The Contract State: Government in the Economy
Nieburg, H. L.
Government has become the economy's largest buyer and consumer. The government contract, improvised, ad hoc, and largely unexamined, has become an increasingly important device for intervention...
...1121, Union Calendar No...
...Cost-competitive ness, the traditional safeguard against corporate power and mis-allocation of national resources, has been suspended by R&D contract practices...
...504 as amended by H. Res...
...To some degree, the forms and effects of contracting evade debate through by-passing the age-old conflict between private and public interests...
...The result will be a new concentration of economic power which will increase the corporation's sole-source status in its areas of activity...
...Virtually every department and agency of the federal government is involved to some extent in R&D contracting although the Defense Department and NASA account for more than 96 percent...
...The first product will be an integrated state plan with engineering details, specifications, and cost estimates (always optimistically low at this stage...
...Over 90 percent of this flows to the highly-concentrated aerospace industry.6 Another $3.3 billion was budgeted for other kinds of R&D, making a total of $27 billion...
...Among the top 100 prime aerospace contractors are such household names as General Electric, General Motors, A.T.&T., Westinghouse, Chrysler, Ford, Socony-Mobil, Firestone, Philco, and Goodyear...
...government to conduct its business by contract is not found in the constitution, but has historically been accepted as a means of achieving constitutional objectives...
...The pattern is already in the process of filtering down to state and local governments...
...defense and economic health...
...The systems management or prime contractor role enables favored companies to become powerful industrial brokers using unlimited taxpayer funds and contract awards to strengthen their corporate position, cartelize the contract market, and exert great political influence...
...Meanwhile, the number of companies receiving annual awards of more than $1 billion has been steadily narrowing...
...12 " If the method of work follows the federal pattern, Aerojet-General will win a state contract by hiring some civil engineers (including some from the state agencies already responsible for such projects) to write a persuasive proposal...
...At the end of the nineteenth century, Henry Adams emphasized the origin of the corporation as an agency of the state, "created for the purpose of enabling the public to realize some social or national end without involving the necessity for direct governmental administration...
...Since that time sectional and economic interests have shifted and changed, the social and technological landscape has vastly altered, and government has emerged as guarantor of social interests against the claims of private power...
...Private corporations have con tracts to act as systems-engineers and technical directors for multi-billion dollar R&D and production activities involving hundreds of other corporations...
...Douglas has 15 directors interlocked with managements of 17 banks and other financial institutions, one insurance company and 28 industrial-commercial corporations (including Cohu Electronics, Giannini Controls, and the Richfield and Tidewater Oil Companies...
...3 Lyndon B. Johnson, while Vice-President, argued: " "If we want to maintain credibility of our claim to the superiority of a free political system—and a free private enterprise system—we cannot seriously entertain the thought of precipitating now so massive a disillusionment as would follow a political default on our commitments in space exploration.4 " The government contract has provided means by which new tasks deemed essential could be performed without direct additions to the size of federal government, thus preserving the alleged rights of private property and profit...
...The Washington area now ranks first in the nation for "scientific personnel" (per 1000 population), although the major product is company promotion and politics rather than science...
...Yet there is precious little consciousness of the trend...
...Washington: USGPO, 1962), pp...
...Erosion of Public Control The dominant centers of corporate power have largely usurped the government's evaluation and technical direction responsibilities...
...The shibboleths of free enterprise perpetuate a system through which, one by one, the fruits of the civilian economy fall into the outstretched hands of the aerospace group...
...Every large corporation has found it necessary to establish field offices in proximity to NASA, the Pentagon, and Capitol Hill...
...The Antitrust Subcommittee staff concluded that management interlocks today are as prevalent as they were in 1914 when the Clayton Act prohibited interlocking directorships...
...The so-called "Great Consensus" assembled by President Johnson is based on the paradox of support from great corporate giants as well as from labor and the liberals...
...The government contract allocates national resources, organizes human efforts, stimulates economic activity, and distributes status and power...
...North American alone, whose vending machine business made Bobby Baker a millionaire, held 28 percent of all NASA procurements...
...Washington: USGPO, 1964), p. 58...
...835, H. Res...
...An aerospace trade magazine commented: "The Governor's effort to put aerospace talents to work on these problems is an imaginative one...
