This rebroadcast originally aired on March 1, 2023.
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In 1993, then Secretary of Defense Les Aspin invited the CEOs of America’s largest defense contractors to a secret dinner.
Norm Augustine, then the head of Martin Marietta, remembers getting the call.
“We showed up for dinner at the Pentagon one night dutifully, none of us knowing why we were there,” Norman Augustine, former chairman and CEO of Lockheed Martin, says.
“I happened to be seated next Les Aspin, and I remember I said, ‘Les, this is awfully nice of you to invite us all to dinner, we’re all pleased to have a free meal, but why are we here?’ And he said, ‘Well, in about 15 minutes, you’re going to find out. You probably aren’t going to like it.’”
Today, On Point: How a secret dinner at the Pentagon kicked off a massive consolidation in the defense industry.
Guests
Norman Augustine, former chairman and CEO of Lockheed Martin. U.S. undersecretary of the Army from 1975 to 1977.
Rep. John Garamendi, Democratic Representative for California’s 8th congressional district. Member of the House Committee on Armed Services and the House Committee on Transportation and Infrastructure.
Also Featured
Taylor Giorno, money-in-politics reporter at OpenSecrets, a research and government transparency group tracking money in politics and its effect on elections and policy.
Show Transcript
MEGHNA CHAKRABARTI: The Pentagon’s budget is not big enough. National debt be damned. That is essentially what Republican Senator Mitch McConnell declared yesterday. Saying, if anything, substantial increases in the defense budget are in order.
MITCH McCONNELL: The defense budget ought to reflect the nature of the threat. We have the ongoing challenge of meeting China in the future. And clearly, in this environment, we need to continue to plus up defense.
CHAKRABARTI: McConnell isn’t asking Congress to do anything new. The House and Senate have a substantial bipartisan history of ‘plussing up’ the defense budget. Take the most recent omnibus spending package passed in December 2022. It’s $1.7 trillion. The Pentagon alone gets half the pie, a record $858 billion. Every other federal agency together received a total of $772 billion. And by the way, that $858 billion is more than the DOD asked for. Congress plussed up the DOD budget by 10%.
The Biden administration had requested only a 4% defense increase in its budget proposal. Meanwhile, that same Congress declined to plus up non-defense spending. Put crudely, the Pentagon gets more money than it needs without even asking. Meanwhile, parents who could use that expanded child tax credit. Sorry, you’re out of luck. This is On Point. I’m Meghna Chakrabarti. Back in September of 2021, we did a show trying to understand how money works in the Pentagon and we learned some rather interesting things, such as:
LINDSAY KOSHGARIAN [Tape]: The Pentagon budget today is almost twice as high as it was in the late 90s.
And no one really knows where all the money is going because the Pentagon has never successfully completed an audit.
REP. MARK POCAN [Tape]: And all we ever get are excuses from the White House, the Department of Defense, why they can’t do it. Well, that’s absolutely B.S. I mean, you can. Like any other area you can have accounting for what happens, but they don’t.
CHAKRABARTI: Now, we haven’t been able to stop wondering why. The Pentagon’s budget could surpass $1 trillion in the coming years. So what are the factors driving this unimpeded growth? Well, obviously, there are a lot of them, and they are complicated. So today, we’re going to focus on just one. It’s a secret dinner that took place deep in the Pentagon back in 1993, and it transformed America’s military industrial complex.
GEORGE H. W. BUSH [Tape]: For over 40 years, the United States led the West in the struggle against communism and the threat it posed to our most precious values. This struggle shaped the lives of all Americans. It forced all nations to live under the specter of nuclear destruction. That confrontation is now over.
CHAKRABARTI: President George H.W. Bush on December 26th, 1991. Two years earlier, the Berlin Wall had fallen, and Bush and Soviet Premier Mikhail Gorbachev met at the Malta summit, a moment heralded as the end of the Cold War. With the Soviet threat receding, U.S. lawmakers saw a rare opportunity at home a chance to reduce America’s vast military spending.
DICK CHENEY [Tape]: As we reduce defense spending and build down our forces, we must do so with a strategy and with common sense as our guide.
