Defense Spending: The Worst Way to Make Jobs

I see it coming. As President Obama gives his speech on how important it is for the government and the country to produce more jobs, and as the budget noose starts to tighten on all government programs, including the Department of Defense (DoD) this time, the DoD will flood the Congress with charts and statistics on how cutting the DoD will also cut important defense manufacturing jobs across the US. Each member of Congress will be notified about how many jobs will be cut for any given weapon system, and this is especially effective because the DoD has becomethe master of spreading weapon production contractor and subcontractor jobs across as many districts and states as possible to get the weapons funded in the first place. The DoD will politically tout that it is an acceptable place in the government to “stimulate” the economy with manufacturing jobs, and this may prove to be irresistible to lawmakers because it is just so easy to get increased defense funding passed, even by the Democrats. According to Businessweek, “Including the cost of the wars, defense spending has doubled in the past decade, to $691 billion in fiscal 2010 from $316 billion in fiscal 2001.” And since the DoD budget has already doubled since 9/11, cutting it will bring howls of protest that it will lead to more unemployment, especially in the manufacturing area.

As we drawdown troops in Iraq and Afghanistan, the defenders of the DoD budget, which unfortunately includes the new Secretary of Defense Leon Panetta, will want to transfer any money saved back into their favorite endeavor: weapons production. In a recent article in US News, they have already started that chorus that cutting DoD is cutting into important jobs:

It's the Pentagon's job to argue in the interest of national security. But these days, as it protects a country reeling from economic problems, the Defense Department may need to argue for American jobs too.

Making his first appearance before the press since taking over the Pentagon, Defense Secretary Leon Panetta Thursday warned against the possibility of more cuts to his department's budget. Panetta and Joint Chiefs of Staff Chairman Mike Mullen focused their message on what future defense spending cuts might mean for national security. But, Panetta, putting on his “old budget hat” as the former budget director put it and Mullen also touched on an important point: that soldiers and civilians who work in and around the defense community are employees who rely on a paycheck just like the rest of Americans.

“The Pentagon realizes how serious this is and they are coming with their strongest message,” says Travis Sharp, a fellow at the moderate Center for a New American Security. “A year and a half before an election which will largely turn on the issue of unemployment, for the defense secretary to come out and say [that] these defense cuts could potentially lead to greater unemployment is a shot across the bow and a warning that the Pentagon budget is not to be cut without consequences.”

The defense industry has also started the drumbeat of DoD as job creators, as important as the rich “job creators” in our country. Loren Thompson, chief executive of The Lexington Institute, which is funded by the defense industry, recently suggested the DoD contractors as one of the potential saviors of manufacturing in America:

They [US policymakers] are willing to spend as much money as necessary to meet the nation's security needs, approaching a tenth of GDP during the early Cold War period, but they aren't willing to think about military outlays as a tool for stimulating the economy. At least, not at the national level – members of Congress routinely channel military funds to their constituents in the hopes of bolstering local economies.

The reluctance to thinking about military spending as an economic tool doesn't stop it from affecting job creation and industrial competitiveness. The Pentagon awards $400 billion in contracts for goods and services each year, an amount equal to roughly one-quarter of manufacturing's share in the GDP, so it's a safe bet that defense expenditures have a sizable impact on the economy.

This isn't a new idea of using the DoD budget as a rationalization to make more jobs. As I began to investigate the DoD in the early 1980s, during our last deep recession, the DoD, the Republican Party and the Reagan administration made a big push to suggest that the exploding cold war defense budget would stimulate the economy and cutting it would have dire effects on the weak economy.

In 1983, I edited a book called “More Bucks, Less Bang: How the Pentagon Buys Ineffective Weapons.” In the final chapter of the book, the famous whistleblower Ernest Fitzgerald wrote the final chapter, called “Overspending to Weakness.” In it, he addressed the efforts of the Reagan administration to use the DoD as a job creator, based on what was going on with the Reagan recession and his experience of the DoD to tout job creation as a cure to the economic downturn in the 1970s. His colorful writing describes the problem well and disturbingly mimics our current situation. Here are some excerpts from his chapter:

… All government contracts are good, mobile, political patronage, but military contracts are the best of all, because the need for and size of the contracts can be can be rationalized on emotional, mystical grounds.

The same mystique can be invoked in administering the contracts to make sure that contract specifications and prices adapt or conform to the actual performance of the big contractors. As a result, big contracts are as close to risk free for the giant, politically favored contractors as could be imagined. If the contracts with these pampered favorites were tightly written, then strictly enforced without softening changes, many of the stories in this book would include accounts of the bumbling, overrunning giants going broke, or at least firing their failing managers.

