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TheGrowthofthe“CamoEconomy”andtheCommercializationofthePost-9/11Wars

HeidiPeltier1BostonUniversity

June30,2020

ExecutiveSummary

SinceSeptember11,2001,UnitedStatesmilitaryspendinghasgrownrapidly,ashastheportionofthatspendingthatpaysformilitarycontractors.Thesecontractingcompaniesengineerandmanufactureequipment,buildandrepairinfrastructurearoundtheworld,provideserviceslikecafeteriasandotherfacilitiessupport,andevenreplacetroopsinmanywarzones.In2019,thePentagonspent$370billiononcontracting–morethanhalfthetotaldefense-relateddiscretionaryspending,$676billion,andawhopping164%higherthanitsspendingoncontractorsin2001.

Overnearlytwodecades,governmentofficials,privatecompanies,andconservative

thinktankshavesoldtheideathatmilitarycontractorsareacostreducer,yetinreality,thegrowthinmilitarycontracting—orwhatIcallthe“CamoEconomy”—hasactuallyincreasedtheoverallcostofthiscountry’smilitaryoperations.It’saCamoEconomybecausetheU.S.governmenthasusedthecommercialization(oftenmislabeled“privatization”)ofthemilitaryascamouflage,concealingthetruefinancialandhumancostsofAmerica’spost-9/11wars.Regardinghumancosts,in2019,therewere53,000U.S.contractorscomparedto35,000U.S.troopsintheMiddleEast.SincetheU.S.invasionofAfghanistanin2001,anestimated8,000U.S.contractorshavedied,inadditiontoaround7,000U.S.troops.2

America’spost-9/11wars,whichtheCostsofWarprojectdefinesasU.S.-led

militaryoperationsandothergovernmentprogramsaroundtheworldthathavegrownoutofPresidentGeorgeW.Bush's"GlobalWaronTerror"andtheU.S.invasionofAfghanistan

1HeidiPeltierisDirectorof“20YearsofWar,”aCostsofWarinitiativebasedatBostonUniversity’sPardeeCenterfortheStudyoftheLonger-RangeFuture.Email:hpeltier@bu.edu.2Asthepaperlaterdetails,theratioofcontractorstomilitarypersonnelhasincreasedfrom1:1in2008to1.5:1today.Forafullcalculationofwarcasualties,see:https://watson.brown.edu/costsofwar/figures/2019/direct-war-death-toll-2001-801000.

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in2001,havecostU.S.taxpayersover$6.4trillion.3Defensespendingnowaccountsformorethanhalfofalldiscretionaryspending,acategorythatalsoincludeseducation,transportation,andhealthcare–virtuallyeverythingthegovernmentdoesotherthanMedicareandSocialSecurity.4Mostoftheseinflatedcostsareduetopaymentstooverlyexpensivemilitarycontractors.

Thispaperdisprovesthetheory,putforthbyadvocatesformilitarycontracting,that

thecommercializationofgovernmentservicesdecreasescostsandincreasesqualityofthesegoodsandservices,therebybenefitingthepublicpurse.Instead,thepapershowsthatmilitarycontractingisatleastasexpensive,andoftenmoreexpensive,thanifthemilitaryweretoperformthesameservicesin-house.Thisisbecausecontractorslackcompetitivepressurestoreducethepricestheychargetothegovernment.Thislackofcompetitionisdue,first,tothenatureofthecontractsthemselves.Forty-fivepercentofthePentagon’scontractswereclassifiedas“non-competitive”in2019–amuchhigherpercentagethanothergovernmentagencies.EvenofthosecontractsthePentagonclassifiesas“competitive,”someare“cost-type”contracts,whichcreatenoincentiveforcontractorstokeepcostslow.Between2008and2019,theDepartmentofDefense(DoD)spentover$1.2trilliononsuchcost-typecontracts,noneofwhichweresubjecttothecost-reducingpressuresofprivatemarkets.Othercontractsincludelifetimeserviceagreementsandsole-suppliercontracts,whicheffectivelycreatemonopolies.

Scantcompetitionormonopoliesalsooccurbecauseofthenatureofthework.

Serviceslikebuildingdininghallinfrastructureandtroopsupportfacilitiesoverseashavehighfixedorupfrontcosts.Sometimesmilitarycommandersbecomeaccustomedtoworkingwithcertaincontractorsanddonotwanttomakechangesmid-mission.Theprevalenceofsub-contracting,forexamplewhenadiningservicescontractorsubcontractsforprovisionofutensilsorcookware,buildsinlayersofprofit-making,leadingcontractorstobeinefficientorexpensive.Thisoutsourcingalsoencouragesfraudandabuse.

Iusetheterm“commercialization”ratherthanthemorecommon“privatization”

becauseinmanycases,thesefirmssimplydonotfacethecompetitivepressuresoftheprivatemarket.Inaddition,theyarenotstrictlyprivate:theyprofitfrompublicfunds,ostensiblyserveapublicpurpose,andintheoryaresubjecttosomelevelofoversightbytheDoD.

Theextremeprofitabilityofmilitarycontractors—boththoseprovidingservicesin

wartheatersaswellasthoseproducinggoodsandservicesintheU.S.—negativelyimpactsU.S.labormarkets.IndustrygiantssuchasLockheedMartin,whichearnedover$8billioninprofitsin2019,orKellogg,Brown&Root(KBR),whichearned$653million,areableto 3Crawford,N.(2019).UnitedStatesBudgetaryCostsandObligationsofPost-9/11WarsthroughFY2020:$6.4Trillion.CostsofWar.WatsonInstitute,BrownUniversity.https://watson.brown.edu/costsofwar/files/cow/imce/papers/2019/US%20Budgetary%20Costs%20of%20Wars%20November%202019.pdf 4 InFY2019,morethanhalfofalldiscretionaryspendingwasdefense:$676billiondefensecomparedto$661non-defense.Source:CongressionalBudgetOffice(CBO).(2020).DiscretionarySpendingin2019.https://www.cbo.gov/system/files/2020-04/56326-CBO-2019-discretionary-spending.pdf

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offersignificantlyhigherwagesthaneitherthemilitaryorsimilaroccupationsinthedomesticeconomy(e.g.,securityservices,electricalrepair,ormechanicalengineering).Thispapershowsmilitarycontractorsareabletopaywagesthatrangefrom20to166percentabovethenationalaverageforsuchoccupations.Thispaydiscrepancydistortsthenationallabormarketbymakingitmoredifficultforotherfirms,orforthemilitaryitself,tocompete.5Thisisproblematicbecauseitsignifiesalossormisallocationofhumancapital,withworkersseekingcontractoremploymentandtherebycontributingtowarprofiteeringinsteadofprovidingtheirservicestothemilitaryorothersociallyimportantsectorsoftheeconomy.Atalentedengineer,forexample,mightchoosetoworkforLockheedMartinratherthanarenewableenergycompanybecauseofthehighersalary.

Whileanumberofresearchershavenotedthenegativeeffectsofcontractingonthe

military’sowncapabilities,includinganincreaseddependenceoncontractorsanddiminishedin-houseexpertise,thefocusofthispaperisonthecostimplicationsforthefederalbudgetandthelabormarketdistortionsofmilitarycontracting.6

Finally,Iprovideaneconomist’srecommendationsforreform.Thesereforms

includereducingmilitaryspendingoverall,decreasingcontractingasapercentageofmilitaryspending,andrefashioningthecontractingprocesstoreducewaste,excessiveprofitsandlabordemandbycontractors.IalsosuggestincreasinglabordemandfromothersectorsimportanttotheAmericanpublicthathaveoccupationalcrossoverwithmilitaryandcontractorlabor,suchasconstructionofinfrastructureandcleanenergyproduction.Growthinthe“CamoEconomy”

HereIexamineevidenceofthegrowthoftheCamoEconomysince2001,andinthefollowingsectionIexaminereasonsforthisgrowth.Wewillseehowincreasedrelianceoncontractorshasactuallyincreasedcostsratherthandecreasingcostsaspromised,howtheseincreasedcostshaveramificationsforfederalspending,andhowtheprofitabilityandcoststructureofmilitarycontractingleadstolabormarketdistortions.ThegrowthintheCamoEconomycanbeseenboththroughthelevelofspendingchanneledtomilitary

5Inthispaper,weareprimarilyconcernedwiththeeffectsonlabormarketsintheU.S.,andthusfocusonthewagedifferentialsbetweencontractorpayandmilitaryorothercivilianpayforU.S.workers.Otherpapers,includingNoahCoburn’s2017paper,“TheGuards,Cooks,andCleanersoftheAfghanWar:MigrantContractorsandtheCostofWar,”addresstheissueofsub-contractsandlowwagesforthirdcountrynationals.Retrievedfromhttps://watson.brown.edu/costsofwar/papers/2017/guards-cooks-and-cleaners-afghan-war-migrant-contractors-and-cost-war.6Formoreonthenegativeeffectsofcontractingonmilitarycapabilitiesandnationalsecurity,seeforexample:Singer,P.W.(2008).CorporateWarriors:TheRiseofthePrivatizedMilitaryIndustry,UpdatedEdition.CornellUniversityPress;Pelton,R.Y.(2006).LicensedtoKill:HiredGunsintheWaronTerror.PenguinRandomHouse;Grazier,D.(2019).TheF-35andtheCapturedState.ProjectonGovernmentOversight.https://www.pogo.org/analysis/2019/06/the-f-35-and-the-captured-state/;orCongressionalResearchService(CRS).(2019).DepartmentofDefenseContractorandTroopLevelsinAfghanistanandIraq:2007-2018.https://fas.org/sgp/crs/natsec/R44116.pdf.

