Tag: aerospace industries association

Defense Lobby’s Scare Campaign Falls Flat

The defense contractors and their allies and advocates in Washington have been beating the drum against sequestration for over a year. They’ve commissioned studies purporting to show that sequestration will throw hundreds of thousands of people out of work. They’ve embarked on a “stop sequestration” road show, and boosted spending on advertising and gimmicks, including the Countdown to Sequestration clock.

And they’ve held press conferences, including one today at the National Press Club that I attended.

The contractors’ full-court press isn’t working. Polls show that the American people are more interested in cutting defense spending than domestic spending to reduce the deficit. (See, for example, The Economist/YouGov poll, .pdf, Q15) And they, and especially Republicans and independents, are opposed to paying higher taxes to fund a bloated Pentagon (.pdf, Q56).

The public isn’t falling for the lobby’s scare campaign for a few reasons. First, U.S. military spending remains near an all-time high in real, inflation-adjusted dollars. Second, sequestration would reduce the budget to 2007 levels, and reductions along those lines are consistent with other post-war drawdowns. Third, while Americans overwhelmingly support the troops, they appreciate that not every dollar spent on the military is spent wisely.

The United States will retain a state-of-the-art military even if total Pentagon spending declines by 10 to 15 percent. Such reductions might actually induce policymakers to be more responsible when it comes to military intervention abroad. The leading opponents of sequestration are big fans of open-ended, nation-building missions, but they are a small and shrinking minority. Most Americas have learned the painful lessons from the wars in Iraq and Afghanistan, and they are determined to avoid those sorts of expensive and counterproductive wars in the future.

A smaller U.S. military that costs less money cannot be expected to be everywhere all the time. U.S. troops should not be the first responders to every 911 call. Other countries will have to step forward to take responsibility for their own defense, and contribute their fair share to address common security challenges.

What Sequestration Might Mean for San Diego (and Other Places)

A few days ago, I wrote about the fight looming between taxpayer advocates and defense contractors over whether Congress should scrap the Budget Control Act (BCA) and allow the Pentagon’s budget to grow. The contractors and their allies, led by the Aerospace Industries Association (AIA), contend that cuts in military spending will have a harmful (some say devastating) impact on the sluggish economy; taxpayers groups point out that the Pentagon’s budget has risen dramatically over the past decade and object to suggestions that we should raise taxes or incur more debt to pay for additional increases.

In my earlier post, I focused on the politics of this fight, here I focus on economics. I’m not convinced—and neither are a number of others—by the AIA’s claims that sequestration will wreck the economy.

For starters, we should keep an eye on the bottom line. If there is no deal to undo the BCA, the Pentagon’s base budget in 2013 will be about the same as in 2007. The budget, in short, is not being gutted, slashed, cut to the bone, etc. (pick your favorite metaphor). In real, inflation-adjusted terms, Pentagon spending will remain near historic highs and well above the spending levels of the 1990s. As for the economic effects of the spending cuts contemplated under sequestration, these are likely to be small because the cuts are tiny relative to the economy as a whole, less than three tenths of 1 percent of GDP per year over the next decade.

Those small cuts are likely, in the big picture, to generate overall benefits. It’s easy to focus exclusively on the companies and individuals hurt by the cuts and forget that the taxed wealth that funded them is being employed elsewhere. Provided that defense-spending cuts allow for lower taxes, people will have more disposable income to spend. If they spend it wisely (and even if they don’t), that will generate new economic activity that will offset the job losses elsewhere.

Of course, regions disproportionately dependent upon military spending are more likely to feel squeezed. Even in these defense-heavy localities, however, the effects of military-spending cuts are likely to be temporary, and the eventual transition of workers out of the defense industry into other fields should have beneficial effects. That goes for areas with sufficient economic activity—especially diversification—to help ease the transition.

That is what we hope will happen. But it is more than just hope; my attitudes toward the economic effects of military spending cuts are also shaped by personal experience, especially a trip that I took to San Diego in the summer of 1997.

