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Drain the Swamp: The Pentagon Robbed Taxpayers of $16 Billion

March 7, 2018
Mandy Smithberger / The Project on Government Oversight & Linda J. Bilmes and Joseph E. Stiglitz / The Washington Post

Under the law, when a foreign government buys US weapon systems through the Department of Defense those governments are required to reimburse the Department for research, development and other one-time costs for those systems. A recent audit by the Government Accountability Office found the department has waived $16 billion it could have recovered for taxpayers on $250 billion worth of weapons sold under the Foreign Military Sales program from 2012 to 2017.


Drain the Swamp:
The Pentagon Robbed Taxpayers of $16 Billion

Mandy Smithberger / The Project on Government Oversight & War Is Boring

(March 5, 2018) -- Under the law, when a foreign government buys US weapon systems through the Department of Defense those governments are required to reimburse the Department for research, development and other one-time costs for those systems. A recent audit by the Government Accountability Office found the department has waived $16 billion it could have recovered for taxpayers on $250 billion worth of weapons sold under the Foreign Military Sales program from 2012 to 2017.

Under the law, foreign governments can request a waiver from repaying these costs, which the department can grant for factors like interoperability or to avoid the loss of a sale. Defense contractors argued this requirement for foreign governments to repay the US taxpayers raises the price of our weapon systems, making it more difficult to complete a sale.

When the department waives these repayments, that usually gives a competitive edge that defense contractors benefit from enormously. The contractors invest very little of their own money in research and development -- those costs are generally paid by the taxpayers as part of the original acquisition process.

The contractors are then able to sell these weapons, developed at taxpayer expense, to foreign governments at a significant profit and only a minimal corporate investment. Allowing foreign governments to skate on the legally required repayments is little more than welfare for defense contractors, and this audit makes a compelling case for why Congress should close this loophole.

Under the Arms Export Control Act the Defense Security Cooperation Agency, the Pentagon's "point person" for all foreign military sales, evaluates waivers. As Bill Hartung, the Director of the Arms and Security Project at the Center for International Policy explains, that office has perverse financial incentives to prioritize sales over what's best for taxpayers or US national security.

In a typical sale, the US government is involved every step of the way. The Pentagon often does assessments of an allied nation's armed forces in order to tell them what they "need" -- and of course what they always need is billions of dollars in new US-supplied equipment.

Then the Pentagon helps negotiate the terms of the deal, notifies Congress of its details, and collects the funds from the foreign buyer, which it then gives to the US supplier in the form of a defense contract.

In most deals, the Pentagon is also the point of contact for maintenance and spare parts for any US-supplied system. The bureaucracy that helps make all of this happen, the Defense Security Cooperation Agency, is funded from a 3.5 percent surcharge on the deals it negotiates. This gives it all the more incentive to sell, sell, sell.

Given DSCA's incentives to promote foreign military sales, it's unsurprising DSCA approved 810 of the 813 waivers it reviewed from 2012 to 2017 -- an approval rate of 99 percent. When it came to waivers for loss of sale, the GAO found "none included any additional information on competing offers or spending limits" as evidence that the sale would be lost if the payment wasn't waived. As Hartung notes, the Obama Administration brokered more weapons sales than any other administration since World War II.

For most of the duration of the GAO's audit, the head of DSCA was Vice Adm. Joseph Rixey. Before he left that position, The Intercept reported he was the guest of honor at a reception co-hosted by the Senate Aerospace Caucus and the Aerospace Industries Association, the latter representing contractors like Lockheed Martin, Boeing, Northrop Grumman and Raytheon.

"Thank you, admiral, for all that you do . . . in helping us to sell our products," Lockheed Martin CEO Marilyn Hewson said at the event. Perhaps unsurprisingly, shortly after his retirement Rixey joined Lockheed Martin as vice president for international program support for Lockheed Government Affairs.

The Trump administration may be on track to increasing foreign military sales even more. The Security Assistance Monitor found that foreign military sales in the first year of the Trump administration slightly surpassed sales in the last year of the Obama administration. Waivers cost taxpayers approximately $1.3 billion in 2016 and $6 billion in 2017.

Costs to taxpayers may increase further without more oversight. In January 2018, Reuters reported plans to increase the role of diplomats and military attaches to promote US weapons sales. As part of that effort the State Department sent Ambassador Tina Kaidanow, Principal Deputy Assistant Secretary of State for Political-Military Affairs and the top diplomat for overseeing arms sales, to the Singapore Airshow to promote US weapons, including the F-35 Joint Strike Fighter.

