The Pentagon Turns on Wall Street

The defense industrial base is collapsing. Blame monopolies and Wall Street, writes the DOD. Meanwhile, the Pentagon's Deputy Secretary expresses concern over "extreme consolidation."


Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Today’s issue is about the little noticed but increasingly important debate over corporate power between the Pentagon and the monopoly defense contractors it relies on. The American military, aside from politically influential, is the largest buyer of goods, software, and services in the world. So this national security debate will shape what our corporate world looks like going forward.


  • New antitrust and Section 230 legislation shows congressional action on big tech and antitrust is now inevitable.

  • The costs of the Sprint-T-Mobile merger come due.

  • The cheerleading world collapses into acrimony.

  • Facebook made around $3 billion from QAnon in 2020.

  • Human resources divisions are where America’s racial and gender dialogue really occurs.

  • There’s an obscure monopoly over the bread clips that let you close a bag of bread or fruit.

And now some house-keeping. I was on both CNN and NPR’s 1A to discuss GameStop, and the Majority Report and Harry Shearer’s Le Show to discuss independent pharmacies and the vaccine roll-out. I also wrote a Guardian piece on Jeff Bezos stepping down as CEO of Amazon.

And now…

Kathleen Hicks, the Pentagon’s new chief operating officer, testifies at the Senate.

The Military’s Monopoly Problem

Last week at a Senate Armed Services Committee hearing, Senator Richard Blumenthal asked Kathleen Hicks, nominated for the second most important job at the Pentagon, the Deputy Secretary of Defense slot, about consolidation in the defense industrial base. The Deputy Secretary of Defense is the chief operating officer of the Pentagon, responsible for running the single largest budget in the world, more than half a trillion dollars of buying power.

Blumenthal pointed to a recent government report showing the number of suppliers to the naval submarine program has dropped by up to 80% since the 1980s, a collapse which has delayed construction of new subs. The report also revealed other problems, like a design software monopoly problem. Blumenthal brought up subs because the giant contractor Electric Boat is in his state, but he also pressed her more broadly about concentration hindering the defense base.

Hicks responded with concern, telling Blumenthal that she worries about “extreme consolidation” and a lack of competition among contractors. “We need to have a lot of different good ideas out there, “ she said. “That’s our competitive advantage over authoritarian states like China, and Russia. And so if we move all competition out, obviously, that’s a challenge for the taxpayer. But it’s also a challenge in terms of the innovation piece.” Her main worry over concentrated supply chains and monopoly was not just practical, but ideological. Hicks argued that liberty in how we trade with one another, as expressed in open competition in defense contracting, leads to a stronger society that can better protect itself.

It’s an important response, though it’s not clear how Hicks prioritizes addressing financial concentration. The temporary picks Biden has put through on the Pentagon in mid-tier roles are not promising, with McKinsey public relations executive Jesse Salazar picked to run industrial policy, despite McKinsey recently being stripped from the government cost schedule for cheating public agencies. Ultimately though if the Pentagon is to even have a supply chain, Hicks will have to push back on consolidation, because the defense industrial base is breaking down due to monopolization and financial corruption.

How to Lose Wars Through Profiteering

I found this back and forth between Blumenthal and Hicks quite compelling. Hearings on the military are nearly always full of useless jargon and strategy-talk, discussions of base closings, and frustrated politicians complaining about expensive and behind-schedule weapons system development. And much of this hearing was dedicated to standard defense questions, like the rise of China, sexual assault in the military, and the need to spend a lot of money to upgrade our nuclear arsenal.

But Blumenthal, and a few other Senators, brought something different into the discussion. They questioned whether extreme financial power might be a threat to national security, thinking about not just what weapons we have to buy, but the very markets in which those weapons making firms operate.

While Blumenthal’s question is likely the first time a Pentagon number two pick has been confronted with monopoly power at a confirmation hearing, it is hardly the first important DOD warning flare on the subject of consolidation.

In 2018, the Defense Department released a study lamenting the loss of over 20,000 suppliers since 2000, and observing that “a surprising level of foreign dependence on competitor nations exists” for a whole host of critical products. Just a few months ago, the Pentagon sent Congress a groundbreaking report on how Wall Street is destroying the defense base. “A U.S. business climate,” it read, “that has favored short-term shareholder earnings, deindustrialization, and an abstract, radical vision of ‘free trade,’ without fair trade enforcement, have severely damaged America’s ability to arm itself today and in the future.” Keep in mind that this is not some advocacy group calling for fair trade or criticizing short-term shareholder profiteering, it’s the Pentagon.

