Military contracting was sold to the American people as a way to reduce the cost of military operations, yet the result has been quite the opposite. Recent research of mine has shown that rather than reduce costs, military contracting—or what I call the “Camo Economy” because it camouflages human and financial costs—has resulted in higher costs to taxpayers. It has also distorted labor markets and contributed to rising inequality, as military contractors earn excessive profits that enable them to pay their employees and particularly their top executives much more than their counterparts in the public sector and most other private sector jobs.
Military contracting serves a public purpose and uses public funds, while contractors earn profits at the taxpayer’s expense and are often not subject to the competitive pressures of private markets.
In 2019, $370 billion—more than half of all Department of Defense (DOD) spending—went to contractors. While contracting is sometimes called "privatization," I think this is an inaccurate description, since military contracting serves a public purpose and uses public funds, while contractors earn profits at the taxpayer’s expense and are often not subject to the competitive pressures of private markets.
Many contractors operate more as monopolies than as competitive firms. Last year, 45 percent of DOD contracts were classified as "non-competitive." And even among competitive contracts, many of these are "cost-type" contracts, which means that the firm will be reimbursed all its reasonable costs, and therefore has no incentive to reduce costs as competitive, non-monopolistic firms would. Additionally, firms such as Lockheed Martin have created monopolies for themselves by selling weapons systems (like the F-35 fighter aircraft) and other equipment to the DOD that come with “lifetime service agreements” in which only Lockheed can service the equipment.
Military contractors, then, act more as commercial monopolies than as competitive private firms. And using their monopoly powers they are able to earn excessive profits. In 2018, Lockheed Martin Corporation earned $8 billion in profits. About 85 percent of their business was government contracts.
High profits allow military contractors to pay high wages, which contributes to rising inequality. While the average wage across all occupations in the U.S. last year was about $53,000, at Lockheed Martin the average wage was about $115,000, over twice as much. KBR, a contractor that provides various services in the Middle East, had an average wage of $104,000, nearly twice the national average. The CEO of Lockheed earned nearly $2 million in base pay, well above the national average of $193,000 for CEOs; once we include stock options and other compensation, however, Lockheed’s CEO earnings shoot up to over $24 million.