Sometimes, military contracts have negative externalities. Take the Humvee, for example. To see how badly the Congressional-military-industrial complex can wreck havoc, read on.
On 22 March 1983, during the Reagan Administration, the Pentagon awarded a $1.2 billion contract to AM General Corp. for development of a high-mobility multipurpose wheeled vehicle (HMMWV or Humvee). That contract was for 55,000 Humvees over a five-year period (five basic models with 15 configurations).
A direct predecessor had developed the jeep during World War II. Preliminary design work for the Humvee had begun in 1979; in 1981, early in the Reagan Administration, the Army awarded a prototype contract.
After winning the contract, later that year American Motors Corp. (AMC) sold AM General to LTV Corp. “for $170 million in cash and short-term notes and a $20 million dividend from AM General.” Dallas-based LTV was a conglomerate that operated an Aerospace/Defense group as well as a steel industry division. AMC was trying to stay out of bankruptcy.
Three years later, in July 1986, LTV Corporation, 43d-largest industrial company in the country, filed for Chapter 11 bankruptcy protection for the first time. At the time, it was the largest bankruptcy in US history; it was $4 billion in debt.
LTV and its steel unit, the LTV Steel Company, listed total assets of $6.14 billion and liabilities of $4.59 billion.
You might ask yourself why such a deal was approved by regulators. It was the era of debt and “Greed is good.”
And yes, companies can file for bankruptcy protection even when assets exceed liabilities.
A brief review of banking and debt
The average 30-year mortgage rate was 10.19% in 1986. IRS interest rates were 9-10%. Pre-tax profits on credit card debt in 1986 were an estimated $5 billion, a dramatic increase from $3.6 billion in 1985. Credit card interest had been tax-deductible until Congress phased it out in the 1986 tax reform act.
Between the mid ’40s and the early ’70s, which just happened to be the golden age of America’s economic growth, banks were very tightly regulated and supervised. They were limited in what they could market, how they could compete, the interest rates they could charge borrowers and the interest rates they could pay depositors. Regulators also limited who could engage in banking. And — oddly enough — real interest costs were low, there were almost no bank collapses and the real economy thrived. Consumers got less into hock.
When LTV filed for bankruptcy a final time in 2000, its pension plans were “in jeopardy.” It terminated one of its pension plans in 2002, leaving the Pension Benefit Guaranty Corporation (PBGC) to pick up the remains. Although not funded directly with taxpayer money, PBGC has been the beneficiary of Congressional interest payment reform.
Back to the Jeep and Hummer
The US Army gave AM General (still a division of LTV) a new multi-year contract for more than 33,000 Humvees in August 1989.
The first Hummers sold at the rate of about 1,000 a year. Their enormous weight and cost – five tons, and $140,000 (£71,000)- made them a highly specialised market, and a subculture soon developed among owners.
You and I have directly subsidized the purchases of those civilian versions of the Humvee via federal tax deductions. From 2003:
But some people have a more practical reason for laying down $50,000 to $60,000 to buy an H2: a federal tax deduction of nearly $38,000.
The H1 and H2 are so heavy that they qualify under American law as trucks, and are therefore not required to publicise their miles-per-gallon figures, but reports suggest that it lies somewhere between 9mpg and 11mpg, barely half that of the original Model T Ford.
The civilian version of this military vehicle is no more. In December 1999, General Motors acquired exclusive ownership of the Hummer brand name; it ceased production of the H3 in 2010.
But the military Humvee persists. A 2019 report described how the federal government is paying to crush and scrap Humvees rather than donating them or selling them to the public. Even in old age Humvees are a burden.
During US invasions of Afghanistan and Iraq, Humvees were vulnerable to IEDs, improvised explosive devices. Troops added improvised armor, then the Army followed. The extra weight made the vehicle without antilock brakes or an electronic stability control system more likely to roll over in fatality crashes.
The House has denied most of the Pentagon’s proposal for a quick fix to deadly rollover accidents in the military’s fleet of older Humvees, instead opting to buy new vehicles produced in Indiana, the home state of Defense Appropriations Subcommittee Chairman Peter J. Visclosky [D-IN]…
The House-passed appropriations bill includes nearly $200 million for new Humvees, which include the latest safety technology but were not requested by the administration
Humvees, like a lot of military equipment, are still prone to too many training deaths, often due to rollovers. Deaths in training. On American soil.