...Consequently, a system now prevails neither "free" nor "competitive," in which the market mechanism of supply/demand has been abolished for key sectors of the economy, its place taken by government policy-making and political influence...
...The Army learned an important lesson in its struggle with the Air Force during the Thor-Jupiter controversy—that its extensive inhouse engineering-manage-anent capability was a positive disadvantage in mobilizing Congressional and public influence to support military missions and budgets...
...The military cutbacks that characterized the Eisenhower years were accompanied by expanding military budgets, a paradox explained by the systematic substitution of private contractors to carry out historical in-house activities...
...Private industry had provided the Air Force with a potent weapon in Congress for outflanking the Army during all the years of strategic debate over missile development and the role of infantry forces in a nuclear world...
...6. U.S., Congress, House, Select Committee on Government Research, Report, Imfact of Federal Research and Development Programs, Study No...
...Adherence of the R&D contract cult to the shibboleths of free enterprise may serve to conceal the fact that a kind of backhanded government planning, in which it participates and from which it benefits, has come to replace free enterprise...
...also U.S., Congress, Senate, Committee on Aeronautical and Space Sciences, Hearings, NASA Authorization for Fiscal Year 1965, Part I. S. 2446...
...U.S., Congress, House, Select Committee on Government Research, Report, Contract Policies and Procedures for Research and Development, Study VII, H.R...
...The tension between private and public decision...
...Atomic energy has been cited as an example of the new collaboration: "Without contracts, it would be governmentowned and operated...
...In its rapid climb during the 50's, the Air Force fostered a growing band of private companies which took over a substantial part of regular military operations, in cluding maintaining aircraft, firing rockets, building and maintaining launching sites, organizing and directing other contractors, and making major public decisions...
...Other states and the federal government are watching the experiment with interest...
...A study of 74 major industrial, commercial and financial companies found that 1,480 officers and directors held a total of 4,428 positions...
...This lesson was inscribed on the Army-Navy skin by the budgetparing knife of the Eisenhower Administration and led to gradual weakening of the arsenal system...
...58-9...
...They may use their power over a subcontractor to acquire his proprietary information and force him to sell them his company...
...3. Industrial Research, December 1959, pp...
...86th Cong., 1st Sess...
...Loyal to the new consensus, government has accepted the responsibility to maintain the financial status of its private contractors as essential to U.S...
...Steel sold perhaps 2 or 5 percent of their annual output to government bodies...
...Thus large prime contractors will invite design competition, establish source selection bids, send out industrial survey teams, make subcontract awards on a competitive or a negotiated basis, appoint small business administrators, designate plant resident representatives, develop reporting systems to spot bottlenecks, make cost analyses of subcontractor operations, and request monthly progress and cost reports from subcontractors.8 The giant contractors have the authority to decide whether or not to conduct an activity themselves or to contract it out...
...2 An aero " space journal cites space technology as "the fastest moving, typically free-enterprise and democratic industry yet created," achieving these values "not on salesmanship" (that is, on traditional quality/cost competitiveness) but "on what is needed most—intellectual production, the research payoff...
...In some instances government built new facilities which it leased at nominal fees...
...Clearly, if the resulting technical discoveries are permitted to remain within these narrow confines rather than be disseminated widely through the society, a disproportionate amount of the benefits will be channeled into the hands of the few and further economic concentration will take place.lo Government itself continues to enhance the power of the prime contractors by accentuating the trend toward fewer and bigger contracts...
...This trend was heralded as a move back to "free enterprise...
...During the second half of the nineteenth century, the corporation proved a powerful vehicle for mobilizing and organizing resources to achieve rapid economic growth made possible by burgeoning technology...
...The only way to approach such problems, he declared recently, is from the systems management viewpoint...
...As described in the 1962 Bell Report: The companies involved "have the strongest incentives to seek contracts for research and development work which will give them both the know-how and the preferred position to seek later follow-on production contracts.5 Favored corporations that win R&D work there " after exploit a number of special advantages: They may achieve solesource or prime contractor status, which eliminates competition and dilutes all cost and performance evaluation...
...Such facilities were permitted to be used, without cost, for commercial production as well...
...In the mid-1960's, government R&D (excluding related procurement) stabilized between 2 and 3 percent of the GNP...
...Harper's, January 1960, p. 43...
