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.
Knew a little bit about this corruption, but this article really puts a fine point on it all. Thanks, Matt. I guess :)
Any idea when WaPo will be copying...I mean doing a follow up?
I do have limited experience with Federal contracting in a few categories, and the way successful subs lock in profits from 10-20% is a nice business model. But what these primes have pulled off is nauseating.
Apr 15, 2023·edited Apr 15, 2023Liked by Matt Stoller, Todd Mentch
One important thing to remember in the Second World War is how spread out industry and manufacturing had to become to meet wartime needs. Models of firearms were being made across many companies other than the ones who owned the patents, some with no background in firearms. Small tractor companies were making parts for tanks. Massive new ammunition plants were built (luckily these were in a better place due to suppling Britain). The war was not won by a couple of massive firms shouldering it all and they often fell short. Well except for General Motors. They actually did a pretty damn good job. The point is the big conglomerates at the time had a hard time meeting demand on their own and often required serious restructuring while smaller firms stepped in to pick up the slack.
Apr 16, 2023·edited Apr 16, 2023Liked by Matt Stoller
I accidentally stumbled into a J.D. Vance interview a few days ago. I think you will find it interesting. It seems like more and more people are starting to sound the alarm on our military industrial capability.
Regarding this: with Ukraine in mind, do you think current US industrial base could do something similar? Whenever I see worried headlines about basic weaponry (ammunition for field arms, for instance) I think "In an all out war footing, we would be able to redirect existing plants, or build new ones, to supply a WW2 style multi front war."
War is unpredictable so who knows? The best chance we have however is to change course immediately and bring back and upgrade our manufacturing. There is something I am almost as concerned about as capacity, technical expertise. You can have machines and materials to do things but if you do not have the people who know how to make the tools and dies, maintain and repair the equipment, and know the ends and outs of complex processes, you're screwed. Most of the master machinists are old men now. Skilled specialists have been out of a job a long time. Even worse, it takes time for new people to learn these skills. It's not just machines and materials, we need people. You would be amazed at how much the aerospace industry outsources to small time machinists and gunsmiths across the country simply because they are some of the few people who have the knowledge to machine parts to complicated specifications. This needs to be taken as seriously as a part of our industrial base.
Hard Agree! Finding skilled crafts/trades people was always a treasure since the 90s, now it's a rare artifact. I would vote 10 times for any politician who talked about funding for the "skilled industrial arts and crafts technicians."
Niccolo Soldo touched on this a bit yesterday, referencing an article on the "Golden Age of Aerospace" in Palladium. Wide-ranging and fascinating piece describing the conditions and culture of America's glory days in defense engineering during the postwar years:
General Motors not only did a fine job for the United States during WWII but also for Nazi Germany. General Motors was the largest car manufacturer for Nazi Germany and had other corporate interests especially Opel also involved in war production for the Nazi's. General Motors war production for Nazi Germany was filtered through the many companies it owned in Europe particularly in Norway and Denmark. General Motors received $33 million dollars in reparations for Allied bombing damage over Germany during WWII. Of course the FBI investigated and determined that General Motors activity in Nazi Germany was collusion but of course not traitorous.
And let's not pick on General Motors when you have Standard Oil, IBM, Kodak, General Electric, Coca Cola and Chase Bank still the model for laundering money for Mexican cartels, European drug cartels, ISIS and of course Al-Gaeda at it's peak, all who participated in Nazi Germany's military build up and war effort.
So it is very possible that these companies were stretched to the breaking point of having to profit from both sides.
President and General Eisenhower is smiling in his grave now that his warning about the increasing power of the military industrial complex that it became so greedy and lethargic from their fattening wallets, that they cannot capitalize now completely from this farce of the Ukrainian dollar drain.
And in the case of Kaiser, bringing fresh ideas and changing the industry. Before he proved it was not only possible, but better than riveting, the industry said welding ships was impossible. Kaiser knew better because he had seen welding replace rivets in building projects.
There's another way the big primes screw up the subcontractors. When prime submits a bid for a major contract, that bid includes a list of maybe dozens of subcontractors, chosen by the prime to supply various components or activities. Each of those subcontractors is chosen by means known only to the prime, for any reason whatsoever subject only to internal review. The entire package is then presented to the government on a take-it-or-leave-it basis.
Even if there are three primes bidding on a contract (rare), that's only three sets of subcontractors out of the entire broader industry. The effect on the universe of subcontractors is profound, as the DOD's choices are limited to those approved by the primes.
