Wednesday, October 25, 2006

Congress Fails to Investigate or Punish War Profiteering

The following post is the text of a radio commentary I (Mike Meeropol) delivered over WAMC radio in early October.

Did you know that the US Congress has rejected efforts to punish, investigate and criminalize war profiteering?

Yes, that’s right. This past February, the House on a mostly party-line vote rejected an effort to forbid expenditures from going to any contractor, “…if the Defense contractor audit agency has determined that more than $100,000.000 of the contractor’s costs involving work in Iraq … were unreasonable.”

Meanwhile, the Senate on an equally party-line vote, rejected an amendment to an appropriation bill “to prohibit profiteering and fraud relating to military action, relief and reconstruction…”

What’s going on here?

The key to understanding this issue is in attempting to define the term “war profiteering.” Can we be precise or must we accept an “I know it when I see it” position as did former Supreme Court Justice Potter Stewart, about pornography?

Whenever a nation goes to war and buys supplies and equipment from private businesses, unless the government forces businesses to sell at a loss, the deal will lead to increased profits. But profiteering and merely profiting are different concepts. Profiteering implies that profits are too high. But how is that possible? How can a price voluntarily arrived at between two parties – one party the US government – be too high?

Well – one way is if the business fails to deliver the product promised. The business gets its money and the government gets little or nothing of what was promised. Anecdotal evidence abounds in any war --

This is clearly fraud – and should be punished severely.

But what if the product paid for is actually delivered – how do we define war profiteering then? The only economic argument would be that the price charged and the profit earned is much higher than the price and profit that would have been high enough to induce the business to supply the particular product --- In other words, if there were no war, the business would be satisfied to get, say, a 20 % profit – but now they’re getting 40%.

Why does a business gets such a great deal? Because there’s little or no competition – and because the government is very anxious to get production started quickly. Because the stakes in wartime are so high, these extra costs don’t seem to matter at the time – But of course they do.

The House Bill proposed to allow the Pentagon’s own internal audit agency to investigate whether any defense contractor was either padding costs in order to commit fraud or overcharging in other ways. Note that each contractor under that proposed bill would have $99 million in “wiggle room” --- only “unreasonable” charges over $100 million would trigger sanctions.

During the Korean War Congress decided that all businesses were probably going to earn quite high profits and an excess profits tax was imposed. They didn’t even bother to discriminate between unreasonably high profits and just high profits. That made some sense because it is difficult to prove that a specific cost charged is “unreasonable…” Such an allegation would certainly be contested and the time it would take to settle the matter would be time wasted and remember there’s a war on!

So there was an excess profits tax during the Korean War. By the way, this very high tax did not interfere with procurement – there is no evidence that Korean War soldiers were short on equipment.

Given the Bush Administration’s unwillingness to support any tax increase, the Korean War solution was never an option during this war. So why weren’t the proposals aimed at punishing and investigating specific acts of war profiteering unanimously approved? -- Why were they defeated in partisan votes?

The answer lies in the difficulty of proving the existence of war profiteering. What Republicans probably feared was that efforts to punish war profiteers would degenerate into a partisan effort to make the President and his big business buddies look bad – with lots of charges and no real resolution of the problem. An effort ostensibly to pursue war profiteers would in the end contribute to reducing the public’s support for Bush’s war.

I would guess that’s why Republicans including NY State Republicans voted against it.

[1] The references is to an amendment to a Defense Appropriations bill. The bill was H.R. 4939. The amendment was H.AMDT.746: The amendment called for inserting the following: \ SEC. __. None of the funds appropriated or otherwise made available by this Act shall be obligated or expended by the Secretary of the Army or his designee to award a contract to any contractor if the Defense Contract Audit Agency has determined that more than $100,000,000 of the contractor's costs for contracts involving work in Iraq under one or more Army contracts were unreasonable.

[2] Even more significantly, a proposal by Senator Byron Dorgan of North Dakota to establish a system for investigating fraud and abuse has never even made it out of committee. (S. 2361)

[3] One can find the quote at the BrainyQuote web site:
The actual full quote is “I shall not today attempt to define this kind of material but I know it when I see it.”
For a full background discussion see Movie Day at the Supreme Court or "I Know It When I See It": A History of the Definition of Obscenity by Judith Silver at
[4] During World War II, a Senator from Missouri, Harry S. Truman made a name for himself by driving, “…thousands of miles around the country going from one defense plant to another documenting waste and fraud. [Truman] then headed the Senate Special Committee to Investigate the National Defense Program -- the Truman committee, for short. The process saved American taxpayers $15 billion (in 1940s dollars). And by uncovering faulty military equipment, he prevented the deaths of hundreds if not thousands of U.S. soldiers.” The quote is from an OP-ED piece in the St. Louis Post-Dispatch entitled Fighting War Profiteering, Truman Style by Sarah Williams posted on the AlterNet web site on March 6, 2006March 6, 2006 Unfortunately, there is much evidence that a lot of the same is happening in Ira q. The article goes on to mention a few examples. For more details, there is a new documentary by Robert Greenwald called IRAQ FOR SALE. At their web site, there are a number of links and a number of references to books that specifically relate to war profiteering in the current war.

[5]Economists call this return “rent.” For economists rent is not what you pay the landlord. Instead it is a payment over and above the payment that would induce you to sell a product or provide a service. Imagine you own a house on a small (1/2 acre) piece of land overlooking the ocean and you want to sell it. You bought it ten years ago for $200,000 and if you had invested the $200,000 in the stock market you would have averaged a rate of return of, say, 10% a year. That would have doubled the value of your $200,000 investment. One might say that any payment above $400,000 (let’s fix on $420,000) for that piece of land would be sufficiently high enough to induce you to sell. However, this year, there are 3 or 4 millionaires anxious to buy that house. You know if because a house right next door to you sold for $1 million. So you get them bidding against each other and you end up getting $1.2 million. The difference between the $420,000 you would have been willing to sell for and the $1.2 million you received is called “rent.” It is a pure return to scarcity and does not reflect what economists call the opportunity cost of the land and house. In the case of military contracting – the company would make a fine profit at a much lower price but the government is in a hurry and does not carefully scrutinize the details of the bid and does not put enough fine print in their to control the behavior of the military contractor and the result is that the government pays much more than it had to pay and the company makes more than the product is actually worth in terms of real costs.

[6] The Korean War began in the summer of 1950. During the fiscal year 1951, individual income tax revenues rose from 15.8 to 21.6 billion dollars while corporation income tax revenues rose from 10.4 to 14.1 billion. Total federal receipts rose from 14.4 percent of GDP in fiscla 1950 to 16.1 percent in fiscal 1951 to 19.0 percent in fiscal 1952. In fiscal 1953 which was the year of prolonged negotiations till the armistice was signed that summer, receipts fell to 18.7 percent of GDP. The tax increases were so significant that in fiscal 1951, even though defense expenditures rose from 5 to 7.4% of GDP the budget went from a small deficit (-1.1% of GDP) to a small surplus (1.9% of GDP). [See Economic Report of the President (any year) Tables B-79 and B-80.]

[7]You can inspect the votes of Representatives at the following site:
A quick check shows one NY State Republican, Representative John Sweeney as not voting. The New Hampshire Republicans split with Jeb Bradley voting yes and Charles Bass voting no. New Jersey members of Congress split perfectly along party lines while Rob Simmons was the only Connecticut Republican to vote yes.