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contractors,aswellasthenumberofcontractorpersonnelincomparisontoDepartmentofDefense(DoD)personnel.

TodayDoDspendingonmilitarycontractsismorethan2.5timeswhatitwasin2001.Atthestartofthepost-9/11wars,contractsfromDoDtotaledabout$140billion,accordingtodataIcompiledfromUSAspending.gov(Figure1).In2008,atthepeakofthe“GlobalWaronTerror,”contractingthroughDoDreachedahighof$380billion,dippingbackdownby2015andthenclimbingagain,untilthemostrecentestimateavailable,for2019,showsDoDcontractingtotalingabout$370billion.Figure1.DoDContracts,2001–20197

Overthatsame18-yearperiod,contractorspendingincreasedabout20percentmorethanpersonnelspending.Whilespendingoncontractorsoverthisperiodincreasedby2.5times,spendingforDoDmilitaryandcivilianpersonnelrosemuchless.AccordingtotheWhiteHouseOfficeofManagementandBudget(OMB)historicaltables,8militarypersonnelspendingwasabout$74billioninFY2001and$156billioninFY2019,about2.1timesasmuch.

ThisworryingtrendcanalsobeseeninFigure2,whichisdrawnfromtheDefense

BusinessBoard(2018).Hereweseecontractedgoodsandservices(includingweapons

7Source:AuthoranalysisofUSASpending.govdata.Currentdollars.8OfficeofManagementandBudget.HistoricalTables,Table3.2—OutlaysbyFunctionandSubfunction:1962-2025.https://www.whitehouse.gov/omb/historical-tables/.

$140,366,548,877

$380,045,570,925 $369,710,465,629

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procurement,construction,andothercontractedservices)madeupabouttwo-thirdsofDoDspendinginboth2001and2016,whilein-housepersonnel(bothcivilianandmilitary)madeupaboutone-thirdofDoDspending.Figure2.GrowthinContractSpending9

Figure2showsthatbetweenFY2001andFY2010,contractedservicesgrewparticularlyfast,andthatbyFY2016contractedservicesaccountedforabout24percentoftheDoDbudget.10

Whilespendingoncontractedservicesaccountsforabout24percentofoverallDoD

spending,contractedservicesaccountforamuchgreaterproportionofDoDspendingintheatersofwar.DatafromUSASpending.govoncontractswhose“placeofperformance”wasIraqorAfghanistanshowthatovertheperiod2001–2019,62percentofthosecontracts(intermsofdollars)wereforservices,includingmainlyfacilitiessupport 9DefenseBusinessBoard.(2018).FullyBurdenedandLifecycleCostsoftheWorkforce.ReportDBBFY18-01.Washington,D.C.10Notethatsomemilitarycontractors,suchasLockheedMartin,providebothcontractedgoodsaswellasservices(andinthefigureabove,theirserviceswouldappearinthemiddle(pink)tranche,whilecontractsforequipmentandothergoodswouldappearintheupper(darkblue)tranche).

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services,aswellasengineering,officeadministration,telecommunications,rentalservicesforvehiclesandbuildings,andvariousothermiscellaneousservices.11

Thisincreasedspendingoncontractorsisaccompaniedbyanincreasedpresenceof

contractorsonornearthebattlefieldandanincreaseintheratioofcontractemployeestomilitarypersonnel.Accordingtoa2008CongressionalBudgetOffice(CBO)report,contractinginthepost-9/11era,particularlyinIraqandsurroundingcountries,reachedaratioof1:1,whichwas"atleast2.5timeshigherthanthatratioduringanyothermajorU.S.conflict.”12Whilethe1:1ratiohadbeenreachedforthefirsttimeafewyearsearlier,theconflictintheBalkansduringthe1990s“involvednomorethan20,000U.S.militarypersonnelatanytime,aboutone-tenthofthetotalintheIraqtheaterasof2007.”13

Accordingtothe2019CongressionalResearchService(CRS)reportDepartmentof

DefenseContractorandTroopLevelsinAfghanistanandIraq:2007-2018,inrecentyearscontractorpresenceinAfghanistanandIraqwasfrequentlymorethan50percentofthetotalDoDpresenceinthecountry.14

Amorerecentreport,publishedbytheCenterforStrategicandInternational

Studies(CSIS)inOctober2019,foundtheratioofcontractorstomilitarypersonnelhascontinuedtoincrease."OperationalorbattlefieldcontractorsoutnumbermilitarypersonnelintheCENTCOMregion(53,000to35,000),andtheratioofcontractorstomilitarypersonnelhasincreasedfrom1:1in2008to1.5:1today."15

Boththeratioandthescaleofcontractinginthepost-9/11eraareunprecedented,intermsofthedollarsspentaswellasthenumberofpeopleinvolved.Nextweexaminereasonsforthisgrowth.DriversofGrowthinMilitaryContracting

Profitableindustriestendtogrowaslongastheyareprofitable,butthereareadditionalfactorscontributingtothegrowthofmilitarycontractinginparticular.Thisgrowthmaybetracedtoideological,political,andeconomicfactors. 11Theseservicesareallthoseidentifiedbysix-digitNorthAmericanIndustryClassificationSystem(NAICS)codesfallingbetween500,000and600,000. 12CongressionalBudgetOffice(CBO).(2008).Contractors’SupportofU.S.OperationsinIraq,1.http://www.cbo.gov/sites/default/files/110th-congress-2007-2008/reports/08-12-iraqcontractors.pdf.13Contractors’SupportofU.S.OperationsinIraq,12.14DepartmentofDefenseContractorandTroopLevelsinAfghanistanandIraq:2007-2018.DoDpresenceincludesbothcontractorsandtroops,andtherefore,ascontractorsaccountformorethan50percent,thismeansthatcontractorsoutnumbertroops.15Cancian,M.F.(2019).U.S.MilitaryForcesinFY2020:SOF,Civilians,Contractors,andNukes.CenterforStrategicandInternationalStudies.https://csis-prod.s3.amazonaws.com/s3fs-public/publication/191024_Cancian_FY2020_OtherForces_v2.pdf?J8LrHnAxmk7kpuQpqSenZf2nfjgHeLgS.

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IdeologicalDrivers:NeoliberalismandthePromiseofCostSavingsThroughCompetition

The1980sbroughtawaveofprivatizationofpublicservices,partofthelargermovementsometimesreferredtoasneoliberalism.“Chicago-school”economics,whichinthe1970sand1980sbecameanincreasinglyinfluentialschoolofthoughtledbyMiltonFriedmanandGeorgeStigler(economistsattheUniversityofChicago),proposedthatfreemarketsweresuperiortogovernmentplanningandthatthegovernmentimpededmarketsandshouldbederegulatedandprivatizedasmuchaspossible.Conservativethinktanks,suchastheHeritageFoundation,pushedtheideathatprivateproviderswouldnecessarilybemorecost-efficientthangovernmentduetothenatureofcompetition.16In1983,theOMBissuedarevisedversionof“CircularA-76,”firstissuedin1966,whichencouragedthecommercializationofgovernmentactivitieswhereverpossiblewiththeaimofincreasingefficienciesanddecreasingcost.Theexception,accordingtoOMBA-76,wasfor“inherentlygovernmental”activities.