… [U]nemployment reached a post-World War II peak and the High Priests of Waste, the advocates of limitless military spending to “make jobs” (and corporate sales and profits) made a dramatic comeback. Redistribution of income, anathema when accomplished through “social programs” once more became respectable…. [O]n December 7, 1982, the national newspaper USA Today reported:

“Nobody is arguing that defense spending is hurting the economy now. In fact, it might be propping up some industries. While overall industrial production declined 9.6 percent between July 1981 and July 1982, defense and aerospace production rose 6 percent. New defense orders rose 2.1 percent, while overall new orders fell by 12 percent. 'In the 1983 picture, it's hard to find negatives and easy to find positives for more defense,' said George F. Brown, Jr., author of Data Resources' Defense Economics Research Report. 'With the economy depressed, defense production can only help.'”

… Military contracting may not “make” as many jobs per dollar as other kinds of expenditures, but… they're by far the easiest to get approved by Congress. In a January 31,1983 press release presenting the Pentagon's fiscal 1984 budget, the Office of the Secretary of Defense set forth the purported Reagan Administration policy:

“The primary mission of the Department of Defense is to ensure our national security, but defense spending has an impact on the economy…. Critics have claimed that defense purchases create fewer jobs than do other forms of public spending. We maintain that impact of defense spending on employment, when compared to other forms of spending, has favorable aspects…. The economic impact of defense spending is consistent and supportive of the President's overall economic recovery program. As such, it will have a favorable, long-term impact on employment.”

… Of course, military contracts, “makes jobs.” So do automobile wrecks, dope traffic, prostitution, abortions, frivolous lawsuits, arson, wars and, perish the thought, social programs. It just happens to be hard to appropriations for such activities if undifferentiated job creation is your objective. Military contracting is another matter; it is downright unpatriotic even to question it.

… So what's the problem with boondoggling? Why not redistribute income through bloated contracts for weapons whether they work or not? Such activities certainly produce, at least temporarily, a statistical glow of economic health. The problem is that this glow is like the one induced by booze in human beings. It won't last and it's not really healthy as a steady diet. The economists' statistics ignore reality. They don't measure true economic wellbeing; merely the flow of money. This money does not represent a real store of value, since it can be created by a stroke of a pen or by electronic impulses commanded by politicians. Modern mainstream economists seem to have lost the concept of creation of true and beneficial wealth. Economic activity induced by automobile wrecks… and military contract cost overruns all increase the Gross National Product (GNP), add to something call the Gross Aggregate Demand, “make jobs” and thus may be presumed to have beneficial economic effects. If neighbors could take turns mowing one another's lawns and charging for it, the economists would report and rejoice over an increase in the GMP. The explosion of Mt. St. Helen was economically “beneficial” in the same way as the last overrun on the Maverick missile.

… I don't believe our leaders fully appreciated how even a limited, partial defense-driven economy, with attendant permissive contracting, had already profoundly and adversely affected our competitive position in world markets.

… In the long run we must find a way to end our political economic dependence on contrived work. As long as we have that dependence, we shall remain vulnerable to Wehrwirtschaft and its dire consequences, including national bankruptcy and probably war.

… In the short run, citizens must keep themselves informed about military spending issues, then put pressure on their elected representatives to make sure that they vote right. The lobby for unfettered contract boondoggling is formidable. As we have seen, they are rich, smart, well-organized and are adept at manipulating Congress. However, it is heartening to remember that the beneficiaries of boondoggling are vastly out numbered by citizens who pay or otherwise deprived by the excesses of the big spenders.

It is chilling to go back and see that much of what Fitzgerald wrote over 30 years ago could be used as an excuse to keep this ridiculously high defense spending going despite bad economic times and soaring debt. If the US government decides to invest in bridges, roads, electrical grids, waterworks, and other infrastructure spending, it helps our productivity throughout the public and private sectors and make us more competitive in the world economy. When you make weapons, however, you hope that you bend the metal and then let it rust. If we go to war and use it, we have already taken blood and more treasure out of our economy, along with the wasted manufacturing. I am certain, after so many years of investigating military fraud and waste, that I don't want our economic recovery to rely on a bureaucracy that openly admits that many of its weapons and other contracts are unauditable and it is the only main government agency that cannot pass a financial audit.

The solution? I would suggest that all of us memorize and repeat Fitzgerald's final warning on using DoD contracts to bail out our economy:

“As long as there are potential robbers about, the Firm USA will need a guard force, but the Firm's stockholders should never confuse the guard force, no matter how competent or brave, with its producers.”

Take a look at this chart below and you will know that we are already dangerously confusing productivity with our guard force, when compared to the past.

On a personal note, I am glad to report that my mentor, Ernie Fitzgerald, after serving in the DoD from 1965 to 2006, (with a few years of forced vacation,) recently celebrated his 85th birthday.

Correction:

Last week's column contained a major mistake about Rep. David Price. He was incorrectly identified as a Republican and is a Democratic member of Congress. Also, the column states that he was responsible for passing an amendment to cut up to 55 percent of FEMA's budget this year. The member of Congress that put in those cuts was actually Rep. Robert Aderholt (R- Alabama), chairman of the Homeland Security subcommittee. Representative Price put in an amendment to restore the cuts to FEMA, but the amendment failed. We have corrected last week's column and I extend apologies to Representative Price for the errors.

Dina Rasor, Solutions Editor