Tag: Sequestration

An Update on Different Pentagon Spending Plans

On Monday, I posted a lengthy entry here comparing the different plans for military spending: the current Obama administration/OMB baseline, CBO’s latest estimate for sequestration, Mitt Romney’s plan to spend four percent of GDP on the Pentagon’s base budget, and Paul Ryan’s plan.

I should have taken a bit more time checking my numbers, because I ended up comparing apples to oranges (or 050 to 051, in budget-wonk-speak).

Thankfully, the ever-watchful Carl Conetta at the Project on Defense Alternatives spied the error, and set me straight. The gap between the Ryan plan and the current baseline (President Obama’s plan) is less than I had previously reported. The gap between the Ryan plan and the Romney plan is larger. The new numbers, and a revised chart are enclosed below.

I have had to make some inferences, so Governor Romney has some wiggle room. Romney’s surrogates have clarified other aspects of his plans for military spending, most recently here, but I still don’t know what is included when he says he will have a “goal of setting core defense spending—meaning funds devoted to the fundamental military components of personnel, operations and maintenance, procurement, and research and development—at a floor of 4 percent of GDP.” And no one seems to know how soon he intends to achieve that goal.

He could claim that the four percent goal should be applied to the entire “national defense” category (aka 050), which includes nuclear weapons spending within the Department of Energy, for example. This amounts to about a $25 billion difference annually. He could also include mandatory spending within the Pentagon’s budget, another $9 billion a year, on average.

The bottom line remains unchanged, however: Paul Ryan would spend more than President Obama on the military; Mitt Romney would spend much more. To his credit, Ryan has specified other spending cuts in domestic programs to ensure that his plan doesn’t add to the deficit or require higher taxes. Romney has not.

As before, I anxiously await additional clarification on how Romney plans to make up the difference.

Details, in constant 2012 dollars, for the period 2013-2022:

  • Obama/OMB Baseline (051, discretionary):  Total $5.163 trillion
  • Sequestration per CBO (051, discretionary): Total $4.659 trillion; $504 billion in savings
  • Ryan plan (051, discretionary): Total $5.321 trillion; $158 billion in additional spending
  • Romney 4 percent in four years: Total $7.015 trillion; $1.852 trillion in additional spending
  • Romney 4 percent in eight years: Total $6.868 trillion; average $687 billion/year; $1.704 trillion in additional spending

More Truth about Sequestration

Pentagon officials and other proponents of big military spending have three basic complaints about sequestration. That’s the process created by last summer’s Budget Control Act that would cut planned federal spending by about $1.1 trillion over the next nine years through budget caps and a $110 billion in across-the-board cuts in January 2013, with half the cuts coming from defense.

The first complaint is that the cuts would harm national security. The second is that the defense cuts would cause great job loss and economic damage. The third complaint concerns sequestration’s breadth. Because the hit coming in January would apply in equal proportion to every “program, project, and activity” in the defense budget, Pentagon officials claim it prevents prioritizing among programs and planning to limit its pain. That’s what Secretary of Defense Leon Panetta, always ready with a violent metaphor, calls the “goofy meat-axe approach.”

The video Cato posted yesterday concerns the first complaint, noting that the cut is not that large in historical terms and that we could safely spend far less if we defended fewer countries (a point Chris Preble, Justin Logan and I have often made elsewhere). In a paper Cato released today, Ben Zycher attacks the economic case against military spending cuts, including sequestration, showing that they generally increase economic productivity and employment in the long term.

In a piece published today by CNN.com’s Global Public Square, I concentrate on the third complaint. I point out several ways that current law gives the Pentagon to control where sequestration applies. The most important is a provision in the 1985 Gramm-Rudman-Hollings Act, which the BCA amends. It seems to allow the president to transfer funds at will beneath the defense cap, provided Congress passes an expedited joint resolution approving the shift. So the president, with Congress’s permission, can convert the 2013 sequester into a cap and prioritize among programs beneath it.

These options (and several others mentioned in Frank Oliveri’s excellent subscriber-only piece in CQ Weekly) undermine the claim that the Pentagon cannot plan for sequestration. The reason you hardly hear about them is that both the Obama administration and Republicans leaders are gambling that the threat of sequestration will serve their priorities (tax increases and entitlement cuts, respectively), so everyone in power wants it to sound as scary as possible.

To be clear, I do not think sequestration is good policy unless what I just mentioned occurred—the 2013 cut essentially becomes a spending cap. Even if that joint resolution process does not occur, the same end could be accomplished by amending the BCA.