Congress shares plenty of blame for betraying taxpayers, as well, by continually revising the Arms Export Control Act to further subsidize weapon sales. For instance, the law didn't always allow loss-of-sale waivers from recouping research and development costs. But in 1996 -- at the urging of the Aerospace Industries Association -- the law was changed to allow such waivers if not recouping those costs could result in the loss of a sale.

The Project On Government Oversight fought the change and other efforts to get rid of recoupment payments, calling it "corporate welfare at its worst." The GAO found that change alone resulted in substantial losses for taxpayers, since 338 loss-of-sale waivers totaling almost $9.2 billion were given under that authority between 2012 and 2017.

In POGO's 2017 Baker's Dozen of recommendations to Congress we noted more must be done to make the Pentagon financially accountable. Reimbursing taxpayers must be part of the equation.

Taxpayers invest a lot of money in the research and development of weapon systems -- the Pentagon's most recent budget request asks for $92.4 billion for research, development, test, and evaluation -- and they deserve a fair return on their investment. It's time to revise the Arms Export Control Act to get rid of this multi-billion crony-capitalism loophole.

Mandy Smithberger is the Director of the Straus Military Reform Project at the Center for Defense Information at the Project On Government Oversight.

Looking Back:
The Iraq War Will Cost Us $3 Trillion, and Much More

Linda J. Bilmes and Joseph E. Stiglitz / The Washington Post

(March 9, 2008) -- There is no such thing as a free lunch, and there is no such thing as a free war. The Iraq adventure has seriously weakened the US economy, whose woes now go far beyond loose mortgage lending. You can't spend $3 trillion -- yes, $3 trillion -- on a failed war abroad and not feel the pain at home.

Some people will scoff at that number, but we've done the math. Senior Bush administration aides certainly pooh-poohed worrisome estimates in the run-up to the war. Former White House economic adviser Lawrence Lindsey reckoned that the conflict would cost $100 billion to $200 billion; Defense Secretary Donald H. Rumsfeld later called his estimate "baloney." Administration officials insisted that the costs would be more like $50 billion to $60 billion.

In April 2003, Andrew S. Natsios, the thoughtful head of the US Agency for International Development, said on "Nightline" that reconstructing Iraq would cost the American taxpayer just $1.7 billion. Ted Koppel, in disbelief, pressed Natsios on the question, but Natsios stuck to his guns. Others in the administration, such as Deputy Defense Secretary Paul D. Wolfowitz, hoped that US partners would chip in, as they had in the 1991 Persian Gulf War, or that Iraq's oil would pay for the damages.

The end result of all this wishful thinking? As we approach the fifth anniversary of the invasion, Iraq is not only the second longest war in US history (after Vietnam), it is also the second most costly -- surpassed only by World War II.

Why doesn't the public understand the staggering scale of our expenditures? In part because the administration talks only about the upfront costs, which are mostly handled by emergency appropriations. (Iraq funding is apparently still an emergency five years after the war began.)

These costs, by our calculations, are now running at $12 billion a month -- $16 billion if you include Afghanistan. By the time you add in the costs hidden in the defense budget, the money we'll have to spend to help future veterans, and money to refurbish a military whose equipment and materiel have been greatly depleted, the total tab to the federal government will almost surely exceed $1.5 trillion.

But the costs to our society and economy are far greater. When a young soldier is killed in Iraq or Afghanistan, his or her family will receive a US government check for just $500,000 (combining life insurance with a "death gratuity") -- far less than the typical amount paid by insurance companies for the death of a young person in a car accident.

The stark "budgetary cost" of $500,000 is clearly only a fraction of the total cost society pays for the loss of life -- and no one can ever really compensate the families. Moreover, disability pay seldom provides adequate compensation for wounded troops or their families. Indeed, in one out of five cases of seriously injured soldiers, someone in their family has to give up a job to take care of them.

But beyond this is the cost to the already sputtering US economy. All told, the bill for the Iraq war is likely to top $3 trillion. And that's a conservative estimate.

President Bush tried to sell the American people on the idea that we could have a war with little or no economic sacrifice. Even after the United States went to war, Bush and Congress cut taxes, especially on the rich -- even though the United States already had a massive deficit.

