1.
U.S.
CONGRESS WORKS TO AVERT DEFENSE BUDGET CUTS
by Lisa Mascaro
** As part of the summer's spending deal, the threat of the cuts was intended to spur Republicans and Democrats to agree on a deficit reduction plan. **
Los Angeles Times
October 25, 2011
http://articles.latimes.com/2011/oct/25/nation/la-na-defense-supercommittee-20111026
WASHINGTON, D.C. -- Weeks after agreeing to impose mandatory spending cuts on the federal government in exchange for raising the debt ceiling, members of Congress are hard at work to overturn a key element of the deal -- the threat of automatic, steep cuts in the defense budget.
The possibility of defense cuts -- what budget insiders call a trigger mechanism -- was intended to spur Republicans and Democrats to agree on a plan to reduce the deficit by $1.5 trillion over the next decade. Instead, Congress increasingly seems likely to scuttle the cuts even without a deficit deal.
"It feeds into the notion that everyone is having, but not saying, which is that the trigger is a complete phony thing," said Jim Kessler, a vice president at Third Way, the moderate Democratic think tank. "Congress has built up a reputation for avoiding any real decision."
To be sure, the Joint Committee on Deficit Reduction, otherwise known as the "super committee," has been working behind closed doors for two months trying to find common ground.
And the effort to undo the automatic cuts is at odds with the public stance of congressional leaders, including House Speaker John A. Boehner (R-Ohio). The speaker orchestrated the summer debt accord with President Obama, and has pressed the committee to reach as big a deficit deal as possible.
The 12-member super committee -- six Republicans and six Democrats -- will hold a public hearing Wednesday as it works toward its Nov. 23 deadline to produce a bipartisan package. Indications are the committee has tentatively identified cuts but is short of the $1.5-trillion goal.
If the committee comes up with less than $1.2 trillion in proposed cuts over 10 years, the shortfall is supposed to be made up by automatic cuts that would start in 2013, split evenly between defense and non-defense spending.
But public statements and private comments from key defense champions and their allies, backed by the intense lobbying of the defense industry, have thrown into doubt whether those reductions will come to pass.
The defense hawks have been unbridled in their mission. Sen. Jon Kyl of Arizona, the Senate's No. 2 Republican, said he would walk away from his position on the super committee if defense cuts were part of its recommendation.
Sen. John McCain (R-Ariz.), who is not on the committee, said he would try to roll back the mandatory defense cuts before they could kick in.
Rep. Howard P. "Buck" McKeon (R-Santa Clarita), chairman of the House Armed Services Committee, suggested that steep mandatory cuts could require the military to institute the draft. If forced to choose, McKeon said, he would prefer new taxes -- something he has never voted for.
A Virginia Republican is circulating a resolution of opposition with dozens of co-sponsors.
Even though some tea party lawmakers say all federal agencies must be trimmed, the defense hawks are getting a boost from top Pentagon brass, including Defense Secretary Leon E. Panetta, who warned that making the required reductions would be "shooting ourselves in the head."
"It would be the dumbest thing," said Sen. Lindsey Graham (R-SC) as Panetta appeared at a Senate hearing last month. "I am disappointed in my Republican Party for allowing that to be part of the puzzle."
The White House acknowledges the trigger mechanism is "not ideal policy," according to Meg Reilly, a spokeswoman for the Office of Management and Budget. But the administration says its purpose was to be an unpopular possibility that would motivate lawmakers to reach an agreement.
"It's meant to provide a powerful incentive for Congress to do its job and pass balanced, responsible deficit reduction," she said. "Congress has a responsibility to make cuts to defense prudently to ensure that our national security efforts are not compromised."
Super committee Democrats have concerns that the panel's work could be undermined by suggestions that defense is off the table, according to an aide familiar with the deliberations. With Republicans already refusing new taxes, that would force disproportionate cuts on health, education, and federal programs for the poor.
Because the mandatory reductions do not go into effect until 2013, Congress has a full year to wrestle with the issue. The presidential election will likely influence that debate, and Congress will still have a few months to act afterward -- allowing members to put off a formal decision on the triggers until after the elections. Many doubt the triggers will ever be pulled -- or that a move to protect only defense will succeed.
"The bullets don't even hit until a year later -- you've got a year to correct it," said Sen. Carl Levin (D-Mich.), chairman of the Armed Services Committee, who doubts the political climate would allow defense to be spared at the expense of domestic accounts. "If you want to start over again, that's fair. But I don't think you'd be able to get votes to just undo part of it."
Leaders of both parties are concerned that if the super committee fails, financial markets will be thrown into turmoil over Congress' inability to tackle big problems. The nation's once-stellar credit rating -- which one credit agency downgraded this summer -- could be further eroded. That could lead to higher interest rates for ordinary Americans on virtually every aspect of consumer lending, further imperiling the sluggish economy.
McCain, a party leader on defense issues, downplayed his influence on the super committee. But if the panel fails, the Arizona senator is optimistic his backup plan to protect the defense budget would find broad bipartisan support.
"We think we could succeed," McCain said.
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2.
Danger Room
DEFENSE INDUSTRY: KEEP PAYING US OR THE ECONOMY DIES
By Spencer Ackerman
Wired
October 26, 2011
http://www.wired.com/dangerroom/2011/10/defense-industry-cuts-economy/ (see original for additional links)
Defense giant Lockheed Martin had a totally sweet quarter, raking in $700 million and looking forward to the same this time next year. So it raises eyebrows when Lockheed’s anointed mouthpieces predict mass economic disaster if Congress touches the defense budget.
On Tuesday, the aerospace industry put out a report saying that chopping the defense budget would put over a million Americans out of work. Cuts that could total up to a trillion dollars over 10 years would “devastate the economy and the defense industrial base and undermine the national security of our country,” said Marion Blakeley, president of the Aerospace Industries Association, which sponsored the report.
