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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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Tuesday
Jul172012

Defense, Jobs, and the Making of Hypocrites

Updated from the 30 Oct 2011 post on Capital Gains and Games and the abridged the Will and the Wallet post

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, regardless of what happens to the shadow play about a defense sequester and the full court press coming from Sens. Ayotte, McCain, and Chairman McKeon, and especially the defense industry, which is once again threatening pink slips and job losses from defense cuts.

Start with the facts.  The current projection of a flat defense budget (there have been no projected cuts yet) is the most moderate and shallow build down we have ever experienced since the end of the Korean War.   The current flat budget projection is not a cut, but it is less than the previous projection (done in the FY 2012 budget) by about 8%. The last three defense build downs saw defense resources actually fall, on average, 30% in constant dollars over ten years.  Even with a sequester, the overall cut of an additional $500 billion, in round numbers, would be only 17%, and that’s from a budget that was projected to grow.

We’re a long way from "doomsday" and all the political hair tearing, garment rendering, and teeth gnashing.  But the “defenders of defense,” are back at it on the jobs front, arguing, again today, that such a build down will cause a terrifying loss of more than one million jobs in the economy, something we can ill afford in a soft labor market with high unemployment.

The jobs argument is on the table because the Aerospace Industries Association (AIA) has just updated its jobs study from last October.  The study and the argument ought to be dismissed out of hand for what they are: flawed and hypocritical.  This is a side show about the economy, not a straight-up argument about whether defense should be affected by 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.

But let’s examine the argument on the purported merits. 

First things first, a truth that some critics of the defense budget find it hard to acknowledge: of course defense industry and technology employment would go down if defense acquisition budgets go down.

And then there is the truth the "defender” crowd, supported by AIA, don’t like to acknowledge: 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 more significant, as the average wage in these sectors is lower than that in the defense sector.) Sequester or spending cuts hit everyone, in every sector.

Then there is the hypocrisy.  AIA’s members have no problem shedding employees in the service of the bottom line.  AIA no longer provides long-term historical data on industry employment, 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.  Even the industry unions, who support the “jobs” argument know that 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, are equally hypocritical in using the jobs argument to support their campaign.  At the same time as they argue for exempting defense from sequester, they have no difficulty arguing that non-defense discretionary and entitlement spending need to be cut further, while revenues remain unchanged, as the Ryan budget provides.  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. 

This argument is not about defending defense, it is about defending the defense budget.

But, for a moment, take the Fuller study seriously.  It is not very useful for policy judgment.  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 political purposes, not very good analysis of the labor market. 

In order to really know the impact on employment of a change in one vector of federal spending, models generally hold other economic variables constant.  Meaning, in plain English, in the Fuller analysis, nothing else happens in the economy when defense dollars go away; 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 Republicans really believe this stuff, there is every reason to reduce defense, along with everything else, and put the theory to the test.

But this test would fail, because it is not dynamic.  This is the flaw in the Fuller number. By going beyond the direct job losses and projecting the "indirect" and "induced" jobs that would be lost from defense cuts, the analysis seems to accept the notion that nothing else will happen in the economy.  In the real world, those jobs (which are nearly 2/3 of the 1.1 million), particularly the "induced" jobs that they link to defense spending are also attributed by economists to every other activity in the economy as well. Add up all the induced jobs forecast in static forecasts, and you may have more induced jobs than actually 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, whatever its source (stimulus or lower taxes), would have this effect today.*

But, of course, this debate is not about a theory of economic growth.  It’s about politics and fear -  grabbing any available argument and favorable number to justify protecting the defense budget.  Defending the defense budget, and pushing a scary jobs scenario to re-enforce that defense, not theory or even growth, is what really matters.

Ultimately, defense budgets, programs, and spending, are not about jobs, even if the politicians (and the industry) want the public to 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 and is available at http://thewillandthewallet.squarespace.com/storage/Does%20the%20Def%20Dollar%20Make%20a%20Difference_19870701.pdf

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