CHAKRABARTI: That’s then Secretary of Defense Dick Cheney in March of 1990 as Congress considered defense appropriations for the next year.
CHENEY [Tape]: We should not engage in the kind of radical reductions that followed World War II, Korea and Vietnam. Each reduction left us weaker. Each reduction had to be reversed at great cost. We are now on a prudent path to lower defense spending, one guided by our strategy and an understanding of our enduring military requirements.
CHAKRABARTI: Of course, the United States was soon at war again. That August, Saddam Hussein’s Iraq invaded Kuwait, and President George H.W. Bush authorized the call up of U.S. reserve forces. Remarkably, the House did not back away from trimming Pentagon spending. This is Les Aspin, Wisconsin Democrat and then chair of the House Armed Services Committee, speaking when the House passed the budget in September of 1990.
LES ASPIN [Tape]: The House today, I think, passed the first defense bill of the new post-Cold War era, and it provides for a military that is still primarily shaped to meet the Soviet threat. But I think it takes the first steps towards buying the right stuff for a new kind of a defense.
CHAKRABARTI: From 1991 to 1996, the defense budget dropped by more than 15%. In 1992, then presidential candidate Bill Clinton made a campaign promise. The end of the Cold War required a transformation of the military ‘from the bottom up.’ And in 1993, President Bill Clinton named Les Aspin, his first secretary of defense. Well, Aspin’s bottom-up review influenced the development of the 1994 Pentagon budget.
One thing was clear. Spending reductions were going to decimate the nation’s defense contractors. William Perry, then deputy secretary of defense, reportedly said, quote, ‘We expect defense companies to go out of business. We will stand by and watch. It happened.’ Except that Aspin and Perry didn’t exactly stand by. In the fall of 1993, they quietly invited CEOs of the nation’s top defense contractors to dinner at the Pentagon. Norman Augustine was one of the invitees and he joins us now. Mr. Augustine, welcome to On Point.
NORMAN AUGUSTINE: Thank you. Very nice to be with you.
CHAKRABARTI: In 1993, what was your title?
AUGUSTINE: At that time, I was the chairman and CEO of Martin Marietta Corporation, which was an aerospace firm.
CHAKRABARTI: Aerospace and major missile designer and manufacturer as well, a very important company in the world of defense. So when did you get this call from the Pentagon that you were invited to dinner there?
AUGUSTINE: Well, as you said, it was in the fall of 1993. That was a time that the Cold War would come to an end, and really the Berlin Wall fell in 1989. Soviet Union ceased to exist in 1991, so defense appeared to be entering into a new world. And we were invited by Secretary Aspin to a dinner at the Pentagon. When I say we, it was probably 20 or 25 CEOs of aerospace defense … companies.
CHAKRABARTI: Did they tell you why Secretary Aspin wanted you to come to the Pentagon with your colleagues from the defense contracting world in person?
AUGUSTINE: We were simply invited to come to dinner in the secretary’s dining room next to his office. And needless to say, that’s an invitation you don’t refuse. So we all appeared.
CHAKRABARTI: You actually ended up sitting right next to Secretary Aspin, is that right? During the dinner portion?
AUGUSTINE: During the dinner. But for whatever reason, I don’t know, but I happened to be sitting next to the secretary. And of course, I wonder why I was there. So I said to him, these were very hard times, and it was nice to get a free meal. But why are we here?
CHAKRABARTI: What did he say?
AUGUSTINE: He responded that you’ll know in a few minutes, and you probably won’t like it.
CHAKRABARTI: Oh, dear. Okay. So I’m sure that that didn’t make you feel terribly confident about what was going to happen next. But then I understand that dinner wraps up and you go into a conference room nearby. And was it William Perry who then began speaking?
AUGUSTINE: That’s accurate. We went to a little room next to the dining room by the secretary’s office. It really wasn’t a conference room. More just a little presentation room with a screen and the 20 or 25 of us had chairs there and looked at the screen. The secretary welcomed us all. Then deputy secretary Bill Perry made a presentation.
CHAKRABARTI: And in that presentation, William Perry provides basically some information about what the Pentagon thinks is going to happen regarding its procurement over the next several years. What did Perry say?
