Defense Companies Use Congress to Save Their Profits, No Matter What (Part One)

Part of the Series

Solutions

In this column two weeks ago, I discussed how the Pentagon and its contractors used several ruses over the years to thwart any discussion about cutting their budget. These ploys are especially frustrating now because the generals and bureaucracy in the Pentagon act like any cuts, especially the cuts planned in the budget sequestration that may or may not take place by the end of the year, are the end of the world as we know it. All this frenzy over any Pentagon budget cuts needs to be tempered by the facts – the Pentagon budget is higher than during the height of the cold war and even the sequestration cuts would take us back to 2006 levels when George Bush was president.

However, as much as the Pentagon works behind the scenes to kill any budget cuts, the Pentagon contractors use even more influence and money to keep anything from being cut. When the contractors worried about any cuts in the budget, they turned to their tried-and-true enablers, the Congress, to force the money through using the fear of losing jobs, jobs, jobs in various Congressional districts. Unfortunately, this ploy by the contractors usually works, and in a bipartisan way, with both Democrats and Republicans out cheerleading for ineffective and overpriced programs to continue so they can bring the Pentagon pork home to their district or state.

Recently, the contractors, including Northrop Grumman’s CEO Wes Bush, joined with members of the Virginia delegation and the Virginia governor to hold rallies in heavily defense-contract-laden districts in Virginia to fight any sequestration cuts and any jobs that may be lost in the state. A report in the publication Defense Daily shows this bipartisan effort, rare in today’s Congress, but it also shows the power of defense contractors and their money:

Rep. Jim Moran (D-Va.), called on Democrats and Republicans alike to work toward finding a compromise to prevent the “extraordinary destructive” effects of sequestration and to “stop this insanity.” He was joined on stage by fellow Virginia representatives Gerry Connolly (D), Frank Wolf (R) and Robert Scott (D). Marion Blakey, the head of the Aerospace Industries Association, also addressed the gathering.

It is not like the major defense contractors are at death’s door, even with the threat of cuts back to 2006 levels. According to AOL Defense, the financial group Motley Fools isn’t too worried about the viability of the largest contractors:

Even as Lockheed Martin chairman Robert Stevens warns of mass layoffs if sequestration hits, his company has been doing remarkably well this year, with revenue up six percent this quarter and earnings up 26 percent, according to an analysis by Motley Fool’s Rich Smith.

Boeing has done even better, with 58 percent earnings growth, thanks largely to its commercial aircraft sales. Raytheon basically stayed even on revenue but gained 17 percent on earnings, while General Dynamics and Northrop Grumman declined on both measures. Smith called Northrop’s problems puzzling, given its strong position in unmanned aerial vehicles (although its Block 30 Global Hawk faces cancellation) and its undervalued price-to-earnings ratio.

While sequestration may already be having a chilling effect on investment and on small business, the axe has yet to fall for the biggest defense companies.

And even if there are any cuts, these contractors will cruise for quite a while on their hefty Pentagon backlogged contracts. According to the Project on Government Oversight (POGO) (note: I founded and ran POGO for many years and am still on the board of directors), these contractors have more stashed away in future contracts than many Cayman Island bank accounts:

2011 was another record year for defense and aerospace industry revenues and profits. According to a recent PWC report, Lockheed Martin currently has an $81 billion worth of backlogged orders; Boeing has a $46 billion backlog; and Northrop Grumman and General Dynamics both have $40 billion backlogs. “Backlogs provide a significant cushion between demand and current production rates that could absorb any reasonably anticipated softening in demand.” [PriceWaterHouseCoopers, Aerospace & Defense: 2011 year in review and 2012 forecast, 2/12.]

Yet, when any Pentagon cuts were floated with or without the sequestration formula, various members of Congress, such as John McCain, Lindsey Graham and Kelly Ayotte, swooned at the thought of any cuts and predicted massive job losses to scare other members of Congress and the public into resisting any cuts. One of the most vocal defenders of the Pentagon budget is Rep. Buck McKeon (R-California), chairman of the House Armed Services Committee. He insisted, along with Pentagon companies such as Lockheed, that according to federal law, these large Pentagon contractors would have to send out thousands of warning pink slips to defense workers across the country that their jobs may be eliminated just a few weeks before the presidential election. I am sure that they thought that that would put President Obama in a box of facing voters in key states such as Virginia and Colorado because possible defense cuts would also mean pink slips, anticipated job losses and panic at the polls.

However, the US Labor Department defused that election bombshell by making a ruling that, since the sequestration cuts had not been voted on and may disappear if there is a budget compromise, there was no factual reason or legal requirement, especially in defense spending, to send out these pink slips according to federal law.

McKeon was not a happy camper after working hard through various Congressional hearings to whip up election mania about the pink slips. According to Defense Daily:

House Armed Services Committee Chairman Howard “Buck” McKeon (R-Calif.) yesterday released an angry response shortly after the Department of Labor issued guidance saying federal contractors, including Defense Department contractors, did not have to provide Worker Adjustment and Retraining Notification (WARN) notices 60 days before any contract termination or reduction if sequestration kicked in January 2.

“Instead of working to bring his party in the Senate to the negotiating table to resolve sequestration, the President is focused on preventing advance notice to American workers that their jobs are at risk and on perpetuating uncertainty,” McKeon said in a short statement.