Despite the anodyne bureaucratic wording, the level of alarm at how private equity and mergers have weakened productive capacity was evident, with the report asserting that “The number of cases where there is just one – often fragile – supplier is staggering. This is a deterioration from a decade ago when 3 to 5 suppliers existed for each component, let alone several decades ago when the military generally enjoyed dozens of suppliers for each item.”

For years prior to these reports, anti-monopolists have been writing about the threat that consolidation poses to our defense base. Nearly two thirds of DoD major weapons system contracts have only one major bidder, and the top 10 aerospace and defense companies account for 86 percent of industry revenues.

Last month, national security expert Lucas Kunce traced how activist shareholders destroyed the defense systems of a once promising corporation, iRobot, as well as linking the problem of monopoly directly to the rise of Chinese power. As former Marine and Congressman Paul Cook put it a few years ago, “the system we have right now, I swear to God, we would have lost World War II.”

There have always been serious problems with the defense base, but the inability of America to competently produce weaponry is a new problem. Indeed, America won World War II largely because of our productive capacity. How did it fray so badly?

Bill Clinton and the Last Supper

Starting just before World War II and extending into the Cold War, the military procured vast fleets of weapons and supplies to use in wars, boosted scientific and engineering advances (like creating the internet and the nuclear submarine), and structured large swaths of the economy. It was for instance responsible in many ways for industrializing the South.

The origin myth of that defense apparatus was Dwight Eisenhower’s military industrial complex speech in 1960, in which he warned Americans that such scientific power funded at a high and permanent level was incompatible with a democracy unless the citizenry was especially alert.

But though many still look back to Eisenhower’s warnings as a touchstone for the key political problem of our defense base, that military procurement system, despite its very serious problems, had strict anti-profiteering and anti-monopoly provisions to block theft, incompetence, and offshoring. Today, our defense base is better characterized as the military-private equity complex, and is less a creature of Eisenhower’s management of the transition into the Cold War than Bill Clinton’s approach to the end of it. And its origin story is less well-known, but equally important.

In the 1990s, national security thinkers recognized that military spending would drop because of the end of the Cold War. The question defense contractors sought to answer, especially Norm Augustine of Martin Marietta (soon to be Lockheed Martin), was how to maintain the profit margins of their firms even as revenue dropped. Augustine cut an informal deal with the incoming Clinton administration, in which the contractors would not oppose spending reductions as long as the Pentagon helped engineer a large merger boom and get rid of its anti-profiteering provisions.

In 1993, Defense Department official William Perry gathered CEOs of top defense contractors and told them that they would have to merge into larger entities because of reduced Cold War spending. “Consolidate or evaporate,” he said at what became known as “The Last Supper” in military lore. Former secretary of the Navy John Lehman noted, “industry leaders took the warning to heart.” They reduced the number of prime contractors from 16 to six; subcontractor mergers quadrupled from 1990 to 1998.

The goal for Clinton and his neoliberal staffers (like Steven Kelman) was to stop what they perceived as an adversarial relationship between big defense contractors and the government. Of course, the adversarial rules were there for a reason, with every one of them passed because a contractor tried to steal everything that wasn’t nailed down. And sure enough, when Clinton let the party start, the defense base got far more bloated and corrupt.

Some consequences of the Last Supper and the Clinton era policy choices on procurement included higher prices for military supplies, the mass roll-up of defense subcontractors by private equity firms, as well as Wall Street bankers aiding the Chinese government in building its missile program with U.S. technology (a missile program it is now using to threaten American interests.) Perhaps the most noticeable outcome was how the resulting merger mania effectively ruined Boeing and paved the way for the 737 Max fiasco.

This is not to say the changes in the Clinton era were solely about greed, for they weren’t. They were ideological, an importation of the Chicago School’s neoliberal attitude into the military. And it stuck, and in many ways, is still dominant today. I’ve seen this first-hand. In 2016, when in a meeting of Senators opposed to the Trans-Pacific Partnership, I heard progressive Senators fretting, ‘When they need the votes they’ll just bring in the generals, that’s how they always get these trade agreements over the edge.” Sure enough, then-Secretary of Defense Ash Carter was lobbying for the TPP by saying that the agreement was as important to the national defense as having “another aircraft carrier.”