I was there to do some research on the missile gap and the presidential election of 1960. John F. Kennedy and Richard Nixon had both campaigned in Southern California, and both alleged that their opponent’s decisions with respect to military spending would drive thousands of people out of work. I located some interesting information at UC-San Diego and San Diego State. The most memorable moment, however, occurred during a visit to General Dynamics’s Convair facility, not far from the San Diego Airport (aka Lindbergh Field).

Consolidated Vultee Aircraft Corporation (Convair) had been a major manufacturer of manned aircraft during World War II and then later moved into the design and manufacture of missiles and rockets. Operated as a division of General Dynamics after the two companies merged in 1954, Convair was one of the largest civilian employers in San Diego for several decades. Convair employment in San Diego peaked at more than fifty thousand in 1961, fell to less than six thousand by 1976 and then spiked again in the 1980s to more than twelve thousand employees. But orders for Convair products collapsed following the collapse of the Soviet Union. By June 1995, GD’s Convair Division counted a mere 1,432 workers in its San Diego facility. When I arrived at the Convair plant, two years later, in June 1997, I found a single construction trailer that served as the office for Convair’s final two employees. As I explained in the epilogue to my book, John F. Kennedy and the Missile Gap, “I witnessed a dying company breathing its last.”

Although it was just one company, one might expect Convair’s demise to have had a devastating ripple effect, given its signal importance to the San Diego economy over the years. It didn’t. Likewise, the other Pentagon cuts of the early 1990s (holding constant for inflation, DoD outlays fell by 29 percent from the peak in 1987 to the trough in 1999) did not do irreparably harm. For example, San Diego’s unemployment rate was the same as the national average in 1996 (5.4 percent), and well below that of the rest of California (7.3 percent) at the time. By 1999, San Diego’s unemployment rate had fallen to just 3.1 percent, more than a full point below the national average (4.2 percent), and more than two points below California state-wide (5.3 percent).

Why did San Diego fare so well? As one study of the region observed in May 2001:

the defense engineers and managers diverted, by the loss of their jobs, into entrepreneurial pursuits … helped the region emerge from the severe economic challenge posed by defense cutbacks at the beginning of the 1990s. Today, San Diego’s economy is growing and contains a more diverse set of industries.

Of course, we will never know if San Diego might have experienced even stronger economic growth in the absence of defense cutbacks in the early 1990s. Nor can we be certain that it will respond to the looming defense drawdown under sequestration as well as it did to the far deeper cuts of the late 1980s and early 1990s. But this one case study shows that even defense-heavy localities can adapt to lower levels of defense spending. At a minimum, the story serves as an important counterpoint to the AIA’s claims of impending doom.

Cross-posted from the Skeptics at the National Interest.

The Defense Lobby, Americans for Tax Reform, and the Texas Chainsaw Massacre

Bloomberg’s Roxana Tiron reports that Congress is nearing a deal to postpone some of the most contentious provisions of last year’s Budget Control Act (BCA) until March 2013, or later. This is good news for the Aerospace Industries Association (AIA), which has been lobbying since late last year to undo at least that portion of the BCA that pertained to the Pentagon’s budget (i.e. that portion that threatens to cut most deeply into its members’ profits).

Although the mechanics of sequestration’s across-the-board cuts are problematic, the scale of the Pentagon build-down would be modest by historical standards. And yet, the mere suggestion that sequestration might actually occur has sent the industry into apoplexy. The AIA’s campaign has included the release of a new report claiming that the BCA cuts could result in over 1 million lost jobs, and warnings that hundreds of thousands of workers would be receiving pink slips just a few days before the November elections.

In short, sequestration is a horror show, a Texas Chainsaw Massacre, and the AIA’s public relations effort is designed to scare the wits out of the audience. “Sequestration,” explains Della Williams, the chief executive of Fort Worth-based Williams-Pyro Inc., “is surgery with a chain saw.”