Accordingtothisneoliberaleconomictheory,competitivepressureswoulddrivedowncostsandincreasequality,leadingtobothcheaperandbetterproductsandservicesthanthegovernmentcouldproduceitself.Privatizationofthepublicsectorwasthereforeadvocatedasawaytosavetaxpayerdollars,withconservativethinktanks,powerfulcorporations,andneoclassicaleconomistsexertingincreasedpressuretocontractoutservicesthatwerenot“inherentlygovernmental”(thoughthelinebetweenwhatisandisnotinherentlygovernmentalhasbecomeincreasinglyblurry).P.W.Singernotesthatitwas“…the'privatizationrevolution,'whichprovidedthelogic,legitimacy,andmodelsfortheentranceofmarketsintoformerlystatedomains."17PoliticalDrivers:CamouflagingtheLevelofDeploymentandtheNumberofDeaths

Therearemanypoliticalfactors—uniquetomilitarycontracting—thathaveledtothegrowthoftheCamoEconomy.Thepoliticalusefulnessofmilitarycontractingcomesintwostages:first,thenumberofpeoplebeingsenttowariscamouflaged,ascontractorssupplementandevenoutnumberthetroopsbeingsentoverseas;andsecond,thenumberofpeoplewhoareinjuredorkilledinwarisalsocamouflaged,ascontractorinjuriesanddeathsarelesspubliclyvisibleoracknowledged.Byhidingthefullhumancost,militarycontractingmakeswarmorepoliticallyacceptableandlesspubliclyopposed.

Presidentscanavoidcallingupreservistsandnationalguardmembersby

increasingtheuseofcontractorsduringwartime.Thepoliticalexpediencyofusingcontractorsinthiscaseiswell-describedbyCharlesSmith: 16FromaMarch1986“Backgrounder”bytheHeritageFoundation:“Toacceleratecontractingout,theAdministrationshouldchangetheprocedureforawardingcontractssothatthebiasagainstprivatefirmsisremoved.Inaddition,Congressshouldoverhauldrasticallytheimpedimentsthatithaserectedtocontractingout.Byworkingtogethertoimprovetheprocess,significantreductionsinspendingcouldbeachievedwithoutreducingservicestotheAmericanpeople.”SeeMoore,S.(1986).Backgrounder:HowtoPrivatizeFederalServicesby“ContractingOut.”TheHeritageFoundation.http://s3.amazonaws.com/thf_media/1986/pdf/bg494.pdf.17Singer,49.

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TheuseofcontractorsupportappearstoobviatewhathasbeencalledtheAbrams’Doctrine.GeneralCreightonAbramsrestructuredmilitaryforcestocloselyintegratethereserveandguardcomponentswithregularArmyunits.Forexample,acombatdivisioncouldnotdeployandoperatewithoutareservetransportationunittomovetheirsuppliesandareservewaterunittoproduceandtransportwater.ThereisspeculationthatAbramsintendedthislinkagetoforceleadershiptorealizethatanyuseofcombatforceswouldrequirebroadsupportasreserveandguardunitsweremobilized.ReplacingthesereserveunitswithcontractorsmaycreateamoralhazardinthataPresidentcannowcommittroopstowarwithoutcallingupsignificantreserveandguardunits.18

Nationalguardandreservetroopslivethroughoutthecountry,workincivilian

occupations,andaremembersofvariouscommunities,meaningtheirabsenceisfeltmorewidelybybusinessowners,familyandfriends,andotherswhentheyarecalledtowarincomparisontoactivemilitarymembers.Usingcontractors—ratherthantheNationalGuardandreservists—enablesthemilitarytohavethesupportitdeemsnecessaryoverseas,whileshieldingthehumancostsofwarfromtheAmericanpublic.

Forcemanagementlevels,alsoknownas“troopcaps,”arelimitstheexecutivebranchsetsonthenumberoftroopsthatcanbedeployed.Theselevelshavebeenresetmanytimes,includingbytheObamaadministrationtodrawdowntroopsinAfghanistan,Iraq,andSyria,19aswellasmorerecentlybytheTrumpadministration.Accordingtoa2019CRSreportoncontractors,someexpertsarguethatforcemanagementlevelsdriveincreasesincontractoractivities,ascontractemployeesarenotsubjecttothesecaps.20Thisisonepoliticallyexpedientwaytoincreaseormaintainapresencein-countrywhilepubliclydeclaringthenumberoftroopsisdiminishing.DoD’suseofcontractorsalsocontributestounendingwar,enablingthecontinuationofconflictandthepresenceofU.S.DoD-relatedpersonnel,whilecreatingthepublicimpression(intheU.S.,butnotabroad)thattheU.S.presenceisdiminishing.Thecamouflageprovidedbyusingcontractorsdiminishespressuretoendaconflict.Inthiscase,continualwarmaynotbedrivenbycontractors,butitisenabledbythem.

Unlikewithmilitaryveterans,theinjuriesanddeathsofmilitarycontractorsarenot

recognizedormournedpublicly.Eventhough,since2001,U.S.contractorcasualtieshavebeenhigherthanfortroops.TheCostsofWarProjecthasestimatedthatamongU.S.casualties,about8,000contractorshavediedinthepost-9/11wars,comparedtoabout7,000servicemembers.21Whilemilitarycasualtiesarecloselytrackedandpublicly

18Smith,C.M.(2012).WarforProfit:ArmyContractingvs.SupportingtheTroops.Algora,199.19DepartmentofDefenseContractorandTroopLevelsinAfghanistanandIraq:2007-2018.20Ibid. 21AsofNovember2019estimates,7,014U.S.Military,22U.S.DODCivilian,and7,950U.S.Contractorshavediedinthepost-9/11wars,includinginAfghanistan,Iraq,Syria,Yemen,Pakistan,andotherrelatedareas.See:Crawford,N.C.&Lutz,C.(2019).HumanCostofPost-9/11Wars:DirectWarDeathsinMajorWarZones,AfghanistanandPakistan(October2001–October2019);Iraq(March2003–October2019);Syria(September

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recorded,contractordeathsneitherreceivethesametransparencynoranequivalentpublicacknowledgement.ContractordeathsarelessvisibletotheAmericanpublic,whichispartofthepoliticalusefulnessofmilitarycontracting.

Furthermore,manyofthecontractorsworkingandriskingtheirlivesinthesewar

zonesarenotU.S.citizens,butratherhost-countryand“third-countrynationals.”In2017,NoahCoburndocumentedhowmanynon-U.S.personnelworkforU.S.contractorsandtheabysmalworkingconditionsandhumanrightsabusestheyface,inadditiontothelevelofinjuryanddeathtowhichtheysuccumb.This,too,ispartofthecamouflageprovidedbymilitarycontracting.22EconomicFactors:ExcessSupplyCreatesItsOwnDemand,SometimeswithaBitofHelp

Say’sLawisofteninvoked(correctlyornot)astheideathat“supplycreatesitsowndemand.”Thisisanotherwayofsaying“Ifyoubuildit,theywillcome.”Butjustasadvertisementandmarketingcancreatenewdemandsfromnewly-perceived(newly-manufactured)needs,somefirmsintheCamoEconomyhavecultivatedaperceivedneedfortheirservices.Theultimateexpressionofthiscanmanifestasaperceivedneedformilitaryinterventioninordertocreateamarketformilitarygoodsandservices.Shortofthisisthemarketing—fromdefensecontractorstodefenseprocurementspecialists,membersofCongress,orotherdefensedecision-makers—ofmilitarygoodsandservicesthatcouldbeusedforwarorforwhatislooselyandvaguelycalled“nationalsecurity.”

TheendoftheColdWarbroughtwithitthepromiseofapeacedividend—that

funds,people,equipment,andothernationalresourcesthatweremobilizedagainsttheSovietUnionduringthemassiveReagan-eradefensebuildupcouldinsteadbechanneledtopeacefulandproductivepurposes.Instead,militarycontractors—bothemergentandestablished—createdanewmilitarymarketforthisexcesssupplyofmilitary-relatedlabor,equipment,andmanufacturingcapacity.Twosetsofsuppliersappeared:the“marketopportunists”andthe“marketmakers.”

Marketopportunistsandmarketmakersaredistinguishedbytheirhistoricalplace

intheCamoEconomy.Theopportunistsweremadeupofentrepreneurialveteransandmilitary-adjacentpersonalitieswhoestablishednewcontractingfirms,whilethemarketmakerswerelargeandestablishedfirmswhowerealreadyembeddedwithinthenetworkofpolitically-connectedcontractingfirmsandwhowereabletocreateneworexpandedmarketsfortheirservicesbyconvincingmilitarydecision-makersoftheirneed.

2014–October2019);Yemen(October2002–October2019);andOther.TheCostsofWarProject,BrownUniversityWatsonInstituteandBostonUniversityPardeeCenter.https://watson.brown.edu/costsofwar/files/cow/imce/papers/2019/Direct%20War%20Deaths%20COW%20Estimate%20November%2013%202019%20FINAL.pdf.22Coburn,N.(2017).TheGuards,Cooks,andCleanersoftheAfghanWar:MigrantContractorsandtheCostofWar.TheCostsofWarProject,BrownUniversityWatsonInstitute.https://watson.brown.edu/costsofwar/files/cow/imce/papers/2017/CoW_Coburn_Migrant%20Contractors_Aug%2023%202017.pdf.