A few years later at a fancy D.C. event, I ran into four star Admiral William McRaven, a legendary commander of U.S. special forces, and I asked him about why the Pentagon doesn’t try to stop consolidation in the defense base. He practically spat at me, before stammering that the military simply cannot, does not, must not, interfere in the free market. (Apparently, as a friend noted, war is a continuation of politics by other means, except when it comes to the magic market.)

Today, this attitude is breaking down, as it becomes increasingly obvious that the way we’ve structured our commerce is setting up the U.S. to lose a major war. For example, the Solar Winds hack, which Senator Joe Manchin brought up at the hearing, occurred in part because of private equity ownership and control of our largely unregulated software industry.

Is Democracy Is a National Security Problem?

Hicks and Blumenthal are taking tentative steps towards challenging this consensus. But a few weeks before Hicks’s nominating hearing, James Taiclet, the CEO of Lockheed Martin went on an investor call to show just what she is up against.

Taiclet was asked about Lockheed’s attempted acquisition of Aerojet Rocketdyne, which he noted was part of a larger corporate strategy of buying out competition. (He actually said 'enrich our platforms with more mission systems content,’ but translated into normal English it means to engineer a bunch of mergers).

Wall Street analyst Doug Harned pushed Taiclet on this point, bringing up the Last Supper and Norm Augustine and potential problems with monopoly power in defense contracting. Taiclet wasn’t having it. “Vertical integration concerns from a classic antitrust perspective” he responded, “are dwarfed by the… added cost frankly that comes from the existing defense industrial base structure that is stratified with a supply chain that's quite fragmented.” In other words, bigger is more efficient.

The most interesting part of Taiclet’s response was, like Hicks’s answer, the ideological component. Taiclet suggested that antitrust enforcers look to “competitors, which are China, Russia, Iran, and North Korea for example, comparing our defense industrial base capabilities to those of the peer group.” In other words, while Hicks argued that our democratic competitive systems make us stronger, Lockheed Martin’s CEO said just the opposite. We should, in his view, mimic authoritarian societies in the way we run our commerce.

Is Competition Good for National Security?

Is there an actual answer in this debate on practical grounds? To find out, let’s go back to policy under the Trump administration, and see how a very recent merger worked out.

Trump, despite some populist instincts, tended to hire officials who did whatever Wall Street sought in many of the upper level and mid-level areas. His pick for the Pentagon to handle mergers, Under Secretary of Defense for Acquisition and Sustainment Ellen Lord, was no different. Last month, Lord explained her philosophy, saying “I feel very strongly about not interfering in capital markets and I believe we need a free marketplace where companies decide themselves what they want to do.”

Her behavior mirrored her philosophy. In 2018, Northrop Grumman bought the only major rocket engine maker, Orbital ATK. The Federal Trade Commission approved the merger, because Lord told them to do so. She wrote the FTC that the Pentagon expected “substantial benefits from the merger, including increased competition for future programs and lower costs.” The FTC allowed the merger, but imposed a settlement on Northrop, saying that the corporation must “make its solid rocket motors and related services available on a non-discriminatory basis to all competitors for missile contracts.” In other words, Northrop had to sell rocket motors to its competitors.

So how did this merger go? The short answer is, not well. A good amount of the chatter from Senators at Hicks nominating hearing was over the need to upgrade our nuclear weapons arsenal, since it’s fifty years old and it’s generally a bad idea from a safety standpoint to have old nuclear weapons sitting around. But an upgrade is an expensive proposition, and will likely cost a hundred plus billion dollars over many years. And it turns out, now there’s only one bidder for the upgrade, and that’s Northrop Grumman. Boeing, the other bidder, dropped out, because Northrop now won’t sell rocket motors to Boeing on equal terms, an antitrust violation known as 'vertical foreclosure.’ Vertical foreclosure over rocket motors is a direct violation of the FTC consent decree, and the reason this merger should have been blocked in the first place.

The net effect of this merger is that now there is just one seller of the nuclear triad, meaning that the U.S. military is a price taker when it comes to buying what we need for upgrading our nuclear facilities. The price will be far higher than it should be, but in addition, as in any monopolized market, the quality of the end product will go down, and that means that safety standards are likely to be worse than they would be if there were multiple bidders.

