Penetrating a fog of acronyms, Humphrey McQueen explains why strategists allege that Operation Iraqi Freedom is impeding the transformation of the U. S. military-industrial complex into a military-information complex.

The phrase “military-industrial complex” gained currency from the farewell address to the U.S. people that President General Dwight D. Eisenhower made on 17 January 1961:

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.

The “military-industrial complex” became shorthand for how the national security state served the bottom line of corporations which, in turn, pressured Congress to wage eternal war for perpetual peace.

Successive anti-war movements took up Eisenhower’s warning as an impeccable source, trotting it out to explain the foreign policy of the United States. In 2002, Helen Caldicott added Eisenhower’s tag to the sub-title of her New nuclear danger, though the complex plays no part in her argument. Last November, Chalmers Johnson put the above quotation at the head of his article in Harper’s on the outsourcing of military activities in Iraq.

Like every cliché, “military-industrial complex” has become a barrier to comprehending change. The relations between the military and its corporate suppliers are being upended. Secretary of Defence Rumsfeld faces as big a battle around the Pentagon as he does against Iraq, Afghanistan and non-state terrorists combined. He has jettisoned the “modernization” of the U.S. military in favour of its “transformation”, arguing that “cultural change” will be as significant as new equipment in coping with “unknown unknowns”.

The military-industrial complex is being overtaken by a military-information complex. The $4.5bn aircraft carrier USS Ronald Reagan is at once the last of the old and the first of the new. Northrop Grumman designed it to be redesigned during its construction and to facilitate systems upgrades every two years throughout its fifty-year life. By contrast, the next generation of carriers will be the $10bn CVN 21 due to enter service around 2014. It is being designed to be reconfigured on the run instead of during scheduled refits.

The dynamics of the military-information complex emerge more clearly when contrasted with the three pillars of the military-industrial complex: first, links between business and government personnel; secondly, the benefits to specific contractors; and finally, expansion of the entire economy through defense spending. Each of these is acquiring new content in an unstable context.

Personnel links
The easiest strand to identify in the military-industrial complex was the intertwining of legs under the table. Procurement officers looked forward to golden parachutes into the corporations with which they had placed orders. Contractors held out the promise of post-retirement bonuses for serving officers who played the game.

A series of scandals led Congress to install road-bumps to the transfer of defence personnel onto corporate payrolls. Nonetheless, the practice persists. The president and CEO of National Defense Industrial Association is a retired U.S. Air Force Lt-General, Lawrence Farrell.

Legislation will never eliminate the shadier side of these crossovers. Boeing went into a tailspin late in 2003 when its Chief Financial Officer resigned because of the circumstances surrounding his recruitment of the procurement supremo at the U.S.A.F. to be a vice-president at Boeing. She bailed out as well, followed by the Chairman.

The demands of “transformation”, however, will alter the kind of military personnel sought by the corporations. Sears Roebuck recruited Norman Swartzkopf because of his mastery of logistics during the first Gulf War. More radically, instead of retired Top Brass moving to the corporations to trade on their network of service contacts, the Pentagon will be headhunting Chief Information Officers from the business world.

Individual firms
The second prop of the old-style complex was that defence contracts featherbedded a clutch of conglomerates. The Fortune 500 list of top U. S. corporations indicates the diminishing place of the military-industrial complex in the business hierarchy. In 1993, five defense and aerospace corporations were among the first fifty firms. Only two survived into 2003. Across that decade, the number of armaments suppliers in the 500 fell from seventeen to ten.

The military-industrial complex delivered more benefits to corporations than profits from weapons contracts. The Defense Advanced Research Projects Agency (DARPA) provided a platform for innovation. Billions in corporate welfare underwrite research and development at IBM and Boeing. .