But just as some people aren’t easily scared by campy slasher flicks, there are still a few people in Washington—especially Grover Norquist, President of Americans for Tax Reform (ATR)—who are cheering for the guy with the chainsaw.

The two sides squared off in separate events last Thursday. At the Bloomberg Government Defense Conference, AIA President Marian Blakey, Reps. Norm Dicks (D-WA) and Randy Forbes (R-VA) and Sens. Carl Levin (D-MI) and John McCain (R-AZ) called for bipartisan compromise on taxes in order to fund further Pentagon spending increases. Judging from the number of times that speakers invoked his name, Norquist posed a greater threat to national security than China or Iran. Levin, in particular, scorned ATR’s famed taxpayers’ pledge, and suggested that it was largely responsible for the impending catastrophe.

Norquist is characteristically unfazed by all this special interest pleading for more money. While Blakey and her congressional friends were attempting to rally the troops and rustle up more money, Norquist was reaffirming his opposition to higher taxes—including the closing of tax loopholes that generate more revenue—at a meeting on Capitol Hill. There is no Pentagon budget escape hatch in ATR’s pledge. If the defense industry wants more, it will have to get it from elsewhere in the budget.

The fight over sequestration, taxes, and the defense budget reveals text book cases of two perennial public policy realities: the politics of concentrated benefits, diffuse costs; and the economics of the seen vs. the unseen.

With respect to the first case, the defense industry, broadly defined, benefits disproportionately from Pentagon spending. And that industry can count many interested parties within its coalition. In addition to the defense companies, including the executives and the shareholders, there are also the workers’ at these firms (often represented by a union). Then there are the mayors and local officials who represent communities that are home to defense firms.

Given what is at stake, it is understandable that all of these groups have amped up their lobbying efforts to fend off sequestration. To take just one example, a single F-35 will cost, on average, nearly $125 million ($112.5 million for the aircraft, plus another $22 million for the engine). Prime contractor Lockheed Martin spent $15 million on lobbying in 2011 and is expected to spend even more this year. Such expenses can easily be justified to investors and shareholders if they are seen as protecting the company’s cash cow.

Individual taxpayers, by contrast, have little incentive to organize, and even less incentive to pool their money to fight against the AIA. The cost of the F-35, spread around to every taxpayer, amounts to about a dollar (if we just count the 122 million people who paid federal income taxes). Generally speaking, people do not scrutinize where every tax dollar goes; indeed, payroll tax withholding causes Americans to ignore what they pay in monthly taxes.

A few groups, including Norquist’s ATR, try to offset this imbalance of interests, and they have been reasonably successful. But Norquist’s pledges would be worthless if voters didn’t agree with him. But many do. In this poll (.pdf), for example, half of all respondents were opposed to having their taxes go up in order to pay for higher Pentagon spending.

The AIA’s other line of attack—the claim that substantial cuts in military spending will have a devastating impact on the economy, resulting in a million or more lost jobs—reveals the age-old broken-window fallacy. The AIA wants people to focus on that which is seen—defense workers who are laid off—and to ignore any consideration of how the economy as a whole will be better off if the resources that had previously gone to building planes and rockets are allocated elsewhere in the economy. These transitions are certainly difficult and painful for the individuals and firms involved, but they can be expected, all other factors being equal, to have salutary aggregate effects, especially over the long term. I’ll have more to say on that point later this week, drawing on my previous study of San Diego in the late 1950s, the early 1990s and the early 2000s.

In the meantime, I encourage you to read a succinct explanation of the broken-window fallacy from Henry Hazlitt’s Economics in One Lesson. And, if you’re really motivated, consider reading a less succinct, but more colorful, discussion of the phenomenon by Hazlitt’s intellectual forefather, the French philosopher Frédéric Bastiat.

Cross-posted from the Skeptics at the National Interest.