The whole setup is intrinsically corrupt, and corrupting. Break up the primes, and the big contracts they are awarded; let the DOD administer its own contracts instead of paying the primes to do it for them. It's a fallacy that business can do things cheaper than government can -- as long as they're doing equivalent things.
Nobody understands this better than Marine Corps Vet Lucas Kunce who is fighting to replace runnin' Josh Hawley as US Sen. from Missouri. www.lucaskunce.com
For a deep drive, a detailed missive of industrial output during WWII, I highly recommend the book Brute Force, if you can find it. One of the more interesting things in regards to the Germans is that they actually wound down military industrial production after initiating the war. Meanwhile one of the precepts of the Japanese strategy was an overwhelming blow against the United States, because they were aware that ultimately the United States had the capacity if mobilized to out produce Japan on an epic scale. There's also a healthy discussion of logistics in the book, and frequent tables showing outputs of materials, and so forth. Fascinating read.
"In the 1990s post-Cold War era, the White House sought to cut defense spending. Bill Clinton’s administration arranged a deal with defense contractors; they would tolerate lower revenue or stagnant revenue, if they got higher margins."
Thank you for your article. I was aware of much you reported. The military-industrial complex is there for anyone to see. Policies pursued by the United States Government have delivered tremendous amounts of cash flow to the members of the defense industry for decades. It is shocking, the amount of industry consolidation that has been allowed. It’s my hope that the articles you publish will help to push back against the special interests of giant, wealthy, entrenched groups. That’s why I pay your subscription.
I am frustrated by how so many voices frame these issues in terms of dividends and share buybacks.
I pay your subscription to read your insights and support your work. I am satisfied with the value I receive. I simply do not care what you do with the money.
By the time the dividends are paid, and the shares purchased, the deeds are done.
Capitalism is a system. When this system is operated in a responsible way it is extremely powerful and rewarding to all the participants in the system. When a monopoly is allowed to exist, it creates unchecked economic returns which are used to build political power which is used to protect and grow the monopoly. Unfortunately, government is too often the most powerful participant. Every day elected representatives and operators within government use the power of government to bend the normal system of capital. Representatives want to be reelected and generals want a big payday in the private sector. They are well served by monopolies.
Tax monopoly revenue. Make the tax progressive. The monopolist will raise price which grows the margin opening the door for competition. When competition is enforced (another way of saying monopoly is destroyed), capitalism will bring more supply to industries with abnormally high margins. More supply means more, good paying jobs.
Attacking dividends and share buybacks is a canard, a MacGuffin. Worse, it’s a waste of effort.
Great post, and I like the way this single topic post really provides an update and an alarming further depth to your 2019 post on how we gave China the technology to build missiles and planes. So the “military-industrial complex” Eisenhower warned us about has now become the “military- industrial- financial complex”, but without the R&D that would help improve our security.
I hope the single subject short posts will let you step out of the swimming pool of documents you must wade thru everyday, and dry off (free thoughts time) once in a while!
Has anything been written about how this lack of resilience and innovation in military procurement processes threatens our attempts to stop climate degradation? Knowing full well that this is highly militarized world of Nation-States, I think no one will shut down petroleum/ fossil fuel production until they can convert all that military hardware into killing machines that do NOT run on fossil fuels. In my mind that is the black cloud that will never go away. It must be on Bidens’ mind too, I would hope, apart from his eagerness to please his corporate clients.
Hi Matt, great writing and summary. I would hope bipartisan support for the recommendations. Also, wondering if the Armed Services have eliminated the redundancies with their supply chain?
Great article! I had no idea the extent of corruption but it doesn’t surprise me. I highly doubt we’ll see meaningful changes but this report is a great first step.
Add, how hard is it, "IF" research as to 'New products or idea`s", paid for by the people- gov. OK, you as a private person or company can go produce that. BUT, how in the hell Your able to go patent it?
Plus, and unable to repair a product, you as a person Like a farmer or Gov. OK, maybe break a warrentee, ONLY if You totally change how it works, used it for what it not met to be used for or bypassed a working part- function.
The budget instability really hurt’s Research contracts. Those get held up while congress sits on the CR and the bureaucracy has far less time to initiate new investigations.
Knew a little bit about this corruption, but this article really puts a fine point on it all. Thanks, Matt. I guess :)
Any idea when WaPo will be copying...I mean doing a follow up?
