REASON Interview: Ernest Fitzgerald

The defense expert fired by Nixon explains why military budgets are still too high.

Ernest Fitzgerald became a household word in 1968 when he blew the whistle on a $2 billion cost overrun on the Lockheed C-5A cargo plane contract—an overrun that the Air Force had been covering up for several years. For his troubles, Fitzgerald was called on the carpet, stripped of meaningful work, and in 1970 fired by Air Force secretary Harold Brown.

When Fitzgerald talks about wasteful defense contracting practices, he knows whereof he speaks. With an engineering degree from the University of Alabama, he helped start an aircraft modification firm in Birmingham, serving as quality control engineer while taking graduate courses in mathematical statistics. That led to an industrial consulting job with Arthur Young & Co., one of the nation's largest CPA firms. After five years of helping the firm's clients with cost-control problems, Fitzgerald went into business as an independent consultant. Three years later he "got sweet-talked into going into the Pentagon."

Fitzgerald did not take his subsequent firing lying down. While working at several part-time jobs on Capitol Hill (including a stint with the National Taxpayers Union), his attorneys fought to have him reinstated, donating services worth more than $250,000. But Fitzgerald's December 1973 victory in that battle has proved a hollow one. Though restored to his job, he is black-balled within the Pentagon, given little meaningful work to do. This has occurred despite 1976 presidential candidate Jimmy Carter's invocation of Fitzgerald's case as an example of the need for more openness and honesty in government. Of course, that was before Harold Brown—who had fired Fitzgerald—became Carter's secretary of defense.

Fitzgerald has been in the news again recently because of his current lawsuit. As an outgrowth of the Watergate affair, one of the White House tapes was found to contain a discussion in which Nixon—allegedly referring to Fitzgerald—exclaimed "I said get rid of that son of a bitch," and further explained, "Have the most godawful gobbledy-gook answer prepared. Just put it out on executive privilege…something that will allow us to do everything we want." The $3.5 million civil damage suit names Nixon and aides Bryce Harlow and Alexander Butterfield and is scheduled for trial this June.

Meanwhile, the C-5A—which ended up costing $61.7 million apiece instead of the planned 28.3 million—has developed a new problem. Its wings have begun failing after only 8,000 flight hours. The Air Force has obligingly given Lockheed a new multimillion-dollar contract to replace the wings with new ones that can last for the plane's full 30,000-hour design life.

REASON interviewed Fitzgerald last fall when he was in Los Angeles to address the Libertarian Party convention. Anticipating the growing pressures for increased defense budgets, we wanted his insights into how well—or poorly—our defense dollars are being spent. Interviewer Robert Poole, himself a former aerospace engineer, began by asking Fitzgerald about the C-5A episode.

REASON: When did you go to work for the Defense Department?

FITZGERALD: I went to work for the Air Force the same day that this brilliant young guy became secretary of the Air Force. His name's Harold Brown.

REASON: Our current secretary of defense—was he one of McNamara's whiz kids?

FITZGERALD: Yes. He'd been head of Defense Research and Engineering until then, and in the early days I thought he was going to be just what we needed. I got along fine with him up until the time of my C-5A testimony.

REASON: How long had you been there before the whole C-5A situation came to your attention and you decided to do something about it?

FITZGERALD: Well, it came to my attention immediately because the contract was let just about the time I went into the Pentagon. It was to be our model of procurement. All of the past problems were going to be worked out. By January of 1966 I knew that wasn't true. And it went downhill from there. Late in 1966 I made a series of inspection trips to the plant where it was being built because my misgivings had grown. Actually, that was when the whistle was blown on the C-5, and I didn't do it. My sidekick, Colonel Joe Warren, did it, and he wrote just a marvelous report on it. It's so good that I put the entire letter that he wrote as an appendix in my book, The High Priests of Waste.

REASON: Did you suspect at that time that it was a $2 billion overrun?