The solution to this particular merger is simple - just reverse it, considering that Northrop is violating the FTC consent decree. (According to the FTC, the Pentagon has a compliance officer overseeing the decree, so maybe ask that guy about why the decree failed to achieve its goals). But the problem of consolidation in defense is much broader, hitting sectors such as military vehicles, batteries, shipbuilding, printed circuit boards, machine tools, space, and unmannered drones.

And then there are dual use technologies, which the military needs but that come from the commercial sector. For instance, it is also virtually certain that monopoly of high end semiconductor production in Taiwan, which has caused a shutdown of virtually the entire auto industry due to shortages, is a significant vulnerability (caused in part by the operational collapse of American semiconductor monopolist Intel). As the DOD noted, without policy action to re-shore production of semiconductor fabrication, “we will have frightening vulnerability to foreign cutoffs whose impact would make our COVID-related shortages look miniscule.”

For decades, national security officials have taken for granted the underlying productive capacity of the American economy. The health of the defense industrial base has been an after-thought in military strategy, with American factories useful in a strategic sense only to trade away to allies for forward bases or political favors. American elites focused not on production, which they simply assumed we could and would always be able to do, but on the control of the dollar as a reserve currency, or on the ability to secure or drilling for oil and natural gas. This was a myopic viewpoint. As it turns out, the ability to make what you need matters, especially during emergencies like pandemics, or in wartime. And Wall Street, as well as financial agents like the CEO of Lockheed Martin, who were once considered key allies in protecting the American way of life, are increasingly recognized as inhibiting core national security interests.

Fortunately, the low level of panic that is starting in national security circles is a prelude towards real policy action. I don’t know if Hicks meant what she said in responding to Blumenthal. But she’ll have to deal with consolidation regardless.

Congress Will Break Up Big Tech and Repeal Section 230: Last week, Senator Amy Klobuchar re-introduced a package of bills to change antitrust laws. The bills would make it a bit harder for companies to engage in mergers, and would make some shifts to the vague language of the Sherman Act. It’s not particularly good legislation, but it’s the momentum for action, not the details, that matter. Klobuchar has been filing this same legislation for a few years now, only now she’s the head of the Antitrust Subcommittee. So we can expect hearings and an end product in some form from Congress.

Similarly, Senator Mark Warner just released his long awaited bill to repeal a good chunk of Section 230 of the Communications Decency Act, which provides a liability shield for tech platforms for the conduct of their users. Warner, a former venture capitalist and a business-friendly centrist, is a leader on this question among Democrats. So again, Section 230 looks headed for the dumpster.

And it’s not just the Democrats who are getting more aggressive.

House Republicans are now saying they are open to stronger action in the wake of big tech censorship of Trump. Republican Rep. Greg Steube of Florida just told the Washington Examiner, “I do think there is an appetite amongst Republicans, if the Democrats wanted to try to break up Big Tech, I think there is support for that.” And the House GOP already wants to repeal Section 230.

Stronger antitrust laws and the repeal of Section 230 are at this point inevitable.

Sprint-T-Mobile Merger Kills Independent Businesses: One of the most egregious mergers of the Trump era was the Sprint-T-Mobile combination, which shrunk the already concentrated wireless sector from four major providers to three.

Usually bad mergers result in layoffs, more aggressive bargaining against suppliers, and higher prices. The merger closed in April. So what has happened so far?

First, on labor questions, T-Mobile has already gone through several rounds of layoffs since the merger. Check.

Second, on suppliers, sure enough, T-Mobile CEO Mike Sievert did mention that they are using their newfound market power by engaging in “expedited retail rationalization.” What does that mean exactly? It turns out that independently owned retail shops that sell phones and phone plans are getting hit hard. T-Mobile is changing pricing terms to exploit its monopoly power, which includes forcing these shops to only buy from certain distributors for phone accessories. That’s a no no, or it would be if the rule of law existed. Check.

Third, on prices, yes, pricing trends got worse for consumers. Though corporations are usually savvy enough not to explicitly announce price hikes, well look what we have here…

Ok then. A troika!

