Payoffs for Layoffs: Much More Than A Sound Bite

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March 11, 1997

In 1994 the Pentagon introduced a new policy of paying corporate "restructuring" costs following mergers of defense contractors. Norman Augustine, chairman of Lockheed Martin corporation, is one of the four CEOs who asked for the policy change. In a February 23rd Washington Post opinion piece he defends the policy. He argues that the "payoffs for layoffs" policy -- so named because it subsidizes corporate mergers that have triggered increases in exorbitant CEO compensation and mass layoffs of workers -- has been hurt by a false sound bite.

A bill sponsored by Reps. Chris Smith, Bernard Sanders, and Peter DeFazio (H.R. 925, the Payoffs for Layoffs Corporate Welfare Elimination Act of 1997) has been introduced in the House to reverse this policy. Similar legislation passed in the House by voice vote last session.

Unfortunately, Augustine makes his case by ignoring the fundamental issue: whether government funding is needed to gain the purported benefits of the policy. Nor, in the end, is he convincing that huge, newly-merged corporations will provide benefits to the government in the long run.

  • Augustine's Interest. In his opinion piece Augustine failed to mention that much of the outrage over this policy was sparked by the merger of his company, Martin Marietta, with Lockheed. Newly-formed Lockheed Martin quickly announced the firing of 19,000 workers and billed the government for $31 million in additional CEO compensation, including $8 million for a single individual -- Norman Augustine. Lockheed has already billed the government for at least $855 million in overall restructuring costs.
  • Why Is Government Needed? According to Augustine, the Pentagon pays restructuring costs because it wants a smaller defense industry, and because it can purportedly realize savings by buying from smaller, "more efficient" firms. The key flaw in this policy is that defense corporations are merging as fast as they can for sound business reasons of their own. Since when do corporations in any sector of the economy need a push to get them to merge? The government used to be concerned about too much merging because of anti-trust concerns and loss of competition. If corporations are merging naturally, why should the government pay them subsidies to get the claimed benefits of merging when the government will get the benefits anyway?

Major defense firms are certainly not in financial straits that justify help from the U.S. government. Lockheed Martin's profits rose 98% from 1995 to 1996, reaching $1.3 billion, and defense and aerospace stocks are outperforming the rest of the market.

  • Will There Really Be Savings? It is also a dubious claim that there will be extensive benefits to the Pentagon from widespread corporate merging. Augustine claims unequivocally that savings are being realized by the Department of Defense (DoD), and that they outweigh the payments to corporations for restructuring. On Lockheed Martin's merger he says: "The math is easy: Costs to DoD = $1.2 billion one-time. Savings to DoD = $1.3 billion every year."

It is easy enough for a contractor to claim that there are savings, but a lot more independent proof is required. Defense contractors will have to counter decades of scandals that exposed frequent overcharging of the government. In fact, it is extremely difficult to demonstrate savings, since prices charged over time are determined by many factors.

Augustine claims that the government does supply independent verification: "The government carries out extensive approvals, audits and certifications to guarantee that costs and savings are accurately reported." But in fact, the Pentagon has admitted that it can't demonstrate actual savings. According to the 1996 DoD report on restructuring payments, " 'Savings' are not recorded with a contractor's book of accounts and are not readily available" (emphasis added).

These mergers contain an even more fundamental problem: even if there are short-term savings for the government, in the long run any lower prices are likely to be offset by the effects of reduced competition from excessive corporate merging. The Pentagon has not yet fully examined the long-term government costs of reduced competition from the tremendous concentration currently underway in the defense industry.

  • The Hidden Source of the Problem. The policy of paying restructuring costs is part of a much larger scandal: the extensive Pentagon practice of awarding "cost-plus" contracts. Under cost-plus contracts, contractors can bill the government for all their costs. This includes costs, like mergers, that come up during the contract. They then get a guaranteed profit on top of these costs. It is no surprise that, under this extremely generous policy, corporations have little incentive to cut costs. Instead contractors face temptations to bill the government for costs they should cover themselves.

    The restructuring fees are just one of the many costs corporations bill to the government under cost-plus contracts. In contrast, under the fixed-fee contracts that the commercial world and consumers use, there is no billing for costs as they come up; no requirement for auditing additional costs; and no controversy about which costs the government should or should not pay directly. About half of the Pentagon's contracts are "cost-plus." Sharply curtailing this practice would eliminate controversies like the current one over merger subsidies, and would put a stop to a practice that serves only as corporate welfare.

The government's policy of artificially encouraging more mergers than would occur naturally is unnecessary to achieve the goals it supposedly seeks, and it is also based on questionable assumptions that the Pentagon will receive short- and long-term benefits. Before taking the advice of industrial barons like Norman Augustine, the government's efforts would better be focused on making sure that old-fashioned monopolies aren't being built with the help of public funds.

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

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