By Michael V. Palinkas

Following the end of the Cold War, the defense budget in the United States began to shrink.  In response, domestic arms manufacturers in the U.S. increased their focus on political lobbying.  This lobbying worked to gain favorable subsidies for research and development, improve access to foreign markets, and open lucrative secondary markets.

Richard A. Bitzinger wrote that “the armaments industry [has] long been among the more protected economic sectors,” typically placed outside the boundaries of the free-market standards of open competition, efficiency, and profitability.[1] State assistance is argued to be a necessity in order to ensure that the state has the capacity and resources to internally mobilize the materials required for national defense.[2] However, at what point do the costs of assisting the arms industry outweigh the benefits received by American taxpayers?

The primary tool used by arms manufacturers to influence the domestic political system is that of lobbying, which has been the case for decades.[3] Effective lobbying allows arms manufacturers to gain financial and strategic advantage of tax dollars by means of subsidies for the research and development of new weapons systems, as well as assistance to market their products to foreign customers.[4]

Subsidies to arms manufacturers include taxpayer-backed loans and grants to conduct research and development, government promotional activities in order to market their goods to foreign buyers, and funds that assist in allowing arms manufacturers to conduct mergers and acquisitions of other companies, further consolidating their market share.[5] Major arms manufacturers receive government-built plants and production equipment at little or no cost, which places the financial risk of developing new technologies on the government.[6] According to economic and free-market theory, such aid should be applied only when the action would otherwise not be conducted without the assistance of government[7] and if the action works to improve social well-being.[8] Instead, arms manufacturers continue to receive subsidies even while earning billions of dollars of profits each year.[9]

Edmund F. Byrne proposes three primary reasons why arms companies are provided subsidies to conduct their business: (1) lack of a genuine democracy; (2) lack of relevant information on behalf of the American citizen; and (3) “a deliberately inculcated fear” that allows the United States to “fund the arms industry on a level that surpasses what all other countries combined spend” on national defense.[10]

In addition, politicians who support the funding of arms manufacturers receive hundreds of thousands of dollars for their campaigns and are able to claim credit for creating jobs and opportunities, often times within their own districts.[11] While funding arms manufacturers does work to create jobs, it does not do so at the same rate as if the money were invested in other sectors. Studies have shown that for every billion dollars invested in the defense industry, 8,555 jobs are created; while every billion dollars invested in education creates 17,687 jobs.[12]

Such a case would not be all bad, yet the generosity of the United States government is not paid back in full by the arms industry. Shrinking United States defense budgets in the post-Cold War era mixed with new market opportunities allowed U.S. arms manufacturers to aggressively pursue new customers.[13] External suppliers are the sole source of arms for most developing countries,[14] which would be unable to afford such goods unless they were subsidized by the U.S. government.[15] In order to provide financial assistance, the U.S. operates a number of arms sales programs. For instance, the Foreign Military Sales (FMS) program, which sells arms on behalf of manufacturers via loans and grants, provided $1.7 billion of arms to Saudi Arabia in 2009; $1.2 billion to Egypt; $1.4 billion to Greece; and, $1.2 billion to Japan.[16] Such programs are supported and maintained in an effort to further shore up domestic arms companies and to bolster the US economy.[17]

The primary issue with selling arms to foreign customers is that their design and production is funded by U.S. taxpayers. More than half of U.S. foreign arms sales are financed by taxpayers through subsidy programs – a transfer of funds that does little to grow the U.S. economy.[18] For example, Boeing is currently the largest U.S. arms exporter with 60 percent of its sales coming from foreign countries.[19] The U.S. also grants credits and loans to foreign buyers in order to facilitate their purchase of U.S. arms.[20] Of these credits and loans, tens of billions of dollars have been written off or forgiven for political or financial reasons.[21] In an effort to assist U.S. arms manufacturers to improve their foreign share, the Departments of Defense, State, and Commerce provide market advice in order to facilitate negotiations and trade.[22] The Commerce Department, for its part, publishes a series of defense market assessments which provide U.S. firms with detailed information and data on the state of the arms market in key regions around the world.[23]