AUGUSTINE: Well, it was … obviously a difficult time for the Defense Department. As the U.S. has often done at the end of a war is cut way back in defense. And people spoke at that time of the defense dividend, the peace dividend, that was the end of the Cold War and that the country could divert funds to other reasons. The Defense Department clearly was going to have a major budget cut. And if I take the example of the industry I’m most familiar with, aerospace, at that time, there were about 15 companies.
And the ideal from a standpoint of national security would be to continue to have 15 very strong companies of various sizes. It would be good for competition, would be good for the industrial base. The problem was that wasn’t a choice. And so I’m in no way critical of what the position that Secretary Perry took. I think they had bad choices to choose from, and he did the best you could have done under the circumstances.
… Secretary Perry made a presentation using a graph that was projected on the screen. And it was a stunning graph, so much so that the following day I went over to the Pentagon and asked for a copy of it, which I still have. And what was startling about it was that the Defense Department was saying there are way too many companies in the defense industrial base. That we can’t afford them. And that we couldn’t have a bunch of companies with half full factories and not enough money to invest in research and development, huge overhead, high costs. And we need to consolidate the industry.
And just to give you an example, the chart had a column on it that showed how many companies in various categories of military equipment, like fighter airplanes, tanks or what have you, how many companies the Defense Department was going to be able to afford to keep in business. And as an example, there were 16 categories of equipment and there were three. The government said it could keep three companies in business in one of the categories. In another of the categories it could afford to keep, let’s see, it was six categories, it could afford to keep two companies in business. And there were seven categories where it considered it could only keep one company in business.
CHAKRABARTI: Mr. Augustine, you were just describing how at this last supper, Bill Perry had this chart. And it showed various categories of military equipment and spending. Bombers, submarines, tanks, things like that. And then there was one column that showed how many companies were currently providing that equipment. Like, say, I believe in the early 90s, there were like three main companies that were providing equipment for bombers, let’s say. And then Perry had a second column that showed how many the Pentagon felt like they could keep in business or that they would need in the coming years, post-Cold War. And in some of those columns, there was just the number one. Do I have that right?
AUGUSTINE: That’s accurate. Needless to say, I was stunned, for really two reasons. One, it pointed to how fragile our defense industrial base was going to become. But there was another factor that to me was also important, that in those areas there would not be competition. I happen to be a strong believer in competition. The free enterprise system, I think has served our country well. And apparently we were in such a financial position where we weren’t going to be able to afford that and in some areas.
CHAKRABARTI: So then what did Aspen and Perry tell this gathering of CEOs from the defense industry? Like this is what’s happening. The defense budget is going to decline. This is how many companies that we can continue to work with. Did they have any recommendations of what you should do as you filed out of the room?
AUGUSTINE: They did. They had made very clear what they could afford and they were going to pay for companies that had one third of all factories and inefficiencies to go with that. And they said that the government was not in the business of redesigning companies or consolidating industries or putting people in or out of business. That was up to us, the CEOs of the companies that were in the industry at the time.
And that was quite an awakening, they heard from the Defense Department on how small an industry would be afforded. And I should add to that that in serious war time, the defense industrial base is really the national industrial base. And it too had manufacturing was severely declining at the same time. And in 1980, 18% of the workforce in the nation was in the manufacturing world. Shortly after the Last Supper it was 7%. So the commercial industrial base was declining and the defense industrial was going to decline. Big worry for any future need for large scale military equipment.
CHAKRABARTI: Now, walking out of the meeting were the various CEOs, including you, Mr. Augustine, were you sort of looking at each other being like, Hey, good luck to ya?
AUGUSTINE: Yes, I was somewhat surprised by the reaction. It was kind of things are going to be very tough for you and your company, but nobody seemed to be absorbing it for their own company. And the next day, I was asked by a reporter what had happened at the dinner, and I said, well, it was a last supper. And that sort of stuck. And it was in many regards, the Last Supper.
CHAKRABARTI: You’re the one who came up with that phrase. It was off the cuff?
AUGUSTINE: I’m sorry. I didn’t hear that.
CHAKRABARTI: When you said to that reporter that it was like the Last Supper for the defense base? Was that just an off the cuff phrase?
