1998/dom/981109/cover1.html; Dean Stanseland Stephen Moore, “Federal Aid to DependentCorporations: Clinton and Congress Fail toEliminate Business Subsidies,” Cato Institute,Briefing Paper no. 28, May 1, 1997; Charles M.Sennott, “The $150 Billion ‘Welfare’ Recipients:U.S. Corporations,” Boston Globe, July 7, 1996; andRobert J. Shapiro and Chris J. Soares, “Cut andInvest to Grow: How to Expand Public Invest-ment while Cutting the Deficit,” ProgressivePolicy Institute, Policy report no. 26, July 1997.

7. For another definition of corporate welfare, seeStansel and Moore, p. 2: “Corporate welfareshould be defined as any government spendingprogram that provides unique benefits or advan-tages to specific companies or industries. Itincludes subsidies, grants, cut-rate insurance, low-interest loans and loan guarantees, trade restric-tions, and other special privileges that confer ben-efits on targeted firms or industries.”

8. For example, in early 1997 House BudgetCommittee chairman John Kasich promoted a

package of reductions in corporate welfare thatwas compiled by a right-left coalition of taxpayerand governmental reform organizations and thatexplicitly excluded military-related subsidies. Fora description of that package, see Rosenbaum.

9. On subsidies for arms exports, see William D.Hartung, Welfare for Weapons Dealers 1998: TheHidden Costs of NATO Expansion (New York: WorldPolicy Institute, March 1998). For more detail onthe methodology used to arrive at the estimate ofsubsidies for arms exports, see William D.Hartung, Welfare for Weapons Dealers: The HiddenCosts of the Arms Trade (New York: World PolicyInstitute, 1996). Both of these publications areavailable in full text versions on the World PolicyInstitute’s Web site, at www.worldpolicy.org (clickon “arms control”).

10. See, for example, U.S. Congress, Office ofTechnology Assessment, Global Arms Trade, OTA-ISC-460 (Washington: Government PrintingOffice, June 1991), pp. 30–31.

11. Secretary of State, Congressional Presentation forForeign Operations, Fiscal Year 1999 (Washington:U.S. Department of State, 1998), pp. 996–99.

12. Secretary of State, Congressional Presentation forForeign Operations, Fiscal Year 1998 (Washington:U.S. Department of State, 1997), p. 486.

13. Hartung, Hidden Costs of NATO Expansion, p. 3.

14. Calculations on relative military aid fundingto Eastern and Central Europe are based on fig-ures in ibid., p. 2; and “Your Tax Dollars at Work:FY 2000 Military Assistance Request,” Arms SalesMonitor, no. 39 (February 1999): 6–7.

15. Quoted in Barbara Opall, “Pentagon ToutsLoan Guarantees,” Defense News, June 16–22,1998.

16. Barbara Opall-Rome, “Pentagon Loan Pro-gram Faces Insolvency,” Defense News, March 1,1999.

17. On “fixing” DELG, see Opall-Rome, “Penta-gon Loan Program Faces Insolvency.” On theproblems of the DELG program, see U.S. GeneralAccounting Office, “Defense Trade: Status of theDefense Export Loan Guarantee Program,”GAO/NSIAD-99-30, December 1998.

18. Hartung, Hidden Costs of the Arms Trade, pp.34–36; and U.S. Department of Defense, DefenseSecurity Assistance Agency, “Status of DoDDirect Loans as of September 30, 1996,” 1996;and idem, “Status of DoD Guaranteed Loans asof September 30, 1996,” 1996.

19. “Your Tax Dollars at Work,” p. 6.

23

20. Paul F. Pineo and Lora Lumpe, RecycledWeapons: American Exports of Surplus Arms,1990–1995 (Washington: Federation of AmericanScientists, 1996), pp. 16–17.

21. For a discussion of the relative merits of build-ing the F-22 versus upgrading current systems,see David Evans, “Catch F-22,” In These Times, July11, 1994; “Air Force Faults GAO on F-22 Study,”Aerospace Daily, March 28, 1994; Mark Lorell et al.,The Gray Threat: Assessing the Next-GenerationEuropean Fighters (Santa Monica, Calif.: RANDCorporation, 1995); and Williamson Murray,“Hard Choices: Fighter Procurement in the NextCentury,” Cato Institute Policy Analysis no. 334,February 26, 1999.

22. Secretary of State, Congressional Presentation forForeign Operations, Fiscal Year 2000 (Washington:U.S. Department of State, 1999), pp. 1142–46.