FITZGERALD: It was clear by then that it was a disaster. The only question was how big a disaster it would be. The thing went underground, and we were more or less cut off. Joe got fired; he had been disgusted with the procurement business for a long time and had been sort of searching around. Some years before he had expressed an interest in being an air attache, particularly in London or Paris. That was forgotten until all of a sudden he began blowing the whistle on the C-5. Joe was found to have, within days after he delivered this letter, absolutely unique qualifications to be air attache to Addis-Abbaba. They said, "Joe, we need you in Ethiopia. You gotta go." At that time I was still in good stead in the Pentagon, so we pulled a few strings and got him assigned to the secretary of defense's office—kept him from going to Ethiopia, but that was the end of his career. At any rate, it was two years after that before I testified.

REASON: What was the basic reason for those costs growing out of sight?

FITZGERALD: Well, there were a number of reasons. The things that I found right off the bat were just mundane accounting and cost-control things. The skill mix was wrong—they put too many high-graded people on compared to their estimate, so their direct labor rates were exceeding the projections. Overhead, general and administrative expenses, had gone out the roof, and then we began slipping engineering milestones. By the late part of 1966 we learned it had started all over. Now, design cycles, as you know, are not as long as pictured in the public mind. It really doesn't take five years to design an airplane. You know, it goes right ahead once you farm the work out. Well, they were bending metal—making airplanes—and starting all over on design, simultaneously. We found that the wings were being designed on contract in England.

REASON: This is the wing that they're now having to replace because it won't last the life of the plane?

FITZGERALD: That's right. As a matter of fact, the cost estimate for the wing fix is growing, and the wings are not all that's wrong with the airplane either. Jack Anderson had a series of exposes this past July. Almost everything went wrong.

REASON: Was the basic problem McNamara's procurement method, or was the company taking advantage of the situation to add all kinds of spurious costs?

FITZGERALD: Conceptually, there was nothing wrong with the approach that McNamara and his people pushed: the so-called total package contract for a cargo airplane. I mean, it really was not that much of a marvel, you know. It was bigger and fatter than a C-141, but it was pictured and projected as a blown-up C-141. The C-141 was a workman-like airplane. But they had made a mistake in the cross-sectional area of the C-141's cargo bay. It was what the designers call cube-limited—it could carry a lot of weight but not much volume; it needed to be fatter, wider, and taller. So that's where the design for the C-5 came from, the world's fattest plane. But other than that and a few gimmicks such as kneeling like a camel and castering landing gears, it's what the jargonists call "state of the art." But Lockheed Georgia had really never designed an airplane right from scratch except for the C-141, and it wasn't too hot, either. And when they farmed out part of the design, all the things that they got into, then covered up the problems…

REASON: Was it primarily Lockheed that covered up?

FITZGERALD: They and the Air Force. And the Air Force is responsible. You know, I found that large contractors as well as small ones eventually do what the customer wants. You know, they might fuss, kick, scream, or something, but they eventually do what the customer wants. And I think the cover-up was a combination of pride on the part of people in the Air Force and then, once it became serious, the problem it became for the financial community.

REASON: Because of Lockheed's own financial problems?

FITZGERALD: Their exposure. Shortly after the C-5 was started, Lockheed started the L-1011 commercial transport, and the amount of money they had to raise to finance it was so great that it was a consortium of 24 banks which put together the financing, and that went sour too. It's a combination which I've described in The High Priests of Waste—of the disaster on the C-5, disaster on the L-1011, disaster on the Cheyenne helicopter, disaster on the SRAM motor, disaster on the shipbuilding contracts. Everything just came down on them at one time. The simple reason for it is bad management.

REASON: And then because of the financial community's worries, it became de facto Pentagon policy to help cover it up?

FITZGERALD: Yes, exactly. After I testified in 1968 the cover-up continued, particularly the technical cover-up. See, even after it became obvious that the costs were going to be exceeded, they kept trumpeting the technical excellence, which was just absurd.

REASON: But you and the people in the Pentagon knew that.

FITZGERALD: Well, yes, of course we did. We were cut off from reports, at least the critics were, but all the signs were there. You didn't have to be much of an engineer to stand beside the airplane and see these wrinkled skins and popped rivets and things like that to say, "Well, we have a problem."

REASON: What was it specifically that made you decide to go to Congress with the story and testify?