AUGUSTINE: Oh, absolutely. Just popped … [in] the mind at the time. But there had been a lot of curiosity, both in industry and in the media that relates to the industry as to why we were all being invited to dinner at the Pentagon. That never happened before to my knowledge. And so when they asked, it just occurred to me, well, it was the Last Supper.
CHAKRABARTI: So really the Pentagon said this is happening. There’s going to be a reorganization. You guys take care of it. Now, one thing that could have happened is that companies could have just gone out of business. But that’s not what happened. There was this incredible period of consolidation and mergers. So can you tell me a little bit, Norman Augustine, about the roles or the role that policies at the Pentagon itself or politics played in advancing the mergers of the company, for example, that you ended up being the CEO of, Lockheed Martin?
AUGUSTINE: The policy of driving companies out of business, I wouldn’t even say that was a policy. The policy was to streamline the defense industry so it didn’t have a lot of overhead. And I also saw many of these companies had capabilities that the government wanted to maintain. But in the next three years, we saw our industry lose 40% of its employees to the aerospace industry, and nearly 70% of the companies were basically absorbed and other companies were combined together to be more efficient. And it saved the government a great deal of money. The problem was it reduced the size of the industrial base, should we need one in the future.
And I have to say very quickly here that this has not been uncommon, though. I mentioned that we talked about the peace dividend at the end of the Cold War during World War II in Great Britain. The comment was made that we’ll have peace in our time. And you go back to at the end of World War I, Churchill made what I thought was a more remarkable statement right at the end of the war. He said that war is unthinkable in this modern world that we live in. We have the League of Nations, We have travel people from all around the world getting to know each other. Businesses work in all countries together. And it’s just unthinkable that we could have a major war. And then he said, it would be a pity if we were wrong.
And that’s the tough part of the issue. When you don’t need defense in the short term, it’s very tempting and probably appropriate in some cases to cut back. The trick is not to cut back so far. And at that time, at the Last Supper, China wasn’t even an issue. I was among the first Americans to ever travel in China, and huge crowds would follow me just because they were curious. I saw maybe a half a dozen bicycle. That was 1978. Excuse me, half a dozen automobiles. Everybody had bicycles. One of the questions I often got from people in China, they had apparently heard that Westerners were supposed to be wealthy. People in China would ask me, how many bicycles do you own? That was a measure of wealth.
And so China wasn’t even on the cards at that time, or in the cards. Russia at the time, or even today, Russia is a country with a population of Mexico or a GDP of Spain and 16, 050 deliverable nuclear warheads. I think it was John McCain that said Russia is a filling station with nuclear warheads. And we’re seeing what that means in today’s world when one thinks about places like Ukraine, Taiwan and so on.
CHAKRABARTI: Well, so the sort of change in global context is important to keep in mind as we talk about sort of where the world is now. But I want to just refocus for a moment on the creation of Lockheed Martin as a company. Because as you know well, the world of M&A is littered with a lot of mergers that didn’t quite go as planned in that they didn’t accomplish what was hoped for in bringing companies together. But when Lockheed Martin was formed, I think something like, what, 15, 16 or 17 groups in a sense, were brought into one company. Did the Pentagon and particularly the Justice Department, did they do anything to actually smooth the way for that merger to succeed?
AUGUSTINE: Well, you make an interesting point, and that is it. The history of mergers and acquisitions in the United States has it. About 80% fail to accomplish the objectives they set out to accomplish. And those aren’t just in the defense world. Those are companies overall. And so to go into a strategy of mergers and acquisitions was obviously high risk. And also to build a bigger company in a time when the market was collapsing or was also a risk. There were good reasons to take that risk, at least in my view, and our board view and many other boards.
And so we set out to put together pieces of companies or all of companies, and we put together … about 17 organizations in the next couple of years. And became much more efficient and were able to provide a great deal of savings to the government from what they were purchasing from us. I’ve said at the time, and I’d say it again, that I’d rather have 17 healthy companies in industry rather than 17 weak companies. But the 17 healthy company wasn’t on the agenda. And so the question was, would you like 17 companies or three or four strong ones or even, as it turned out, one or two. That was the choice. And the antitrust world, at that point in time, was very supportive of the companies going together with a great deal of encouragement on the part of the Defense Department.