...But without recognition of planning as a legitimate government responsibility, planning authority is fragmented, scattered among federal agencies and Congress, with the makeshift planning that results serving the interests of the most powerful political alignments...
...Many of the aerospace companies are mere facades and legal fictions having no individual existence but representing entities of financial and/or political convenience...
...Instead of free enterprise, we are moving toward a government-subsidized private-profit system...
...The government contract has risen to its present prominence as a social management tool since World War II, achieving in two decades a scope and magnitude which now rivals simple subsidies, tariffs, taxes, direct regulation, and positive action programs in impact upon the nature and quality of American life...
...The Contract State of the postwar world must be viewed as a drastic innovation full of unfamiliar portents...
...Perhaps the slow progress of traditional politics is preferable to a system which evades democratic controls and may eventually spread its grip into all areas of public policy...
...General Dynamics, $1.1 billion...
...Washington: USGPO, 1964), p. 55...
...The exploitation of the myths of free enterprise have deflected attention from the feudal baronies of economic power and the tendency of the Administration to attack the symptoms of a growing inequality of wealth without disturbing its sources...
...What is new is the persistence and growth of government-industry contract relationships under which, in the words of David E. Bell (then director of the Budget Bureau), "numbers of the nation's most important business corporations do the bulk of their work with the government...
...Aerospace Corporation plays a similar role for the Air Force) . Still in the picture are major corporations, universities drawing a majority of their research budgets from government, non-profit institutions conducting pad-and-pencil studies of strategic and policy matters for government agencies, and government laboratories operated by industry or by uni versities...
...Government contracting on its present scale has created a new problem...
...The Air Force's success over her sister services during the Eisenhower years established the magic formula that all federal agencies soon imitated, setting in motion a rush to contract-out practically everything that was not nailed down and, in the process, decimating the government's in-house management, engineering, and R&D capability, inflating the costs of R&D, and reducing the scientific and engineering resources available to the civilian economy and to universities...
...810, 88th Cong., 2nd Sess...
...Instead of fighting "creeping socialism," private industry, on an enormous scale, has become the agent of a fundamentally new economic system which resembles both traditional private enterprise and the corporate state of fascism...
...The result is severe distortion in the allocation of resources to national needs...
...87th Cong., 1st Sess...
...and General Electric, $1.03 billion...
...In less than a decade the area surrounding Washington, D.C...
...Chronology on Science Technology and Policy...
...Points of No Return The quasi-governmental mercantilist corporations, which maintained monopoly power through royal franchises, were anathema to the classical liberals...
...A contract negotiator or supervisor must deal with men who can determine his career prospects...
...The same 300 companies which perform 97 percent of all federal R&D also perform 91 percent of all private R&D...
...McDonnell Aircraft, $1.4 billion...
...Governor Brown's statements are cited here as well...
...Knitting the complex together is an elite group of several thousand men, predominantly industrial managers and brokers, who play a variety of interlocking roles—sitting on boards of directors, consulting for government agencies, serving on advisory committees, acting as managers on behalf of government in distributing and supervising subcontracts, moving between private corporations and temporary tours-of-duty in government...
...In the area of missilry, junior officers and enlisted men were reduced to liaison agents or mere custodians...
...Air Force lobbying during the 1950's contributed importantly to American over-dependence on nuclear weaponry and the doctrine of massive retaliation, while the complete range of sub-nuclear military capabilities was allowed to wither...
...The Martin Company, for example, does 99 percent of its business with the government...
...51-2...
...Once the contract is awarded, the corporation will hire the necessary technicians from the state government, the universities, and other on-going operations, paying them greatly augmented salaries for work they were already doing under the traditional arrangements...
...Lockheed, $1.4 billion...
...Not uncommon is the pattern by which each company holds stock in its nominal competitors (for example, McDonnell Aircraft holds a large block in the Douglas Company "as an investment...
...the other 15 work for contractors...
...The myths of economic freedom tend to insulate the giants from social control, protecting their private government status and threatening the political freedom of the majority...
...88th Cong., 2nd Sess...
...Generally, they can and do use their decision-making power to stabilize their own operations, protecting their economic strength at the expense of smaller and weaker companies, and competing with other giant corporations by constant mergers, ac quisitions, and investments among the flock of companies dependent upon them for government largess...