FITZGERALD: Well, I didn't really decide that. I just sort of fell into it. I'd been invited to have lunch with two staffers on the Joint Economic Committee who were planning hearings into the economics of military procurement. Meanwhile, the staff began nosing around on specific programs, and they were steered to the C-5 by people in the office of the secretary of defense. They said, "If you want to see the right way to do it, go to this one."

REASON: Now, were these people naive—they just didn't know at that point?

FITZGERALD: They knew about it, but they thought they could con them. They couldn't. The problem was growing so large that it was going to be difficult to keep under wraps forever anyway, but we were coming up on a crucial decision point in the program. It turned out that the exercising of the order for the second batch of planes triggered a repricing formula which, had it been allowed to run its course, would have given Lockheed a positive incentive to overrun further. In other words, the more they overran the first contract, the more they made on the second and the extra money they made on the second was more than enough to offset their losses. So they had what was called a reverse incentive or, as the newspaper reporters called it, the "golden handshake." It was important to keep things covered up until the exercise of the option for the second buy.

REASON: Okay, so when the congressional examiners came around, did they invite you to testify?

FITZGERALD: I believe I'd already been invited by the time they really started nosing around. And, as a matter of fact, the day before I appeared, they put the same question to another DOD witness, as they put to me. He didn't tell the truth, but he knew. He'd been to the same briefings I had.

REASON: How typical do you think situations like that are? Of course, there are two aspects of the situation. One is the cost overrun; the other is the knowing concealment.

FITZGERALD: More or less routine.

REASON: Both aspects?

FITZGERALD: Uh huh.

REASON: That's pretty frightening.

FITZGERALD: As a matter of fact, the things that were thought scandalous when I made the disclosures are accepted practices now.

REASON: So then, all of the risks that you took in going public with the story got publicity for that particular incident but haven't resulted in any fundamental changes in the way the Pentagon does business?

FITZGERALD: No, the only overall result is a rationalization and a making legal of the practices that we were following all along.

REASON: Why is that?

FITZGERALD: Well, it's a comfortable way to operate.

REASON: It's comfortable for the companies because they don't have that much risk of losing money.

FITZGERALD: None. Lockheed lost a little but not much. Overall they're doing fine, still losing money on the commercial program, but they've had money just pumped to them on the military. You see, Lockheed was bailed out not only with the loan guarantee, but they were officially made a ward of the government under Public Law 85-804. The only place you can read about that is in The High Priests of Waste, never in the papers. But this law, the bail-out law, as interpreted by the General Accounting Office's legal staff, says that any firm whatsoever can be declared essential to the national defense—presumably with some sort of ceremony, given the impact of it—and having been declared essential to the national defense, can then be given money with or without consideration. Usually the bail-out is accomplished by what's called technically, "amendments without consideration," that is, amendments to the contract with nothing returned. Just give them money. In the case of the C-5, the Lockheed contracts, they tore up the old contracts, took them off the hook for technical performance and schedule performance, and converted it to cost reimbursement. Lockheed agreed to take a paper loss which they were to have paid back by 1984, out of money we gave them, of course, and they were given a gift of money that amounted to at least a billion dollars more than the most generous interpretation of the contract disputes could have given them on C-5 alone.

REASON: A billion!

FITZGERALD: More than a billion. And that was the first really big grant under 85-804. Most of the previous ones had been small bail-outs. I think the next largest before Lockheed was something like $5.5 million, and the Lockheed bail-out set the precedent for the hundred-million-dollar shipbuilding bail-outs that took place in 1978. There were several firms involved, but that's now routine.

REASON: Routine in the sense that actions of this type are taking place every year?

FITZGERALD: Yes, most of the bail-outs take place on a day-to-day basis through contract changes—changes that have oftentimes a very small, maybe even negative, work content but have huge price tags attached to them. We used to call it contract nourishment—the contracts accommodate themselves or adapt to whatever the contractor is able to produce.

REASON: It's obviously a very convenient way for the contractor to operate, but what's the attraction to the Pentagon to do business that way?

FITZGERALD: It's easy…popular, the politicians like it.

REASON: Politicians who have plants in the district?