In February, CBS News investigated military training deaths and interviewed, Ricardo Defense which developed an upgrade kit for Humvees to help prevent rollovers. The kit (Antilock Brake System/Electronic Stability Control) costs about $16,000 per vehicle.
You could make 10 or more old vehicles safer for the price of one new vehicle. And yet, the Department of Defense is asking for a lot of money for new Humvees, but only a fraction of what’s needed to retrofit old ones…
Chair of the Armed Services Subcommittee on Readiness, Congressman John Garamendi [D-CA], told us that Congress and the Pentagon’s preference for new over upgrades is “often predicated on keeping defense contractors fed.”
According to Ricardo, the Humvee is expected to remain in service until 2050.
According to data presented by the National Highway Traffic Safety Administration (NHTSA), the application of ABS and ESC reduces the ‘number of fatal rollovers by 74% and fatal impacts by 45%’.
Eisenhower’s Congressional-military-industrial complex is real. It’s expensive. And it’s deadly.
- The federal government needed an all-terrain vehicle for WWII. It subsidized that development (due to war exigencies).
- Willys-Overland filed its trademark application for the “Jeep” brand-name in February 1943. It was America’s “first four-wheel drive one-fourth-ton tactical utility truck.”
- Willys (Model MB) and Ford (Model GPW) built the Jeep for the US Army. Willy’s supplied Ford with the plans and specifications. In 1953, Willys-Overland became Kaiser Jeep.
- The Jeep was widely imitated: in France by Delahaye; and in Japan by Mitsubishi Motors and Toyota; in the UK by Land Rover. Hotchkiss et Cie manufactured Jeeps under license from Willys after 1954.
- Kaiser Jeep bought the Studebaker Corp. manufacturing assets in 1964. It launched a Defense and Government Products Division in 1967 to focus on military vehicles.
- American Motors Corp. (AMC) bought Kaiser Jeep in 1970. Jeep Corporation became a wholly owned subsidiary of AMC.
- AMC established AM General Corp. in 1971 “to fulfill the special transportation requirements of the U.S. Government.”
- In 1983, the LTV Corporation bought AM General from AMC and established it as a wholly-owned subsidiary of the LTV Aerospace and Defense Company.
- In 1992, Renco Group, New York City-based holding company, acquired AM General and reorganized it as an LLC.
- In 2004, MacAndrews & Forbes Inc acquired AM General.
- In 2020, private equity firm KPS Capital Partners LP bought AM General.
- Chrysler Corporation acquired AMC in 1987.
- Daimler-BenzAG acquired Chrysler in a stock swap in 1998.
- In 2007, DaimlerChrysler sold 80.1% of Chrysler Group to the private equity firm Cerberus Capital Management, L.P., for $7.4 billion.
- The Great Recession began in 2007, before President Bush left office. Detroit was an early and broad casualty.
- On 30 April 2009, Chrysler LLC filed for Chapter 11 bankruptcy protection, defaulting on more $4 billion in secured debts. (Does this look familiar?) The Obama administration made a partnership with Fiat a “precondition for any further government assistance. Nevertheless, Chrysler was unable to avoid the bankruptcy process.”
- On 24 May 2011, Chrysler repaid $7.6 billion in loans from the United States and Canadian governments.
- On 16 December 2014, Chrysler Group LLC renamed itself as FCA US LLC.
- On 21 December 2020, the European Union approved the merger of Fiat Chrysler Automobiles (FCA) and French automaker Peugeot. The $58 billion merger created the world’s fourth-largest automaker, Stellantis, when shareholders approved it in January 2021.
In December 1999, General Motors acquired exclusive ownership of the Hummer brand name.
- Hummer/H1 – Built by AM General from 1992 through 2006 (11,818 produced)
- H2 – Built in the AM General facility under contract to General Motors from 2002 to 2009
- H3 – Designed and built by GM from 2005 to 2010
- GM is releasing an all-electric Hummer this year