Defense Cuts Will Further Impair Economic Recovery

The U.S. economy is currently enduring its slowest recovery since the Great Depression. One reason for the modest rate of recovery is that consumers are deleveraging from the excessively optimistic spending patterns of the past decade. They hardly have a choice, since a weak housing market has deprived many of them of their biggest asset. Beyond that, though, the tools Washington favors for stimulating economic activity just aren’t working very well. Injecting liquidity into the banking system hasn’t helped much because banks are too scared to make loans. Keeping tax rates low hasn’t helped much because taxpayers are paying down debt, and when they do buy a new car or electronic device, it often comes from overseas.

Against this backdrop, last week’s bipartisan deficit agreement to cut federal spending is a sure job killer. The entitlement programs that politicians want to avoid cutting give money mainly to the part of the population that is least likely to spend — the elderly. The domestic discretionary and defense programs they will target instead for spending cuts are major engines of job creation. Unfortunately, job creation is a two-way street: when discretionary spending surges, it pumps money into the economies of places like Georgia, Colorado and Ohio that leads to new hiring. But when discretionary spending falls, economic activity shrinks and so does employment.

So word that the deficit agreement could cut defense outlays by up to a trillion dollars over the coming decade is real bad news for an economy that has already seen its share of global output decline from 32 percent in 2001 to 24 percent today. Combined with anticipated cuts in domestic spending for law enforcement, education, transportation and science, the spending declines could be enough to nudge an anemic economy back into recession. Respected economists such as Gary Schilling are already predicting a new recession next year, arguing that it will have been four years since the present “recovery” began, and that is the average duration of economic expansions during the postwar years. Whether that pessimism is warranted or not, it should be obvious that layering big cuts in defense and domestic spending on top of a weak housing market, cautious financial sector, and deleveraging consumers will further cloud the outlook for our struggling economy.

It isn’t hard to see why many members of Congress want to reduce the pace of federal borrowing, and the Department of Defense is by far the biggest generator of discretionary spending in the government. However, money spent in the Pentagon’s base budget tends to stay in the United States and create jobs there — jobs that produce useful goods and services. Money spent on overseas contingencies is more likely to end up wasted on things like nation building in Afghanistan, and money spent on entitlements often channels into activities that contribute little to America’s economic strength. So whatever the merits may be of targeting the Pentagon’s base budget while leaving overseas contingencies and entitlements off the table, the impact on the economy is likely to be negative. When former defense secretary Robert Gates killed the F-22 fighter, he doomed 95,000 direct and indirect jobs in places like Georgia and Connecticut. Isn’t it time for the Obama Administration to start thinking through what some of its defense “efficiencies” may mean for the nation’s economy?