Proliferation Press

A webpage devoted to tracking and analyzing current events related to the proliferation of WMD/CBRN.

Do Defense Contractors Recieve Unfairly Bloated Returns? Does Public Opinion Determine America’s Defense Spending? Robert Higgs Answers these Questions and More

Posted by K.E. White on March 19, 2007

Robert HiggsRobert Higgs recently published work, Depression, War, and Cold War: Studies in Political Economy, explores the finances of America’s evolution into a global hegemon during WWII and cemented during the Cold War.

Higgs casts a critical eye on America’s superpower evolution:

Not the least of this self-damage was the transformation of the executive branch of the federal government into a secretive, highly discretionary, often ill-advised, and badly informed organization that was far too dedicated to attempting the futile task of running the whole world. (xii-xiii)

Proliferation Press highlights two chapters of his recent book. The first explores the profits of defense contractors, and the second looks at the relationship between public opinion and American defense spending.

Profits of U.S. Defense Contractors

Do Defense Contractors defy market forces? Are defense industries being handed profits unfairly owing to a corrupt political system?

Higgs response: Not really.

But defense contractors do receive a significantly greater total market returns.

From Depression, War, and Cold War:

That claim that investment in defense companies was riskier than investment in the overall market is not compelling…We found that the systematic risk…borne by an investor in the top contractors as a group did not differ significantly from the risk borne by an investor in the overall Markey during the 1970s and 1980s.

These finds establish that the financial performance of the leading defense contracting companies was, on the average, much better than that of comparable large corporations during the period 1948-89. The findings do not justify a normative conclusion that the profits of defense contractors were “too high,” particularly in the case of the accounting rates of return (Fisher and McGowan, 1983)…

Either (a) the Capital Asset Pricing Model does not capture some relevant risk perceived by investors in defense firms or (b) investors persistently guessed wrong, leaving stocks undervalued over very long periods.

Does Public Opinion Determine U.S. Defense Spending?

Or is it all structural, with anyone outside the ‘military industrial complex’ hopelessly unable to change their nation’s defense priorities?

Higgs’ surprising claim:

Other ‘causes’ that are normally advanced by analysts (domestic economic conditions, perceived foreign threats, and so forth) do not directly determine changes in defense spending…”


Higgs goes back to exploring the impact of public opinion on defense spending. Higgs finds a curious correlation between the changes in public opinion on whether more money should be spent on spending and actual changes in defense spending.

While returning to the view that public opinion should not be seen as the determining factor in charting swings in defense spending, Higgs does the good service of bringing the public back—and especially how political elites contest over public opinion—to win their battles of spending for America’s national security.

Although surprising at first, the finding that public opinion alone is a powerful predictor of changes in defense spending seems, on reflection, exactly what one ought to have expected. Despite how defense (and other) analysts normally conceive of public opinion—as one element in a long list of commensurable influences…public opinion stands conceptually on a place by itself. It is a different kind of variable. Public opinion expresses people’s preferences regarding policy action. Other “causes” that are normally advanced by analysts (domestic economic conditions, perceived foreign threats, and so forth) do not directly determine changes in defense spending; rather, they determine what decision makers and the public prefer with regard to changes in defense spending. Once public opinion has revealed itself in the polls (or in other ways), government officials, especially those immediately concerned with reelection, face a constraint. They must either act in accordance with public opinion or bear the political risk inherent in deviating from it.

Higgs reminds scholars and non-scholars alike to not toss public opinion away too quickly when seeking to understand U.S. defense spending. Instead he re-opens the black box of public opinion and demands greater attention be paid to this highly prized, greatly contested over, and greatly unknown variable.

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One Response to “Do Defense Contractors Recieve Unfairly Bloated Returns? Does Public Opinion Determine America’s Defense Spending? Robert Higgs Answers these Questions and More”

  1. Ken Larson said

    I am a 2 tour Vietnam Veteran who recently retired after 36 years of working in the Defense Industrial Complex on many of the weapons systems being used by our forces as we speak.

    Politicians make no difference.

    We have bought into the Military Industrial Complex (MIC). If you would like to read how this happens please see:

    http://www.vanityfair.com/politics/features/2007/03/spyagency200703

    Through a combination of public apathy and threats by the MIC we have let the SYSTEM get too large. It is now a SYSTEMIC problem and the SYSTEM is out of control. Government and industry are merging and that is very dangerous.

    There is no conspiracy. The SYSTEM has gotten so big that those who make it up and run it day to day in industry and government simply are perpetuating their existance.

    The politicians rely on them for details and recommendations because they cannot possibly grasp the nuances of the environment and the BIG SYSTEM.

    So, the system has to go bust and then be re-scaled, fixed and re-designed to run efficiently and prudently, just like any other big machine that runs poorly or becomes obsolete or dangerous.

    This situation will right itself through trauma. I see a government ENRON on the horizon, with an associated house cleaning.

    The next president will come and go along with his appointees and politicos. The event to watch is the collapse of the MIC.

    For more details see:

    http://www.rosecoveredglasses.blogspot.com

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