I do have limited experience with Federal contracting in a few categories, and the way successful subs lock in profits from 10-20% is a nice business model. But what these primes have pulled off is nauseating.
One important thing to remember in the Second World War is how spread out industry and manufacturing had to become to meet wartime needs. Models of firearms were being made across many companies other than the ones who owned the patents, some with no background in firearms. Small tractor companies were making parts for tanks. Massive new ammunition plants were built (luckily these were in a better place due to suppling Britain). The war was not won by a couple of massive firms shouldering it all and they often fell short. Well except for General Motors. They actually did a pretty damn good job. The point is the big conglomerates at the time had a hard time meeting demand on their own and often required serious restructuring while smaller firms stepped in to pick up the slack.
Correct!
I accidentally stumbled into a J.D. Vance interview a few days ago. I think you will find it interesting. It seems like more and more people are starting to sound the alarm on our military industrial capability.
https://www.youtube.com/watch?v=Fhieu6Pwmcg
Regarding this: with Ukraine in mind, do you think current US industrial base could do something similar? Whenever I see worried headlines about basic weaponry (ammunition for field arms, for instance) I think "In an all out war footing, we would be able to redirect existing plants, or build new ones, to supply a WW2 style multi front war."
Your thoughts on this?
War is unpredictable so who knows? The best chance we have however is to change course immediately and bring back and upgrade our manufacturing. There is something I am almost as concerned about as capacity, technical expertise. You can have machines and materials to do things but if you do not have the people who know how to make the tools and dies, maintain and repair the equipment, and know the ends and outs of complex processes, you're screwed. Most of the master machinists are old men now. Skilled specialists have been out of a job a long time. Even worse, it takes time for new people to learn these skills. It's not just machines and materials, we need people. You would be amazed at how much the aerospace industry outsources to small time machinists and gunsmiths across the country simply because they are some of the few people who have the knowledge to machine parts to complicated specifications. This needs to be taken as seriously as a part of our industrial base.
Hard Agree! Finding skilled crafts/trades people was always a treasure since the 90s, now it's a rare artifact. I would vote 10 times for any politician who talked about funding for the "skilled industrial arts and crafts technicians."
Niccolo Soldo touched on this a bit yesterday, referencing an article on the "Golden Age of Aerospace" in Palladium. Wide-ranging and fascinating piece describing the conditions and culture of America's glory days in defense engineering during the postwar years:
https://www.palladiummag.com/2023/04/04/the-golden-age-of-aerospace/
General Motors not only did a fine job for the United States during WWII but also for Nazi Germany. General Motors was the largest car manufacturer for Nazi Germany and had other corporate interests especially Opel also involved in war production for the Nazi's. General Motors war production for Nazi Germany was filtered through the many companies it owned in Europe particularly in Norway and Denmark. General Motors received $33 million dollars in reparations for Allied bombing damage over Germany during WWII. Of course the FBI investigated and determined that General Motors activity in Nazi Germany was collusion but of course not traitorous.
And let's not pick on General Motors when you have Standard Oil, IBM, Kodak, General Electric, Coca Cola and Chase Bank still the model for laundering money for Mexican cartels, European drug cartels, ISIS and of course Al-Gaeda at it's peak, all who participated in Nazi Germany's military build up and war effort.
So it is very possible that these companies were stretched to the breaking point of having to profit from both sides.
President and General Eisenhower is smiling in his grave now that his warning about the increasing power of the military industrial complex that it became so greedy and lethargic from their fattening wallets, that they cannot capitalize now completely from this farce of the Ukrainian dollar drain.
And in the case of Kaiser, bringing fresh ideas and changing the industry. Before he proved it was not only possible, but better than riveting, the industry said welding ships was impossible. Kaiser knew better because he had seen welding replace rivets in building projects.
There's another way the big primes screw up the subcontractors. When prime submits a bid for a major contract, that bid includes a list of maybe dozens of subcontractors, chosen by the prime to supply various components or activities. Each of those subcontractors is chosen by means known only to the prime, for any reason whatsoever subject only to internal review. The entire package is then presented to the government on a take-it-or-leave-it basis.
Even if there are three primes bidding on a contract (rare), that's only three sets of subcontractors out of the entire broader industry. The effect on the universe of subcontractors is profound, as the DOD's choices are limited to those approved by the primes.
The whole setup is intrinsically corrupt, and corrupting. Break up the primes, and the big contracts they are awarded; let the DOD administer its own contracts instead of paying the primes to do it for them. It's a fallacy that business can do things cheaper than government can -- as long as they're doing equivalent things.