CHAKRABARTI: At that point in time. Because I understand that you, for example, a little later on, Lockheed Martin wanted to, I think, acquire General Electric Aerospace. But there were parts of the government that were maybe looking on that not so kindly. And you called Bill Perry up and said, hey, we’re trying to do this merger. And your colleagues over at DOJ aren’t really falling in line. Help us out here.
AUGUSTINE: Yes. The first merger we got involved in was with General Electric Aerospace Company or Division, I guess. And the antitrust folks at that time were making it very hard to put the two organizations together. That was the beginning, as I said. And so I actually watched the Pentagon visit with Secretary Kerry and said that if you really want the Iraqi industry to consolidate, you better tell your friends in the government to get with the program.
CHAKRABARTI: And they did thereafter. So, Bill Perry’s role here is quite important because by 1997, things started changing in the Pentagon, the Department of Defense, that was once encouraging after the Last Supper, all this big consolidation in the defense sector, it was starting to look a lot different.
WILLIAM PERRY [Tape]: The hardest farewell to say is to the troops who served me and whom I have served. Words cannot adequately describe my pride in you.
CHAKRABARTI: Now, that is William Perry in January of 1997, on his way out as secretary of defense. Now, recall, he was the guy back in 1993 who said, you know, we expect defense companies may go out of business and we will stand by and watch it happen. Well, in his place came Secretary William Cohen. And during Cohen’s confirmation hearings, he, in fact, raised some concerns about the dwindling amount of competition in the defense sector because the mergers were continuing apace. Just one month earlier, two companies announced one of the biggest mergers yet.
PHIL CONDIT [Tape]: Good morning. I’m Phil Condit. In a few minutes Harry Stonecipher and I will hold a news conference to announce publicly we are now operating as a single company. This is truly a historic moment and it’s hard not to say, wow.
CHAKRABARTI: So that was an internal company video from aviation giant Boeing. Phil Condit was its CEO. And in December of ’96, Condit announced Boeing’s $14 billion acquisition of McDonnell Douglas, then led by Harry Stonecipher. Well, soon after that merger came Raytheon and its purchase of the Defense Holdings of Texas Instruments and Hughes Electronics for $2.5 billion. Now, none of those mergers faced, you know, a ton of regulatory opposition.
The Justice Department did require Raytheon divest itself of a TI business unit that produced some components for radar systems. But the overall merger was allowed to go through in July of 1997. But here’s the thing. In July of ’97, the Justice Department also signaled a notable change in its tune about defense sector consolidation. Joel Klein was the newly named assistant attorney general in the DOJ’s antitrust division. And on July 2nd, 1997, he said while industry downsizing can be desirable or even necessary, we will do what it takes to preserve effective competition. So, Mr. Augustine, what did you make of these personnel and political changes going on at that time?
AUGUSTINE: As I said, I’m a strong believer in the free enterprise system and competition. I say that as an American and also a person in business. I’d rather compete with strong companies are weak companies that do desperate things. And so I find no fault with what Secretary Perry did under the circumstances. … I will say that I’ve worked ten years for the government in six different jobs, and I get it. Our government makes the rules and interprets the rules and enforces the rules and industry follows the rules. And that’s the way it ought to be.
My complaint about the way that the switch and policies are handled is that nobody told the industry that there was new policy. What happened was a new person came into Justice and a new person into Defense, and they adopted policies that they thought were appropriate to the new times. And I don’t find fault with that. But I wish they had told the industry that there’s a new policy now. It was a little like, you know, if you put up a sign that says speed limit, 35 miles per hour, most of this industry will try to go no less, no more than 35 miles an hour. But when you put up a sign that says no speeding subject to arrest, that isn’t very helpful.
CHAKRABARTI: We have about 30 seconds before we have to take our next break, Mr. Augustine. But I want to quickly ask you, Joel Klein made that announcement about, you know, maybe not being so keen on mergers on July 2nd of 1997. The next day, on July 3rd, Lockheed Martin announced its plans to acquire Northrop Grumman for $11 billion. So just begin to give me an answer here. What made you continue to pursue that deal?
