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Project on Government Oversight

Defense Contractors: Driving the Pentagon Budget Debate

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July 30, 2012

In their campaign to stop reductions in Pentagon spending and protect their profits, big defense contractors are spending millions on studies, rallies, and lobbying Congress with the false claim that defense cuts will result in the loss of more than 1 million American jobs. But Pentagon contractors’ threats to send layoff notices to thousands of employees in the days preceding the Presidential election are political stunts. The public has a right to know the truth behind the rhetoric and fear mongering.

Pentagon contractors are making record earnings:

  • “Lockheed Martin, which builds the F-35 and F-16 fighter jets, also exceeded Wall Street’s expectations on Tuesday. The company’s quarterly earnings from continuing operations rose 4.4 percent to $781 million, and sales rose 3.3 percent to $11.9 billion in the second quarter. Northrop Grumman beat Street expectations even though the Global Hawk unmanned aircraft maker saw earnings fall 7.7 percent to $480 million, and sales drop 4.4 percent to $6.27 billion.” [Nextgov, “Defense Contractors Beat Wall Street Expectations Despite Budget Pressures,” 7/27/12]

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Even under the deepest cuts—the unlikely budget sequestration—Pentagon contractors have huge revenue streams for years to come:

  • 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 Northrup 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]

  • Raytheon executives are not panicking over sequestration. “We are not in a panic mode,” Wajsgras said. “We’ve been managing the company from a cost efficiency standpoint for a number of years. I’m quite comfortable with how we’ll perform in the future.” [Bloomberg Businessweek, “Raytheon Raises 2012 Forecast After 10% Profit Increase,” 7/26/12]

  • William D. Hartung, Center for International Policy, and Stephen Miles, Win Without War: “With continued strong growth in sectors like commercial aerospace, an increase in exports, and hundreds of billions of dollars in backlogged orders, there is plenty of work to keep the employees in the aerospace and defense sectors busy. And with piles of cash from years of record profits, Pentagon contractors are better suited than most companies to help their employees survive today's tight economic times. Simply put, defense contractors are using their own workers as pawns—threatening them with massive layoffs—to scare up political opposition to any attempt to rein in runaway spending at the Pentagon.” [Huffington Post, “Pentagon Contractors Play a Disturbing Game,” 6/25/12]

If Pentagon contractors need to tighten their belts, they should start at the top. Contractor executive pay is out of sight, on par with Wall Street execs:

  • William D. Hartung, Center for International Policy: “Last year, Lockheed Martin's CEO Robert J. Stevens took home $25.3 million in compensation, more than all but two Wall Street CEOs. How many employees could Lockheed keep on its payrolls if Mr. Stevens took a pay cut? Mr. Stevens' handsome compensation came for running a company that receives nearly all its revenue directly from the U.S. government.” [Huffington Post, 6/25/12]

  • Ben Freeman, Project On Government Oversight: “Both Lockheed Martin and Northrop Grumman could afford to keep paying quite a few of their employees by dipping into their CEO's compensation. Unfortunately, it appears they’re more interested in playing political games, using their employee’s livelihoods in a game of chicken with Congress. If the CEO’s of major defense contractors are serious about saving money on personnel costs perhaps they should look no further than the mirror.” [Huffington Post, “The Guerilla Warfare of Pentagon Contractors, 7/2/12]

  • “Meanwhile, Lockheed paid CEO Robert Stevens $19.1 million in 2010. Boeing’s Jim McNerney made $19.7 million. In other words, defense cuts won’t, by themselves, force firms to fire people. Companies will surely be stressed by the revenue loss, but their bright economic pictures give them some options.” [Wired: Danger Room, What’s Next in National Security, “Defense Industry: Keep Paying Us or the Economy Dies, 10/26/11]

  • “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. At the moment, the stakes for Lockheed in Washington are even higher than usual, with the company leading the military contracting industry's charge to convince Congress to avoid a $492 billion, 9-year cut in military spending set to be triggered in January.” [ProPublica, “Key Senate Staffer on Military Issues Got Big Payout From Lockheed Martin,” 7/26/12]

There is plenty of fat to cut in mismanagement and waste by big defense contractors:

  • Jon Basil Utley, The American Conservative: “Republican leaders claim that government spending to create jobs is a giant waste. But then they argue that such spending for military jobs is necessary to help the economy. Many openly argue that the defense budget is a jobs program. Think though of how many jobs the talented, ambitious people in the defense establishment could create in the private sector. Cutting fat, not meat is the important need. But faced with even marginal cuts to the defense budget, Republicans threaten voters like big city Democrats warning that the opposition will first cut firemen and policemen while leaving untouched all the fat, waste, pensions and welfare in city budgets. There are places we can cut without sacrificing effectiveness, and sequestration can help us find them.” [The American Conservative, “Sequestration: The Way to Cut Defense Waste,” 7/24/12]

  • Lawrence Korb, Center for American Progress: “AIA fails to mention that, in the past decade, as a result of the industry’s own business practices, the Defense Department spent $50 billion on weapons that were canceled. Cost overruns of weapons exceeded $300 billion.” [Politico, “Defense is not a Jobs Program,” 11/16/11]