FITZGERALD: Yes, Armed Services committees in general, and Appropriations. Of course, it's a horrible way to buy weapons. You know, you just don't get much. I've never understood the willingness of generals and admirals to sacrifice military capability to make politicians and bankers and all happy, except that they must do it or they'll get fired. Furthermore, as one of my general-friends told me back when we were having an overhead-reduction drive, "Look, Fitzgerald," he said, "I'd be a damn fool to cut contractors' overhead. I'm going to retire in a couple of years and I'll be part of that overhead."

REASON: But the result is that the amount of money that the political process decides to allocate for defense expenditures buys a lot less than it otherwise would.

FITZGERALD: That's right.

REASON: With really competent management that rewards cost cutting and penalizes overruns, how much do you think could be cut from the defense budget each year?

FITZGERALD: Well, if I told you what I really thought, that'd sound irresponsible. I'm not allowed to look at the big weapons contracts any more anyway. But things are certainly no better and are perhaps worse than they were when I was allowed to look at them. And in those instances where I was able to have competent people doing what we called "should cost" analyses, we came up with averages of 30 percent that could be taken out without any fundamental changes.

REASON: Now, these were not 21-year-old whiz kids who had never been out seeing what it was like to produce weapons in the plants…

FITZGERALD: Not these guys. When I worked with people like these in the private sector, we'd take on the responsibility for helping clients achieve those kinds of results, and we did. Now that 30 percent is just by tightening up, not eliminating gold plating and the really big things.

REASON: That was 30 percent of the procurement part of the defense budget, right?

FITZGERALD: That's right. I think it's around $40 billion right now.

REASON: So 30 percent of that would be about $12 billion that could be saved right there. What about going beyond just tightening up?

FITZGERALD: Well, I'd hesitate to guess what it would be in total dollars, but some of the small procurements are unbelievably bad. An investigation of small procurements by the ABC-News "20/20" program found some of them to be mind-boggling—$91 for a 3-cent screw and things of that sort. It's grotesque. And I know from having looked at the same organization that they not only pay too much but buy a lot more than they need. A high percentage of the stuff they buy goes out to the scrap yard—perfectly good standard hardware-type stuff. These are not mistakes. It's smelly; it's really, really smelly. All in all, in acquisition we spend about half the budget, half of a $125 million budget. And, of course, the in-house part is fat too.

If you were to really put the test of function to the military organizations, they would be a fraction of the size they are. By the test of function I don't mean the purpose—you know, "Our purpose is peace"—but our function is to kill, maim, and destroy. Now, that's something we don't like to think about or talk about, but it's a fact. That is the function of the military.

All right, you could walk through the Pentagon and look at the organizations and ask, "What does this organization contribute to our ability to kill, maim, and destroy or to threaten to do it to someone?" and you'd come across such organizations as the Institute for Heraldry. We really have one. It's a fairly sizable organization run by the Army, I believe. They design heraldic symbols. That was important back in the days of armored knights, you know. You couldn't tell your brother-in-law from an infidel without the proper heraldic symbol.

REASON: In terms of that kind of bureaucratic fat, what percentage of that portion of the budget could go?

FITZGERALD: I would hesitate to say, because you'd have to go through it organization by organization. You'd also have to look at excessive layering—numbers of organizational layers which every businessman who is appointed to a high job in the Department of Defense remarks on and swears to do something about and ends up adding another layer, as a rule. You could slice out layer after layer, but there's a reason we don't cut off these superfluous organizations. There are several reasons. First off, we're having trouble spending the appropriation today, but even when we're not, there's a very compelling bureaucratic reason for maintaining organizations and excessive layers of staff, and that is the excess number of high-ranking military officers.

REASON: You have to have something for them to do?

FITZGERALD: Yes. And a general can't be just a general, you know. I'm a GS-17, which is the protocol equivalent of a major general. I can work by myself, but a general has to have a staff. He's got to be the peak of a pyramid, so we have something we call dual staffing in the Pentagon—which means that we often have a senior civilian bureaucrat who is the deputy to a general or perhaps the senior colonel, and is in the same functional area. It's quite obvious that in most of these cases, you don't need one or the other. If it's a purely military function, it should be a military person. If not, you have to ask yourself, Why do you need the general there?

