By Loren B. Thompson
Texas Insider Report: WASHINGTON D.C. Washington may be running out of money but there is no shortage of metaphors in the defense sector for characterizing the coming fiscal crisis. Analysts describe the automatic spending cuts contained in last
years Budget Control Act that are
scheduled to trigger on January 2 as a train wreck" a perfect storm" and a sword of Damocles" hanging over the nations military establishment.
However there is so little understanding of the process leading to the cuts that a more fitting metaphor might be provided by Samuel Becketts famously absurd play Waiting for Godot. The two main characters spend the entire play waiting for somebody named Godot to show up but admit that if he did arrive they might not recognize him. He never appears.
That may be what happens with sequestration the arcane budget process the law invokes for slashing defense and domestic spending as a way of reducing the governments deficit. Although Congress has done little to avert the threat its too busy posturing for the November elections there may be bipartisan agreement in the lame-duck session that follows the elections to simply defer implementation of the law.
But since there is no assurance of an agreement people in the defense sector are starting to get edgy as the clock ticks down. It doesnt help that the first authoritative commentary on how budget sequestration would unfold rendered by defense secretary Leon Panetta in a letter to Congress last November grossly exaggerated the likely impact of cuts. Panetta predicted a 23 cut to weapons accounts in one year leading to such draconian steps as slashing all three legs of the nations nuclear deterrent.
It wouldnt really be like that. The cut from the defense spending baseline of $721 billion (which includes funding of overseas wars and unobligated balances from prior years) would be around 8. If the cuts were taken solely from the Pentagons base budget for fiscal 2013 the
base budget would decline 10. And if the president exercised his option under the law to exempt military personnel from automatic cuts then the remaining accounts would be debited something like 13.
A 13 cut to weapons and readiness accounts in a single year would be big news but its nowhere near the 23 that Panetta predicted. And as Byron Callan of Capital Alpha Partners points out the cuts wouldnt really fall in one year anyway because although spending may be authorized in 2013 it takes years for all of it to actually be spent. He figures that even if sequestration is triggered as feared the accounts industry cares about most would only see outlays decline about 5 the first year and a similar amount the next year.
That doesnt sound like the end of the world to me. In fact the steps industry is already taking in anticipation of sequestration like halting new hiring and discretionary investment could save more money than would be lost by implementing sequestration. So why is the defense sector so apprehensive about the prospect of automatic cuts in January a threat that may in fact never materialize?
I think the fear is caused largely by uncertainty. Back when I was teaching nuclear strategy at Georgetown I used to debate other academics about what deters better the certainty of harsh retaliation or uncertainty as to how a victim of aggression might respond. We never resolved the debate but theres little question that uncertainty about the future can spawn anxiety.
In the case of the automatic spending cuts mandated by the Budget Control Act theres less clarity about the outcome than there is about next years weather in Boston. First there are the political uncertainties. Who will win the election? How will the lame-duck session deal with
budget issues? What would President Romney do about defense?
The budget law adds a whole new layer of ambiguity to the usual election-year jitters because it is arcane and untested. For instance the law would appear to reduce defense spending by $600 billion over nine years $500 billion after savings from reduced federal borrowing are factored in but how would the cuts be allocated?
The law says that whether military personnel are exempted from automatic cuts or not each account that actually is cut to get to $55 billion in annual savings must be reduced by a uniform rate. Some congressional staffers understand this to mean the same rate must be applied down to the individual program project and activity level leaving scant room for tradeoffs. But the White House budget office and Pentagon comptroller appear to believe the rate would be applied to broad accounts leaving considerable discretion.
We wont know what level of specificity applies in allocating cuts until sequestration is triggered in January (if it is) and even then adjudication may be required before implementation unfolds. By the time that is resolved the new Congress could be well on its way to amending or repealing the provisions in question.
Obviously this is a nightmare for military planners and anyone in the defense industry trying to project future cashflows. Beyond that we shouldnt minimize what sequestration would mean for long-term military spending. Although the draconian cuts from prior-year levels only occur in 2013 because they permanently adjust the defense-spending baseline downward another half-trillion dollars disappears from Pentagon coffers through 2021 on top of a similar amount already removed by implementation of the budget laws initial cuts.
However 2021 is a wee bit beyond the planning horizon of most policymakers and industry executives. Even if the Budget Control Act were to remain in effect for ten years which it most definitely will not what people in the defense sector care about is mainly the next two years. After that a host of imponderables from emerging threats to economic conditions to political upheavals intrude to make any projections useless. During those two years the impact of automatic spending cuts would be significant but not huge.
And remember thats assuming the cuts happen at all which is assuming a lot. If theres one thing all the pundits agree on its that almost nobody in Washington wants to see automatic spending cuts imposed the way they are mandated in the Budget Control Act. In democratic political
systems when nobody wants something to happen it generally doesnt happen.
So here are the three generic futures for budget sequestration and all those other obscure fiscal concepts you wish youd never heard of. Future number one is that one party or the other sweeps the elections and then averts sequestration of defense funds by imposing its preferred solution to the deficit. Future number two is that the political system remains divided and a lame-duck Congress discovers that both parties can agree on the need to delay automatic cuts. Future number three is that the cuts are actually triggered and then a new Congress either blunts them or finds the impact isnt as great as everyone feared.
None of these scenarios justifies panicked selling of defense equities or rethinking plans for a military career. America will remain by far the greatest military power (and spender) in the world and the consequences of an ill-conceived budget law will prove to be much less onerous than we currently fear.
Loren B. Thompson is Chief Operating Officer of the Lexington Institute. He was Deputy Director of the Security Studies Program at Georgetown University. He has also taught at Harvard Universitys Kennedy School of Government.