AUGUSTINE: … McDonnell Douglas, the Europeans rejected that some. The United States strongly backed the deal. And so on the heels of that, it seemed to us, having not been clearly told anything else, that combining Northrop Grumman and Lockheed Martin made a great deal of sense and would save the government literally billions of dollars a year. And that’s been audited. The trouble with that, of course, is it reduces the size of the number of companies in the defense industrial base, which is something that I think would prefer not happen for the longer term.
CHAKRABARTI: Today, we’re talking about what’s known in the world of defense contracting as the Last Supper. It’s a series of events that led to the rapid consolidation of the defense sector. After 1993, roughly between 1993 and 1998. And I’m joined here by Norman Augustine. He’s the former chairman and CEO of Lockheed Martin. Now, before the break, we were talking about how on July 3rd, Lockheed Martin announced its plans to acquire Northrop Grumman for $11 billion. That’s July 3rd, 1997. Well, come March 23rd, 1998, Attorney General Janet Reno announced this.
JANET RENO [Tape]: In a fast-moving global economy, our nation cannot afford anything less than full blooded competition. That is why we asked the federal court in Washington, D.C. today to prevent the merger of the Lockheed Martin Corporation and the Northrop Grumman Corporation, two of the largest suppliers of defense systems to the United States military.
CHAKRABARTI: So the government was going to block the merger, one of the largest mergers ever challenged by the Department of Justice. Mr. Augustine, that was March 23rd. You, in fact, knew that the government wasn’t going to support the merger a couple of weeks before that. How did you find out?
AUGUSTINE: The meeting was called in the Pentagon on Friday afternoon, I think at 5:00 after the markets closed. And the representatives of both Northrop Grumman and Lockheed Martin were invited. And so the night before that, we had met with all our lawyers, both companies’ lawyers, a large number. And I had asked them specifically, what’s the worst thing that could happen to us? And they had been talking with the government daily for almost a year and the comment was, oh, we might be required to sell certain pieces of the companies that did pose antitrust problems.
So we were certainly prepared to sell those parts. Seemed appropriate to do that. When we got in the meeting, an individual from the Justice Department said they were going to stop the transaction. And I think all of us from both companies were stunned. The CEO of Northrop Grumman said that he didn’t want to need to sell his company, but he had a problem and that was that they had not even bid on the most recent fighter plane because they didn’t feel they had a good chance of winning, he said the next fighter plane is going to come up 20 years from now, the next opportunity at best. And so his company just didn’t feel it could sit around under the defense budgets that had been going on until then and wait. And so that was the reason they were selling their company.
CHAKRABARTI: The government stepped in and did not support or allow the Lockheed Martin Northrop Grumman merger. But nevertheless, the effects of the Last Supper were lasting. Because there had been a real, complete transformation of the defense sector. I mean, in fact, a Department of Defense report last year found that right now the number of prime contractors in the United States has dropped by 90%, down from 51 in the 90s to just five today. Now, those companies are often referred to as the big five, Lockheed Martin, that Norman Augustine used to be the head of Raytheon, General Dynamics, Boeing and Northrop Grumman.
So, Mr. Augustine, just stick with me for a little bit because I want to sort of take listeners to where we are now, because in 2021, the General Accounting Office issued a report that continued its long-standing analysis that DOD procurement processes are vulnerable to waste, fraud and abuse. And that same year, retired Colonel Larry Wilkerson joined us on this show and honed in on one aspect of the GAO report.
LARRY WILKERSON [Tape]: They look at a fiscal year 2020, $422 billion going to contractors. Yes, you heard that right. That’s more than half. That’s about 60% of the annual money DOD gets going to contractors.
CHAKRABARTI: So to repeat, 60% of the Defense Department budget is paid out to contractors. And this has been the norm for several years. Because after 9/11, defense spending started rocketing up. Now, so remember, at the top of the show when we talked about the fact that more than half of the federal government spending goes to the Defense Department.
Well, if 60% of that goes to contractors, that means almost a third, 30% of federal dollars budgeted in this country ends up in the coffers of defense contractors who are led by just five companies. Well, Taylor Giorno is the money and politics reporter at Open Secrets, a group that tracks money in politics. And she found that the big five companies wield huge influence in Washington, thanks to lobbying.