So the war had to be funded by more borrowing. By the end of the Bush administration, the cost of the wars in Iraq and Afghanistan, plus the cumulative interest on the increased borrowing used to fund them, will have added about $1 trillion to the national debt.

The long-term burden of paying for the conflicts will curtail the country's ability to tackle other urgent problems, no matter who wins the presidency in November. Our vast and growing indebtedness inevitably makes it harder to afford new health-care plans, make large-scale repairs to crumbling roads and bridges, or build better-equipped schools.

Already, the escalating cost of the wars has crowded out spending on virtually all other discretionary federal programs, including the National Institutes of Health, the Food and Drug Administration, the Environmental Protection Agency, and federal aid to states and cities, all of which have been scaled back significantly since the invasion of Iraq.

To make matters worse, the US economy is facing a recession. But our ability to implement a truly effective economic-stimulus package is crimped by expenditures of close to $200 billion on the two wars this year alone and by a skyrocketing national debt.

The United States is a rich and strong country, but even rich and strong countries squander trillions of dollars at their peril. Think what a difference $3 trillion could make for so many of the United States' -- or the world's -- problems. We could have had a Marshall Plan to help desperately poor countries, winning the hearts and maybe the minds of Muslim nations now gripped by anti-Americanism.

In a world with millions of illiterate children, we could have achieved literacy for all -- for less than the price of a month's combat in Iraq. We worry about China's growing influence in Africa, but the upfront cost of a month of fighting in Iraq would pay for more than doubling our annual current aid spending on Africa.

Closer to home, we could have funded countless schools to give children locked in the underclass a shot at decent lives. Or we could have tackled the massive problem of Social Security, which Bush began his second term hoping to address; for far, far less than the cost of the war, we could have ensured the solvency of Social Security for the next half a century or more.

Economists used to think that wars were good for the economy, a notion born out of memories of how the massive spending of World War II helped bring the United States and the world out of the Great Depression. But we now know far better ways to stimulate an economy -- ways that quickly improve citizens' well-being and lay the foundations for future growth.

But money spent paying Nepalese workers in Iraq (or even Iraqi ones) doesn't stimulate the US economy the way that money spent at home would -- and it certainly doesn't provide the basis for long-term growth the way investments in research, education or infrastructure would.

Another worry: This war has been particularly hard on the economy because it led to a spike in oil prices. Before the 2003 invasion, oil cost less than $25 a barrel, and futures markets expected it to remain around there. (Yes, China and India were growing by leaps and bounds, but cheap supplies from the Middle East were expected to meet their demands.) The war changed that equation, and oil prices recently topped $100 per barrel.

While Washington has been spending well beyond its means, others have been saving -- including the oil-rich countries that, like the oil companies, have been among the few winners of this war. No wonder, then, that China, Singapore and many Persian Gulf emirates have become lenders of last resort for troubled Wall Street banks, plowing in billions of dollars to shore up Citigroup, Merrill Lynch and other firms that burned their fingers on subprime mortgages.

How long will it be before the huge sovereign wealth funds controlled by these countries begin buying up large shares of other US assets?

The Bush team, then, is not merely handing over the war to the next administration; it is also bequeathing deep economic problems that have been seriously exacerbated by reckless war financing.

We face an economic downturn that's likely to be the worst in more than a quarter-century.

Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy.

But there's no great mystery here. The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them.

Meanwhile, banks and creditrating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the US household-savings rate plummeted to zero. It's a bleak picture.

The total loss from this economic downturn -- measured by the disparity between the economy's actual output and its potential output -- is likely to be the greatest since the Great Depression. That total, itself well in excess of $1 trillion, is not included in our estimated $3 trillion cost of the war.

Others will have to work out the geopolitics, but the economics here are clear. Ending the war, or at least moving rapidly to wind it down, would yield major economic dividends.

As we head toward November, opinion polls say that voters' main worry is now the economy, not the war. But there's no way to disentangle the two. The United States will be paying the price of Iraq for decades to come. The price tag will be all the greater because we tried to ignore the laws of economics -- and the cost will grow the longer we remain.

Linda J. Bilmes, a former chief financial officer at the Commerce Department, teaches at Harvard University's Kennedy School of Government. Joseph E. Stiglitz, a professor at Columbia University, served as chairman of the Council of Economic Advisers under President Bill Clinton. They are coauthors of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.

Copyright 2008 The Washington Post Company

Posted in accordance with Title 17, Section 107, US Code, for noncommercial, educational purposes.




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