REASON: Can't you just fire or retire surplus colonels and generals?

FITZGERALD: Oh, sure. I believe that every general and admiral, every flag officer, is eligible for retirement. I don't believe there is a single one that isn't.

REASON: So they're not really interested in cutting the fat and running an efficient, lean operation?

FITZGERALD: Well, I wouldn't say not really interested, but it appears they're not willing to pay the political price for doing it, because you get a lot of flack from Congress. You see, we have quite a number of congressmen—or senators, at least—who are also generals. And so it's a tight club.

REASON: How about changing procurement policies? Suppose Congress got very concerned that this could no longer go on, that it was just not acceptable. Would it be feasible for them to try to impose a reform that would end this cozy system of subsidizing defense contractors?

FITZGERALD: Sure.

REASON: What would have to be done?

FITZGERALD: Cut the budget.

REASON: The meat-axe approach, like Proposition 13, to force them to make choices?

FITZGERALD: Yes, I believe that's right. It sounds crude, but the so-called meat-axe approach need not be a meat-axe at the detail level. Every business, every family, has to occasionally get together and say, "Look, we have to tighten up." Congress could pass what the National Taxpayers Union used to push frequently, called an efficiency amendment—not cutting specific programs or head counts or anything, but just say, "Look, you cut so much. You figure out where to do it." Now, I think this would be a good thing to do, and I think you could watch it carefully and look for signs of good stewardship appearing and keep cutting until they did appear.

REASON: Such a move would be immediately attacked by conservatives as weakening America's defenses—whether sincerely or not, I don't know.

FITZGERALD: I don't know either, but they would be the group who would fight it. We found that repeatedly. The Taxpayers Union's early studies and ratings of congressmen were very revealing. Most people think the conservatives are not big spenders, but when all kinds of spending are put together and you look at how the congressmen voted, you find that a few conservatives manage to go for as much spending as the few liberals who spend the most. And it's because they support big defense budgets.

Here's another amazing statistic that we pulled out. It's a little off the point, but it illustrates something I want to tell you, and that is that the big prize is patronage. That's the name of the game in Washington. And it happens that the military budget is far and away the biggest lump of steerable patronage, see? Of steerable patronage.

REASON: Because of the bases and plants in so many areas of the country…

FITZGERALD: And now, with contracting out of routine functions, it can be done anyplace.

REASON: So in a way Congress can only make things worse?

FITZGERALD: Oh, absolutely. There's no question about it.

REASON: With the tax revolt growing across the country, do you think that cutting the defense budget in order to cut waste could become a real political issue over the next few years?

FITZGERALD: Oh, I think it will. But so far it has not. Military spending is not spending in the eyes of so-called tightwads in Congress, you know, the traditional, right-wing kind of people. They rave and rant about cutting government spending and then take a deep breath and propose a blank check for the military. It makes absolutely no sense at all.

REASON: How did you get involved with the National Taxpayers Union?

FITZGERALD: I got involved while I was fired from the Pentagon and working on Capitol Hill. About a year after I went to work on Capitol Hill I was analyzing the supersonic transport program. I was working for the Joint Economic Committee part-time, and Senator Proxmire was the chairman. And of course he'd been fighting the supersonic transport subsidy for seven or eight years with no success at all up until then. So I began contacting groups who were interested in it, and the Taxpayers Union was very helpful; they really did terrific work on it, particularly in recruiting such people as Sen. Harry Byrd from Virginia and Sen. Jordan from North Carolina, senators who'd ordinarily be expected to vote for aerospace programs. And even though this wasn't a military program, it was so draped in the flag as to have all of the appeal of a big military program. NTU did a great job but in the process lost a lot of their right-wing support. They came on hard times and asked me to help them. I worked with Jim Davidson to reorganize it and became chairman at that time.

REASON: Are you still chairman?

FITZGERALD: No, I'm just a member, I resigned as chairman shortly after I went back into the Pentagon, because it's a lobbying organization and I didn't feel comfortable as head of it. I'm chairman of the National Taxpayers Legal Fund, which is a public charity; we're not primarily a lobby. But I've worked with the Taxpayers Union, and all the time I was fired from the Pentagon we economized and cut it back to nothing and rebuilt. Of course, it's a huge organization now, 120,000 people.