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Themarketopportunistsestablishedwhataresometimesreferredtoas“PrivateMilitaryCompanies”(PMCs)or“PrivateMilitaryFirms”(PMFs).ManyofthesePMCs/PMFswereservice-orientedandincludedtheprovisionofsecurityaswellasvariouslogisticsinordertosupplementorreplacemilitaryforce.Onewell-knownexampleisthefirmBlackwater,whichwasstartedin1997byformerNavySEALsAlClarkandErikPrinceasashootingrangeandtargetmanufacturer.ClarkandPrincequicklyturneditintoabillion-dollarsecurityenterprise,saying,“WearetryingtodoforthenationalsecurityapparatuswhatFedExdidforthePostalService.”23In2001,theCIAhiredBlackwatertoprovidesecurityfortheirofficersintheirhuntforOsamabinLaden,andthefirmwentontosecurevariouscontractsinAfghanistanandIraq.

Meanwhile,amajorinnovationinthecommercializationofthemilitarywasbeing

createdthatwouldbringcontractingtoanewlevel.“Marketmakers,”firmsthathadalreadyestablishedcommercialrelationshipswiththemilitary,foundawaytocreateopportunitiesthatwouldsecureorexpanddemandfortheirproductsandservices.Themarket-makingstrategy,whichprovedtobequitelucrative,involvedDoDhiringcontractorstoassessmilitarypreparednessandprovidesolutions,whichunsurprisinglyledtothecontractorsrecommendingthattheDoDshouldrelyuponthemmoreheavilytomeetcontingencyoperations,suchasthosethatwouldultimatelyariseinAfghanistanandIraq.ThebestandperhapsmostobviousexampleofthisisKBR(Kellogg,Brown&Root).Byintegratingitselfaspartofthelogisticsplanningoperation,KBR(atthetime,BrownandRoot),wasabletocreateamarketforexactlythetypesofservicesthatitcouldthenprovide.

The“LogisticsCivilAugmentationProgram,”knownasLOGCAP,wasfirst

establishedbytheU.S.militaryin1985inordertoplantheaugmentationandsupportofmilitaryforcesincontingencyoperations.AccordingtotheCBO,“LOGCAPistheArmy’sprimarymeansofprovidingsupportserviceformilitarypersonnel.ContractorpersonnelprovideawiderangeofservicesunderLOGCAP,suchasoperatingfoodserviceanddiningfacilities,storingandsupplyingammunition,distributingfuel,maintainingequipment,andmanagingprocurementandproperty.”24

In1992,LOGCAPawardedafive-yearumbrellacontract,knownas“LOGCAPI,”to

Brown&Root(asubsidiaryofHalliburton;eventuallytobecomeKBR),underthen-SecretaryofDefenseRichardCheney.Immediatelyprecedingthis,Cheneyhad:

…taskedBrownandRootwithplanningandbudgetingthetheoreticallogisticalsupportformorethanadozendifferentfictionalscenariosthatcouldrequirethedeploymentoftwentythousandtroopsinfivebasecampsforsixmonths.Theresultingstill-classifiedreportapparentlyconvincedCheneyoftheutilityofhavingonemegacontractorwithanopen-endedandoverarchingcapabilitytomanagelogistics

23BlackwaterUSA:HearingbeforetheCommitteeonOversightandGovernmentReform,HouseofRepresentatives.(2007),110thCong.https://oversight.house.gov/sites/democrats.oversight.house.gov/files/documents/20071127131151.pdf.24Contractors’SupportofU.S.OperationsinIraq,4-5.

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support,sinceBrownandRootsoonafternettedthearmy’sfirstfive-yearumbrellaLOGCAPcontract.25

Brown&RootwascontractedformilitaryinterventionsintheBalkans,Somalia,and

elsewhereinthe1990s,andwasatthereadytotakeonthelargestmilitaryservicecontracteverforaten-yeartermimmediatelyafterthe9/11attacks.Thiscontract,knownas“LOGCAPIII,”wasworthover$37billionbyJuly2011.26

ItisnocoincidencethatboththestudyofthepotentialneedforcontractorsandtheresultingawardofthefirstmegacontractwenttoBrown&Root.Thoughsemi-privatized,theworldofmilitarycontractingisnotanopenmarket.So,itisoftenconnections,morethancompetitions,thatgarnerandextendcontracts.InbetweenhistimeasSecretaryofDefense(1989–1993)intheGeorgeH.W.BushadministrationandasVicePresidentintheGeorgeW.Bushadministration(2001–2009),CheneyservedasCEOofHalliburton,theownerofsubsidiaryBrown&Root.AccordingtodatafromUSASpending.gov,KBRhascapturedover$50billionincontractsfromDoDbetweenFY2001andFY2019.27

Figure4.KBRContractsthroughDoD,2001–201928

Aswetrytounderstandthemassivecontractingincreaseinthepost-9/11era,itisimportanttonotethatpoliticalconnectionsandeconomicopportunitiessuchasthesehave 25Pelton,101.26Weinberger,S.(2011,August30).MilitaryLogistics:The$37Billion(Non)Competition.Wired.https://www.wired.com/2011/08/military-logistics-the-37-billion-noncompetition/. 27ThisisKBRorsomecombinationofKBR,Brown&Root,andKellogg,Brown&Root,sincethefirmhasgonethroughdifferentmanifestations.28 Source:AuthoranalysisofUSASpending.govdata.

$7,975,328,382

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2001200220032004200520062007200820092010201120122013201420152016201720182019

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gonehand-in-handtocreateandsustainevermoreprofitablebusinessopportunitiesforcontractingfirms.In2019alone,thefirmsBoeing,NorthropGrumman,andLockheedMartineachspentover$13milliononpoliticallobbying.29Similarly,contractorswhostandtoearnsignificantprofitsandensuretheircontinuedexistenceandpossiblegrowthhaveincentivestopressurepoliticaldecision-makersinordertobothengageinandprolongengagementinmilitaryconflict.Theseeconomicdrivers(withpoliticallevers)thereforemaynotonlycreateariseincontractingbutmayalsocreatepressuresforcontinualwars.WhyisMilitaryContractingSoExpensive?CommercialMonopolyandLackofCompetitionorCost-ReducingIncentives

Theideologicaljustification,borneofneoliberaleconomictheory,isthatprivatefirmswillproducegoodsandservicesatlowercostandhigherqualitythanthepublicsector.Thisisduetothenatureofcompetition—iffirmsaretryingtomakeprofitsandstayinbusiness,theywilltrytoimprovetheirproductsandlowertheirpricestooutcompeteotherfirms,whereasthepublicsectorisessentiallyamonopoly,andwithnocompetitionthereisnoincentivetoreducecostsandimprovequality.

Butaremilitarycontractorsactuallyprivatefirmsoperatinginacompetitive

environment,withincentivestoreducecostandthereforesavetaxpayerdollars?Inthispaper,Imakethedistinctionbetween“privatization”and“commercialization.”Iusethelattertermwhenitcomestomilitarycontractors,becausetherearevariousreasonswhythesefirmsdonotfacethecompetitivepressurestolowercostandincreasequality,andtheyarenotstrictlyprivate,astheyprofitfrompublicfunds,serve(ostensibly)apublicpurpose,andare(theoretically)subjecttosomelevelofoversightbyDoD.Insomeways,thisistheworstcombinationofpublicandprivate.Publictaxdollarsfundingprivateprofitswithoutthetransparencyorcollectivedecision-makingthatshouldoccurinthepublicsectororthemarketpressuresthatshouldoccurintheprivatesector.

Ratherthanasetoffirmscompetingtoimprovecostandquality,muchoftheCamo

Economyisaprivatemonopoly.However,sincetheCamoEconomyisinterlinkedwiththepublicsector,Iwillusetheterm“commercialmonopoly”insteadofprivatemonopoly.

Militarycontractingisinlargepartsnon-competitive,andevenwhenitis

competitive(inname),therearelimitedincentivestoreducecosts.ThisresultsintheDoDoutsourcingtohigh-cost,non-competitivefirmsandultimatelywastingtensorhundredsofbillionsofdollarsintaxpayermoneyeachyear.Militarycontractingisinefficientandnon-competitivebecauseof:

1. Thenatureofcontracts,includingtheexistenceof“cost-type”contractswithno

incentivetominimizecosts,aswellastheexistenceof“non-competitive”contracts;

29AccordingtodatafromtheCenterforResponsivePolitics.https://www.opensecrets.org/federal-lobbying.AccessedFeb26,2020.

