StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Defense, Jobs,and the Making of Hypocrites

30 Oct 2011
Posted by Gordon Adams

Defense budgets go up and down.  They have ever since the end of the Second World War. We are in a build down today, one that is likely to continue for the next decade, reardless of what the Super Committee does, and regardless of the hard court press coming from the Pentagon, its allies in Congress (Chairman McKeon of the House Armed Services Committee), and, especially, the industry that manufactures weapons for the Department of Defense.

In fact, were defense budgets to decline by $465 billion from the current DoD projections, it would be the most moderate and shallow build down we have ever experienced since the end of the Korean War.  The last three build downs saw defense resources fall, on average, 30% in constant dollars over ten years, as the Stimson Center's project on Budgeting for Foreign Affairs and Defense pointed out a month ago.  The currently projected decline (from the DoD projection), would be around 8%, hardly the end of the world.  Even a round trillion dollars from that forecast would be only 17% of the total, just over half as far as the last three build downs.

So there is little reason to fear, little reason to cry "doomsday" as we manage this build down.  That hasn't stopped hair tearing, garment rendering, and teeth gnashing.  Once again, as with every build down in the past, the stalwarts of high spending step in warning that this build down will cause a terrifying loss of one million jobs in the economy, something we can ill afford in a soft labor market with high unemployment.

The jobs argument, flagrantly advanced by the Aerospace Industries Association (AIA) last week, is both flawed and hypocritical.  On both counts, it ought to be dismissed for what it is - a side show about the economy, rather than a straight-up argument about whether defense needs to be part of deficit and debt reduction, and whether we can or need to continue spending the highest sums we have ever spent on defense, peacetime or wartime, since the end of World War II.

First, let's examine the merits of the claim that a million jobs would be lost if the defense budget declined a mere 17% over the next ten years.  First, the truth some critics of the high level of defense spending don't like to acknowledge: of course defense industry and technology employment would go down if defense acquisition budgets go down.

And then, the truth the "Second to None" crowd, supported by AIA, won't admit: every reduction in federal spending reduces employment somewhere, whether it is cops, teachers, defense workers, or public sector employees.  That is no surprise at all to economists. (In fact, the impact of non-defense cut backs on direct employment is probably more serious, as the average wage in these sectors is lower than that in the defense sector.)

Moreover, to add to the partial, and hypocritical argument AIA is making, the defense industry has no difficulty shedding employees in the service of its well-being, rain or shine, if shedding employees helps the bottom line.    The AIA no longer provides long-term historical data, but back thirty years ago AIA data showed that well over one million people worked in the aerospace part of the defense industry in the United States. Today in a market that has more than doubled over the past decade, that sector's employment has shrunk to 621,000, according to AIA data

In the mid-1980s, moreover, overall defense industry employment peaked at over 3.5 million, according to a GAO study.  Using a different base, the Bureau of Labor Statistics estimated defense industry employment in 2010 at less than 1.4 million and, noted that defense industry employment had shrunk by 42% from its Cold War peak in the 1980s.  The Machinists Union, who backed the AIA study last week, know this full well; their defense industry membership has shrunk continuously over the past fifty years.

The politicians who want to exempt defense from anything more than what the Budget Control Act would already mandate, have been equally hypocritical, using the jobs argument to support their campaign.  At the same time as they argue for exempting defense, they have no difficulty arguing that non-defense discretionary and entitlement spending need to be cut further, while revenues remain unchanged.  The consequence, of course, of cutting non-defense discretionary and entitlement spending is that public sector workers - fire-fighters, police, teachers, health workers - will lose their jobs. 

So, hypocrisy abounds in this jobs argument.  It is not about defense, it is about defending the defense budget.

Just for a second, let's take the Fuller study seriously, but just for a moment.  It is not very useful for policy judgement.  In brief, it is a static analysis of projected lower spending in one sector of the federal budget, running the implications out in a model as far as they would go, and assuming the worst.  Good for AIA's purposes, not very good analysis. 

In order to really know the impact of change in one vector of federal spending, any model holds other economic variables constant.  Meaning, in plain English, in the Fuller analysis, nothing else happens; just that sector of federal spending gets cut.

In reality, defense spending changes take place in a dynamic context of overall federal spending, revenues, and, especially, non-governmental economic activity.  In other words, something else happens to the foregone resources, the $1 trillion that would go away from the current DOD forecast over the next ten years. 

Assume, for a moment, that reducing defense budgets, along with other spending, and holding revenue policy constant had, as Republican economics assume today, a healthy impact on economic growth and job creation.  Private capital is liberated to invest, risk-takers abound, interest rates remain low, the government gets smaller, and, voila!, the economy starts to surge, creating millions of jobs.  If Republcans really believe this stuff, every reason to reduce defense, along with everything else, and see if the theory works.

This is where the Fuller analysis is flawed.  In projecting out into the economy the "indirect" and "induced" jobs that would be lost from defense cuts, the analysis seems to accept the notion that nothing else is happening to the economy.  In the real world, the same third tier "induced" jobs they attribute to defense are attributed by economists to every other economic activity, as well. Add up all the induced jobs forecast in static forecasts, and you may have more induced jobs than exist in the US economy.

A look at history suggests the importance of looking at a dynamic economy.  While defense industry employment shrank in the 1990s, overall economic activity surged, creating millions of new jobs, including opportunities for defense industry employees.  An economic recovery, however stimulated, would have this effect today.*

But, of course, a theory of economic growth is not what this is all about.  It's really about grabbing any available argument and partial analysis to justify protecting the defense budget.  So we have the side show of jobs, because, to the advocates, the large economic theory doesn't matter. Defending the defense budget, and pushing a scary jobs scenario to reenforce that defense, is what really matters.

Ultimately, defense budgets, programs, and spending, are not about jobs, even if the politicians (and the industry) think so. They are about what is needed for our security and those needs have to be set against all the other public needs for which the government has responsibility.  That's what the argument should really be about.


* In 1987, New School economist David Gold and I wrote a lengthy analysis of the economic consequences of defense spending, reviewing much of the then current literature on the subject.  The study included considerable discussion of the employment impact of defense.  This publication is no longer in print, but still timely.  It may be available through inter-library loan.

"Every gun that is made,

"Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed."
Dwight D. Eisenhower

I have to laugh when people

I have to laugh when people claim to be fiscally conservative and yet they wont even discuss cuts to the DOD.

The DOD is the biggest waste of money of any gov program.

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