The business of war, however, was no expressway to success. The emphasis that U.K. manufacturer Vickers put into weaponry in the 1980s held back its development. The Thatcher government picked armaments as a winner to overcome technical backwardness.  Instead of setting Vickers up for success in the commercial market, “defence contracting imposed high overheads on other parts of their business, thus reducing the ability to compete”, according to the January 2004 issue of Business History,

For a start, the manufacture of weapons runs contrary to that for civilian commodities. The armament-maker works to the buyer’s specifications for high performance, robust equipment. In addition, the complexity and long lead times for the design of military items engenders “an organisational inertia which is unable to respond to quick changes in the commercial market and is unwilling to take risks in the face of competition”. Motorola, Boeing and McDonnell-Douglas split their operations to protect their civilian divisions from being dragged down by military orders.

Furthermore, the commercialisation of spin-offs from arms contracts requires an utterly different marketing pitch from that applicable to military orders. In military matters, the bidding firm faces a single-purchaser; the task is sell the design, and then make the product. With the contract signed, Vickers was certain of sales at set prices. Once that schedule had been filled, the company had no alternative income stream if it failed to secure follow-on orders.

Certain defense firms continue to benefit, but not in the old way. The new breed is exemplified by IT-savvy manufacturers with logistics backup. Business Week’s 2004 survey of corporations categorized eighteen Aerospace & Defense firms, with total sales for 2003 of $220 billion and total profits of $8.9 billion. Sixteen had increased their sales in the past year but only twelve reported higher profits. These uneven results are indicative of the stresses from “transformation”. IT promises fatter margins, but delivers them only if the software works. Among the winners in 2003 was General Dynamics where sales went up by 23 percent to $4.83bn while profits rose by 80 percent. This boost came from its Information Systems and Technology and Combat Systems.

Expansion of capital
Just as armaments sales sustain a shrinking number of companies so does the military budget no longer provide a motor for the entire economy. Spending on the Second World War did more to pull the United States out of its deflationary cycle than had Roosevelt’s New Deal. The prospect of a return to a global depression stalked the late 1940s. The 1948 Marshall Plan underwrote the export of U.S. goods to Europe before the Korean War boom put paid to alarms about a renewed collapse.

In 1944, 38% of U.S. gross domestic product went on the war. In 1953, the fraction was 14, and by 1968 still reached 9.4. The importance of military spending can be made by comparing the total costs of each conflict: World War Two took 130% of GDP, Korea 15%, and Indo-China 12%.

Between 1941 and 1991 these outlays were of such a magnitude that their effect on the entire economy led to talk of “warfare Keynesianism”. Whereas European social democrats stimulated consumption by welfare outlays, the US government used military spending for its multiplier.

The U. S. defense budget has not contracted much in absolute terms. The shift has been as a proportion of Gross Domestic Product. Military spending lost its prominence as a pump-primer in 1980s, despite Reagan’s Star Wars when the military budget took 6.8 percent of GDP. Throughout the 1990s, that fraction fell from 4.7 in 1991 to 3.4 in 2002. Even today, it is only just over 4 percent.

The retreat from “warfare Keynesianism” spun out of a realignment of the U.S. economy as manufacturing gave way to mass marketing funded by debt. For instance, Wal-Mart now has the biggest corporative revenues at $244bn. Telemarketing turns over $600bn a year, compared with $500bn on the armed services. Similarly, health care takes about 13% of GDP, three times as much as the defense.

Hence, the 1990s boom coincided with the lowest percentage outlays on defense in over fifty years. The post-September 11 pick-up in outlays had some effect on the economy as a whole because of its depressed state. Even so, excess capacity was so great that a 30 percent growth in military budgets did not call forth new investment. 

The New Economies of War
The restructuring of manufacturing and management that transformed the corporate sector from the 1980s is now being applied to the military by cutting their labour force. To cope with Afghanistan and Iraq, the Army is battling to keep its total numbers below 500,000 by banning retirements and hiring “mercenaries”. In the longer term, the half-million limit will be maintained by restructuring towards more flexible combat brigades.  Generals describe this “transformation” as the “most monumental change the Army has undertaken in 50 years”. It can not start until divisions return from Iraq.