23. Ibid., pp. 1147–48.

24. Quoted in Douglas Barrie, “Boeing SweetensPolish Package,” Defense News, February 22, 1999.

25. Defense Policy Advisory Committee on Trade,“A Report Outlining U.S. Government PolicyOptions Affecting Defense Trade and the U.S.Industrial Base,” November 1988, p. 18.

26. Calculations on the relative proportion of U.S.arms exports accounted for by the FMS programare from U.S. Department of Defense, DefenseSecurity Assistance Agency, Foreign Military Sales,Foreign Military Construction Sales, and MilitaryAssistance Facts as of September 30, 1997 (Wash-ington: U.S. Department of Defense, 1998).

27. “Hundred Million Dollar Gift to ExportersSlips through Congress,” Arms Sales Monitor, no.33 (February 1997): 3.

28. U.S. General Accounting Office, ForeignMilitary Sales: Millions of Dollars of NonrecurringResearch and Development Costs Have Not BeenRecovered (Washington: U.S. General AccountingOffice, October 1988), p. 2.

29. U.S. Arms Control and Disarmament Agency,“World Military Expenditures and Arms Trans-fers 1997,” www.acda.gov/wmeat.97htm.

30. Office of the Under Secretary of Defense forAcquisition and Technology, Worldwide Conven-tional Arms Trade (1994–2000): A Forecast andAnalysis (Washington: U.S. Department of De-fense, December 1994), p. v.

31. Janne E. Nolan, “Report of the PresidentialAdvisory Board on Arms Proliferation Policy,”President’s Advisory Board on Arms Proliferation,1996, p. 17.

32. Figures on R&D spending on the F-15 andF-16 fighters are calculated by the author fromU.S. Department of Defense, “Program Acqui-sition Costs by Weapons Systems,” FY74 throughFY95.

33. Congressional Budget Office, Reducing theDeficit: Spending and Revenue Options (Washington:Congressional Budget Office, March 1997), p. 91.

34. Sam Johnson, “The Defense Jobs and TradePromotion Act of 1999,” Congressional Record,February 23, 1999, p. E247; and Loren B.Thompson, “26 U.S.C. 923 (a) (5): Bad for Trade,Bad for Security, and Fundamentally Unfair,” inOut of Control: Ten Case Studies in Regulatory Abuse(Washington: Lexington Institute and theInstitute for Policy Innovation, 1998), pp. 17–18.

35. Ibid., p. 17.

36. “Report of the Presidential Advisory Board,”p. 16.

37. For a more detailed discussion of the rationalefor treating the bulk of ESF funds as an indirectsubsidy for arms exports, see Hartung, HiddenCosts of the Arms Trade, pp. 37–38.

38. Secretary of State, Congressional Presentation,Fiscal Year 1999, pp. 990–95.

39. Export-Import Bank, “Dual Use Determin-ations: As of February 7, 1999,” memo from theExport-Import Bank, 1999.

40. Barbara Opall-Rome, “Pentagon Acts to EaseFMS Bureaucracy,” Defense News, January 18,1999.

41. Calculations of State Department personneland resources devoted to arms export promotionare by the author, drawing upon U.S. Departmentof State, Bureau of Political Military Affairs,“Congressional Submission for FY 1998,”November 1997. For additional details on the roleof the State Department in arms export promo-tion, see Hartung, Hidden Costs of the Arms Trade,pp. 16–18.

42. U.S. Department of Commerce, Pacific RimDiversification and Defense Market Assessment: AComprehensive Guide for Entry into Overseas Markets(Washington: U.S. Department of Commerce,November 1994), p. 33.

43. Ibid., p. 21. Emphasis added.

44. Charles Sennott, “The Show: America’sMuscle in an All-Star Cast,” Boston Globe, February11, 1996.

45. For details on the estimates of costs of air

24

shows, see Hartung, Hidden Costs of NATOExpansion. See also Sennott, “America’s Muscle.”

46. Figures on military R&D expenditures arefrom Office of the Under Secretary of Defense(Comptroller), “National Defense Budget Esti-mates for FY 1997,” March 1997, pp. 82–88.

47. U.S. Department of Defense, “100 Contrac-tors Receiving the Largest Dollar Volume ofPrime Contract Awards for Research, Develop-ment, Test, and Evaluation, Fiscal Year 1998,”1999, Table 2.

48. U.S. Department of Defense, “SAR ProgramAcquisition Cost Summary as of September 30,1998.”

49. Colin Clark and Robert Holzer, “Pentagon toCombine Theaterwide, THAAD,” Defense News,January 18, 1999; and “Pentagon Anti-MissileSystem Fails Fifth Test in a Row,” New York Times,May 13, 1998.

