Since 1998, U.S. military spending has grown exponentially, reaching 20 percent of overall federal spending and more than half of discretionary spending-levels not seen since the end of World War II. In particular, the portion of the budget used to purchase equipment from private industry has doubled over the last 14 years, growing from about $100 billion in 1998 to nearly $200 billion today.
Unsurprisingly, the defense industry has enjoyed remarkable prosperity during this time, with industry profits quadrupling between 2001 and 2010. But with a struggling economy and the conclusion of two wars, the United States can no longer afford to fund a massive defense buildup in the absence of an existential threat. Every bipartisan group confronting the deficit problem -- including the President's Debt Commission (Simpson-Bowles), the Domenici-Rivlin Task Force, and the Gang of Six -- has recommended reducing defense spending by about $1 trillion over the next decade. And the Budget Control Act (BCA), passed last summer, called for Congress to identify $1.2 trillion in cuts, revenue, or both to address this fiscal dilemma. If Congress failed, the act stipulated that $500 billion be automatically "sequestered" from defense (an equivalent amount would also be "sequestered" from non-defense programs) to meet the shortfall.
Faced with the prospect of declining government spending, the defense industry has stepped into the fray. Whereas for much of the last decade the defense industry relied on fears of terrorism and the ongoing conflicts in Iraq and Afghanistan to secure lucrative contracts, the end of the wars and the economic downturn have forced it to dramatically change its approach. Now, the defense industry is marketing itself as an essential job creator. Lockheed Martin, in particular, garnered headlines last week by announcing it will issue layoff notices to the majority of its 123,000 employees the week before the November elections unless sequestration is averted. It's certainly a tactic tailored to the times. The question is: will it work?
The Lockheed announcement was not the first shot in this new battle. In October 2011, the Aerospace Industry Association (AIA) published an economic impact analysis which concluded that cuts of $1 trillion over 10 years would cost the U.S. economy more than 1 million jobs, increasing the rate of unemployment by 0.6 percent. More recently, the National Association of Manufacturers (NAM) echoed this dire economic forecast, reporting that the BCA plus sequestration would result in the loss of over 1 million jobs, increase unemployment by 0.7 percent, and decrease gross domestic product by almost 1 percent. Most of these jobs, however, would not come from the defense industry itself. To maximize their findings (and their political impact), both studies assessed the effects of defense sequestration on every sector of the economy that could be hit by "induced effects," including secondary and tertiary effects like reduced consumer spending. As a result, the "1 million jobs" figure includes jobs in industries as distant from defense as "retail trade" and "leisure and hospitality services."
In addition to this methodological sleight of hand, the AIA and NAM studies are flawed for two fundamental reasons. First, defense spending is not a jobs program; it is a collective effort to address the threats facing the country, assure our national security, and secure our interests abroad. Therefore, the level of defense spending should be dictated by our national strategy and fiscal capacity, both of which point towards a drawdown. While it is in our interest to maintain essential industrial capacity, revenue growth and profit margins should not enter the calculus. Furthermore, if implemented wisely, $1 trillion in cuts spread over 10 years would not threaten our industrial base or national security. After more than a decade of real growth, such cuts would amount to a reduction of only about 15 percent in real terms and return defense spending to 2007 levels.
Second, defense spending is an extremely inefficient way to stimulate the economy. Both studies ignore the fact that defense spending creates far fewer jobs per billion dollars spent than other forms of government spending. For example, spending on educational services creates three times as many jobs as military spending and health care twice as many, according to research from the University of Massachusetts. Even tax cuts create almost 30 percent more jobs than money spent on weapons. So if Congress wants to spend taxpayer money to create jobs, it shouldn't give it to defense contractors.