Why is the US military ceding ground to China? As a new DOD report shows, big defense contractors are middlemen whose main purpose is stock buybacks and dividends.
Welcome to BIG, a newsletter on the politics of monopoly
power. If you’re already signed up, great! If you’d like to sign up and
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Today I’m writing about an astonishing report
that came from the Pentagon this week on how Wall Street has wrecked
the defense industrial base. This chart, which shows stock buybacks are
up while research and development is down, is the key finding.
“Despite
improving profit margins and cash generation for defense contractors in
2010-2019 vs 2000-2009, the share of contractor spending on Independent
Research and Development (IR&D) and capital expenditures declined
while cash paid to shareholders in dividends and share repurchases increased by 73%” - DOD Contract Finance Study Report, April 2023
Before I get to that, I have a few announcements. First, there’s some good BIG-related news. Montana Congressman Ryan Zinke is demanding an investigation into Booz Allen’s Recreation.gov contract and the consulting giant’s control over national parks. As you may recall, I broke the story about Recreation.gov late last year, and the Wall Street Journal did a follow-up on it last week. There’s also a class action complaint against Booz Allen. So yay.
Second, I’ll now be sending occasional shorter missives to paid subscribers. On Wednesday, I sent out a shorter quick read
on how Wall Street expects action against drug middlemen. Don’t worry,
I’ll still be writing the longer stuff. If you want access to all the
writing and the BIG Discord server, you can subscribe here.
And now…
On
the eve of Germany’s invasion of Poland in 1939, America was woefully
unprepared for a conflict that everyone thought would come. Most
strategists knew the nation that could produce more with its industrial
base would probably win, and yet even so, the American business world
was oblivious. 85% of U.S. factory machinery dated from the 1920s or
earlier, and some predated the Civil War.
And the deeper one
looked the worse the situation seemed. The next war would be fought at
the cutting edge of technology, which is to say, with airplanes. And an
air force required the technological marvel of aluminum, which you could
only get from the longest-lasting industrial monopoly in U.S. history,
the Aluminum Company of America, or Alcoa. Aluminum, light and strong,
was also immensely energy-intensive to create, and Alcoa organized
production of 100% of it.
The President of Alcoa, Arthur Davis, a
hoarder of talent, tools, and inputs like bauxite, wasn’t worried. He
had promised there would be no shortage, that Alcoa, modern and
sophisticated as it was, could fulfill all military and civilian demand,
and then some. Yet even before the entry of America into the war, Davis
was proven wrong. Aerospace firms just couldn’t get their hands on
enough of the wonder metal.
After America joined the fight, the
shortage got worse. “Prime Minister Churchill said of the Royal Air
Force that never in history did so many owe so much to so few,” wrote
investigative journalist I. F. Stone. “It might be said of us that never
did a people do so little with so much,” he added. Politicians were
furious at Alcoa, as were military leaders. FDR demanded 50,000
airplanes a year, and the U.S. delivered that, and more. But to do so,
the national security apparatus, which has always lurked in the
background of monopoly power questions, had to help break Alcoa’s power,
through a mammoth antitrust suit, as well as industrial strategy in the
form of subsidies to nascent rivals.
Today, we face
something similar. Not a world war, fortunately, but a collapsing
defense industrial base that limits the American ability to supply its
military. And increasingly, American leaders are angry, not at Alcoa
this time, but at the defense contractors who hold market power over
what the military buys. From Javelins to ordinary ammunition to ship
repair to ball bearings, the U.S. military just can’t get what it needs. “I am not forgiving of the fact that you’re not delivering the ordinance we need,” said Admiral Daryl Caudle
at Surface Navy Association conference earlier this year. “All this
stuff about COVID this, parts, supply chain this, I just don’t really
care. We’ve all got tough jobs."....