TAYLOR GIORNO: From the beginning of the 2002 election cycle to the end of the 2022 election cycle that we just had, the defense sector steered $381 million into federal political contributions alone, but it spent $3.6 billion on federal lobbying. And during that 20-year span, the defense sector hired over 2700 lobbyists who have worked in the same government that regulates and decides funding for the industry.
CHAKRABARTI: And where are those political contributions going?
GIORNO: The vast majority of these campaign contributions go towards members of the House and Senate Armed Services and Appropriations Committees, a.k.a. the people that are making the decisions about … how much money will go to the Department of Defense, which will then go towards the individual contractors.
CHAKRABARTI: And during the 2020 election cycle, Giorno says that the top recipients of defense sector dollars were the new chair of the House Armed Services Committee, Republican Mike Rogers and House Defense Appropriations Subcommittee Chair Republican Ken Calvert.
GIORNO: But the industry has bipartisan giving, so former House Armed Services Committee chair and current ranking member Adam Smith, a Democrat from California, and defense appropriations committee ranking member Betty McCollum, a Democrat of Minnesota, are also top recipients.
CHAKRABARTI: So Giorno says we are caught in a textbook self-sustaining cycle of lobby, spend, lobby. The defense sector pours money to lobby Congress and in return, both Democrats and Republicans ‘plus up,’ to paraphrase Senator Mitch McConnell, the Defense Department budget and then the DOD pours that money back into the defense sector.
GIORNO: From 2016 to 2021. Lockheed Martin, Raytheon, Boeing, Northrop Grumman and General Dynamics, which are typically referred to as the Big Five, raked in more than $765 billion from the federal government, including about $705 billion from the Department of Defense. And to put that number into context, only Pfizer breached the top five DOD contractor rankings during 2021 amid the coronavirus vaccine rollout. These five contractors received more money from the Defense Department and the federal government than any other government contractor since 2016.
CHAKRABARTI: Last year the Defense Department itself said, Enough is enough. In February 2022, the Pentagon released a report and in it declared DOD is increasingly reliant on a small number of contractors for critical defense capabilities. For example, today, 90% of missiles come from just three sources. And the report goes on to say, quote, ‘Having a small number of sources for defense needs poses significant national security risks. Promoting competition to the maximum extent possible is a top priority for the department.’
Well, after that report was published, it’s called the State of Competition within the Defense Industrial Base. Representative John Garamendi cosigned a letter to Defense Secretary Lloyd Austin urging him to scrutinize defense industry mergers. And the representative joins us now. I understand he’s on his way to a vote on the House floor and may be joining us via cell phone. So, Representative Garamendi, can you hear me?
JOHN GARAMENDI: Yes, I can. And I am on the House floor to step off and continue the conversation. …
CHAKRABARTI: Well, so first of all, I appreciate you taking a second of time out from doing your civic duty here. But tell me a little bit more about why you decided to write that letter to Secretary Austin. What are your concerns about the consolidation in the defense industry?
GARAMENDI: Well, your show is laying it out precisely the way that we are concerned about it. There is no competition on some of the most expensive defense systems that are out there. For example, the replacement of the Minuteman missile, which will probably be somewhere over the next decade and a half, somewhere over $150 billion will be spent replacing the Minuteman missiles, which were in the silos in the upper Midwest. That is a pile of money, a single source contract, presumably where there’s no bidding at all, no competition. That’s just one example.
The aircraft carriers, again, they’re probably somewhere $12 to $15 billion, depending on there’s only one company that produces them, the new Columbia class submarines, one company that produces them. There’s no competition in the major defense procurement programs. The other thing that really concerns me, I’ve been the chairman of the Readiness Committee, which is responsible. Once all of that equipment is purchased, the readiness committee is responsible for seeing that it’s maintained, available for use, ready to be used.