The Truth about Sequestration

Cato has just released a new video, titled “The Truth about Sequestration,” that tells the real story about sequestration, the automatic budget cuts required by the Budget Control Act. Many in Congress claim to abhor their creation, including many of those who voted for it, yet the members and the president haven’t done much to prevent it. Perhaps they shouldn’t do anything and let the cuts happen. In our video, my colleagues Ben Friedman and Dan Mitchell join me in explaining that, whatever its shortcomings as legislation (and there are many, as discussed below) sequestration may be the only viable way to reduce the Pentagon’s budget.

However, there’s little likelihood that sequestration will significantly reduce the defense budget long term. That’s because sequestration cuts the defense budget only in the first year. Every year after that, defense spending will increase. Spending levels will indeed be lower than the Pentagon last year expected them to be. But only in Washington is that considered a cut. So, under sequestration, instead of spending $5.7 trillion on defense over the next decade, as the FY2013 budget suggests, the government will spend about $5.2 trillion.

That $500 billion difference may not actually materialize. Congress has a few options to mitigate the effects of the initial $55 billion slice off the budget. They could reprogram funds after the sequester, change the definition of “programs, projects and activities” (the budget level at which the cuts are implemented), or take advantage of the flexibility within operations and maintenance (O&M) funds. In fact, because the Office of Management and Budget has declared that war spending is eligible to be sequestered, the total cuts to O&M can be spread out across a bigger pot of money. Beyond all that, sequestration does not affect outlays or funds already obligated, which means it will not affect existing contracts. So, the real story is that should sequestration actually happen, Congress and the Pentagon will have much more flexibility than they’re willing to admit.

Our video also highlights the fact that we spend far more on the military than is necessary. Since the end of the Cold War, policymakers and pundits have coalesced around the idea that the United States is the “indispensable nation” responsible for protecting everyone from everything. Under the misapprehension that threats anywhere in the world are necessarily threatening to the United States, we have taken on the responsibility of policing the entire planet. This increases the chances that the United States will become involved in conflicts that do not engage vital U.S. interests, or that we do not fully understand, or can easily remedy. This strategic hypochondria (H/T Ted Galen Carpenter) also burden American taxpayers with additional costs that could and should be borne by others. The video includes a nifty graphic showing the expansion of NATO. We have added a host of weak or fragile countries in the Middle East and Southwest Asia (including, still, Iraq and Afghanistan), and now we are doubling down with assurances to Asian nations that we will constrain China (and implying that they need not do so).

In short, a bloated defense budget has enabled these misguided policies, encourages free-riding by our “allies” and make us less safe abroad and less free at home. Though I would have much preferred a serious strategic debate before the current fiscal crisis, and indeed called for such a thing, sequestration should help us to refocus our national security priorities. In fact, the real story is that sequestration doesn’t restrict our choices, it enables us to make better ones.

Americans shouldn’t worry that sequestration will make our defense budget too small. We account for approximately 48 percent of the world’s military spending. We will retain a margin of superiority over any conceivable combination of rivals, including China, even if our share of military spending fell to 44 or 45 percent of the world’s total.

Sequestration was no one’s first choice, but keeping our reckless spending and strategic myopia on auto pilot is worse.

Note to Education Reporter: GDP Is HUGE, Just like Education Spending

Last week I testified before the Senate Appropriations subcommittee that deals with education. The topic was sequestration, and my case was, frankly, overwhelming, showing that education spending has ballooned for decades while achievement for 17-year-olds – our schools’ “final products” – hasn’t budged.

At least I thought it was overwhelming. But apparently a Huffington Post reporter was underwhelmed by it and wrote the following:

Some lobbyists in the education reform camp note that U.S. education spending has skyrocketed, while test scores have stagnated. Neal McCluskey – an expert witness who serves as associate director for the Cato Institute’s education center – took this line, but a recent report from the nonpartisan Center on Education Policy shows that education spending has actually not grown at all as a share of the gross domestic product.

Aside from the odious implication that I am either a lobbyist or take my cues from them, the big problem with this rebuttal is that it is flat-out wrong. Open the link to the CEP report, go to page 35, and there you will see that the share of GDP taken by elementary and secondary education in fact grew between 1999 and 2009, from 4.4 percent to 4.6 percent.

Perhaps the writer thinks a 0.2 percentage point uptick isn’t big enough to constitute growth. If so, she should really take a look at the Digest of Education Statistics table that furnished the GDP data. It reveals just how big a spending increase that seemingly dinky rise was, a function of GDP starting very large and growing  substantially. Indeed, there was an increase of over $237 billion, or a 57 percent ballooning, with spending rising from $413 billion in 1999 to $650 billion in 2009!

Those are current dollars so we should really adjust for inflation. Doing that moves the 1999 figure to $531 billion, but that still means there was a real increase of $119 billion, or a 22 percent move. That’s no growth by no means.

