The coronavirus epidemic has already transformed the country, disrupting industries nationwide and causing thousands of Americans to lose their jobs. Congress recently approved over $2 trillion in spending to help businesses, large and small, and families cope with this crisis. But this level of spending also attracts profiteering. Among the industries ready to cash in are Pentagon contractors, which are already the top beneficiaries of government spending largesse while simultaneously demonstrating a history of misusing and wasting those funds.
“Boeing’s financial problems are of their own making, and taxpayers shouldn't have to bail out a company that has shown such little regard for public safety.”
Boeing’s request for a $60 billion bailout is an instructive case study. The hubris of asking for this much from taxpayers is particularly galling when the company prioritized shareholders in $43 billion in stock buybacks since 2009, and gross mismanagement of the 737 Max program that killed 346 people in five months. Boeing has tried to mitigate public concerns that this money would just go to additional profiteering activities by promising to give up the CEO and chairman’s pay and to suspend dividends, but that’s still just a drop in the bucket compared to how much the company is asking taxpayers for now. And unfortunately, Congress has at least partially acquiesced to Boeing’s request, carving out $17 billion in funds that seem to be tailored to benefit the company and others like it.
Boeing’s behavior isn’t uncommon among publicly traded defense companies. A 2017 investigation by the Providence Journal found the top five defense contractors spent more than $114 billion on share repurchases from 2005 to the first half of 2017. Boeing topped the list. William Lazonick, an economist at the University of Massachusetts Lowell who studies stock buybacks, told the Journal the practice benefits shareholders and executives, whose compensation often includes stock holdings, by boosting stock value. It can simultaneously hurt employees by taking money away from salaries and pensions. Boeing’s financial problems are of their own making, and taxpayers shouldn't have to bail out a company that has shown such little regard for public safety.
There are a number of ways taxpayers have already underwritten the financial security of the defense industry. In just the last year the top 20 defense contractors received $200 billion in contracts. On top of that, Good Jobs First’s Subsidiary Tracker reports the defense and aerospace industry in fiscal year 2019 alone raked in an estimated $808 million in federal subsidies and another $68.7 million in federal loan bailouts.
“It’s almost impossible to overstate the degree to which the defense industry has Pentagon officials’ ears.”
It’s almost impossible to overstate the degree to which the defense industry has Pentagon officials’ ears. Ahead of the budget rollout earlier this year, a number of senior Pentagon officials met with the CEOs of the defense contractors, and the secretary of defense tweeted a photo of the meeting. As the coronavirus crisis intensified, the Pentagon’s top acquisition official, Ellen Lord, recently instituted daily phone calls with the non-governmental Chamber of Commerce, the Professional Services Council, and the National Defense Industrial Association, as well as other major defense lobbying groups. One of the Aerospace Industries Association’s top asks of the Pentagon was for the defense industry to be declared “critical infrastructure,” so companies could force their employees to continue to come to work. The National Defense Industrial Association and others also asked the Defense Department “to consider accelerated contracting and disbursement of the approximately $160 billion of unobligated funds under the department’s control.” Those calls seem to have paid off already: On March 20, Lord issued a memo giving companies the designation they sought, and announced that the Pentagon was increasing the amount of money paid to contractors.
Frank Kendall, who held Lord’s position during the Obama administration, criticized the guidance for giving companies “license” to tell workers they have no choice but to come into work and risk spreading or contracting the virus. “What really is critical to national security in general is not the on-time delivery of products and services, but the people who provide those products and services,” he wrote in a column for Forbes. He noted that the Pentagon already has a number of contract mechanisms in place to accommodate the disruptive impact of the virus without putting employees in danger.
Unlike many executives and lobbyists, many of these employees building and maintaining weapon systems can’t telework. The Washington Post reported that union leaders for defense contractor employees have also begun to criticize companies’ decisions to endanger their workers. Representatives for employees at Bath Iron Works, operated by General Dynamics, complained workers were “sacrificial lambs to meet the needs of our customer.”
“Lord’s coziness with industry, as a former Textron executive herself, means that she appears to not even be challenging defense contractors’ arguments.”
That said, there are instances where companies are acting responsibly in the most affected areas. Boeing announced it was temporarily shutting down facilities in Seattle. Lockheed Martin temporarily closed F-35 plants in Japan and Italy—but then quickly reopened them, even though Italy remains one of the countries most affected by the virus.
Lord’s coziness with industry, as a former Textron executive herself, means that she appears to not even be challenging the defense contractors’ arguments. When he was still at the Defense Department, former Pentagon pricing czar Shay Assad had initially convinced Lord that the Pentagon need to reduce, not increase payments to contractors. Assad, who served in both the Trump and Obama administrations, told Bloomberg the scheme being implemented now to increase contractor payments is a “taxpayer rip-off,” estimating the top five contractors bought back $90.5 billion of their own stock from 2012 to 2017. And with interest rates as low as they are, “large business is more than capable of using their own cash or borrowing at minimal interest rates,” he said.
Those advance payments appear to be for the benefit of smaller suppliers, but in a statement shared with POGO over email, Assad pointed out that under current practices large defense contractors are already well positioned to cover costs. “Under the present regulations large business are already reimbursed 100% (not 80 % or 90%) of the contract financing that they supply to their subcontractors,” he wrote. “In addition, under the present regulations prime contractors are reimbursed for invoices submitted by their subcontractors before they pay their subcontractors.” That arrangement raises serious questions about whether the department’s generosity will actually benefit small businesses with the speed they need.
The government needs to provide relief to the Americans who are most adversely impacted by this crisis. And the behavior of the major defense contractors, including lobbying for policies that would endanger their employees, shows that bailing out their corporate leadership and boards should be our last priority.