Dear Fellow Unreconstructed Thatcherites,
There’s a fine line between criticizing a terrible idea and merely shooting a dead horse. But you can’t be too careful these days. So, I will err on the side of caution, and point out what everyone should already know: Commerce Secretary Howard Lutnick’s advocacy of US government equity stakes in defense companies (in an August 26 CNBC interview), is the holy grail of crap ideas. For the avoidance of doubt, I’d offer ten observations:
1. Isn’t this a bit un-American? We’ve never done this before (in my lifetime) because the US isn’t a socialist country. Countries that have done this have regretted it. Or are France.
2. Government equity stakes (or partial nationalization) are perhaps understandable for industries or companies that are both starved for capital and strategic. Defense is certainly strategic. But it’s drowning in capital, unlike, say, Intel, or cars and banks back in 2008. Over the past five years, the S&P500 is up 85%; the aerospace and defense sector is up 166%. Over the past 12 months, those numbers are 15% and 39%, respectively. Aerospace companies have plenty of investment cash – and generate monster profits – and do not need more government money.
3. Would the USG limit the allocation of that capital? Whether it’s acquisitions of other companies, or investments in new technologies, or in shareholder returns, would government start to “guide” management decisions? Would they demand a board seat?
4. What would those government-directed capital allocation limitations mean for investor enthusiasm for aerospace and defense companies? Nothing good, I expect. The result could be a case of government money driving out private sector money.
5. One of Lutnick’s rationales is that these are profitable industries, so why wouldn’t the government want a piece of the profit? Well, if the profits are that great, why doesn’t the government work to reign in profits, rather than take part of the company? Perhaps they’ll have a hard time reigning in profits because some of the DoD workforce charged with overseeing contracts (particularly Inspectors General) was fired. Oops. And, wouldn’t the government want more profit out of its ownership stake? In other words, wouldn’t one part of the government want to reign in defense profits, while another part wanted higher profitability, as a reward for part ownership?
6. There’s also the problem that much of these profits don’t come from the USG. In his interview, Lutnick claimed, “Lockheed Martin makes 97% of their revenue from the U.S. government.” That’s nonsense – the real number is 73%. That’s not an academic difference, because failure to realize that this industry is an export powerhouse leads to dumb policies, like tariffs. Boeing, GE, and others get more than half their revenue from exports, making them vulnerable to component import tariffs and retaliatory tariffs. And if USG has equity stakes in the aerospace industry, it will naturally be more inclined to create higher trade barriers to “protect” those companies, even if the net result weakens exports.
7. What would this USG stake mean to competition? How could USG possibly resist favoring businesses in which they had a stake, at the expense of new, innovative companies, or international companies from allied nations? Would this diminished threat of competition make companies with some USG ownership complacent?
8. Will these companies be forced to accept government stakes? What if Boeing, RTX, Lockheed Martin, GE Aerospace, etc. shareholders, executives, and boards don’t like the idea? What’s the penalty for resisting this big government power (and cash) grab? In Putin’s Russia, it’s defenestration, but surely there are kinder and gentler forms of extortion or something socialists can use to prevail….
9. How much of the economy will be subject to the tender mercies of big government? The rationale for USG stakes in weaker companies is protection. The rationale for USG stakes in stronger companies is profits. I guess only the ones in the middle will be safe.
10. Gentle reminder to Republicans: eventually, Democrats will hold the presidency again, along with these defense equity stakes (and perhaps stakes in other parts of the economy). They might be centrist Democrats, but what if they’re left-wing Dems? If you like reading history (something tells me Lutnick doesn’t), consider the rather difficult experience of France’s defense industry during the Mitterand socialist government of the early 1980s. If Republicans attack capitalism and the market economy, who exactly will defend it?
Here’s a metaphor I only roll out on special occasions: the windmill. If there’s a storm, you can fix your windmill’s blades in place or you can let them spin freely, and either way things should be fine (I’m told). The only way to screw things up in a storm is to try something in the middle, to slow the blades down, but still let them move in the wind, in a managed way. The defense industry is a bit like that. If you let these companies spin freely in the market (as the US has done), they’re fine. If you fix them in place by nationalizing them in some kind of arsenal system (China, or the US in the 1800s) they might be fine, if a bit corrupt. The only way to make a total hash of things is some managed, semi-socialist middle outcome, with partial government ownership and all kinds of interference. That’s a good way to rip apart your windmill, or aerospace industry.
Speaking of which, New York mayoral candidate Zohran Mamdani is rightly criticized for socialist ideas like government-owned grocery stores. But when will the far right and far left sit down together, realize they have lots in common, and go get a beer? That will leave regular centrist folks and businesspeople in charge. But until then, we’ve got government ownership stakes, giant trade tariffs, a proposed “national crypto reserve,” government interference in business decisions, and, for that matter, armed national guardsmen milling around the nicer tourist spots of my hometown, picking up trash and spreading mulch. Big government is back, and history tells us that this just isn’t good for our industry.
Yours, ‘Til AeroDynamic Is Nationalized And My Job Taken By A Big Campaign Donor,
Richard Aboulafia