Monday, May 27, 2024

"The Military-Industrial Stock Buyback Complex"

From Matt Stoller's BIG substack, April 15, 2023:

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 receive issues over email, you can do so here.

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 contract and the consulting giant’s control over national parks. As you may recall, I broke the story about 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."....


Earlier today:

See also, if interested:

 Pity they don't have that $110 billion they spent buying-back stock.

This buyback nonsense has actually reduced national security.

Well, buybacks and management so clueless that the CEO said NVIDIA just got lucky with artificial intelligence....