Senate Should Join House to Curb Defense 'Welfare' the Pentagon Should Stop Paying for Industry Mergers

By Korb, Lawrence J. | The Christian Science Monitor, September 12, 1996 | Go to article overview

Senate Should Join House to Curb Defense 'Welfare' the Pentagon Should Stop Paying for Industry Mergers


Korb, Lawrence J., The Christian Science Monitor


The Republican-dominated Congress has been rightly criticized for adding pet projects and wasteful spending to this year's proposed defense budget. All told, the House and Senate have added more than $10 billion for some 100 items contained neither in the Pentagon's five-year plan nor in President Clinton's request.

But the GOP leadership in the House has not received credit for ending what the Wall Street Journal called a multibillion windfall the Clinton administration gave defense corporations by providing government subsidies for defense mergers and acquisitions. Unfortunately, the Senate refused to support the House in ending this egregious corporate welfare, and the issue will have to be settled in conference.

This subsidy policy was initiated in the summer of 1993 by John Deutch, then the Pentagon's acquisition czar. Without informing the Congress or even changing the federal acquisition regulations, Mr. Deutch, who now runs the CIA, allowed defense companies to begin billing the Pentagon for the costs of mergers and acquisitions. To date, the Defense Department has paid about $300 million to Hughes, Martin Marietta, Northrup Grumman, and United Defense. And over the next three years, the Pentagon will pay another $3 billion to the likes of Lockheed-Martin, Boeing, and Raytheon, unless the conference on the defense appropriations bill supports the House position. The justification for Deutch's decision is that these subsidies have always been allowed and that they are necessary to promote the rational downsizing of the defense industry. According to the Pentagon, without these subsidies defense companies would have little incentive to merge. Since the mergers will reduce overhead costs, the Defense Department will save more money than it spends. Restructuring costs are the price we must pay today to realize cost savings tomorrow, goes the Pentagon refrain. While these reasons sound fine in theory, they are not supported by the facts. This is indeed a new policy. From the Nixon administration through the Bush administration, the Defense Department held that government is not concerned with the form of the contractor's organization. As late as 1992, the Bush administration rejected a Hughes Aircraft request to be reimbursed for $112 million in costs resulting from its acquisition of General Dynamics Space Division. But, more importantly, the new policy is neither necessary nor cost effective. Mergers and acquisitions always have and always will be a staple of defense industry. Just about every defense company that exists is a product of a merger, some decades old. McDonnell bought Douglas in the 1960s, General Dynamics acquired most of its major subsidiaries in the '70s and '80s, and Martin Marietta bought General Electric's defense division in the early '90s. …

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