In addition to the assistance described above, the U.S. has made new methods available to provide arms to foreign customers. One example is the use of surplus sales, which have increased dramatically in past 20 years.[24] Surplus sales take place as the US government conducts audits of its arms inventory and deems certain goods to be in excess of current needs.[25] Many of these items are state-of-the-art systems that are highly capable and fully functional.[26] An estimated 80 percent of surplus items have been given away for free to foreign customers;[27] those that are sold are done so at prices averaging 85 percent less than the original acquisition value of the product.[28] This process works to justify the purchase of new weapons, as well as to provide additional funding for new research and development projects since other states now have equivalent technologies. In addition, it grants foreign customers the opportunity to sample and test drive the products that US arms manufacturers have to offer, further increasing their market share and profit potential.[29]

The influence of the domestic arms industry does not stop at the U.S. border. Rather, as countries begin to diversify their trading partners and stockpile new and advanced weapons, regional and domestic conflicts become the norm. Additionally, research has shown that as countries increase their arms imports, the sanctity of human rights is diminished.[30]

Given the evidence presented above, U.S. arms manufacturers are not providing sufficient benefits to the American taxpayer relative to the share of government assistance they receive. U.S. arms manufacturers have access to unnecessary subsidies to offset the cost of research, development, and production for goods they primarily sell to foreign countries that use U.S. aid to purchase weapons. The U.S. government also provides detailed market analysis and allows arms manufacturers to resell their goods using lucrative second-hand schemes. All of this while providing little in terms of jobs and enhanced security.

– Scott Ross served as Lead Editor for this article.

About the Author

Michael V. Palinkas recently received his Masters of Public Policy at American University where his research interests included tax issues, state and local government efficiency, and quantitative demographic studies. Michael lives in Washington, D.C.

Endnotes

1. Richard A. Bitzinger, “The Globalization of the Arms Industry: The Next Proliferation Challenge,” International Security 19, no. 2 (1994): 172.

2. Ibid.

3. Raimo Vayrynen, “Transnational Corporations and Arms Transfers,” Instant Research on Peace and Violence 7, no. 3/4 (1977): 157.

4. Edmund F. Byrne, “Assessing Arms Makers’ Corporate Social Responsibility,” Journal of Business Ethics 74, no. 3 (2007): 204.

5. William D. Hartung, “Corporate Welfare for Weapons Makers: The Hidden Costs of Spending on Defense and Foreign Aid,” Policy Analysis 350, August 12, 1999, http://www.cato.org/pubs/pas/pa350.pdf, (accessed February 16, 2012), 1.

6. Ibid., 16.

7. Ibid., 3.

8. Byrne, 205.

9. Ibid.

10. Ibid., 206.

11. Hartung, “Corporate Welfare for Weapons Makers,” 21.

12. Andrew Feinstein, The Shadow World: Inside the Global Arms Trade. New York: Farrar, Straus and Giroux, 2011, 366. Furthermore, for every billion dollars invested in healthcare, 12,883 jobs are created and in the clean energy sector, 17,100 jobs are created.

13. Bitzinger, “The Globalization of the Arms Industry,” 173.

14. Shannon Lindsey Blanton, “Instruments of Security or Tools of Repression? Arms Imports and Human Rights Conditions in Developing Countries,” Journal of Peace Research 36, no. 2 (1999): 238.

15. Hartung, “Corporate Welfare for Weapons Makers,” 4.

16. Congressional Research Service, U.S. Arms Sales: Agreements with and Deliveries to Major Clients, 2002-2009 by Richard F. Grimmett, Washington, DC: Congressional Research Service, 2010. http:// assets.opencrs.com/rpts/R41539_20101220.pdf, (accessed February 16, 2012), 5.

17. Blanton, “Instruments of Security or Tools of Repression?” 241.

18. Hartung, “Corporate Welfare for Weapons Makers,” 5.

19. Byrne, “Assessing Arms Makers’ Corporate Social Responsibility,” 211.

20. Hartung, “Corporate Welfare for Weapons Makers,” 6.

21. Ibid., 7.

22. Ibid., 13.

23. Ibid., 14.

24. Byrne, “Assessing Arms Makers’ Corporate Social Responsibility,” 207.

25. Ibid.

26. Hartung, “Corporate Welfare for Weapons Makers,” 8.

27. Byrne, “Assessing Arms Makers’ Corporate Social Responsibility,” 209.

28. Hartung, “Corporate Welfare for Weapons Makers,” 8.

29. Ibid., 9.

30. Blanton, “Instruments of Security or Tools of Repression?” 239.