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2. Lifetimecontractsorsole-suppliercontracts(whicharerelatedbutseparatefromthefirstpoint);

3. Defactomonopolies,orcasesinwhichcompetitionistheoreticallypossiblebutstrategicallyorpoliticallyimpractical.

TheNatureofContracts

Federalgovernmentcontractscontaindifferentstipulationsofhowthecontractorwillbepaidorreimbursedforservicesperformedandalsovaryinthelevelandtypeofcompetitiontowhichtheyaresubject.Howthecontractorispaidwilldetermineinparthowmuchofanincentivetheyhavetoreducecostsandwhowillbeartheriskofcostoverruns— isitthecontractororthegovernment(thetaxpayer)?Whetherthecontractiscompetitiveornotisanotherfactoraffectingtheincentivetoreducecosts.Governmentcontractsareprimarilyeither“cost-type”contractsor“fixed-price”contracts.Someothercontracttypes,suchas“timeandmaterials,”alsoexist,butwewillfocushereoncost-typeandfixed-pricecontracts,astheserepresentthevastmajorityofcontractsthroughDoD.

Incost-typecontracts,contractorsarereimbursedforthecostsincurredwhile

producingcontractedgoodsorprovidingcontractedservices.Manycost-typecontractsalsoincludeafee,whichcanbeeitherafixedamount,apercentage,orafeebaseduponperformance(cost-plus-awardorcost-plus-incentive).Withfixed-pricecontracts,contractorsbeartheriskofcostoverrunsandreapthebenefitsofcostsavings.Incost-typecontracts,thegovernmentbearsthecostsofoverrunswhilethecontractorbearsnone.Butthereisanasymmetryhere:infixed-pricecontractsboththebenefitsandrisksaccruetothecontractors,whereasincost-typecontractsthegovernmentbearstheriskofhighercostsbutrarelyexperiencesthebenefitofcostsavings,sincethecontractorhasnoincentivetominimizecostandpassthosesavingsontothegovernment.

Cost-typecontractsareusefulinmilitaryoperations,inwhichtheexactneedsand

lengthofthecontractcannotbespecifiedexante.Thesetypesofcontractsgivethemilitarytheflexibilitytheyneedtocalluponthecontractorstoprovideasmuchofthegoodsorservicesthatmightberequiredduringatimeofconflict.Theyalsoprovideassurancetothecontractorthattheywillbepaidforwhatevercoststheyincur,whichreducesuncertainty.TheflexibilityforDoD,andtheguaranteedpaymentforthecontractor,makecost-pluscontractsattractivetobothparties.However,theyalsoprovidenoincentiveforcontractorstominimizecosts.Particularlyincost-plus-percentagecontracts(whicharenowrarelyused),contractorsinfacthavetheincentivetoincreaseratherthandecreasecosts.

AccordingtotheUSASpending.govdata(Figure5),overtheperiodFY2008–FY

2019cost-typecontractstotaledintherangeof$80billionto$100billionperyear,whilefixedfeecontractstotaledabout$190billionto$260billion.Onaverageovertheperiod,cost-typecontractsgenerallyaccountedforabout30percentofDoDcontracts,whilefixed-pricecontractsmadeupabout70percent.

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WhiletheDoDisnotuniqueinitsuseofcost-typecontracts,itsuseofthesetypesof

contractsfarexceedstheirusebyothergovernmentagencies.DODusescost-typecontractsfourtimesasmuchastheDepartmentofEnergy,andovertentimesmorethanHealthandHumanServicesortheDepartmentofTransportation.30

Figure5.Cost-typeContracts:DoDandOtherAgencies,2008–201931

Everycontractthatisacost-typecontracthasthepotentialtounnecessarilyincreaseDoDspendingbecausecontractorswillhavenoincentivetoreducecosts.WhilethemajorityofDoDcontractsbetween2008and2019werefixed-price,theDoDstillspent$1.2trilliononcost-typecontracts.Thisrepresentshundredsofbillionsofdollarsthatwerenotsubjecttothecost-reducingpressuresofprivatemarkets.

Inadditiontospecifyinghowacontractorwillbereimbursed—whetheritisacost-

typeorfixed-pricecontract—governmentcontractsalsovaryintheircompetitiveness.Governmentcontractscanbesubjectto“fullandopencompetition”orothertypesofcompetitiveness;alternatively,theycanbe“non-competitive,”“notcompeted,”or“notavailableforcompetition.”AccordingtotheFederalAcquisitionRegulation’s“FairOpportunity”requirements,acontractmaybenon-competitiveifthereis“onesolesource”availableforthecompletionofthecontractorifthenatureofthecontractisconsidered“urgent,”“authorizedorrequiredbystatute,”for“nationalsecurity”reasons,orbecauseitisinthe“publicinterest.”

30 By dollar value of contracts, not by number of contracts. Dollar values shown in Figure 5. 31 Source:DatacompiledbyauthorfromUSASpending.gov.

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InFY2019,about45percentofDoD’s$370billionincontractswereclassifiedas“non-competitive,”withtheremainderclassifiedas“competitive.”But,evenwithinthecategoryof“competitive”contracts,thereisoftenalackofcompetition.Thiscanhappenwhenacontractorinitiallywinsabidforacompetitivecontract,butthenthecontractisrenewedorextendedformultipleyearswithoutanysubsequentcompetition.So,whilethedatabaseshowsa10-yearcontractas“competitive,”inrealityitwouldbecompetitiveonlyinitsfirstyear,andnon-competitivefortheremainder.

Onewaythesenon-competitivecontractscanmasqueradeascompetitiveisbecause

of“ID/IQ”or“IndefiniteDelivery,IndefiniteQuantity”contracts.Theseprovidethemilitarywiththeflexibilitytocontractinconflictsituationsinwhichthereisnoclearend-dateandtheydonotwanttofixorspecifythetermsofthecontractattheoutset.OnceacontractorwinsabidforanID/IQcontract,whichmaybecompetitive,theymaintainthecontractforanumberofbaseyearsplusadditionaloptionyears.Forexample,theLOGCAPIIIcontractmentionedpreviously,whichwasawardedtoKBRin2001includedonebaseyearplusnineoptionyears.

“SoleSource”and“CaptainsofIndustry”Contracts

Oftentimes,thereisonlytheguiseofcompetition.Whilesomecontractscantechnicallybecompetedfor,onlyoneviablecandidateactuallyexists.Othercontractsbecomesolesourcebecausethecontractorspecifiesthatallsubsequentsparepartsand/ormaintenanceforasystemmustbesuppliedbytheoriginalequipmentmanufacturer(OEM).Acompetitivecontractforgoodsthenbecomesamonopolyonlaterservices.ADoDcompetitionreportanalyzingFY2014notes:

Thecompetitivepercentagesarelowerinorganizationsthatbuymajorsystems(includingweapons,automatedinformationsystemsandForeignMilitarySales),specializedequipment,sparesandupgradesthatmayneedtobepurchasedfromtheoriginalequipmentmanufacturer(OEM)orsupplier.Theseprogramsmayrequiresolesourceextensionsofcontractsthatwereoriginallycompetedbecausetheprogramshavemovedpastthestageintheirlifecyclewherecompetitioniseconomicallyviable.32

Relatedly,the“lifetimeservicecontract”isatypeofmonopolyestablishedinthepost-9/11era.Forexample,LockheedMartinholdsacontracttoprovidelifetimeservicefortheF-35planestheyaresellingtothemilitary.Procurementofagood,suchasaweaponsystemorvehicle,usedtobeatime-limitedendeavor,meaningthecontracthadanenddate.Militarypersonnelservicedtheirweapons,vehicles,andotherequipment—thiswasconsideredacriticalfunction,an“inherentlygovernmentalactivity,”thatshouldnotbeoutsourced.Now,however,thisisaregularoccurrence.Thisoutsourcingofserviceslikeweaponsmaintenancenotonlyhasnegativesecurityimplications(asthemilitarybecomes

32U.S.DepartmentofDefense(DoD).(2015).CompetitionReportforFiscalYear2014.https://www.acq.osd.mil/dpap/cpic/cp/docs/DoD_FY_2014_Competition_Report.pdf.

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dependentoncontractors,includingduringbattle),butalsoleadstothecreationofmonopolies.

DeFactoMonopolies

Somemilitaryservicesaretheoreticallysubjecttocompetition,butforpracticalreasonscompetitionmaynotactuallyoccur.Thiscanhappen,forinstance,asafirmwinsacompetitivebidtoprovidefoodservicesorlogisticalsupportonornearthebattlefield.Whilethebidmaybesubjecttorenewedcompetitioneachyearoreveryfewyears,inmanyinstancesthefixedcostsandtimeinvolvedinswitchingtoanewcontractormid-missionwouldbeprohibitive.Furthermore,ascontractorsoftenworkincloselyintegratedwayswithmilitarypersonnel,fieldcommanderswilldeveloppreferencestomaintainuseofthesamecontractorratherthanre-competingthecontractandadjustingtoanewservice.

