How Amazon's $10 Billion Contract Squabble with the Pentagon Reveals the Shady Nature of Military Contracts

Earlier this month the US Department of Defense (DOD) canceled a $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract awarded to Microsoft in 2019. The goal of the contract was to modernize the Department’s IT operations using cloud computing.

The JEDI cancellation occurred following a lawsuit from Amazon after the company was denied the contract. Amazon alleges that they were rejected because the Department of Defense was pressured by then President Donald Trump to “screw Amazon.” The motivation for this move, it was claimed, was driven by Trump’s personal animus for then-CEO Jeff Bezos, who also owns The Washington Post.

Amazon claims insider sources responsible for the book Holding The Line: Inside Trump’s Pentagon with Secretary Mattis provide evidence for Trump’s direct intent to “screw Amazon,” but you need not trust another book published by Washington insiders for this story. Trump’s personal problems with Bezos, valid or not, are extremely public. Tweets targeted at Bezos’ include:

“The @washingtonpost, which loses a fortune, is owned by @JeffBezos for purposes of keeping taxes down at his no profit company, @amazon.” December 7, 2015.

“If @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag. The @washingtonpost scam is saving it!” December 7, 2015.

“Really sick to watch the Fake and totally Slanted News(?) coming out of MSDNC and CNN. It bears NO relationship to the Truth or Facts. They are merely offshoots of the DNC, much like the @nytimes and the Amazon @washingtonpost. Just like 2016, but worse. Sad, but we will win big!” June 3rd, 2020.

“Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!” August 16, 2017.

Prompted by Amazon’s lawsuit, the DOD launched an investigation that yielded a 317-page report evaluating Amazon’s allegations. The authors claimed that lack of cooperation from White House officials prevented them from reaching any clear conclusions.

The DOD later canceled the JEDI contract arguing it no longer suited the Department’s needs, and it is pursuing a new multi-vendor contract called “Joint Warfighter Cloud Capability” (JWCC). As CNBC reported, “the agency said it plans to solicit proposals from both Amazon and Microsoft for the contract, adding that they are the only cloud service providers that can meet its needs.”

Although the JEDI contract cancellation appears to be a unique case, it brings to light a pervasive problem with the military industrial complex. Trump’s uncharacteristically loud administration simply highlights this problem, which is present in all administrations

Politics, Procurement, and Picking Winners and Losers

Although other presidents are less vocal about their opinions about specific businesses and CEOs, their decisions are no less influential. Every year, the DOD, under the direction of the president, consumes billions of dollars in goods and services.

This presents a major problem for the government. How can the world’s most expensive military convince someone to produce what military bureaucrats demand? There are two possible solutions to this problem. The military can either hire someone to produce the goods and services, or the military could produce them itself.

For the most part, the military opts for the first option, offering private companies the opportunity to produce military equipment and technology in exchange for billions of dollars every year. Private companies then submit “bids” detailing how they plan to complete the project with the billions they’re awarded.

The problem inherent in this process is it distorts free market competition. Under the free market, companies win by providing goods which are more valuable to consumers than what they cost to create. When a business does this, they earn what economists call “economic profit”. Any business that fails to do this will earn a loss, and, unless the owners turn things around, they’ll go out of business.

But, when businesses seek government procurement contracts, they no longer are seeking the favor of consumers. Instead, businesses must compete for the favor of politicians and bureaucrats spending taxpayers’ dollars. In other words, politicians are in the position of picking winners and losers. So how do they pick?

Well, perhaps, as in the case of Trump, personal grievances will underlie their decisions. But this is actually the least sinister method of competing for political favor. Alternatively, companies seeking large procurements may be willing to pay politicians and bureaucrats with campaign contributions, fancy lobbying dinners, or outright under-the-table bribes.

So long as the company makes more money for the procurement than is spent on buying political favors, they come out on top. Politicians and bureaucrats also come out on top being able to accept bribes. This process of buying political favor is known to economists as “rent-seeking.”

So who is worse off? Taxpayers and consumers. Taxpayer dollars are now being allocated in a way which serves the politician and bureaucrat rather than the public. Further, these dollars now can prop up otherwise failing businesses that continue to use society’s resources in a wasteful way since they aren’t beholden to consumer values. When a wasteful business wastes scarce resources but is allowed to operate on a windfall from political bribes, the average consumer loses.

A Fundamental Flaw

The ability of companies to engage in rent-seeking is a fundamental flaw that springs out of the military-industrial complex. A military with a budget of billions will use that budget, and when it does so this provides politicians and bureaucrats an opportunity to solicit bribes and favors. The military can’t engage in large-scale purchases without this flaw because the incentives are generated by the system.

Some may argue that the process could be fixed by having the military produce its own goods. This suggestion is akin to arguing that military production should be nationalized or socialized. If military technology is internally produced, there is no problem of purchasing from politically connected corporations, after all.

However, this doesn’t solve the problem at all. This solution merely re-draws the lines. Instead of a company being given the privilege of an excessive procurement contract, an internal bureaucrat now is placed in that position.

If the government is expected to nationalize all military equipment production, this will mean several high-paid individuals will need to be hired. After they’re hired, they’ll have to go before Congress and argue that their department needs more money. In the end, the result is the same. Taxpayer money is used to subsidize competition for political favor without regard for what consumers think is valuable.

So, while Trump may be uncharacteristically loud, there is nothing uncharacteristic about politicians picking winners and losers to suit what they want. In fact, this sort of behavior is characteristic of the system itself.

Source: FEE.org

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics.

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