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.