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“Modest reforms to pay and compensation will improve readiness and modernization. It will help keep our all-volunteer force sustainable and strong. Keeping faith also means investing sufficient resources so that we can uphold our sacred obligations to defend the nation and to send our sons and daughters to war with only the best training, leadership and equipment. We can’t shrink from our obligations to one another. The stakes are too high.”

Gen. Martin E. Dempsey

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Wednesday
Nov022011

Defense, Jobs, and the Making of Hypocrites

The following is an abridged version of a post that originally ran on Capital Gains and Games.

Defense budgets have gone up and gone down ever since the end of the Second World War, and today we find ourselves in one of the build-down periods.  That, of course, doesn’t mean that the Pentagon, defense industry, and their allies in Congress – lately the Rep. Buck McKeon’s House Armed Services Committee – won’t offer resistance. Once again, as with every build down in the past, the stalwarts are warning of terrifying job losses that we can ill afford in a soft labor market with high unemployment.

The Aerospace Industries Association (AIA) most recently advanced this flawed and hypocritical argument. 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 debt reduction or whether we need to continue spending at sums unmatched, in peacetime or wartime, since the end of World War II.

First, let's examine the merits of the hemorrhaging jobs claim.  There’s a truth some industry critics don't like to acknowledge: of course defense industry and technology employment would fall with defense acquisition budgets. But there’s also a truth AIA’s "Second to None" crowd won't admit: every reduction in federal spending reduces employment somewhere. In fact, the impact of non-defense cuts on direct employment is probably more serious since the average wage in these sectors is lower.

This is really about expediency.  Defense industry has no difficulty shedding employees if it helps the bottom line.  It no longer provides long-term historical data but, back thirty years ago, AIA data showed that well over one million people worked in the U.S. aerospace business. Today’s AIA data reveals that the sector's employment has shrunk to 621,000 even in a market that has more than doubled over the past decade.

The politicians who want to shelter defense have been equally hypocritical, using the jobs argument to support their campaign while still arguing for steeper cuts everywhere else and against all revenue increases.  The consequence, of course, is that public sector workers – fire-fighters, police, teachers, health workers – will lose their jobs. 

And still the trouble doesn’t end here.  Just for a very brief second, let's take the AIA study seriously.  Even with all the politics set aside, it is not very useful for policy judgment. 

AIA’s analysis of worst-case spending projections is static and limited to just one sector of the federal budget.  Good for AIA's purposes, naturally, but it assumes that nothing else happens when that one sector gets cut.  In reality, defense spending changes take place in a dynamic context of overall federal spending, revenues, and, especially, non-governmental economic activity.  Where do the foregone resources go?

This is where the hypocrisy is strongest.  Many of those trying to protect defense spending also suggest that reducing federal budgets generically and holding revenues constant will add to our economic and employment health.  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 jobs.  AIA neglects those induced jobs.  Add all of them up and you may actually net jobs to the economy.

A look at history suggests the importance of this dynamic analysis.  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 flailing to protect the defense budget.  And that’s fundamentally wrongheaded.  Defense budgets, programs, and spending should be measured against our security and all the other public needs for which the government has responsibility.  AIA’s flanking maneuver on jobs is, at best, a distraction.

* 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 it is still timely.  Read the report here.