Similar processes are in train for the Navy. To afford increasing the number of ships from 294 to 375, crews will be reduced by high technologies and changes to organisation and methods. Destroyers, for instance, will be down by fifty personnel.

Outsourcing of military services has shot up from one in 100 jobs during the 1991 Gulf War to one in ten today. These raw numbers conflate three processes. The first is the supply of meals by McDonalds, for morale. The second is the contracting of personnel to keep a lid on Army numbers. If more permanent troops are recruited, the less money and thought goes on ‘transformation”. Scandals such as Halliburton’s over-charging for oil distract from the third and most significant driver behind outsourcing. The leasing of equipment, such as 100 in-flight refuellers from Boeing, is a way to keep up with the next-generation technology. Outsourcing is thus one more path to “transformation”, a response to Moore’s law about the escalating rate of change in Information Technology.

The de-industrialisation of the United States has left another barrier to “transformation”. Maintaining some recent equipment is precluded because their manufacturers have gone out of business. Between 1997 and 2003, the monthly value of orders for machine tools fell from $450m. to $150m. This malaise turned critical for the F-35 Joint Strike Fighter (JSF) project. The lead contractor, Lockheed Martin, ordered customized drilling machines from an Illinois firm, Ingersoll, which then filed for bankruptcy. That left only one company in the United States that could build the equipment. The sourcing of advanced manufacturing is complicated by secrecy requirements that prevent contracts being let to foreign suppliers.

Rumsfeld Doctrine
“More Chips, Fewer Choppers”, is how Business Week (14 April 2003) headlined the Rumsfeld push for smarter weapons. President Bush, meanwhile, reads speeches about “skipping a generation of technology”. Yet Rumsfeld knows that ideological legacies are a bigger drag on “transformation” than technical systems. Hence, he promotes “culture change”.

Obstacles to that change include institutional barriers between the services, notably the Marine Corps tradition. Every call to unseat Rumsfeld is supported by officers who resent having to talk to the other services let alone integrate their equipment and operations. The Pentagon’s Office of Force Transformation threatens careers built around specific platforms such as the Comanche helicopter, initiated in 1983 and scrapped this year before the first machine came off the assembly line.

The “transformation” is to be funded by early retirement of equipment valued at $88bn by 2009. This mothballing includes 114 air force fighters, 115 transport and tanker aircraft, 259 naval aircraft as well as ships and tanks. In addition, over the next five years the Army will cancel twenty-four plans for modernising equipment, especially heavy ground-combat systems. Consequent savings of $22bn will be redirected to Future Combat Systems and Objective Force programmes.

The Department of Defence hopes to integrate Navy and Marine air capabilities and therefore require fewer aircraft. The Air Force has proposed retiring ten F-117A Nighthawk stealth fighters, (a fifth of the fleet), because it can reconfigure attack methods by integrating the Nighthawks with other aircraft, drawing on lessons from recent combat.

These promises are no substitute for canceling legacy equipment. Hence, commentators see “transformation” as more hype, dodgy accounting and paper-shuffling than the changes in culture. The U.S. Department of Defence claimed that $25bn will go on “transformation”. From London, the International Institute for Strategic Studies countered that “many of the designated programs” are “traditional projects that have been reclassified. In terms of procurement, while officials talk of a shift in priorities, the fact remains that money is only very slowly being redirected in this direction”. For example, most aviation activity remains on existing short-range fighters, not for long-range bombers or unmanned surveillance aircraft. The army still has no stealth technology.

In addition, the Pentagon is taking accounting lessons from Wall Street. The cost of the first ship of a new class will henceforth will be charged against the R&D budget. This bookkeeping maneouvre gives the illusion of an increased commitment to “transformation”.

Northrop Grumman
For “transformation” to get beyond being a mantra, corporate suppliers are changing their businesses even more rapidly than are the armed services. The switch from a military-industrial complex to a military-information one can be discerned by contrasting the failure at Vickers noted above with how Northrop Grumman remade itself in the 1990s.

Northrop Grumman is the shooting star across the military-information firmament.

