Tag: defense cuts

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.

Debt Deal Signed, Fights over Military Spending Next

The legislation signed by President Obama yesterday, as a solution to the debt ceiling debate, includes the possibility of cuts to military spending. But as Chris Preble points out, the legislation guarantees no defense cuts. Republicans will try to dump all the required cuts on non-defense areas. And the White House has already distanced itself from the prospect of any real defense budget cuts, as did Secretary of Defense Leon Panetta. Both support only the first round of cuts, which will at best halt Pentagon growth at roughly inflation.

On The Skeptics blog, I take a more detailed look at deal’s likely impact on military spending. I also examine its political effect, arguing that it will cause at least four political fights.

The first concerns war funding. As Russell Rumbaugh notes, hawks will be tempted to shift the Pentagon’s bill into the war appropriations (overseas contingency operations, officially), which the bill does not cap. That problem is not new, but the bill worsens it. We’ll see if the White House and Congressional Democrats fight to stop it.

Second, for the two years while the security cap is in place, the bill pits security agencies and their congressional advocates in zero sum combat. For obvious electoral reasons, no one will go after veterans. Defense hawks and top military officers will push to make DHS and State eat the minor cuts required. House Republicans negotiated to expand the security category for this reason. DHS, State and the subcommittees that pass their appropriations will fight back. Republicans and thus the House will tend to the first camp; Democrats and the Senate to the second. So the fight will occur in the appropriation committees, conference, and probably White House-Hill discussions. The paucity of cuts limits the carnage, of course.

Third, if the legislation remains in place after two years and a single cap covers all discretionary spending, the fight will shift and become more partisan. To get under the cap, Republicans will push domestic spending cuts. Democrats will prefer defense cuts. The 2012 elections will determine the institutional contours of this fight.

The fourth fight will center on the Joint Committee, with the most interesting conflict among Republicans. Democrats will likely advocate taxes and more defense spending cuts. Even if they can get a deal including taxes with Republican committee members, the House is unlikely to pass it. Democrats’ most attractive option may then be sequestration. Anti-tax Republicans will accept that outcome but clash with neoconservative Republicans happy to raise taxes to pay for military expenditures.

Those that see this plan as a disaster for defense ought to explain why hawks, like Rep. Buck McKeon (Chairman of the House Armed Services Committee), Rep. Bill Young (a leading House defense appropriator), and Senator John McCain, support it. They evidently prefer this deal to any available alternative and are gambling that they can protect military spending from the knife.

My guess is that defense spending will be level in 2012, growing roughly with inflation, but get hit by sequestration, meaning real defense cuts in 2013. After that, who knows? The political dynamics will then be quite different.

An original version of this post appeared on the National Interest.