Is a Boeing Bailout Taking Shape?

(Big issue 7-19-2019)


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Earlier this month, I discussed why Boeing’s 737 Max was such a disaster, looking in particular at the company’s merger with McDonnell Douglas. Boeing reported earnings this week, and the scandal wiped out its quarterly profit. But this is just the beginning for the company’s troubles. There’s liability from airlines and victim families, and there’s a lack of product in the pipeline to sell on the commercial side.

So what happens now?

Well, the same person who told me to look at the McDonnell Douglas merger as the source of the company’s 737 Max problem is telling me that there are signs that a bailout is in the works, and that this bailout will come through the defense budget.

One of the key problems with Boeing is that the engineering prowess on the civilian side was corrupted by the political corruption in defense procurement, which prioritizes complexity and cost over functionality. So it makes sense that a bailout of Boeing would come through the Pentagon, which wants to protect a supplier as key as Boeing. One possibility is to move money to Boeing through the revision of America’s intercontinental ballistic missile system (ICBM). A contract to run this new program - to replace the Minuteman III missiles built fifty years ago - is now out for bid.

In August 2017, the service awarded a $349 million contract to Boeing and $328 million to Northrop to mature their designs and reduce risk, cutting Lockheed Martin from the competition.

It is unclear how much the program will ultimately cost. The Pentagon’s Cost Assessment and Program Evaluation office previously estimated its price tag as anywhere from $85 billion to $100 billion, but CAPE’s newest estimate, produced in June, has not been disclosed.

I’m new to understanding defense procurement, and I know nothing about aerospace engineering, so I’m not incredibly confident that I understand the tea leaves here. But $100 billion is a lot of money. And the story does make political sense and is consistent with many other problems cropping up within the military defense base. Take this story by ProPublica on the crisis of operations in the Navy, a story prompted by a set of accidents in which sailors drowned after Naval ships got into accidents. It turns out Navy leaders knew about serious problems with training, maintenance, and overwork, but were focused on buying new fancy equipment.

The fleet was short of sailors, and those it had were often poorly trained and worked to exhaustion. Its warships were falling apart, and a bruising, ceaseless pace of operations meant there was little chance to get necessary repairs done. The very top of the Navy was consumed with buying new, more sophisticated ships, even as its sailors struggled to master and hold together those they had.

The whole article from ProPublica is worth reading, but it’s almost as if there are Bill Lumbergh type characters running most of our major institutions, not just our businesses.

Which brings me back to Boeing. One of the key goals of the defense contracting base over the last decade or so has been to replace the old nuclear missiles built in the 1960s with new nuclear missiles to be built in the 2020s. Obama made a half-hearted attempt to stop such a renewed emphasis on a new nuclear arsenal, and was quickly run over by the DOD. Trump doesn’t even have such a pretense, and is fully on board. Now, some members of Congress, like Chair Adam Smith of the House Armed Services Committee, are a bit skeptical on the need for such a strategic deterrent, but the project is moving forward anyway.

Large, expensive projects like this are budgeted and structured with a political logic, what New York political kingpin Robert Moses used to call ‘stake-driving."‘ Stake-driving when you intentionally under-estimate costs so that you can get the project started by telling politicians that it won’t cost that much. Once you get a legislature ‘put the stakes in the ground,’ it becomes too politically difficult to kill. You can tell the politician that, well, you’ve already put so much into the project, there were unforeseen costs, yada yada, you might as well finish it by topping up the amount needed. This form of political accounting means cost overruns aren’t actually mistakes, they are more a subtle form of accounting fraud perpetrated on decision-makers too embarrassed to admit they were snookered.

In defense procurement, stake-driving has a special variant, which is to begin the manufacturing process before the system to be bought is even designed. That way, you can award contracts to contractors and subcontractors, and they can start lobbying to keep the program alive and toss money at it even if the weapon is poorly constructed or too costly.

Is this going on here? Here’s Defense News.

The contract for the Ground Based Strategic Deterrent’s engineering, manufacturing and development phase is expected to be awarded in the fourth quarter in 2020. The Air Force will choose a single winner from the two companies — Boeing and Northrop Grumman — currently involved in the program’s technology maturation and risk reduction phase.

There are technical reasons engineering, manufacturing and development are all in one phase, but there could be a more significant political rationale for jamming all these phases together. And that is the stake-driving political logic.

Another sign of such front-loading are promises about how the project will be cheap. For example, General Timothy Ray, the head of Air Force Global Strike Command, wants to emphasize how the new ICBM’s will be easier to maintain.

“Between the acquisition and the deal that we have from a competitive environment, from our ability to drive sustainment, the value proposition that I’m looking at is a two-thirds reduction in the number of times we have to go and open the site. There’s a two-thirds reduction in the number of times we have to go and put convoys on the road.”

Get it? $100 billion for an entirely new fleet of nuclear missiles will actually save money. Now we could just preserve the existing missile fleet, which would probably cost a lot less. Or we could, *gasp*, recognize that a vast depot of nuclear weapons is totally unnecessary and incredibly dangerous. But so far, our strategists seem to believe it’s important to prepare for a first strike attack from the Soviet Union in 1965.

So where does Boeing come in? Well, the statement by General Ray contains one last hint here about the contract. Ray notes that a key factor in awarding the deal has to do with ongoing silo maintenance. Boeing has a lot of experience maintaining missile silos, and Northrup doesn’t. So even though both companies are technically bidding on the contract, it’s likely the contract will go to Boeing.

Now, it’s possible I’m over-reading into this. Maybe Boeing won’t get the contract. Maybe it’s true that we’re just upgrading our nuclear weapons arsenal, and the money would be shoveled to Boeing, regardless of the 737 Max fiasco. But there’s also a lot of flexibility in how and when money is spent on programs, so it wouldn’t surprise me to see an acceleration of the flow of capital in the contracting terms.

There’s not a lot of hope in this story, but I think the high-profile disaster of Boeing’s 737 Max, and the new anti-monopoly movement, suggest a return to an era of reform. And we don’t have to look back far to find one model.

In the 1970s and 1980s, a set of military officers angry at the failure to effectively equip soldiers in combat during the Vietnam War started what become known as the ‘military reform’ movement. It had a political, an economic, and a technological element. Part of the desire was to move the Pentagon away from overly complex bad weapons systems, but it soon became a political movement to reorient American strategy away from an ossified Cold War model that was undermining the basic ability of the American commercial sector to produce. The military reform movement eventually fell apart, but I suspect something like it will soon come back.

After all, we’re facing a significant threat from the Chinese Communist Party, and mutually assured destruction via nuclear strikes are not how this conflict is likely to pay out. In this geopolitical contest, it is as important to be able to build things in the United States, to protect our domestic political economy from foreign manipulation of our media and tech platforms, to address climate change, and to regain some sense of political consensus about our underlying goals as a nation.

In other words, we’re very far from the Cold War. Yet, we’re likely to award a $100B+ contract to build a vast new arsenal of nuclear weapons to Boeing, and one reason is so major defense contractor executives can continue bullying engineers into creating poorly engineered commercial airplanes that fall out of the sky.

I think I see a few incentive problems here. And I think rational politicians, businesspeople, military officials and other citizens might too.

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Matt Stoller