United States Defense Contractors Math

It Started with Clinton Administration Reducing Defense Spending after the Cold War

By Chuck Warren

The United States defense industrial base has not been in such bad shape since before World War II. It costs too much to produce too little. Let’s start with an example.

After Russia invaded Ukraine in 2022, the Ukrainians initially relied on Javelins to stop the Russians. The Pentagon did not have enough to supply the Ukrainians and negotiated with the private sector to increase production.

At the time, the United States produced 2,100 Javelins a year. After the negotiations, Lockheed Martin, which produces Javelins, agreed to increase its production to 4,000 a year. One small problem: Ukraine was depleting 500 a day. The weeks of negotiations resulted in the annual production of what would be used in 8 days.

Speaking of Lockheed Martin, it is one of the five major Department of Defense contractors. The other four are General Dynamics, Boeing, Raytheon, and Northrop Grumman. Why do some of these companies have two names?

In 1993, the Clinton administration decided to reduce defense spending, assuming that the end of the Cold War meant we would never face militarized enemies again. At the time, there were 51 major defense contractors. Having lost their contracts, they had to either merge or go out of business. So Lockheed and Martin merged into Lockheed Martin. Northrop and Grumman became Northrop Grumman. These 51 companies either merged or went bankrupt, reducing the number from 51 to 5.

Today, they can manipulate prices and run themselves into the ground, knowing that there’s nothing the U.S. government can do but bail them out. Take Boeing, which has been a terribly run company for a long time. It also happens to be one of the only companies that can produce air tankers and bombers—and one of the only two in the free world that can make commercial airplanes.

If the government cuts off Boeing, in the long term, it will be good because there will be new businesses filling the void. But the problem is that in the short run, there won’t be anybody producing air tankers. So we have to put up with it.

There have been startups trying to add competition to the market and challenge the five major contractors, but none of them has made it to the top. Too often, these companies produce a new and better system than the big five, but they can’t sell it because they don’t have the reputation and lobbyists that their corporate rivals have. What happens is that these corporate rivals jump in and buy out these small businesses.

Imagine if you have spent fifteen years with a modest income creating something, and it finally comes to fruition. The only issue is that there is only one customer who would need it: the federal government. And to sell it, you have to get past an army of lobbyists and lawyers on your competitors’ side. If you luck out, in five years, you’ll have convinced Congress and the Pentagon to buy what you are offering and become a multimillionaire.

There is a second option: One of your competitors is at the door with a billion-dollar check to buy your company right now. Most people sell and call it a day. This happens all the time, which is how big defense corporations keep competition out of business.

Simply put, the five major corporations have figured out how to game the system.

Why is free market capitalism failing here? It is because defense is the one area that capitalism does not apply. Normally, the entire world is the customer of a product. Anybody can buy it. But military productions are the only place where there is only one customer, and it is the government. Even if you want to sell your stuff to an American ally, you still need permission from the U.S. government.

And there is no way around it. Even Adam Smith, the father of capitalism, wrote in Wealth of Nations that national defense was one of the few exceptions to the free market.

There are some other problems at work too. One is that the Pentagon does not want to commit itself to long-term contracts. So corporations are often asked to create new production lines for new systems that might be closed down in a year or two. This also jacks up the price because they have to account for this risk when they accept short-term contracts. Lockheed Martin didn’t want to produce Javelins because it had to open a new production line that cost too much, and it feared that once the Ukraine War was over, its new production line would have been useless.

Another problem is government regulations and mandates, especially under Democrats. These companies have to deal with extreme environmental, workers’ rights, DEI, and other regulations that increase production costs. In turn, they either have to reduce the quality of their products or charge the government more to make up the difference.

To get out of this problem, we need to do a few things.

The first is obviously getting rid of these ridiculous mandates, which the Trump administration is doing anyway.

We should also invest more in our security as a nation. I know that it sounds silly to say that we need to spend more money to fix the problem of paying too much, but hear me out.

This is a short-term investment to lower costs in the long run. By investing more, the Pentagon will be able to take risks on new systems and businesses. They in turn will not have to sell their companies. Rather, they can grow them and provide competition to the five major contractors to produce better weapons instead of gaming the system.

Even with the major contractors, more money will mean long-term contracts. Let us put it this way: With long-term contracts, you might have to pay 50% more over a few years, but you will get three times as many weapons. So the price of each piece will end up being lower, and you will have many more of that weapon in the arsenal.

Everybody in Washington knows that the defense industrial base is in trouble and cannot keep up with China. The problem is that everybody knows that the solution is to spend more now to save money tomorrow. But very few people want to do it because they will not be around to take the credit for it, and they would rather pass the problem to their successors. And the American people will be the one paying a great price for this—if lucky, in more dollars, but possibly in blood.

You can see the age-old problem of our politics in defense too: Politicians will not solve a crisis until it becomes a living catastrophe, but those who let the crisis become a catastrophe are long gone and will not be held accountable. (It is how the crisis in Europe became World War II. It is how the debt problem created by entitlements could bankrupt the lives of our children.)

But the bottom line is that our defense industrial base needs a dollar today to save ten dollars tomorrow. It needs a dollar today so our children will not have to board a ship to go and fight China because we’re too weak to deter a war. And the sooner we fix it, the more blood and treasure we save America.

Note: the opinions expressed herein are those of Chuck Warren only and not his co-host Sam Stone or Breaking Battlegrounds’ staff.