...With vast public funds at stake, industries, geographical regions, labor unions, and a multitude of supporting enterprises band together to maintain and expand their share...
...Pork-barrel politics and alignments with federal agencies and political leaders provide a powerful political machine to keep the contract flow forthcoming...
...The problem of bringing the Contract State under democratic control is but a new phase of a continuing challenge in Western industrial societies...
...As an offspring of the Army, the new branch lacked the substantial in-house management, engineering, and R&D capability that the Army had built into its arsenal system...
...The California experiment may achieve the positive goal of building or imposing a consensus for state-wide planning and technical, rather than political, logic in solving large-scale problems...
...political leaders tend to see each contract as an isolated procurement action, overlooking the general pattern...
...Bell asked: "Well, is it a private agency or is it a public agency...
...In place of forward planning responsible to the broad national community, the nation drifts sideways, denying the legitimacy of planning, yet backhandedly planning in behalf of narrow special interests whose corridors of power are closed to public control...
...8. U.S., Congress, House, Committee on Government Operations, Eleventh Report, Organization and Management of Missile Programs, H. R. No...
...Space, defense and R&D together now comprise the nation's single most substantial allocation of funds, towering over all other programs...
...Governor Pat Brown of California has led the way...
...Under existing laws they may make special provisions for small business and depressed areas and maintain contracts for services not immediately required in order to preserve industrial skills or reserve capacity for emergency needs...
...The contracting system had several bonus effects, enabling the Air Force to keep its military personnel levels down while building an enormous industrial and Congressional constituency with a stake in maintaining large-scale funding of new weapons systems...
...1942, Union Calendar No...
...Washington: NASA Scientific and Technical Information Division, 1964), p. 400...
...Washington: USGPO, 1961), p. 74...
...For almost three decades, national resources have been commanded by political and economic power behind defense priorities...
...North American Aviation, $1.9 billion...
...NASA Historical Staff Office of Policy Planning...
...has become one of the nation's major R&D concentrations...
...Organized as a private corporation and "philosophically...
...In order to compete for jurisdiction over new weapons systems, the Air Force turned to private contractors...
...Just as federal grants-in-aid to state and local governments have (since 1933) become a principal means for national integration of divided local jurisdictions, so federal contracting with private corporations is creating a new kind of economic federalism...
...In a 1965 House Judiciary Committee report, the five largest aerospace firms were cited as flagrant examples of corporate interlock...
...Research and development has become the crux of the system...
...Washington: USGPO, 1964), p. 56...
...A congressional committee noted the trend: At the moment a small number of giant firms in a few defense and space-related areas, with their facilities located principally in three states, and engaged almost exclusively in the application of existing engineering and physical knowledge to the creation of new products and processes, receive the overwhelming preponderance of the government's multibillion dollar research awards...
...Since these same companies do all or most of their business with government, the so-called "private" R&D is paid for by the government in the form of overhead on other contracts.° For example, the United States is still paying for Douglas Aircraft's investment in developing the DC-3 thirty years ago...
...The House Select Committee on Small Business reported that while defense procurement increased by $1.1 billion in 1963, small business awards declined by $268 million...
...Grandiose claims are heard on all sides for the "unique contribution" that the contract mechanism has made in preserving "the free enterprise system...
...The politics of corporate finance have accelerated concentration not only in the government contract market but also in the civilian market, both of which are now thoroughly interpenetrated and interlocked...
...The company will then move for a prime contract to conduct the work, hoping to perform some of it itself and to subcontract the rest to local builders and architects who have gained relevant experience through work they were already doing for the state on a piecemeal basis...
...Officials in the lower reaches of the government bureaucracy (both civilian and military), charged with administration of contracts, find themselves dealing with private corporate officials who often were their former bosses and continue as companions of present bosses and congressional leaders who watchdog the agencies...
...Government installations and factories built in World War II were sold to industry, usually at a fraction of the taxpayers' investment...
...Six companies belonged to that exclusive club at the beginning of 1964: Boeing, $2.3 billion...
...Aeronautics and Space Activities 1962, Bureau of the Budget, cited in Missiles and Rockets, January 21, 1963, p. 12...