And the money necessary to do that is constantly being taken to buy new, bright, shiny pieces of equipment. At the same time, we don’t have the money to maintain what we already have. The F-35 is yet another example. Mr. Augustine was speaking to the fighter jet issue, that became the F-35. And so my colleagues want to buy more F-35s. It makes the company very happy. But there’s no money to maintain them, and so half of them can’t fly. So this is an ongoing issue. And so we wrote the letter because we need competition. We have to have multiple suppliers. Even in the big things, but even in the small things.
CHAKRABARTI: Right. So representative, that report that I quoted last year from the Pentagon, the state of competition within the defense industrial base, it actually had recommendations for the DOD to enact itself. One of them was to more carefully scrutinize defense sector mergers and to partner more closely with the Department of Justice in regulating those mergers. Has that happened?
GARAMENDI: Well, no, it has not. There may be one or two folks somewhere over the Pentagon that are talking to the Justice Department. But you have very carefully and very blatantly put out the fact of the matter is there is an enormous amount of money swirling around the political sector and that money talks. And the revolving door is real. You get a fellow that has a couple of stars or a colonel that’s deep into the procurement program. Suddenly he’s retired and he’s over working for one or another of these big five. And it goes round and round. The result of it is the systems are extraordinarily expensive and they are very, very long in coming into reality. And the small companies that are absolutely necessary to produce many of the parts, they don’t exist.
CHAKRABARTI: Well, Representative, I hear that perhaps you were maybe getting called back to the floor here in just a second. So I want to thank you very much for taking time away from voting. That’s Representative John Garamendi, Democratic representative for California’s eighth Congressional District. Thank you so much.
Well, Mr. Augustine, you are the one here in this conversation who has the deep experience running one of these, you know, major defense contractors. When the Defense Department says one thing it needs to do is to lower the barriers of entry into the defense sector, partner more with small businesses. I mean, given the complexity of the kinds of projects that the companies are building. Is that realistic? Can small businesses get into the defense sector?
AUGUSTINE: Well, absolutely. Look what’s happened in the space world where NASA was the predominant player throughout. Today, there are a number of small companies, startups that play a major role. But I have to say that I disagree with much of what I’ve heard in the last 5 minutes or so. First of all, I guess I need to say that I’ve been out of the defense world … I retired 26 years ago, and I’ve been working in other worlds totally different from defense since then.
But the numbers that were quoted, for example, the fraction of the defense budget that went to procurement time being so dominant, at least when I was there, by far the dominant element was personnel costs. I would comment that the federal government, the majority of or near the majority is going to defense, at least while I was there. A matter of fact, more recently it was like one sixth.
And when I go back to the government in 1993, as we’ve talked about, I made a decision. We had too many companies in the defense world, which I happen to not disagree with what they did under the circumstances. But … 30 years later, all of a sudden say, oh, my goodness, we don’t have as many companies as we need in the defense world. And I think the big worry I have is so much of the equipment our military has today is so old. Technically, for example, the Air Force’s largest number of fighters by far were developed 51 years ago when it entered engineering development 51 years ago.
The Army’s tank, main tank went into development 50 years ago. And you can go down the list, the strategic bomber, the main strategic bomber … think how much the technology has changed, how all those systems have been upgraded as they should have been. It’s just very hard to turn a 1975 Buick into a modern car. And I just think that what we need to do is look at the problems we face today, which I think are immense, particularly with the evolution of China and aggression against Russia. And we may have to restructure the industry. I really don’t know. But I think it’s just wrong to point that the industry is behaving in the fashion that was just portrayed.
CHAKRABARTI: Well, so just to clarify, the facts that I presented a little bit earlier or earlier was that you take issue with I mean, in the December 2022 omnibus spending bill, the $1.7 trillion bill, that’s the one I was referring to that was signed by President Biden. $858 billion of that is for Pentagon spending. So that is slightly more than half that number stands now. The other reference that I made was to a GAO report from 2001 that showed that roughly 60% of Pentagon spending these days is going to defense contractors.
So, you know, the 2021, 2022, 2023 now a quite a different world from the early 90s, but I can’t tell you how much I appreciate you joining us today to provide us your insight and your expertise on the consolidation of the defense sector. Norman Augustine, former chairman and CEO of Lockheed Martin. Mr. Augustine, thank you so much.
AUGUSTINE: You bet. Thank you.
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