The State : Why Some Aerospace Firms Should Be Investigated, Not Bailed Out
With the new Administration set to reach deeper into the Pentagon’s pockets for savings and the commercial aerospace business headed for further consolidation, as evi denced by a prospective linkup between Boeing and Europe’s Airbus, we can expect a flood of proposals to bail out California’s struggling aircraft companies. To a broad range of political leaders, these companies represent the “pillar” of the local economy, without which California would soon collapse into Third World despair.
Yet, before preparing huge aid packages for larger aerospace companies, we should closely examine the financial realities of the industry. Even as they have spread the misery of joblessness, four of California’s seven largest defense contractors have managed to nearly double their dividends. Meanwhile, the stocks of six major aerospace firms are selling at or near their highest prices in more than five years. One of the industry’s leading proponents of special handling, General Dynamics, has increased its cash dividends by almost 60% during the past year, driving its stock to all-time highs. It has also amassed cash reserves that may reach $2.5 billion by year end.
Indeed, much of the logic for bailing out the aerospace industry rests on faulty presumptions:
* Aerospace companies represent the high-tech “crown jewels” of California’s economy. To a large extent, the defense industry is a bureaucratic dinosaur, with a large majority of its employees performing clerical and managerial tasks. Even engineers, especially those who have worked in defense for a long time, are so acclimated to the industry’s hierarchical environment that companies in more promising high-tech industries--computers, telecommunications and medical devices--often shun them in favor of younger engineers, many from overseas.
* The business climate is to blame for the mass hemorrhaging of defense and aerospace-related jobs. Statistics compiled in a recent RAND report suggest otherwise. It shows that from 1987-1991, non-aerospace California manufacturing companies did much better than the rest of the country even as aerospace hit the skids. Furthermore, manufacturing cutbacks, in general, have been unevenly distributed in the state. Los Angeles County suffered by far the worst loss of jobs even as other regions added manufacturing employment, like Orange County, although it endures roughly the same regulatory burdens and overall costs as L.A.’s
Much of the blame for L.A. County’s poor performance lies with the apparent indifference of its local leaders and representatives in Washington. Top officials at Northrop, one of the large companies most committed to Los Angeles and a major employer in Rep. Maxine Waters’ district, have found her virtually inaccessible when seeking help. Other local politicians seem implacably opposed to manufacturing of any kind, let alone defense-based production.
* Defense giants are key to converting the local economy to a post-Cold War economy. The sad truth is that Los Angeles has suffered grievously because defense cutbacks hit hardest in missile production and related products, which are concentrated here. Also, McDonnell Douglas’ huge commercial operations have been devastated. Bailouts and special deals may help ease the commercial transition of these companies, but the record demonstrates that giant companies have little aptitude or even a basic desire to move into new fields with great success.
In fact, most cash-rich defense companies have chosen to take advantage of their taxpayer subsidies to reward their shareholders. Many have even cut back quicker than contract contractions warranted, reducing overhead and creating a short-term cash flow for distribution to investors. Conversely, the RAND study shows that defense firms of fewer than 1,000 employees added local jobs even as the major firms contracted.
All this suggests that rather than rallying blindly to bail out giant defense firms, California’s representatives should initiate congressional hearings to investigate what amounts to a massive drain-off of essentially publicly derived monies for the good of speculators and high-priced managers. This would ensure that public efforts to facilitate conversion to the post-Cold War economy, whether underwritten by the Clinton Administration or by Sacramento, will be devised to meet the needs of communities and people, not simply sate the appetites of profiteers.