...The failure on the part of these interests to redirect their magnificent machine toward a broader range of values denies the nation what may be the ultimate basis of diplomatic strength and the only means to maintain the impetus of a mature economy—namely, the fullest enjoyment by all of our people of the immense bounty almost within our grasp...
...The old research triad—government, industry, university—has virtually disappeared...
...The state has already retained Aerojet-General for preliminary studies...
...They may themselves create "independent" subcontractors in order to conceal profits, to keep certain proprietary information from the government, or for other purposes...
...Most of the private R&D is a means of maintaining the inside track for new awards in anticipated areas of government need...
...who may cause him to be passed over or transferred to a minor position in some remote bureaucratic corner, sometimes with a ceremonial drumming before a congressional committee...
...The gross figures provide an index of the economic impact: the 1966 federal budget called for $23.7 billion in new obligational authority for defense and space—$11.4 billion for Defense Department procurement of hardware and control systems, $6.7 billion for R&D...
...Later, as the contract arrangements acquire stability, Aerojet-General may begin a process of mergers and acquisitions among its subcontractors...
...The legal fiction that holds economic and political institutions to be separate and distinct becomes ever less applicable as economic pluralism is swallowed up by corporate giantism...
...In the name of preserving and utilizing the "unique" systems-engineering and management capability that NASA publicists claim as one of the space program's major benefits to the civilian economy, underemployed aerospace industrial teams are now pushing for contracts in such areas as urban traffic management and water conservation...
...Thomas Hobbes compared them to "worms in the entrails of man," and Madison in the Federalist Papers dealt at length with the problems of limiting their growth...
...9. See Carl E. Barnes, "Industrial Research, Is it Outmoded...
...2. James McCamy, Science and Public Administration (Birmingham, Ala.: University of Alabama Press, 1960), pp...
...4. U.S., NASA, Astronautics and Aeronautics, 1963...
...Aerojet-General completed its preliminary waste disposal study in late 1965, recommending a ten-year program to be conducted by systems management techniques and to cost multi-billion dollars...
...All of this represents national planning...
...making is a self-correcting process when its dimensions are visible and understood and when public authority is not wholly captive to the pressures of narrow interest groups...
...Cited in U.S., Congress, House, Committee on Science and Astronautics, Staff Study, The Practical Values of Space Exploration...
...5. Bell Report, printed in Appendix I, Systems Development and Management, Part I, p. 205...
...The contractor will cut across the cleavages of state, county, and municipal jurisdiction, insuring everyone a reasonable return, while retaining for itself two tiers of profit: one from its own work, the other added to that of the subcontractors...
...On the other hand, the implications of economic federalism based upon contracts are far from clear...
...Frank Gibney, one of the early consultants to the House Space Committee, observed that "the spectacle of a private profit-making company rendering national decisions makes the old Dixon-Yates concept look as harmless as a Ford Foundation Research Project.11 " There is no doubt that the flow of billions of federal dollars into narrow areas of the economy tends to create a self-perpetuating coalition of vested interests...
...Business and industry have always been close to the centers of political power, but never before in peacetime have they become a virtual fourth branch of government, enjoying a position created by the permanent crisis of international diplomacy...
...Business Horizons, Summer 1964...
...In spite of such temporary stimulants as tax-cutting and the multiplier effect of missile-space spending, the American civilian economy is faltering in its growth...
...ment's own in-house personnel...
...The implications of grants-in-aid have acquired some clarity: state taxation still takes care of traditional functions, while new and greatly expanded activities devolve upon local bodies through national decisionmaking, and the states operate more and more as administrative districts for centrally-established policies...
...They have the power to make or break geographical areas and individual bankers, investors, and busi nessman...
...The open-end, cost-plus nature of the contract instrument, the lack of product specifications, official tolerance of spending overruns, all increase the total contract and fee, rewarding wasteful practices and unnecessary technical complication, permitting violation of all rules of responsible control, and making possible multiple tiers of hidden profits...
...The Congressional Joint Economic Committee reported that 100 companies and their subsidiaries accounted for 73.4 percent of total federal procurement value in 1964...
...A mere handful of giants (such as North American Aviation, Lockheed, General Dynamics, and ThompsonRamoWooldridge) hold prime contracts over more than half the total R&D and production business...
...In dealing with their subcontractors and suppliers, these corporations act in the role of government: These companies establish procurement organizations and methods which proximate those of the government...
