A federal grand jury on Monday indicted General Dynamics Corp., three of its current executives and its former executive vice president, James Beggs, now administrator of NASA, for allegedly seeking to defraud the Defense Department in connection with a celebrated anti-aircraft contract from 1978 to 1981 and making false statements in the matter. Mr. Beggs, the others named and the company promptly declared that they are innocent and may well prove to be; the perils of prejudging cases like this are well known. The incident as reported is still instructive, at the least a metaphor for the badly blurred relationship between buyer and seller in defense.
It is probably useful to remember that you go back to the Carter administration in this case, a lean time for defense contractors, not a boom. Two companies, General Dynamics and Ford Aerospace and Communications Corp., a subsidiary of Ford Motor, were competing for what then seemed likely to be the lucrative right to build a new forward anti-aircraft gun for the Army, the DIVAD, which this year was dropped from the budget. General Dynamics had been given $40 million to build two prototypes of its proposed version.
The models turned out to cost more than that. Instead of absorbing the excess, the company, according to the indictment, charged it to two other Defense Department accounts. One was to pay for research and development, the other to compensate the company for the costs of preparing bids and proposals; in effect, these accounts were paying the part of General Dynamics' overhead given over to thinking up and selling the services on new weapons. The prosecutor said $7.5 million was fraudulently billed to these sustaining accounts, of which $3.2 million was paid. The company lives in a different world. The dispute, it said, involves not fraud but "cost-accounting judgments" and "a highly sophisticated regulatory and accounting matter which should be resolved in a civil forum, not in a criminal case."
The fiction is maintained that defense contractors are private firms dealing at arm's length with their public customer. Yet often they are little more than jobbers. The government provides them with plant and equipment. There are subsidies for interest when the companies have to borrow and, as the General Dynamics indictment shows, for what in the private world would be normal costs of doing business -- items such as research. As a study commissioned by Navy Secretary John Lehman shows, profits are high as well. It is a cosseted, semi-public, cost-plus industry -- and perhaps it has to be. In the U.S. economy that may be the only way for it to exist. But one price of this, as other recent cases have suggested, and as this new case now suggests, is a diminished sense of public responsibility.