It probably doesn’t matter to entrenched Pentagon cheerleaders such as McKeon, but there have been several polls and studies that show that the public wants to cut more from defense than even President Obama. According to a Truthout news item:

Indeed, the idea of cutting the huge U.S. military budget seems to enjoy considerable popularity among Americans. In May 2012, a survey of U.S. public opinion by the Stimson Center, the Program for Public Consultation and the Center for Public Integrity found that 76 percent of respondents favored slashing U.S. military expenditures. This included 80 percent of respondents in districts that elected Democrats and 74 percent in districts that elected Republicans.

Even in districts with the heaviest military spending – and, thus, presumably benefiting from its economic impact – three quarters of the public favored reducing the military budget. “The idea that Americans … want to keep total defense spending up so as to preserve local jobs is not supported by the data,” reported Dr. Steven Kull, director of the Program for Public Consultation, a survey group associated with the University of Maryland.

By contrast, support for increasing military spending – so fervently backed by Romney – stood at only 4 percent in Democratic districts and 15 percent in Republican districts.

But to the Pentagon contractors and their enablers in the Congress, who are supposed to represent the public, these studies and polls don’t mean much. All the members of Congress will talk a good game when it comes to going after waste and fraud in the Pentagon in their campaign literature to look tough when the next overpriced weapon or spare part hits the press, but they are counting on the Pentagon contractors to keep them fat in campaign contributions and to make sure that the contractors have got the Congress’ back. These Pentagon contractors know the need and the power to have armies of their lobbyists showing up at political fundraisers for the most acquiescent members of Congress who vote their way. According to The Washington Post:

Defense contractors Lockheed Martin, General Dynamics and Raytheon spent a combined $33.4 million on lobbying in Washington last year, a 10 percent increase from 2010, as Congress and the Obama administration weighed cuts in the Pentagon budget.

A review of lobbying disclosures filed with the Senate by a Jan. 20 deadline showed that Bethesda-based Lockheed Martin, the world’s largest defense company, led such spending last year with $15 million for lobbying, a 19 percent increase.

One of those lobbyists, who used to work in the Congress but went to work for ten years as a Lockheed lobbyist, recently went back to work for Congress. Sen. John McCain (R-Arizona), who has never seen or heard of a war he didn’t like, was unpredictably also known to be tough on overrun weapons contracts and would publicly take Pentagon contractors to task for any fraud and abuse. He is puzzling at times because he has been an aggressive hawk who has little tolerance for the Pentagon to waste its money.

However, he stunned many of his bipartisan supporters by hiring a former aide, Ann Elise Sauer, away from Lockheed to be his representative on the Senate Armed Services Committee. This hire puts her in the position of overseeing Pentagon contractors, including Lockheed. But Lockheed knew how to make sure that her loyalty and friendship would remain true and sympathetic to their company – they gave her a wonderful going-away present. According to Propublica:

Former Lockheed vice president Ann Elise Sauer was hired by Sen. John McCain in February as the top Republican staffer on the Senate Armed Services Committee. The revolving door swings regularly in Washington, but the size of the compensation package Sauer received from Lockheed when she left the company is notable. A financial disclosure form shows the defense giant gave Sauer $1.6 million in compensation around the time she took a buyout in January 2011.

She went from Congressional enabler to working for ten years helping Lockheed guzzle defense money. Now, flush with a substantial fee, she is back to enabling defense contractors, especially her lavish friends at Lockheed, to continue to resist any defense cuts and keep the money flowing to her friends.

This sordid situation reminds me of my favorite line from George Orwell’s book “Animal Farm”:

No question now, what had happened to the faces of the pigs. The creatures outside looked from pig to man and from man to pig and from pig to man again; but already it was impossible to say which was which.

So, what is the solution to our errant Congress? Department of Defense (DoD) budget money is the fuel to this enabling, so the best way to try to slow this down is to cut the fuel line. The public wants it, and actually many in the Pentagon upper echelons know that the budget is out of control and would like to say that we need deeper cuts in the Pentagon budget but are afraid to say it. There are also members of Congress who also know that this sacred cow needs to be gored, but they need the milk.

Wouldn’t it be interesting if the sequestration cuts went through (highly unlikely), or even smaller cuts went through and our DoD and our national defense would not collapse? The public suspects that these cuts could be done and, based on what I have seen in 30 years, the national defense and our weapons would actually improve without all the graft.

William Hartung, who wrote an excellent expose book on Lockheed called “Profits of War: Lockheed Martin and the Making of the Military-Industrial Complex” said it well in a Huffington Post blog:

The fact that the defense industry may have trouble living on a military budget that would still be well over the Cold War average has more to do with mismanagement by the Pentagon and the contractors than it does with a lack of funding. When a system like the F-35 combat aircraft doubles in price before it is even in full production, throwing more money at the contractors is not the answer. Or take the case of the F-22, the most expensive fighter plane ever built. Despite the fact that the United States has been involved in three wars during this decade, the F-22 has never been used in combat. And it spent a good part of this year grounded due to problems with the system that gets oxygen to the pilot.

… The bottom line is that the Pentagon and the arms industry don’t need more money. They need more discipline in how they spend our money. Reducing military spending can help make that happen.

In next week’s column, I will show how the Pentagon contractor enablers in Congress will go as far as preventing the Pentagon from stopping a weapon’s production line for several years in order to redesign and fix a weapon with inherent battlefield flaws. I have been investigating this weapon since 1981 and, despite its battlefield and mission flaws, it may continue to be rolled out of its plant despite an excess of 3,000 units.