And this, folks, is why I am proud to be a paying subscriber to this substack. I sent this along to every single one of my military friends.
Any responses?
Nobody understands this better than Marine Corps Vet Lucas Kunce who is fighting to replace runnin' Josh Hawley as US Sen. from Missouri. www.lucaskunce.com
For a deep drive, a detailed missive of industrial output during WWII, I highly recommend the book Brute Force, if you can find it. One of the more interesting things in regards to the Germans is that they actually wound down military industrial production after initiating the war. Meanwhile one of the precepts of the Japanese strategy was an overwhelming blow against the United States, because they were aware that ultimately the United States had the capacity if mobilized to out produce Japan on an epic scale. There's also a healthy discussion of logistics in the book, and frequent tables showing outputs of materials, and so forth. Fascinating read.
I think Lenin said, "The Capitalist will sell you the rope you hang him with."
Great article. I've been asking what we got for our $700 billion a year and this is the first time I've seen an answer.
"In the 1990s post-Cold War era, the White House sought to cut defense spending. Bill Clinton’s administration arranged a deal with defense contractors; they would tolerate lower revenue or stagnant revenue, if they got higher margins."
In a nutshell: https://youtu.be/UYYgUwLaWw8
Thank you for your article. I was aware of much you reported. The military-industrial complex is there for anyone to see. Policies pursued by the United States Government have delivered tremendous amounts of cash flow to the members of the defense industry for decades. It is shocking, the amount of industry consolidation that has been allowed. It’s my hope that the articles you publish will help to push back against the special interests of giant, wealthy, entrenched groups. That’s why I pay your subscription.
I am frustrated by how so many voices frame these issues in terms of dividends and share buybacks.
I pay your subscription to read your insights and support your work. I am satisfied with the value I receive. I simply do not care what you do with the money.
By the time the dividends are paid, and the shares purchased, the deeds are done.
Capitalism is a system. When this system is operated in a responsible way it is extremely powerful and rewarding to all the participants in the system. When a monopoly is allowed to exist, it creates unchecked economic returns which are used to build political power which is used to protect and grow the monopoly. Unfortunately, government is too often the most powerful participant. Every day elected representatives and operators within government use the power of government to bend the normal system of capital. Representatives want to be reelected and generals want a big payday in the private sector. They are well served by monopolies.
Tax monopoly revenue. Make the tax progressive. The monopolist will raise price which grows the margin opening the door for competition. When competition is enforced (another way of saying monopoly is destroyed), capitalism will bring more supply to industries with abnormally high margins. More supply means more, good paying jobs.
Attacking dividends and share buybacks is a canard, a MacGuffin. Worse, it’s a waste of effort.
Great post, and I like the way this single topic post really provides an update and an alarming further depth to your 2019 post on how we gave China the technology to build missiles and planes. So the “military-industrial complex” Eisenhower warned us about has now become the “military- industrial- financial complex”, but without the R&D that would help improve our security.
I hope the single subject short posts will let you step out of the swimming pool of documents you must wade thru everyday, and dry off (free thoughts time) once in a while!
Has anything been written about how this lack of resilience and innovation in military procurement processes threatens our attempts to stop climate degradation? Knowing full well that this is highly militarized world of Nation-States, I think no one will shut down petroleum/ fossil fuel production until they can convert all that military hardware into killing machines that do NOT run on fossil fuels. In my mind that is the black cloud that will never go away. It must be on Bidens’ mind too, I would hope, apart from his eagerness to please his corporate clients.
Hi Matt, great writing and summary. I would hope bipartisan support for the recommendations. Also, wondering if the Armed Services have eliminated the redundancies with their supply chain?
Great article! I had no idea the extent of corruption but it doesn’t surprise me. I highly doubt we’ll see meaningful changes but this report is a great first step.
Great article. Very illuminating!
(just subscribed after weeks of reading)
Add, how hard is it, "IF" research as to 'New products or idea`s", paid for by the people- gov. OK, you as a private person or company can go produce that. BUT, how in the hell Your able to go patent it?
Plus, and unable to repair a product, you as a person Like a farmer or Gov. OK, maybe break a warrentee, ONLY if You totally change how it works, used it for what it not met to be used for or bypassed a working part- function.
The budget instability really hurt’s Research contracts. Those get held up while congress sits on the CR and the bureaucracy has far less time to initiate new investigations.