To her credit, the Huff Po reporter included one piece of context that’s crucial when discussing cuts to federal education spending, context that belies the irresponsible rhetoric of people like Education Secretary Arne Duncan, who said sequestration would “jeopardize our nation’s ability to develop and support an educated, skilled workforce that can compete in the global economy.”

Surely to justify such doomsaying cuts would have to be very large – perhaps 10 or 20 percent – right?

Nope. As Sen. Shelby (R-AL) rightly noted at the hearing – and the Huff Po reported – the 7.8 percent cut to federal education programs likely under sequestration would only translate into about a 0.84 percent cut in total education spending. Why? Because the Feds – though spending far too much on education – still only supply about 10.8 percent of the total. Most funding comes from state and local governments.

When you look honestly at the numbers there really is no question: Sequestration should fully include education.

Let Sequestration Happen

Some members of Congress are anxious to undo sequestration, ignoring the inconvenient fact that they created the process in the first place. Instead of accepting responsibility, they are proposing legislation that would force the White House to outline the effects of the cuts. And people wonder why Congress’s approval rating is at an all-time low.

But there is more than enough blame to go around. The Republican-controlled House, the Democratic-led Senate, and the Obama White House had a chance to implement a range of proposals aimed at deficit reduction last summer. They chose to kick the can down the road, empowering an independent, bipartisan panel to make the tough choices for them. That effort failed.

If the Super Committee was unable to hammer out a compromise when the conditions were ripe last summer, it is unlikely that one will materialize this summer. Sequestration may be the only way to achieve real spending cuts. Let’s let it happen.

To be clear, sequestration is not the best way to cut the military budget, or federal spending overall. It wasn’t supposed to happen at all; the threat of spending cuts was supposed to compel the various parties to reach a compromise. But it may be the only feasible way to cut spending. And it isn’t going to get any easier in the future.

The Democrats are beginning to show their hand: this was never about cutting spending; it was always about raising taxes. Sen. Patty Murray (D-WA) explained yesterday that her party would allow the cuts in defense and nondefense spending to go forward, and the Bush tax cuts to expire, if Republicans didn’t agree to tax hikes on the wealthy. That isn’t likely to happen, and not just because the GOP is being stubborn. A sizable majority of Americans—Republicans and Democrats alike—are in favor of cutting military spending. More than half want to extend the Bush tax cuts for all.

Still, there are some Republican politicians who have always been willing to raise taxes in order to protect the Pentagon, despite what the public says it wants. I don’t fault Democrats for holding Pentagon spending hostage as much as I fault Republicans for allowing themselves to be maneuvered into a corner.

The GOP has a straightforward way out of the box: allow the defense and nondefense cuts to go forward, refuse a tax increase, and renegotiate a debt reduction deal that doesn’t leave entitlements—the real drivers of our long-term fiscal calamity—off the table.

Sequestration likely won’t be as bad as special interests and those in favor of ever-increasing military spending claim. The reductions would only apply to FY 2013 budget authority, not outlays. The Pentagon and Congress will then have greater flexibility starting in FY 2014 to adjust the reductions under the BCA spending caps. In the meantime, many programs could continue on funding already authorized.

We must also keep the cuts in proper perspective. The DoD base budget under sequestration would total $469 billion, about what we spent in 2006, which was not exactly a lean year for the Pentagon. And as for the claim that the military cuts will result in perhaps one million lost jobs, that seems implausible considering that the cuts would amount to less than three tenths of one percent of GDP.

More to the point, the defense budget should never be seen as a jobs program. In a dynamic, market economy, capital and resources adjust to changing demand. Some regions and municipalities that are relatively more dependent upon military spending might suffer some short-term effects, but there is evidence that economies reliant on the military can recover. Some regions could emerge stronger and more diversified. Other reporting indicates that some businesses are already positioning themselves to weather reduced government spending.

Americans spend more today on our military—in real, inflation-adjusted terms—than during the high point of the Reagan buildup. Some might justify these expenditures by claiming that the world is much more dangerous today. But the evidence for that is pretty thin. The Soviet Union on its worst day could do more damage in a few minutes than al Qaeda has managed to inflict in over a decade. We are safer than most politicians are willing to admit.

If they embraced our good fortune, policymakers could cut military spending without undermining U.S. security. Shifting resources from a relatively unproductive and inefficient sector to a more productive one would be good for the economy. And lower military spending could even improve our foreign policy.

It simply isn’t fair to saddle fewer troops with more missions. If we cut spending and reduced the size of the U.S. military, policymakers would have to be more discriminating in the use of force. But greater restraint by the United States would encourage other countries to take responsibility for their own security, and share in the costs and risks of policing the global commons.

Strategic spending cuts informed by a realistic assessment of today’s threats would be ideal. Sequestration may not reach this ideal, but it may be the only way to achieve actual cuts in military spending.

Cross-posted from the Skeptics at the National Interest.

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.