AsnotedbySinger,“ID/IQ”contractsthathaveindefiniterequirementsandlifespan

(suchastheLOGCAPIIIcontractawardedtoKBRin2001),requirealarge,self-sufficientfirmwithaglobalpresence.33Contractssuchastheserequirefirmswiththeabilitytorespondimmediatelywithminimalassistance,thatcanmaintaintheirownlinesofcommunicationsandsupplies,andthathavethefinancialabilitytosustainthemselvesforlongperiodsbeforebeingreimbursed.Allthismeansthatonlylarge,well-establishedfirms,orsometimesonlyonefirm,canfeasiblyoffertheseservices.Andoncesuchafirmestablishesitselfinthetheaterofwaritessentiallybecomesamonopoly.Ithasconstructedbuildingstohouseitsemployees,basesforthetroops,infrastructuretosupportitselfandthemilitaryforceitistheretoserve.Ithasestablishedallthematerialandlogisticalrequirements.Givenalloftheserealities,itwouldbehighlyimprobable,evenifnottechnicallyimpossible,foranotherfirmtoreplaceit.Oncealargecorporationhassuchasignificantcontract,itisverydifficultandpossiblyathreattothemilitary’ssecurityforittopulloutduringatimeofwar—themilitarywouldbevulnerableorevenincapacitatedwhileawaitingitsreplacement.

Defactomonopoliescomeintobeingnotonlybecauseacontractormayhaveunique

experienceinaparticularregionorinprovidingaparticulargoodorservice,butalsobecausemilitarycommandersdevelopafamiliarityandcomfortindealingwithaparticularcontractoranddonotwishtoadjusttonewcontractors.Thisistrueevenifothercontractorsareavailabletocompeteforprovisionofthegoodorserviceandcouldprovideitatlowercost.CharlesSmith,whoservedformanyyearsasacontractmanagerinthearmedforces,writes:

Thisphenomenonofcommanders’unwillingnesstochangesupportcontractorswasapowerfulconstraintoninducingcompetitionintotheLOGCAPprogram.Changecanbedisruptive,andcommandersnaturallyavoidit.Thecontractoralsobecomesadeptatintegratinghisstaffintothecommander’sstaff.Thecontractorbecomesthestaffexpertonservicesupport.Asofficersrotatethroughtheoperationthecontractor

33Singer,CorporateWarriors.

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personneloftenbecomethemostexperiencedmembersofthestaff.In2010,theArmymadeasignificantdecisiontoretainKBRasthelifesupportLOGCAPcontractorinIraq,eventhoughsavingsfromcompetitionwereavailable.34

Non-competitivecontracts,competitiveinnameonlycontracts,andID/IQcontracts

allgrantatypeofmonopolytothecontractingfirm.Thefirmswhowinthesecontractsarenotsubjecttocompetitivepressuresthatwouldlowercosts.Likewise,cost-typecontractsgivefirmsnoincentivetoreducecosts,evenincontractsthataretechnicallylabeled“competitive.”Further,somemilitarycontractingfirmsendupwithdefactomonopoliesbecauseofgeographyorpreferencesorotherreasonsthatmakecompetitionpracticallyunfeasible.Inreality,militarycontractsdon’tlowercosts.Alltheydoisreplacethepublicmonopolywithcommercialmonopolieswhosecostsareatleastashighasthepublicsector,andinmostcaseshigher,sincethesefirmsmustbuildprofitintotheircostestimates.ProfitabilityRaisesCostsandLeadstoFraud,Abuse,andOtherDistortionsCausedbyPoliticalPowerofContractors

Militarycontractingcanbeincrediblylucrative.LockheedMartinearnsabout85percentofitsrevenuesthroughgovernmentcontracting,andabout10percentofallmilitarycontractdollars(roughly$40billionperyear).Since2001,theirannualprofitlevelshavebeeninthe$4-8billionrange,steadilyandquicklygrowinginrecentyears.35Highprofitlevelscreateincentivesformilitarycontractingfirmstolobbyforadditionalmilitarycontractspendingandgenerallytocreatepoliticalpressureforcontinuedwarinthenameofnationalsecurity.

Opportunitiestoprofit,especiallyonsomethinglikewar,createincentivesforfraud

andabuse.Asshownbelow,thewaste,fraud,andabuseofspendingoncontractorsinthewarsinAfghanistanandIraqhavebeenextensivelydocumentedincourtcases,bygovernmentofficials,andthemedia.Thereareseveralreasonsforthis,includingtherapidpaceofincreasedspendingattheoutsetofawar,orthefastscalingupthathappenedduringthe2008troopsurge,whichmakesdue-diligenceimpossibleorimpractical.Additionally,themultiplelayersofcontractingandsub-contractingmasktruecostsandbuildinlayersofprofits.Finally,governmentoversightisinsufficientorlackingbecauseofinadequateplanningorinadequatestaffinglevels.The“AfghanistanPapers”publishedbyTheWashingtonPostinlate2019foundthat:

ThescaleofthecorruptionwastheunintendedresultofswampingthewarzonewithfarmoreaidanddefensecontractsthanimpoverishedAfghanistancouldabsorb.

34Smith,36.35BasedondatacompiledbytheauthorfromLockheedMartin10-KAnnualReports.

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Therewassomuchexcess,financedbyAmericantaxpayers,thatopportunitiesforbriberyandfraudbecamealmostlimitless,accordingtotheinterviews.36Variouslawsuitsagainstwartimecontractorshavedocumentedthecorruptionand

waste.Forexample,thegovernmentfiledalawsuitagainstKBR,whichwasoneofthemaincontractorsinIraq.KBRbilledforwatertestingservicesthatwerecontractedbutneverperformed.Theyalsoinflatedthenumberofmealstheyserved(andchargedthegovernmentfor)byencouragingpeopletoover-scantheirmealIDcards.ADoDauditdiscoveredarateof36percentmealinflation,orbillingfor136mealsforevery100served.37

Onanannualbasis,governmentinspectors,includingtheSpecialInspectorGeneralforIraqReconstruction(SIGIR)andtheSpecialInspectorGeneralforAfghanistanReconstruction(SIGAR),investigatefraudandabuse.Theseinvestigationsoftenleadtocriminalchargesandinsomecasesrecoveringstolenfundsandotherassets.38AcknowledgmentoftheprevalenceoftheproblemledSenatorsJimWebb(D-VA)andClaireMcCaskill(D-MO)tocreatethebipartisan“CommissiononWartimeContractinginIraqandAfghanistan,”whichconcludedinitsfinal(2011)reportthat“between$31billionand$60billionoftaxpayers'fundshavebeenlosttocontractwasteandfraudinIraqandAfghanistan,”oruptoapproximately30percentofthetotalof$206billionspentoncontingencycontractsfromFY2002toFY2011.

Thereisalsoafairlywell-recognizedproblem(andtheterm“problem”isan

understatement)thatasignificantportionofpost-9/11wartimecontractdollarshaveendedupinthehandsoftheinsurgentsthattheU.S.militaryisfighting.Forinstance:

GertBerthold,aforensicaccountantwhoservedonamilitarytaskforceinAfghanistanduringtheheightofthewar,from2010to2012,saidhehelpedanalyze3,000DefenseDepartmentcontractsworth$106billiontoseewhowasbenefiting.Theconclusion:About40percentofthemoneyendedupinthepocketsofinsurgents,criminalsyndicatesorcorruptAfghanofficials.”39

36Whitlock,C.(2019,December9).TheAfghanistanPapers:ASecretHistoryoftheWar.WashingtonPost.https://www.washingtonpost.com/graphics/2019/investigations/afghanistan-papers/afghanistan-war-corruption-government/.37Weinberger,MilitaryLogistics:The$37Billion(Non)Competition.38See,forinstance,the2013FinalReportissuedbySIGIR,orthequarterlyreportsissuedbySIGAR,suchastheJanuary2020reportthatcanbefoundhere:https://www.sigar.mil/pdf/quarterlyreports/2020-01-30qr.pdf.39Whitlock,TheAfghanistanPapers:ASecretHistoryoftheWar;Similarly,a2016SIGARreportfoundthatthroughcorruptionatvariouslevels,“U.S.moneywasflowingtotheinsurgency.”See:SpecialInspectorGeneralforAfghanistanReconstruction.(2016).CorruptioninConflict:LessonsfromtheU.S.ExperienceinAfghanistan.https://www.sigar.mil/pdf/lessonslearned/SIGAR-16-58-LL.pdf.

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Thescaleandpaceofpost-9/11interventionsmadethemabreedinggroundforfraud,corruption,andwaste.TheU.S.military’sover-relianceoncontractorservicesledtoproblemsofmoneyflowingouttooquickly,gettingintothewronghands,allwithoutproperoversight.