Cheerleading World: The antitrust suits and coverage against Bain Capital-owned cheerleading monopolist Varsity Brands have sparked an avalanche of complaints from athletes over sexual abuse. In terms of legal consequences against Varsity or Bain, there hasn’t been much, just three class action antitrust lawsuits, with no action from Federal Trade Commission acting Chair Rebecca Kelly-Slaughter or any state attorney general. The situation got more heated last week. As one contact told me, “Cheerleading in the past 48 hours is a dumpster fire,” with multiple allegations of choking and sexual violence by athletes. Meanwhile, another ‘cheerlebrity’ - Mitch Ryan - was arrested for sexual assault. Sexual assault and poor safety is a ‘quality’ harm, I suppose, not showing up in consumer prices, but all part of a monopoly market power problem. “The anti-competitive cartels path for intentional deregulation caused harm in an area different from most monopolies,” my source told me. “I am disgusted.”

Facebook Made $2.9 billion from QAnon in 2020. The business model of Facebook is dangerous, and encourages addictive content and conspiratorial content. While I’m not a fan of banning people from social networks, I do think there’s an interesting question about why Facebook didn’t act to boot QAnon before the election.

One rumor is that had Facebook done so, executives were afraid of losing users to conservative social networks Parler and Gab, which would in turn limit Facebook’s ad revenue. This led to me to the question, how much money has Facebook made from its moderation choice to retain QAnon groups? Exact amounts of money are impossible to know without Facebook’s internal data, but it’s possible to do a back of the envelope guess on why Facebook did not want to purge its networks of conspiracy theories.

According to NPR, 17% of Americans believe in the core tenet of QAnon. Let’s say that half of them, or 8% of Americans, had moved on from Facebook, as happened to MySpace when a more compelling social network emerged. As of 2020, Facebook had 258 million users in the U.S. and Canada, and its average revenue per user was $163.86. Let’s pretend no one in Canada buys into QAnon, so we’re talking 220 million American Facebook users. That means Facebook feared losing 17.6 million users if they banned QAnon content, which is a loss of roughly $2.9 billion of ad revenue in 2020.

Obviously this calculation is rough, and it’s not clear that anyone would leave Facebook if it banned QAnon. Still, my guess is that someone at Facebook made the calculation about how much such a move *might* cost them. It would be irresponsible not to, considering that the firm told its investors that its user base in the U.S. declined slightly in the third and fourth quarters, and that declining engagement of users is an investment risk. “A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline,” Facebook’s 2020 annual report warned, “in some cases precipitously.”

Facebook has substantial market power, so I doubt they’d lose users if they did take a more aggressive line on moderation. But that said, it’s a paranoid company with an obsessive desire to retain user engagement. And they probably figured, why take the risk?

HR Compliance Politics: This isn’t a news story, but it’s something I’ve been thinking about in the context of why our discussions over identity are so unsatisfying. When we think about race, gender and power, what usually comes to mind is protest, discrimination, culture, epithets, political disputes, police and criminal justice issues, and so forth, with a legacy of the civil rights movement and longstanding legacies of racism as the backdrop.

In reality, that’s all fairly abstract. The power relationship most of us experience in our life is at work, as an employee working for someone else, as a boss, or as both. Workplace policies and their enforcement, whether it’s time cards, anti-harassment guidelines, pregnancy and leave, diversity training, compensation, rules for romance with co-workers, are the primary quasi-legalistic regime most of us experience on a daily basis. In other words, human resources departments organize the rules by which we manage questions of identity and power.

Modern HR policies come from a mash-up of vague civil rights laws passed in the 1960s and 1970s that had to be operationalized by workplaces at the very same time as monopolies rose and unions died. To that end, sociologist Frank Dobbin’s book, Inventing Equal Opportunity, describes their creation as the sort of lost history of the civil rights movement, of activism and legal fights in the Selma era turning into HR compliance regimes blessed by judges in the 1980s and onward. After I read Dobbin’s book, I started paying a lot of attention to the Society for Human Resource Management (SHRM), which is the U.S. Chamber of Commerce for Human Resources.

SHRM is this insane mash-up of corporatist lobbying mixed with social justice rhetoric, and it convinced me that corporate HR departments are what a civil rights movement looks like when labor has no power.

Bread loaf locks: Yes, there’s a domestic monopoly over those u-shaped plastic things that are used to close the bags of pastries, bread, and fruit. The Kwik Lok Closure Corporation makes billions of these a year, as well as bag closing machines, and has maintained its market power through the use of trademark law. I love obscure monopolies.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller

P.S. I’m researching into two different industries. The first is ammunition, and the second is cement. If you have any expertise in the market structure of either industry, or if you know anything about either product category, let me know.