...see Aviation Week, January 21, 1963, p. 30...
...The first result of this staggering outpour has been the artificial inflation of R&D costs, enabling contractors to hire away the govern...
...There is ample precedent, for instance, in the use of railroads for movement of troops, or in General McClellan's arrangements with the Pinkerton Detective Agency for espionage against the Southern Confederacy...
...Explicit authority for the U.S...
...Mobilized to serve national policy, private contractors interpenetrate government at all levels, exploiting the public consensus of defense, space, and science to augment and perpetuate their own power, inevitably confusing their own special interests with those of the nation...
...With contracts, one person in 16 in the industry works for government...
...Key to the Kingdom Unlike older government-fostered industries, the new contractor empire operates without the yardsticks of adequate government inhouse capability or a civilian market...
...Essentially the same questions may be directed at the full-blown Contract State nurtured by the federal government...
...i Traditionally, the government had never become the dominant customer for any private firm except in times of war...
...Yet one must ask if social consensus and rational planning cannot be achieved without the abdication of traditional political and governmental processes...
...Coughlin, Missiles and Rockets, August 2, 1965, p. 46...
...Washington: USGPO, 1959), p. 49...
...part of the private sector," yet "it obviously has a different relationship to governmental decisions and the government's budget . . . than was the case when General Motors or U.S...
...NASA and the Pentagon use their contracting authority to broaden the productive base in one area, maintain it in another, authorize capability here or there for different kinds of R&D, create competition or limit it...
...11...
...5.26 billion for NASA (virtually all R&D), and an additional $272 million for space-related R&D conducted by the Weather Bureau, the National Science Foundation, and the Atomic Energy Commission...
...NASA doubled its prime procurements while the small business share dropped from 11.7 to 8.5 percent...
...The process is delicately balanced, and there are points of no return...
...The traditional political parties have so far failed to achieve this goal...
...Like the conventional political party, the corporation will have acquired the ability to allocate state resources, to dispense job and financial patronage, and to insure profits for its investors from the tax resources of state government...
...is employed by NASA to integrate and test all launch facilities and space vehicles, while Bellcomm, a subsidiary of A.T.&T., is employed for engineering and management of all NASA operations...
...What was initially sustained by emergency comes to be sustained, normalized, and institutionalized (as emergency wanes) through a cabal of vested interests...
...The systematic neglect of the civilian economy has led a great number of small businessmen, managers, white collar workers, and professionals to embrace the simple formulas of Goldwater conservatism which directs the anxieties generated by incipient stagnation against the targets of autocratic organized labor and government spending for welfare and foreign aid...
...1. U.S., Congress, House, Committee on Government Operations, Subcommittee, Hearings, Systems Development and Management, Part I. 87th Cong., 2nd Sess...
...Is there no way to build consensus for regional planning under the aegis of ordinary political leadership and civil service systems...
...7. See Aerospace Facts and Figures 1962 (Washington: Aerospace Industries Association of America, 1963), p. 20...
...Others were leased at low fees to contractors who were then given government business to make use of these facilities profitable...
...In time the systems teams, having emasculated state and local technical resources, will by judicious use of contract money build a political machine in the state legislature— relegating to their own managerial cadre (and to the investment brokers who control their corporate paper) a large share of the decision-making authority of the State of California...
...88th Cong., 2nd Sess...
...Its very success, the efficiencies of bigness, and the inevitable politics of corporate empire-building, thrust into American skies the spires of monopoly power...
...The Cadres of private contractors were mobilized in the 50's for the unprecedented growth of the Air Force...
...In its place is a whole spectrum of new arrangements, such as the so-called "systems-engineering and technical direction" firms operated on a profit or non-profit basis (for example, G.E...
...Cumulative missile/space spending in the decade which began in 1955 amounted to over $100 billion, and during the balance of the 60's we will spend at least an additional $125 billion...
...The aerospace industries, on the other hand, ride high on unprecedented profits and diversify their holdings, biting deep into the most succulent portions of the civilian production machine...
...The government contract, improvised, ad hoc, and largely unexamined, has become an increasingly important device for intervention in public affairs, not only to procure goods and services but also to achieve a variety of explicit or inadvertent policy-ends...
Vol. 13 • September 1966 • No. 5
