Are Defense Contractors Making Excessive Profits? Let’s Talk Before We Point Fingers

June 23, 2012 by  Filed under: Management 

There seems to be public outcry that corporate executives are making too much money, and that corporations are making too much profit, and therefore should be charging the citizens less for the products and services they buy. Of course, if a consumer feels that way, they are free to choose, as Milton Friedman used to tell us, and therefore they don’t have to partake, or participate with their unit of trade we call a dollar. Okay so let’s talk about this for second shall we?

It’s not that I wish to get into an Ayn Rand debate here about the philosophy of what something is worth, but she was right and it should be up to the free-market to decide the intrinsic value of everything, and allow the participants in the market to choose what rates they will charge, or what rate they will pay. So why do we have politicians looking into executive pay in private companies, that’s their business and when it comes to public companies the shareholders should decide not the government?

So, why intervene or make a big stink about it? Well it seems, the answer is simple, because the people want a lower price, and when the government buys services or products, or weapons systems from the private sector, the taxpayer would like to get the best deal.

Now then, let’s talk about defense contractors. Not long ago, I read a rather troubling paper, at least to me as a free-market entrepreneur that is, the paper was titled; “The Excessive Profits of Defense Contractors: Evidence and Determinants” by Chong Wang and Joseph San Miguel from the Naval Postgraduate School, published on April 30, 2012. In the abstract the authors stated;

“A long controversial issue that divides academics, government officials, elected representatives, and the U.S. defense industry is whether defense contractors earn abnormal or excessive profits at the expense of taxpayers.”

The authors go on to explain that as one defense contractor makes an untypically high profit, other companies up prices to follow suit, and that the huge profits have ballooned since 1992. Lastly, these higher profits lead to higher executive pay at these companies, and a lessened measure of solid corporate governance.

Okay so, that last point makes sense, no need to manage the company or sharpen the pencil when flooded with cash, and there are obviously rewards, stock options, etc. for corporate executives who bring home the bacon for their shareholders. Too that point, excessive profits are also zapped up by unions, suppliers, and on down the line, everyone in fact getting inline to get it, while it’s hot.

Now then, whose fault is all this? Could it be the government itself, not working as a competent, prudent, or frugal buyer? Is it the defense contractors fault for working to get the most money – isn’t that their job in the free-market? Do these authors wish to turn defense contractors into utilities, like the power companies? I bet the Obama Administration likes that concept, it is inline after all, with socialist leanings of many of Czars enlisted to put the administration’s policies into action. But a utility is never as efficient, and the costs steadily increase anyway.

Additionally, I am bothered by all this shift of blame onto the defense contractors, and attempting to control their executive pay and profits – and claiming that the taxpayer would be better served is unnerving. If the government wants a better deal, then don’t pay too much or sign contracts in excess of what they feel is fair, every purchasing agent and buyer in the private sector knows that, it’s basic Business 101. Indeed I hope you will please consider all this and think on it.

Lance Winslow has launched a new provocative series of eBooks on Corporate Management Topics. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net

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