  • Project On Government Oversight (POGO): “Boeing charged the U.S. Army $1,678.61 for a plastic roller assembly that could have been purchased for $7.71 internally from the Department of Defense’s (DoD) own supplies. In another transaction, a thin metal pin worth 4 cents that the DoD had on hand, unused by the tens of thousands, ended up costing the Army $71.01—a markup of more than 177,000 percent. In all, Boeing overcharged the Army nearly $13 million in dozens of transactions, jacking up the price on small, mundane parts in some cases up to thousands of times more than they were worth, according to a previously unavailable Inspector General’s (IG) report obtained by the POGO. [“Boeing Overcharged Army Millions for Spare Helicopter Parts,” 7/28/11]

  • William D. Hartung, Center for International Policy: “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.” [Huffington Post, “Arms Industry: Trumped Up Jobs Claims, Pumped Up Profits, 11/2/11]

Defense contractors should cut their massive spending on lobbying and campaign contributions before layoffs:

  • “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.” [Washington Post, “Lockheed Martin Leads Expanded Lobbying by U.S. Defense Industry, 1/29/12]

  • “The Aerospace Industries Association (AIA), which expanded its ‘Second-to-None’ campaign promoting robust defense spending, was on course to almost double its lobbying spending for 2011.” [Washington Post, “Lockheed Martin Leads Expanded Lobbying by U.S. Defense Industry, 1/29/12]

  • “The top five U.S. defense contractors increased spending on lobbying by a combined 11.5 percent in the first quarter of 2012 compared to the same quarter in 2011, a review of lobbying disclosure forms by Defense News found. The increase, following a down year in 2011, brought lobbying investment for Lockheed Martin, Boeing, General Dynamics, Raytheon and Northrup Grumman to a combined total of $15.9 million for the quarter ending March 31. The number represented a new combined high in the four years that all five companies have been filing disclosures.” [Defense News, “U.S. Firms Spending More on Lobbying,” 7/7/12]

  • Jennifer Allen, Lockheed Martin spokesperson: “With 82 percent of our company’s sales derived from U.S. government customers, we naturally have interactions with virtually every standing committee in the United States Congress who has oversight authority over the budgets and policies of all federal agencies, and by extension, the products and services that Lockheed Martin provides to them.” [Defense News, “U.S. Firms Spending More on Lobbying,” 7/7/12]

Even if the deepest proposed cuts to the Pentagon budget—under sequestration—were to happen, there would still be record Pentagon spending:

  • Todd Harrison, Center for Strategic and Budgetary Assessments: “Under sequestration, the base DoD budget would fall to roughly $472 billion in FY 2013. This would bring the budget back to approximately the same level of funding as FY 2007, adjusting for inflation.” [“Five Facts about Defense and Sequestration,” 11/11]

  • Loren Thompson, the Lexington Institute, a defense contractor funded think tank: Thompson notes that the actual impact of sequestration on Pentagon spending is far less than his funders fear. Sequestration targets “budget authority rather than outlays. Budget authority typically takes several years to translate into outlays,” according to Thompson. Thus, “the reduction in defense outlays for 2013 will be only 5-6 percent.” Which is a far smaller percentage than contractors are using in their study to arrive at their hyperbolic claim that more than one million jobs will be lost if sequestration occurs. [Lexington Institute, 6/6/12]

  • Benjamin H. Friedman, Cato Institute, and Veronique de Rugy, Mercatus Center: “Adjusting for the CBO’s predictions for inflation, sequestration would allow the military budget to remain almost flat. The process would leave the 2021 Pentagon with purchasing power equivalent to what it had in 2006, leaving out the wars. That would be a bigger budget in real terms than what the U.S. spent on the military at the height of the Cold War.” [World Politics Review, “Cutting Through the Rhetoric on Defense Sequestration,” 1/6/12]

  • Bill Hartung and Stephen Miles, Center for International Policy and Win Without War: “Nearly all of the purported ‘cuts’ to the Pentagon’s budget are actually reductions in the rate of growth, rather than true cuts in funding levels. In reality, even if sequestration is fully enacted as planned under the 2011 Budget Control Act, the Pentagon’s base budget would only return to 2006 levels (adjusted for inflation), which at the time was among the highest levels of spending since World War II.” [“Fact Sheet: Myths vs. Realities of Pentagon Spending,” 7/17/12]

Job loss threats are overblown political scare tactics:

  • “To employment-law attorney Margaret Keane, giving mass dismissal warnings in such uncertain conditions looks more like a lobbying tactic by corporations trying to ward off the cuts than an effort to follow the letter of the Worker Adjustment and Retraining Notification Act. ‘I just don’t think you need to do that,’ said Keane, a partner with Littler Mendelson PC who advises employers on meeting the notification law’s requirements. ‘Are we really talking about complying with the WARN Act, or are we talking about political pressure being applied?’ [Bloomberg Businessweek, “Lockheed Uses You-May-Be-Fired Scare Tactics,” 7/10/12]