But while Blakeley’s group paid for research to draw that dire conclusion, some of her members reported a sunnier economic outlook to their shareholders. In its third-quarter earnings report, also released Tuesday, Lockheed -- manufacturers of the F-22 and F-35 jets -- told investors to expect that as long as Congress passes President Obama’s next defense budget, ”the Corporation expects 2012 net sales to be flattish as compared to 2011 levels, and that consolidated 2012 segment operating profit margin will remain at approximately 11 percent.” Boom: another $700 million in earnings, on its way.
While there’s no doubt that defense cuts will mean job losses, there’s also no doubt that a report prepared for an industry so reliant on defense cash will paint a stark picture of what happens if that cash is threatened. Congressmembers looking to get reelected pay attention, since fighting for defense money as a jobs program is easier than making a case for what a sensible, appropriately funded defense strategy ought to be. That’s the problem with reports like these: They make it easy to ignore structural economic and defense problems and imply that all will be well if the cash keeps flowing.
To see the report’s breathlessness, check out its methodology. ( http://secondtonone.org/wp-content/uploads/2011/10/aia_impact_analysis.pdf ) The aerospace report draws a straight correlation between lost jobs and lost sales (the result of lower defense budgets for orders). But defense firms concerned about losing jobs have, like all businesses, other options for preserving them, like dipping into their earnings.
And those earnings, as evidenced by the third-quarter disclosures, are up. Lockheed’s $700 million net quarterly earnings are up sharply from its $56 million haul this time last year. Boeing’s net income during that time was $1.09 billion, up from $837 million. General Dynamics? $652 million in net earnings this quarter, slightly up from its $650 million last year.
Meanwhile, Lockheed paid CEO Robert Stevens $19.1 million in 2010. Boeing’s Jim McNerney made $19.7 million.
In other words, defense cuts won’t, by themselves, force firms to fire people. Companies will surely be stressed by the revenue loss, but their bright economic pictures give them some options.
Then there are some dubious assumptions in the report. It says job-providing “modernization” cash is 45 percent of the $550 billion annual defense budget, but as defense gadfly Winslow Wheeler emails, the Congressional Budget Office puts it at 29 percent. ( http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf ) Wheeler adds that the study presumes a cost of $130,000 per lost job: “One seasoned observer opined to me that the total for salary, materials, etc. should be about twice that.”
Nor does the association report actually address the defense manufacturing base that so alarmed Blakeley. It drew its million-job-loss total from “across the breadth of the U.S. economy,” into ripple-effect industries like finance, health care and “retail trade, leisure and hospitality services.” Meanwhile, the structural effects of the shifting defense industrial supply chain go unstudied.
Now: America’s defense industrial base -- the engineering and manufacturing sector of the economy that ensures the U.S. can build warships, planes, and missiles -- is in the midst of a decades-long globalization that policymakers have yet to come to terms with. A recent report from the Center for a New American Security (CNAS) warns that the U.S.’ influence over that supply chain suffers from a key vulnerability: “its dependence upon relatively large defense procurement budgets.” ( http://www.cnas.org/files/documents/publications/ArsenalsEnd_Kapstein_Feb2010_0.pdf ) Cut the budget too deeply, and the economic effects could cascade: the most expensive military program in history, the F-35 Joint Strike Fighter jet family, is built in eight countries.
In fact, CNAS warns that engineering “large-scale, high-technology projects” domestically is a “dying art,” since “many of the nation’s best young people tend to avoid ‘old’ manufacturing industries -- including the aerospace sector -- opting instead for what seem to be more exciting (and potentially much more lucrative) prospects in startup ventures and ‘cutting-edge’ firms that appear to be at the technological frontier.”
In other words, it’s not just the prospect of declining defense budgets that ravage the most important nodes of the defense industrial base. On the low-pay end of the spectrum, it’s the fact that manufacturing plants have moved to low-wage places like China -- which also erodes U.S. engineering know-how. On the high end, defense firms now have to compete with Apple, Google, Facebook, and anything Y Combinator funds for bright tech engineers. All that is a problem that extends way beyond defense budgets, and into fundamental questions of how the U.S. structures its economy and values work.
And assume for a moment that all the aerospace industry’s lost-jobs estimates are accurate. Notice that’s an economic argument, not a national security argument. The explosion in defense spending since 9/11 was predicated on an emergency -- all financed by borrowed money, contributing to the fiscal mess that cuts are meant to fix -- that’s receding. U.S. troops will be out of Iraq on December 31; the Afghanistan war is beginning its own drawdown. Arguing for military spending primarily as a stimulus measure begs the question of why less capital-intensive industries -- road repair, anyone? -- shouldn’t get their own big checks from the government.
The answer -- at least, one that ex-Defense Secretary Robert Gates proposed -- isn’t to look at the military as a big jobs program. It’s to ask what the country wants defense strategy to be. If the U.S. is faced with the necessity of cutting defense, then it makes sense to ask what missions ought to be scaled back or jettisoned. In a series of reports this year, the most recent of which came out on Tuesday, the doves at the Project on Defense Alternatives have at least attempted that, even if not all their ideas are good ones. The aerospace industry? Not so much.
It’s natural for defense cuts to raise anxiety in a military-industrial complex that’s reaped a decade of cash windfalls. And it’s just as natural for defense companies to cherry-pick arguments to support their revenue. That’s all in the game. But unless they’re also willing to accept big tax hikes to finance their continued desired spending, then it’s hard to see how reports like this get around Winston Churchill’s (or maybe Sir Ernest Rutherford’s) famous aphorism: “Gentlemen, we have run out of money. Now we have to think.”
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