Theprofitabilityofcontractsbecomesanevenbiggerproblemascontractsarefurthercontractedouttosub-contractors.Militarycontractscaneitherbeprimecontracts,whicharethosebetweenacontractorandtheDepartmentofDefense,orsub-contracts,whicharebetweentheprimecontractorandanothercontractor.Butthesesub-contractscanbefurthersub-contracted,creatingmultiplelayersofcontractsandcontractorsforfulfillmentofaprimecontract.Ateachlayerofthecontract,thereisanopportunityforpotentialfraudandabuse.Butevenwithoutthepresenceofcorruption,theprofitbuiltintoasub-contractisthenpassedonasacosttotheprimecontractor,whoaddsintheirownprofitasacosttothegovernment.Witheachlayerofcontract,thereisalayerofprofit.Withcost-typecontractsinparticular,thiscanquicklyinflatecoststothegovernment,sinceeachlayerofcontractbuildsinprofit,andthecostbilledtothegovernmentcanbemultipletimesthecostoftheactualgoodorserviceprovided.

NextweturntotheconsequencesofthehighcostsandprofitabilityoftheCamo

Economy.

IncreasedMilitaryContractingConstrainsDecisionsonFederalSpending

Attheaggregatelevel,thecommercializationofmilitaryactivitiesleadstofederaloverspending.Spendingmorethannecessaryonmilitarycontractors,whichispartofthelargerproblemofhavinganinflatedmilitarybudget,thenconstrainspublicdecisionsonfederalspending.Highlevelsofmilitaryspendingincreasethedeficit,publicdebt,andinterestpayments.Thiscreatestwobudgetaryoptions:first,increaseddefensespendingcreatespressuretoreducenon-defensespendinginordertominimizetheincreasesindebtandinterestpayments.Fundingfornon-defensediscretionaryprograms,suchasSupplementalNutritionalAssistanceProgram(SNAP),TemporaryAssistanceforNeedyFamilies(TANF),orEnergyEfficiencyandRenewableEnergy(EERE)iscut,astheywereintheFY2020BudgetoftheUnitedStates.ArangeofprogramsthatareimportanttotheAmericanpublic,includingclimatechangemitigationandadaptation,infrastructure,education,andhealthcaregounderfunded.

Thesecondoption,ratherthancuttingnon-defenseprogramsnow,istocontinue

increasingdeficitsandthedebt,pushingoffobligationstotaxpayersinfutureyears.Asnationaldebtincreases,interestpaymentsonthedebtgrow.Asshowninthisauthor’s2020paperTheCostofDebt-FinancedWar,eveniftheU.S.ceasesfightingandfundingthepost-9/11wars,theinterestpaymentsonthedebtincurredforthosewarswilloutpacethewarspendingitselfby2030,andby2050cumulativeinterestpaymentswillbemorethanthreetimestheamountofwarspending,evenwithnoadditionalwarspendingpast

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2020.40Between2001and2019,$2trillionwasspentforOverseasContingencyOperations(OCO)andthe“GlobalWaronTerror,”inadditiontotheDoDbasebudget.The$2trillionofwarspendingwillresultincumulativeinterestpaymentsof$6.5trillionby2050.Theseinterestpaymentscrowdoutopportunitiestofundallothertypesofgovernmentprograms—bothdefenseandnondefense.TheCBOprojectsnetoutlaysforinterestonallpublicdebtwillrisefrom1.7percentofGDPin2020to2.6percentofGDPby2030,accountingfor11percentofgovernmentoutlaysby2030.41

Overspendingonmilitarycontractors,then,leadstoreducedopportunitiestospend

publicfundsonnon-defenseactivities,eitherbycreatingpoliticalpressurestoreducenon-defensespendingintheshortterm,orbyincreasingpublicdebtandinterestpayments,whichwillcrowdoutfutureopportunitiesatanevengreaterscale.Bypushingpaymentsouttothefuture,ratherthanreducingmilitarycontractingandlimitingdefensespending,theuseofpublicdebttofundwarnotonlyunjustlyburdensfuturegenerationsandlimitstheiropportunities,italsocontributestotheinvisibilityofwar.MilitaryContractingDistortstheLaborMarket

Militarycontractfirms,throughtheirhighprofitsandlowinputcosts,areabletoofferhighersalariesthanthoseofferedbythemilitaryandbyothercivilianfirms.Thisnotonlycreatesupwardpressureonfederalwages,butalsomakesitmoredifficultforthemilitaryandfornon-militaryfirmstoattractorretainneededtalent.

Thehighprofitlevelsearnedbycontractingfirmsenablethemtoofferwage

premiums,makingcontractinganattractiveoptionnotonlyforveterans,butalsoforcurrentservicemembers,leadingtowhatisknownas“laborpoaching.”42HighprofitsalsoenablemilitarycontractingfirmssuchasLockheedMartin,Raytheon,GeneralDynamics,andotherstoattracttalentinengineering,physics,math,andothertechnicaloccupations.Thisdistortsthecivilianlabormarketinadditiontothemilitarymarket—makingitdifficultforotherimportantandsociallybeneficialindustriestoattractthesameleveloftalent.

Inadditiontoinflatedprofitsenablingmilitarycontractorstoofferhighwages,the

contractorswhoemploymilitaryveteransalsoforgomostoftheexpensivetrainingandrecruitmentcostsborneatthepublic’sexpense.AsSingershowsinCorporateWarriors,contractors’recruitmentcostsarerelativelylow,sincetheyhaveaccesstosignificantamountsofinformationaboutanex-servicemember’srecordandtheirlikelyfutureperformance.Further,themilitary—usingpublicfunds—hasinvestedinthetrainingand

40Peltier,H.(2020).TheCostofDebt-FinancedWar:PublicDebtandRisingInterestforPost-9/11WarSpending.TheCostsofWarProject,BrownUniversityWatsonInstituteandBostonUniversityPardeeCenter.https://watson.brown.edu/costsofwar/files/cow/imce/papers/2020/Peltier%202020%20-%20The%20Cost%20of%20Debt-financed%20War.pdf.41CongressionalBudgetOffice(CBO).(2020).TheBudgetandEconomicOutlook:2020to2030.https://www.cbo.gov/publication/56073.42Formoreonlaborpoachinginthecontextofmilitarycontracting,seeSinger,CorporateWarriors.

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preparationundergonebytheservicemember,savingcontractorsthoseexpenses.Highprofitsandlowinputcoststhencombinetoenablecontractorstoofferhigherpayandtorecruitveteransorpoachcurrentservicemembers.Publicfundssubsidizecontractors’laborcostsandputthematanadvantageoverotherindustries,eventhosethatmightbeimportanttothevotingandtaxpayingpublic.

Highsalariesbymilitarycontractorshaveledtoseriousretentionproblemsfor

DoD,asservicemembersareluredtotheprivatewarindustryratherthanremainingintheservice.Onestrategytorecruitnewmembersandtoretainthoseinservicehasbeentoincreasepay;recentyearshaveseensignificantpayraisesformilitarypersonnel,includinga3.1percentincreaseinpayfor2020.Whilepayincreasesmaycertainlybewarranted,theyalsocreateupwardpressureonthefederalbudget,leadingtoanimpetustocontractoutevenmoreasin-housetalentbecomesmoreexpensive.

Thelabormarketdistortionscreatedbymilitarycontractorscreateaviciousspiral

forthefederalbudgetandtheworkforce:

1. Thegovernmenthirescontractingcompaniesbecauseoftheoreticalcostsavingsandtheneedforflexibility.

2. Contractingfirmsofferwagepremiumsoverthepublicsectorandotherprivatefirms.Asmilitarycontractingincreases,andcontractsbecomemoreinclusiveandlonger-lived,themilitary’sowncapabilitiesandworkforcegethollowedout.Thisputsupwardpressureonthefederaldefensebudget,asDoDraisespaytoretainitstalent;in-housecostsrisewhileconcomitantlycontractpaymentsincrease.

3. Increaseddefensespendingisthenmetwithcallsforreducednon-defensespending,orispaidthroughincreasingdebt,whichnotonlyburdensfuturegenerationswithhigherinterestpaymentsbutalsoreducestheircapabilitiestospendpublicfundsfortheirowndefenseornon-defenseneeds.Thiswillmakeitincreasinglydifficulttoincreaselabordemandinsectorssuchasinfrastructureorcleanenergy,whichwouldbothcallupontheskillsofex-servicemembersandservepublicinterests.

Conclusions

ThehiddencostsoftheCamoEconomymustbeincludedinatallyoftheconsequencesofthepost-9/11wars.Thispaperhasdocumentedtheenormousgrowthinmilitarycontractinginthepost-9/11era,aswellasthereasonsforthatgrowthandtheimplicationsforthefederalbudgetandforlabormarkets.Ithasarguedthatcontractingincreasedoverthepastseveraldecadesduetoideologicaldrivestowardprivatizationandthepromiseofcostsavings,aswellasthepoliticalexpediencythatmakescontractingattractivetotheadministrationandtheeconomicopportunitiesthatmakecontractingattractiveforthecontractorsthemselves.WhileDoDspendingoverallroseasaresultofthepost-9/11wars,theriseincontracting—intermsofbothpeopleanddollars—grewdisproportionately.