  • “If the budget cuts known as sequestration take effect, defense contractors wouldn’t see changes in revenue abrupt enough to require broad distribution of pink-slip warnings in advance, said Byron Callan, a defense analyst with Capital Alpha Partners in Washington. ‘That’s more a scare tactic than something that aligns with the underlying reality of how sequestration works,’ Callan said.” [Bloomberg Businessweek, “Lockheed Uses You-May-Be-Fired Scare Tactics,” 7/10/12]

  • “The estimate that an additional 653,570 non-defense jobs ‘would be lost through ripple effects is unreasonably high,’ according to Kevin Brancato, an analyst for Bloomberg Government who previously analyzed the cost of weapons systems for the RAND Corp. [Bloomberg Businessweek, “Lockheed Uses You-May-Be-Fired Scare Tactics,” 7/10/12]

  • Miriam Pemberton and Bill Hartung, Institute for Policy Studies and Center for International Studies: “Maintaining Pentagon spending at current high levels while pushing the burden of budget cuts on domestic programs would result in a net loss of jobs nationwide. That’s because arms spending produces substantially fewer jobs than virtually any other use of the same money, including a tax cut. Structured properly, Pentagon spending cuts could actually give a boost to the economy.

    ..There are big problems with this campaign (forecasting economic disaster that these cuts will visit on congressional districts across the country). The first is the substantial exaggeration involved in the ‘more than a million jobs’ claim. According to the Congressional Research Service, nearly two-thirds of the jobs in the aerospace industry come from building commercial planes. They don’t depend on Pentagon spending at all and are therefore not ‘at stake’ in the budget fight.” [The Hill, “Defense Industry Scare Tactics Won’t Create Jobs,” 3/29/12]

  • Christopher A. Preble, Cato Institute: The AIA’s other line of attack—the claim that substantial cuts in military spending will have a devastating impact on the economy, resulting in a million or more lost jobs—reveals the age-old broken-window fallacy. The AIA wants people to focus on that which is seen—defense workers who are laid off—and to ignore any consideration of how the economy as a whole will be better off if the resources that had previously gone to building planes and rockets are allocated elsewhere in the economy. These transitions are certainly difficult and painful for the individuals and firms involved, but they can be expected, all other factors being equal, to have salutary aggregate effects, especially over the long term. [The National Interest, “The Defense Lobby’s Greatest Fear,” 7/27/12]

  • James Brudney, professor of law at Fordham University, former staff director of the Senate subcommittee on Labor: “Whether defense contractors will need to send WARN Act notices is ‘certainly not a decision that needs to be made now,’ said James Brudney, a professor of law at Fordham University in New York City. ‘It looks more like political brinkmanship.’ The willingness of defense companies to consider job-cut notices months before they might be sent is telling in light of company resistance to the WARN Act before its passage, said Brudney, who advised lawmakers writing the legislation when he was Democratic staff director of the Senate subcommittee on labor. Back then, companies said advance talk of firings would sap employee morale, create the risk that workers would sabotage manufacturing facilities and hurt the ability of companies to raise capital, Brudney said in an interview.” [Bloomberg Businessweek, “Lockheed Uses You-May-Be-Fired Scare Tactics,” 7/10/12]

  • Gordon Adams, professor of U.S. Foreign Policy at American University School of International Service, expert on U.S. national security policy: “The jobs argument, flagrantly advanced by the Aerospace Industries Association (AIA) last week, is both flawed and hypocritical.  On both counts, it ought to be dismissed for what it is—a side show about the economy, rather than a straight-up argument about whether defense needs to be part of deficit and debt reduction, and whether we can or need to continue spending the highest sums we have ever spent on defense, peacetime or wartime, since the end of World War II.

    …Moreover, to add to the partial, and hypocritical argument AIA is making, the defense industry has no difficulty shedding employees in the service of its well-being, rain or shine, if shedding employees helps the bottom line. The AIA no longer provides long-term historical data, but back thirty years ago AIA data showed that well over one million people worked in the aerospace part of the defense industry in the United States. Today in a market that has more than doubled over the past decade, that sector's employment has shrunk to 621,000, according to AIA data.” [Capital Gains and Games, “Defense, Jobs, and the Makings of Hypocrites,” 10/30/11]

The truth is Americans believe it’s time to rein in runaway Pentagon spending:

  • Stimson Center: According to a recent Stimson Center study, the majority of Americans support much deeper cuts to the defense budget— by 18 percent or $103.5 billion. What’s more, the Stimson Center found that even when defense spending benefits their districts, voters were still willing to cut such spending. [5/10/12]

  • Open Letter from Right, Left, and Center Groups to Congress: “Indeed, our organizations with diverse ideologies and interests urge you to take action to ensure better fiscal stewardship at the Pentagon. . . Supporting the Mulvaney-Frank Amendment is a step towards doing so—but more cuts are needed. In today’s constrained economic climate, taxpayers cannot afford to throw precious resources away on unneeded or outmoded strategies for national security. Congress should begin to end wasteful spending and make smarter choices now.” [7/18/12]

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