In 1993, Northrop and Grumman were still separate firms, listed at 104th and 152nd place respectively in the Fortune 500. By 2003, their combination came in at 55th. It ranked fourth in the defense and aerospace category, close behind Lockheed Martin and United Technologies. During the five years from 1999 to 2003, its dividend averaged 13.4 % against only 3.3 for Standard & Poor’s Aerospace and Defense Index.

Northrop Grumman is also the lead player in terms of expansion. Revenues went from $7bn in 1993 to $17bn in 2002, and by 50 percent to $28bn for 2003. Much of this increase has been through mergers and acquisitions, rather than by growing the business. Northrop executed sixteen takeovers in ten years, notably of TRW, Litton and Newport News Shipbuilding. The rest have been with IT firms, notably Logicon.

Moreover, these alignments have been strategic. In the early 1990s, the CEO of Northrop, Kent Kresa, had decided that the Pentagon would shift its focus from tanks and planes to information technologies. He fashioned the conglomerate into the pacesetter for defense electronics and systems integration. The Pentagon rewards companies that manage their own subcontractors. “Synergy” sells.

Although Northrop Grumman did not go into shipbuilding until its purchase of Litton in 2001, that division is already the largest supplier to the U.S. Navy. The merger gave Litton access to high-technology which helped it to win a $2.9bn contract for a new class of destroyer. Similarly, a joint effort in design and manufacture gained TRW a $4.5bn contract for an antimissile system.

Smart, agile weaponry gets costlier by the month. In January, the development phase of the Joint Strike Fighter went up by $5bn to $40bn. The production price for the 2,600 aircraft is already over $200bn, making it the most expensive military project ever.

“Death spiral”
The collapse of the Soviet Bloc led to the boast that Reagan’s military buildup had forced the rival superpower into bankruptcy. Today, proponents of the “death spiral” hypothesis worry least a comparable endgame awaits the United States.

Jane’s Defence Weekly defines the “death spiral” as the ever-rising cost of maintaining ageing equipment while meeting the skyrocketing costs of new platforms. In consequence, “acquisition programmes will reach unrealistic and unsustainable levels”. The result is that “only a fraction of the existing force can be replaced”. The pincer leaves “procurement plans [as] little more than wishful fantasies”.

Jane’s and The Economist co-sponsored a conference in October 2003 on this dilemma. Participants lamented the rush of funds into the wars against terror and in Iraq. Those actions allowed “decision makers to ignore the looming crisis and ignore real efforts at transformation”. Acquisition budgets are being squeezed to maintain field operations. Capital orders were down to 15% in first half of 2003. Strategists allege that the recent boosts to U. S. military spending on the battlefront “are damaging security and industry”.

The International Institute for Strategic Studies delivered an equally blunt assessment in its Military Balance 2003-2004: “In the future, it is unlikely that the Pentagon will be able to continue ignoring the option of cutting certain programmes altogether in order to release the additional funds necessary for broader transformation objectives”.

On top of these twin cost drivers of the “death spiral”, the Bush administration has turned a forecast budget surplus in 2000 of $US1.1 trillion over ten years into a forecast deficit of $1.1trillion. The deficit exceeded $500bn in 2003 and is expected to stay close to the number. Tax receipts as a percentage of GDP slumped to 16.5%, a post-war low. Fortune (8 March 2004) dismissed talk by President Bush about halving the deficit by 2009 as “nothing short of laughable”. The politically induced shortfalls will collide with demographic shifts as fewer income earners support more dependents.

In 1987, reviewers of Paul Kennedy’s The rise and fall of the great powers: economic change and military conflict from 1500 to 2000 drew lessons for the United States as Ronald Reagan promoted Star Wars in an economy reeling from crisis to crisis. Then, the disintegration of the Soviet Bloc, followed by Japan’s descent into a deflationary cycle, resulted in a triumphalism by the surviving superpower. Kennedy would not now need to apologise for his original concern. Against his scoffers, he could argue that the “death spiral” may prevent the “transformation” and “cultural changes” required for the United States to sustain a military-information complex.