Gunpoint Stimulus

Gunpoint Stimulus
Defense contractors are trying to frighten Americans into believing that Pentagon budget cuts will destroy the economy. It's bogus.
BY LAWRENCE J. KORB, ALEX ROTHMAN, MAX HOFFMAN | JULY 2, 2012

Since 1998, U.S. military spending has grown exponentially, reaching 20 percent of overall federal spending and more than half of discretionary spending-levels not seen since the end of World War II. In particular, the portion of the budget used to purchase equipment from private industry has doubled over the last 14 years, growing from about $100 billion in 1998 to nearly $200 billion today.

Unsurprisingly, the defense industry has enjoyed remarkable prosperity during this time, with industry profits quadrupling between 2001 and 2010. But with a struggling economy and the conclusion of two wars, the United States can no longer afford to fund a massive defense buildup in the absence of an existential threat. Every bipartisan group confronting the deficit problem -- including the President's Debt Commission (Simpson-Bowles), the Domenici-Rivlin Task Force, and the Gang of Six -- has recommended reducing defense spending by about $1 trillion over the next decade. And the Budget Control Act (BCA), passed last summer, called for Congress to identify $1.2 trillion in cuts, revenue, or both to address this fiscal dilemma. If Congress failed, the act stipulated that $500 billion be automatically "sequestered" from defense (an equivalent amount would also be "sequestered" from non-defense programs) to meet the shortfall.

Faced with the prospect of declining government spending, the defense industry has stepped into the fray. Whereas for much of the last decade the defense industry relied on fears of terrorism and the ongoing conflicts in Iraq and Afghanistan to secure lucrative contracts, the end of the wars and the economic downturn have forced it to dramatically change its approach. Now, the defense industry is marketing itself as an essential job creator. Lockheed Martin, in particular, garnered headlines last week by announcing it will issue layoff notices to the majority of its 123,000 employees the week before the November elections unless sequestration is averted. It's certainly a tactic tailored to the times. The question is: will it work?

The Lockheed announcement was not the first shot in this new battle. In October 2011, the Aerospace Industry Association (AIA) published an economic impact analysis which concluded that cuts of $1 trillion over 10 years would cost the U.S. economy more than 1 million jobs, increasing the rate of unemployment by 0.6 percent. More recently, the National Association of Manufacturers (NAM) echoed this dire economic forecast, reporting that the BCA plus sequestration would result in the loss of over 1 million jobs, increase unemployment by 0.7 percent, and decrease gross domestic product by almost 1 percent. Most of these jobs, however, would not come from the defense industry itself. To maximize their findings (and their political impact), both studies assessed the effects of defense sequestration on every sector of the economy that could be hit by "induced effects," including secondary and tertiary effects like reduced consumer spending. As a result, the "1 million jobs" figure includes jobs in industries as distant from defense as "retail trade" and "leisure and hospitality services."

In addition to this methodological sleight of hand, the AIA and NAM studies are flawed for two fundamental reasons. First, defense spending is not a jobs program; it is a collective effort to address the threats facing the country, assure our national security, and secure our interests abroad. Therefore, the level of defense spending should be dictated by our national strategy and fiscal capacity, both of which point towards a drawdown. While it is in our interest to maintain essential industrial capacity, revenue growth and profit margins should not enter the calculus. Furthermore, if implemented wisely, $1 trillion in cuts spread over 10 years would not threaten our industrial base or national security. After more than a decade of real growth, such cuts would amount to a reduction of only about 15 percent in real terms and return defense spending to 2007 levels.

Second, defense spending is an extremely inefficient way to stimulate the economy. Both studies ignore the fact that defense spending creates far fewer jobs per billion dollars spent than other forms of government spending. For example, spending on educational services creates three times as many jobs as military spending and health care twice as many, according to research from the University of Massachusetts. Even tax cuts create almost 30 percent more jobs than money spent on weapons. So if Congress wants to spend taxpayer money to create jobs, it shouldn't give it to defense contractors.

Last week, the defense industry brought out the big guns, announcing that, since sequestration would kick in on January 1, 2013, the WARN Act (which requires that employers give their employees 60 days' notice about layoffs) would require defense contractors to issue layoff notices on November 2, 2012-4 days before the presidential elections. That's when Lockheed Martin said that it therefore plans to notify the "vast majority" of its 123,000 employees that their jobs could be lost due to sequestration. Defense hawks immediately seized on the warning as a political weapon; Senator Lindsey Graham (R-SC) has even called on defense companies to start issuing layoff notices sooner to force Congress into repealing sequestration.

The defense industry's new line is a potent political offensive designed to hit legislators where it hurts: their districts. It's a variation on the long-standing industry strategy of spreading the production of weapons systems across numerous congressional districts in order to ensure political support for the programs. Taking the economic tack -- particularly in an election year in which the political punditry has decreed that "it's the economy, stupid" -- is also a useful way to separate the defense spending debate from its proper historical context. Many of the people now animated by the industry's jobs claims are unaware of the recent history of the U.S. defense industry and its taxpayer-financed bonanza.

The offensive has certainly spooked members of Congress with military installations or defense industrial operations in their districts (basically, everyone). Rep. Buck McKeon (R-CA), the chairman of the House Armed Services Committee, has been particularly vocal, declaring that sequestration would "cripple our economy and defenses in a single blow." Senator Kelly Ayotte (R-NH) has also taken up the call, along with Senator John McCain (R-AZ).

While these tactics are designed to cause legislators and their constituents to panic, the fact of the matter is that defense companies are overstating the impact of sequestration. First, sequestration would require the Pentagon to reduce its budget by about 10 percent next year. While a 10 percent reduction in weapons procurement certainly would not be good news for defense contractors' bottom lines, it would hardly require companies to lay off their entire work force.  Lockheed Martin, for example, would still be contracted to build new F-35s, if perhaps not as many as anticipated, and provide maintenance and spare parts for numerous aircraft already in service.

Additionally, defense industry leaders have kept quiet about another trend bolstering their businesses: foreign arms sales. The State Department announced in early June that it had approved over $44 billion in sales of military parts or equipment by private U.S. companies abroad in 2011, up $10 billion from the previous year. This equipment was researched, developed, and tested in large part with U.S. taxpayer funds, but the defense industry has been strangely silent regarding Uncle Sam's seed capital. 

Moreover, sequestration impacts budget authority -- that is, how much money Congress sets aside for programs each year. Not all of this money, however, is spent in the year it is appropriated. Right now, for example, the Department of Defense has an unobligated or unspent authorized balance of $88 billion. As a result, the Pentagon's outlays -- that is, how much the Department spends in 2013 -- will almost certainly be considerably higher than what Congress appropriates, even under sequestration, so there is some economic breathing room. Massive and immediate layoffs would be both premature and an overreaction.

But the most dangerous result of these strong arm tactics by the defense industry has been to prompt budget hawks on the Hill to attempt to divorce the defense cuts from a comprehensive debt reduction plan. The sequester was, after all, the stick intended to force a grand bargain, and in that way it is working. We should not allow the parochial concerns of defense company executives -- even dressed up as sudden concern for economic stimulus -- to distract from this broader public policy debate.

http://www.foreignpolicy.com/articles/2012/07/02/gunpoint_stimulus?page=full