July 24, 2012
Studies prepared by defense industry analysts and the Bipartisan Policy Center conclude that the budget deal reached at the 11th hour last year by Congress could cost the economy between one million and two million jobs in the coming decade and stunt the already anemic economic growth.
The U.S. aerospace and defense industry directly employed about one million workers in 2010 that received $84.2 billion in wages and paid $15.4 billion in federal income taxes and $1.9 billion in state taxes, according to an analysis produced by Deloitte, the auditing and financial consulting firm. More than twice that number – 2.48 million people – work indirectly for the defense industry, bringing the total number of defense-related jobs that could be affected by the cutbacks to 3.5 million.
The defense industry has already begun downsizing in response to previous budget cuts and in anticipation of further reductions resulting from the budget deal reached last August by President Obama and Congress that raised the debt ceiling and averted the first default on U.S. debt in history. That deal now requires $1.2 trillion of automatic long term spending cuts -- divided equally between defense and domestic programs -- known as sequestration. During the past two years, aerospace and defense contractors eliminated 34,759 jobs, although some of those reductions were offset by new hiring.
Industry executives have been talking for months about pressuring the president and lawmakers to grant the Pentagon and its contractors a reprieve from the automatic cuts. Last week, a handful of key industry executives warned that they would have no choice but to announce plans for layoffs before the election. The federal Worker Adjustment and Retraining Notification Act (WARN) requires major employers to notify employees 60 days in advance of plant closings and mass layoffs – although some executives would prefer to do that even sooner. They say they have a legal and moral obligation to give people maximum fair warning.
Some say this would seriously hurt Obama by underscoring his failure to bring down the unemployment rate, which continues to hover above 8 percent. However, Veteran Republican pollster John Zogby argues the layoff warnings could explode in the Republicans’ faces by highlighting the effects of divided government and the crisis atmosphere that has attended much of the budget and economic negotiations between Obama and Congress over the past three and a half years.
“You’ve got major Republican figures who have built their reputations on the promise that not one dime of defense would be cut,” he said.”This is the sort of thing that could really backfire against Republicans, just as the government shutdowns have. The President can say, sure this hurts the military, that’s why I had tried to work out a deal, but I couldn’t cut a deal with Congress that made any sense,” Zogby added.
During testimony before the House Armed Services Committee last week, Robert J. Stevens, chairman and CEO of Lockheed Martin Corp., the Defense Department’s largest contractor, said “we might be required to lay off about 10,000 employees” in response to an anticipated 10 to 15 percent reduction in defense spending next year. But because his company can’t anticipate which divisions and plants would be hardest hit by the cutbacks, Stevens said Lockheed Martin might be obliged to notify “a substantially higher number of our [120,000] employees beginning late in the third quarter of this year that they may not have a job if sequestration takes place.”
Top officials at Pratt & Whitney and EADS North America, two other major defense contractors, also said major layoffs were in the works. And Marion Blakey, the president and chief executive officer of the Aerospace Industries Association, told The Fiscal Times last week that “it’s probably fair to say hundreds of thousands of notices will be going out.”
“You don’t know which projects and which programs are going to actually be severely affected,” said Blakey, whose organization represents 350 defense and aerospace contractors and businesses. “The Pentagon has discretion and they will affect different programs.” The problem dates back to last summer, when Obama and the Republicans approved $1 trillion of deficit savings as part of an agreement to raising the debt ceiling, but left the real heavy lifting of an additional $1.2 trillion of long-term cuts to a “super committee” of House and Senate Democrats and Republicans.
When the super committee failed to reach an agreement, the law required the first wave of 10 years’ worth of automatic spending cuts to kick in Jan. 1 — at the same time that the Bush era income tax cuts and a host of other tax benefits are set to expire.
The House last week overwhelmingly approved legislation requiring the Obama administration to spell out how it would implement the roughly $110 billion in Pentagon and non-defense spending cuts scheduled for early next year. House Speaker John Boehner, R-Ohio, complained to reporters that the president has failed to provide leadership in preparing the country for the looming fiscal challenges.
But Jeffrey Zients, the acting OMB director, said that the president has twice given Congress a detailed set of proposals to reduce the deficit by more than $4 trillion, and that lawmakers and the White House could be making better use of their time than in squabbling over the sequester.
“The truth is that no amount of planning or reports will turn the sequester into anything other than the devastating cut in defense and domestic investments that it was meant to be,” Zients recently said in an op-ed piece published in POLITICO. “What’s needed is action to avoid the sequester by passing balanced deficit reduction that the president can sign into law, not searching for way to cushion the blow on defense –and nondefense—programs.”