50. U.S. Department of Defense, DOT&E FY98Annual Report (Washington, U.S. Department ofDefense, 1999).

51. Gordon Adams, The Iron Triangle: The Politics ofDefense Contracting (New York: Council onEconomic Priorities, 1981).

52. Lawrence J. Korb, “Merger Mania,” BrookingsReview 14, no. 3 (Summer 1996): 22–25.

53. Bernie Sanders, “Payoffs for Layoffs Have toStop,” Los Angeles Times, January 11, 1996; andPatrick J. Sloyan, “Layoff Payoff,” Newsday, March17, 1995.

54. Patrick J. Sloyan, “Pentagon Waives Ethics Rule:Allowing New Official to Deal with Ex-Clients,”Newsday, December 4, 1994; and William D.Hartung, “Welfare Kings,” Nation, June 19, 1995.

55. U.S. General Accounting Office, “DefenseIndustry: Restructuring Costs Paid, SavingsRealized, and Means to Ensure Benefits,” 1999.

56. Ibid., p. 2. Emphasis added.

57. Ann Markusen, “The Foolish, and Costly,Defense Merger Mania,” International HeraldTribune, January 11, 1997.

58. For an elaboration of the case for subsidizingdefense mergers, see the testimony of NormanAugustine and John M. Deutch in DoD Policy onDefense Industry Mergers, Acquisitions, and Restruc-turing: Hearing before the Oversight and InvestigationsSubcommittee, Committee on Armed Services, U.S.House of Representatives, July 27, 1994, 103d Cong.,2d sess. (Washington: Government PrintingOffice, 1995), pp. 4–58. For a critique, see

Lawrence J. Korb’s testimony in ibid., pp. 58–70.

59. Data on the volume of Pentagon prime con-tract awards are from U.S. Department ofDefense, 100 Companies Receiving the Largest DollarVolume, p. 2.

60. Data on Pentagon add-ons for FY96 throughFY98 were provided by Steven Kosiak of theCenter for Strategic and Budgetary Assessments.For FY99, see Tim Weiner, “$9 Billion toPentagon, with Missile Defense,” New York Times,October 16, 1998; and William Greider, “And theWinner Is . . . The Pentagon,” Rolling Stone,December 10, 1998.

61. Charles R. Babcock, “Congress Fattens DefenseBill with $4 Billion in Pork,” Washington Post,August 15, 1998; and Pat Towell, “No Chance forNonfat Bill as Special Projects Flourish,” CQWeekly, August 22, 1998.

62. Eric Schmitt, “Joint Chiefs Tell Lawmakers PetProjects Impair Defense,” New York Times,September 30, 1998.

63. “Statement of Sen. John McCain on the FiscalYear 1999 Defense Authorization and Appropria-tions Conference Reports,” October 1, 1998,www.senate.gov/~mccain/dod99cnf.htm.

64. Walter Pincus, “Cargo Plane with StringsAttached: Congress Funds and Stations C-130sUnwanted by the Pentagon,” Washington Post, July23, 1998.

65. For details on pork-barrel projects pushed byspecific members, see Babcock; and Towell.

66. Pincus; and U.S. General Accounting Office,“Intratheater Airlift: Information on the Air Force’sC-130 Aircraft,” April 21, 1998.

67. For example, Congress has passed provisionspreventing the armed services from reducing U.S.nuclear forces below the levels set out in theSTART I arms reduction treaty. Because Russiacannot afford to maintain its forces even at thelower START II levels, much less the higher STARTI levels, this policy is a costly case of congressionalmicromanagement. As a result, the Navy may beforced to spend billions of dollars on additionalTrident submarines and submarine-launched bal-listic missiles that are not part of its priority spend-ing plan.

68. For data on contracts by state and district, seeWilliam D. Hartung, “The Shrinking Military PorkBarrel: The Changing Distribution of PentagonSpending, FY 1986 to FY 1996,” in The ChangingDynamics of U.S. Defense Policy and Budgeting in thePost–Cold War Era, ed. Leon V. Sigal (New York:Greenwood, forthcoming, 1999).

25

69. Secretary of Defense William Cohen hasbecome so frustrated with congressional inactionon base closings that he has made the issue part ofhis “stump speech.” See Jim Garamone, “CohenAsks America to Support Military Base Closures,”Armed Forces Press Service, January 29, 1999.

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