REASON: Do you consider yourself a libertarian?

FITZGERALD: Yes, in most respects I certainly do. I'm not a member of the Libertarian Party, but I've had these brushes with all-powerful government, I've been the object of a lot of their attention, and I became very frightened of unaccountable government power. When you see it coming down on you personally, it comes home to you; it's not just a theory.

REASON: As a small-"l" libertarian, what views do you have on defense policy in general?

FITZGERALD: Well, I've changed over the years, in that I used to describe myself as a parsimonious hawk. I thought that for much less money than we were spending, if we were spending wisely, we could buy so much stuff we would hardly have room to park it. And I never really gave much thought to anything other than the efficiency aspect of it, until I was fired and thrown into closer contact with the various groups who push different points of view on Capitol Hill.

I think we are going to have some sort of large military force; I don't see any way out of that in the foreseeable future. However, I think it's equally true that it's not getting us anywhere in the world, that it's becoming less relevant than it used to be. And I think for one very good reason we ought to think about trimming back, cutting down. It's clear that what we've got to do is to revert to exemplary leadership. For the first 150 years of our national existence we had almost no army and not much of a navy and no CIA at all, and yet there were revolutions fought all over the world by people who wanted to be like us…

REASON: Yes, we set an example.

FITZGERALD: Today we see most of the popular revolutions being made by folks who want to be different, and that ought to tell us something, that we should rethink it. Of course, I think they're mistaken, I think they get out of the frying pan into the fire in most of these revolutionary situations, but nevertheless their aspirations are not to be like us to the extent they used to be.

But the other factor is the impact of the huge military outlays on our competitive position in world markets. NTU did a study several years ago showing the percentage of military spending to gross domestic investment. I've forgotten the exact figures, but it was something on the order of 50 percent for the United States compared with 14 percent for West Germany, for example. When I was a young engineer we could compete in almost any market we chose anywhere in the world on the basis of price and quality. That's no longer true; there's very few areas where we're competitive.

REASON: People like Martin Feldstein, at Harvard, think that's mostly because our tax policies discourage saving and that we have the lowest saving rate of any industrial country. Do you really see it as being due significantly to the level of military expenditure?

FITZGERALD: Sure. No question about it. Let's take an example of three manufacturing companies. Let's say we had the Firm USA, the Firm West Germany, and the Firm Japan. And the Firm USA says, "You guys don't worry about guards for the plant. We'll give it to you, or provide most of it out of our money." And then we'll say, "You don't even need to worry about applying your engineers to designing the fancy equipment you need. We'll do that, too. You guys go ahead and work on your products." Well, we've seen the decline in industrial productivity—the decline in the rate of productivity increase, actually. In recent times we've had an actual decline. And so we're slipping behind the other industrial countries. The first time since records were kept we had a balance-of-trade deficit in 1971. That was the first time ever. And of course the huge deficits are commonplace nowadays—30 billion a year, on that order. The dollar can't stand that. We're seeing the results of it, because our productivity is the only backing we have for the dollar now. Productivity is down now. We operate the oldest stock of metal working equipment in the whole Western World. So we're diverting enormous resources, too, and the balance-of-trade thing is what's really got to be focused on, I think. Because the excuses given are totally phony. They're blamed on the Arabs.

REASON: But Japan doesn't have that situation. They import all of their oil.

FITZGERALD: 100 percent, I believe. I don't believe they produce a drop. And they have very little coal. The Germans import practically all of their oil and they have coal. But they have huge trade surpluses. They're efficient enough that they can compete in world markets and earn what they need to pay even the exorbitant prices from OPEC. We're hurting from the diversion of investment, the diversion of skilled people, engineers, toolmakers. I really think the skilled workers are perhaps more important than the engineers, because we have lots of them tied up in that sort of business. And also from the infection of our whole industrial body with the bad work habits and management practices that we encourage in the military industry, our largest manufacturing industry.

REASON: You've certainly been enlightening. Thanks very much.