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Theriseincontractingdidnotengenderthepromisedcostsavings.Reasonsforthisarevaried,including:

1. Thenatureofthecontractsthemselves(cost-typecontractsornon-competitive

contracts)whichminimizedoreliminatedthecompetitiveforcesthatwoulddrivedowncosts;

2. Themonopoliesthataroseduetolifetimeserviceorsolesuppliercontracts,andthedefactomonopoliesduetoconditionsandpreferencesinthetheaterofwar;

3. Theprofitabilityofcontracting,whichledtofraud,abuse,andwastebecauseofthescaleandpaceofspendingcoupledwithinsufficientoversight,andtheprofitsbuiltintolayersofcontractsandsubcontractsthatwhencombinedwithcost-typecontracting,quicklyandsignificantlyinflatethecosttogovernmentandtaxpayers.

Militarycontractingatitscurrentscaleisdetrimentalinmanyways.Privatefirmsarenotsubjecttothesamelevelsoftransparencyasthepublicsector,andtheprofitabilityofcontractorscombinedwithdisincentivestoreducecostsleadstoanincreaseinfederalspendingonmilitarycontractors.Additionally,militarycontractingdistortslabormarkets,asprofitablefirmsareabletoofferwagepremiumsovermilitaryoccupationsorsimilarcivilianoccupationsinotherprivatefirms.PolicyImplications

Theseconclusionssuggestseveralopportunitiesforreform.Thefirststepwouldbetoreducemilitaryspendinggenerallybyendingthepost-9/11wars.AsofJanuary2020,thereareover50,000contractorsworkinginAfghanistan,Iraq,Syria,andotherCENTCOMareas,abouthalfofwhomareinAfghanistan.43EndingU.S.interventionsintheseareas,andconcomitantlyreducingspendingforDoDandrelatedcontractors,wouldbethefirststeptowardaddressingtheproblemslaidoutinthispaper.

Secondly,DoDshouldreducethepercentageofitsfundingthatischanneledto

contractors,keepingmoreofitsservicesin-house,particularlythoseservicesthatarevitaltothemilitary’sowncapabilities,includingservicingweaponsandequipment.

Thirdly,themilitary’scontractingprocessitselfshouldbereformedsuchthat

contractorsmustcompetetoprovidethegoodsandservicesthatarenotinherentlygovernmentalactivities.Thiswouldmeanreducingandreforming“cost-type”contractsandnon-competitivecontracts,sothatmilitarycontractorsareactuallycompetingandthusbringingdowncosts.Ifsomepolicymakersconsidergovernment-providedgoodsandservicesinefficientbecauseofthepotentialforpublicmonopoly,theyshouldconsiderthatallowingforthekindsofcommercialmonopolythatcurrentlyexistinmilitarycontracting

43U.S.DepartmentofDefense(DoD).(2020).ContractorSupportofU.S.OperationsintheUSCENTCOMAreaofResponsibility.https://www.acq.osd.mil/log/PS/.CENTCOM_reports.html/5A_January_2020.pdf

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ultimatelyjustsubstitutesonemonopolyforanother.Asignificantdifferencebetweencommercialmonopolyandpublicmonopoly,however,isthattheformergeneratesprofitforprivatecompanies.Thus,thecommercialmonopolyofmilitarycontractingultimatelytransfersfundsfromU.S.taxpayerstoprivatepockets.

Reducingtheamountofcontractingandreducingtheprofitabilityofcontractingwill

correctdistortionsinthelabormarket.Asthescaleandtheprofitlevelsofmilitarycontractingdecrease,theCamoEconomywillgeneratelessofapullonthelaborsupply,whichshouldmakeiteasierforthemilitarytoattractandretainservicemembers.Itshouldalsomakeiteasierforfirmsininfrastructure,cleanenergy,andothersectorswhoseoccupationshavesignificantoverlapwithmilitaryandcontractoroccupations(suchasengineers,electricians,andmanagers)tobecompetitivewithmilitarycontractors.

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MethodologicalAppendix:HowDoSalariesCompare?

Itisdifficulttocomparethesalariesandoccupationsofmilitarymemberswiththoseoftheemployeesofmilitarycontractingfirms.Thisislargelybecausecontractorsareprivateentitiesthatarenotrequiredtopubliclydisclosedataonpersonnel,particularlythedetaileddataonoccupationsandwagesthatwouldbeusefulforresearcherstoassesslabormarketdisparities(andthatwouldbeusefulforDoDmanagementandotherpublicofficialstoknowaswell).Evenpubliclytradedcompaniesonlyneedtoreporttop-linenumbersonpersonnel,suchasthetotalnumberofemployeesinthefirm.However,togetasenseofthemagnitudeofwagedifferences,IusedatafromtheDepartmentofLabor(DoL),whichprovidesa“crosswalk”formilitaryandcivilianoccupations.Ithencomparetheoccupationalpaynationally,usingBureauofLaborStatistics(BLS)dataonwagesandsalaries,andtheoccupationalpayofferedbycertainmilitarycontractors,usingdataprivatelycollectedbythesitePaysa.com.

TheDoLsitessuchasO*NET“MyNextMoveforVeterans”providesomesenseof

whatoccupationalsalarieswillbeformilitaryex-servicememberswhotakecivilianjobs.AnenlistedpersonworkingasasmallarmsrepairerortechnicianintheMarineCorps(MOC2111)mightbecategorizedas“repairandmaintenanceworkers,general,”withoccupationalmedianwagesintheciviliansectorof$38,300annually(asof2018).Anelectronicsengineeringtechnician,workingintheArmyasautilitiesequipmentrepairer(MOC91C)wouldfindamediansalaryof$64,330intheciviliansector(asof2018).44MechanicalEngineers,whomightworkasNavalReactorEngineersintheNavy(MOC122),earnamedianciviliansalaryof$87,370nationally(asof2018).ElectricalEngineers,suchasthoseworkingintheAirForce(MOC32E1E),earnamedianannualciviliansalaryof$96,640(2018).

Next,toexaminethepaydiscrepancybetweenmilitarycontractorsandotherfirmsthatmightrecruitforsimilarpositions,IuseprivatelycollecteddataonmilitarycontractorfirmsandcomparethattotheBLSaveragesalariesforthoseoccupationsnationally.Dataonsalariesforoccupationalgroupscanbefoundforcertainlargecontractors,includingforLockheedMartin.ThewebsitePaysa.comhascollectedsalaryinformationforLockheedandfindsthattheaveragesalaryforallemployeesatthisfirmis$115,375andtheaverageformechanicalengineersis$125,000(witharangeof$110–$137thousand;seeFigure6).WecancomparethiswithdatafromtheBLS“OccupationalHandbook,”whichshowsthatthe2018mediansalaryformechanicalengineersacrossallindustrieswas$87,370.ThismeansthatLockheedMartinoffersa43percentwagepremium,payinganaverageof$125,000permechanicalengineerincomparisontothenationalaverageof$87,370.

44Notethat“MOC”standsfor“MilitaryOccupationalCode”;MOCsaresimilarinstructurebutdifferentintitlesandcodesfromcivilianoccupations,whicharecategorizedunderthesystemof“StandardOccupationalCodes”or“SOC.”

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Figure6.SalariesforLockheedMartinEmployees,201845

Nextwelookatadifferentexample,thatofacontractorwhospecializesinoverseaslogisticaloperations,construction,andotherservices.KBR,whohasbeenoneofthemaincontractorssupportingtheU.S.militaryinIraq,offersanaveragesalaryof$104,304(asof2018;seeFigure7).

WithinKBR,salariesfor“Electricians”average$87,000.Meanwhile,accordingtothe

BLS,themedianannualwageforelectriciansnationallywas$55,190in2018.46Thus,KBRoffersawagepremiumof58percentoverthenationalaverageforelectricians.47 45Paysa.LockheedMartinSalaries.https://www.paysa.com/salaries/lockheed-martin.46BureauofLaborStatistics,U.S.DepartmentofLabor.OccupationalOutlookHandbook.https://www.bls.gov/ooh/home.htm.47Ibid.

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Figure7.SalariesforKBREmployees,201848

Similarly,asshownabove,“Security”occupationsatKBRearnedanaverageof$76,000in2018,whilethenationalaverageaccordingtotheBLSforthisoccupationalcategorywas$28,530forsecurityguardsand$63,380forpoliceanddetectives.Thisisawagepremiumof20percentto166percentofferedbythemilitarycontractoroverequivalentcivilianoccupations. 48Paysa.KBR,IncSalaries.https://www.paysa.com/salaries/kbr,-inc.