The Bottom Line on Sequestration

November 15, 2012 • Commentary
This article appeared in Federation of American Scientists on November 15, 2012.

There is bipartisan opposition in Washington to sequestration, the automatic spending cuts mandated by last year’s Budget Control Act — passed, inconveniently enough, by many of the same people who now rail against it. But the cuts are modest: over the next decade, the federal government will spend about $44 trillion with sequestration, $45 trillion without. And few people are considering the beneficial effects that even those modest cuts could have, both in reducing the nation’s debt, and in stimulating economic activity.

In truth, however, neither Democrats nor Republicans are committed to reducing government spending, and both sides have chosen to focus on possible cuts in the military to score political points. President Obama’s party hopes to convince Republicans to agree to higher taxes to spare the Pentagon’s budget. Such cuts, Secretary of Defense Leon Panetta has said, would be akin to “shooting ourselves in the head.” Members of the GOP, for their part, have attempted to protect the Pentagon by appealing for more cuts in domestic spending, although some have signaled a willingness to abandon the “no new taxes” pledge in order to keep the money flowing.

But the most persistent line of argument against sequestration, beyond whether the cuts will undermine the nation’s security, is the contention that they will wreck the economy and cast hundreds of thousand into the ranks of the unemployed. In his speech to the Republican National Convention, Mitt Romney claimed that “trillion dollar cuts to our military will eliminate hundreds of thousands of jobs,” while the GOP platform predicts that sequestration would accelerate “the decline of our nation’s defense industrial base…, resulting in the layoff of more than 1 million skilled workers.”

Where do Romney and the GOP get their statistics? From the Aerospace Industries Association (AIA), the trade group representing some of the nation’s largest defense contractors. According to the AIA’s studies, authored by George Mason University Professor Stephen Fuller, defense cuts under sequestration would result in a decline of about $86.5 billion in GDP in 2013, and the loss of 1,006,315 full‐​time, year‐​round equivalent jobs. Fuller even broke the job losses down state by state, providing convenient talking points for politicians in the heat of an election year. Virginia will lose 122,800; Florida will shed 39,200. And so it goes.

Several scholars have challenged the AIA’s conclusions. The Brookings Institution’s Peter Singer noted that only 1 out of every 70 American workers were involved in aerospace and defense, and no more than 3.53 million jobs — direct, indirect, and induced — were sustained by that industry. How then, he asked, could a 10 percent reduction in defense spending result in the loss of one third of all defense‐​related jobs? The Mercatus Center’s Veronique de Rugy was equally skeptical that sequestration would upend the fragile economy. “I understand that catastrophic job losses make a convenient case against sequestration,” she wrote at the blog for the conservative National Review, “but that doesn’t make them true.”

Economist Benjamin Zycher showed why they weren’t. In a study published by the Cato Institute, Zycher documented how Fuller’s study (and others like it) grossly exaggerated the harmful economic effects of spending cuts. Military spending has historically contributed very little to GDP growth, and Zycher therefore concluded that cuts would have little long‐​term impact on GDP in the future.

But the AIA’s approach to spending cuts, and particularly to Pentagon cuts, reveal a deeper conceptual flaw: they ignore the beneficial effects that would result from shifting resources from the military to more productive sectors of the economy. Pentagon spending cuts can be expected — all other factors being equal — to generate greater economic activity elsewhere.

Such transitions are certainly difficult for the workers directly affected. But that applies equally to booksellers or music stores as to jet fighter machinists. Competition from Amazon and Kindle drove Borders out of business. The iPod killed Tower Records. In a similar vein, unmanned aerial vehicles and improvements in radar and missile technology may be most responsible for the obsolescence of the F-22 fighter.

The bottom line on sequestration? The Pentagon cuts currently under consideration are small relative to its gargantuan budget, and consistent with those of past post‐​war draw downs. The United States will maintain a substantial margin of military superiority over any conceivable combination of rivals even if it spends far less than it does today. And cuts in military spending should pay dividends for the economy over the long run.

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