Defense Industry: Keep Paying Us or the Economy Dies

By Spencer Ackerman, Wired

27 October 11

efense giant Lockheed Martin had a totally sweet quarter, raking in $700 million and looking forward to the same this time next year. So it raises eyebrows when Lockheed's anointed mouthpieces predict mass economic disaster if Congress touches the defense budget.

On Tuesday, the aerospace industry put out a report saying that chopping the defense budget would put over a million Americans out of work. Cuts that could total up to a trillion dollars over 10 years would "devastate the economy and the defense industrial base and undermine the national security of our country," said Marion Blakeley, president of the Aerospace Industries Association, which sponsored the report.

But while Blakeley's group paid for research to draw that dire conclusion, some of her members reported a sunnier economic outlook to their shareholders. In its third-quarter earnings report, also released Tuesday, Lockheed - manufacturers of the F-22 and F-35 jets - told investors to expect that as long as Congress passes President Obama's next defense budget, "the Corporation expects 2012 net sales to be flattish as compared to 2011 levels, and that consolidated 2012 segment operating profit margin will remain at approximately 11 percent." Boom: another $700 million in earnings, on its way.

While there's no doubt that defense cuts will mean job losses, there's also no doubt that a report prepared for an industry so reliant on defense cash will paint a stark picture of what happens if that cash is threatened. Congressmembers looking to get reelected pay attention, since fighting for defense money as a jobs program is easier than making a case for what a sensible, appropriately funded defense strategy ought to be. That's the problem with reports like these: They make it easy to ignore structural economic and defense problems and imply that all will be well if the cash keeps flowing.

To see the report's breathlessness, check out its methodology. (.pdf) The aerospace report draws a straight correlation between lost jobs and lost sales (the result of lower defense budgets for orders). But defense firms concerned about losing jobs have, like all businesses, other options for preserving them, like dipping into their earnings.

And those earnings, as evidenced by the third-quarter disclosures, are up. Lockheed's $700 million net quarterly earnings are up sharply from its $56 million haul this time last year. Boeing's net income during that time was $1.09 billion, up from $837 million. General Dynamics? $652 million in net earnings this quarter, slightly up from its $650 million last year.

Meanwhile, Lockheed paid CEO Robert Stevens $19.1 million in 2010. Boeing's Jim McNerney made $19.7 million.

In other words, defense cuts won't, by themselves, force firms to fire people. Companies will surely be stressed by the revenue loss, but their bright economic pictures give them some options.

Then there are some dubious assumptions in the report. It says job-providing "modernization" cash is 45 percent of the $550 billion annual defense budget, but as defense gadfly Winslow Wheeler emails, the Congressional Budget Office puts it at 29 percent. (.pdf) Wheeler adds that the study presumes a cost of $130,000 per lost job: "One seasoned observer opined to me that the total for salary, materials, etc. should be about twice that."

Nor does the association report actually address the defense manufacturing base that so alarmed Blakeley. It drew its million-job-loss total from "across the breadth of the U.S. economy," into ripple-effect industries like finance, health care and "retail trade, leisure and hospitality services." Meanwhile, the structural effects of the shifting defense industrial supply chain go unstudied.

Now: America's defense industrial base - the engineering and manufacturing sector of the economy that ensures the U.S. can build warships, planes and missiles - is in the midst of a decades-long globalization that policymakers have yet to come to terms with. A recent report from the Center for a New American Security (CNAS) warns that the U.S.' influence over that supply chain suffers from a key vulnerability: "its dependence upon relatively large defense procurement budgets." (.pdf) Cut the budget too deeply, and the economic effects could cascade: the most expensive military program in history, the F-35 Joint Strike Fighter jet family, is built in eight countries.

In fact, CNAS warns that engineering "large-scale, high-technology projects" domestically is a "dying art," since "many of the nation's best young people tend to avoid -old' manufacturing industries - including the aerospace sector - opting instead for what seem to be more exciting (and potentially much more lucrative) prospects in startup ventures and -cutting-edge' firms that appear to be at the technological frontier."

In other words, it's not just the prospect of declining defense budgets that ravage the most important nodes of the defense industrial base. On the low-pay end of the spectrum, it's the fact that manufacturing plants have moved to low-wage places like China - which also erodes U.S. engineering know-how. On the high end, defense firms now have to compete with Apple, Google, Facebook and anything Y Combinator funds for bright tech engineers. All that is a problem that extends way beyond defense budgets, and into fundamental questions of how the U.S. structures its economy and values work.

And assume for a moment that all the aerospace industry's lost-jobs estimates are accurate. Notice that's an economic argument, not a national security argument. The explosion in defense spending since 9/11 was predicated on an emergency - all financed by borrowed money, contributing to the fiscal mess that cuts are meant to fix - that's receding. U.S. troops will be out of Iraq on December 31; the Afghanistan war is beginning its own drawdown. Arguing for military spending primarily as a stimulus measure begs the question of why less capital-intensive industries - road repair, anyone? - shouldn't get their own big checks from the government.

The answer - at least, one that ex-Defense Secretary Robert Gates proposed - isn't to look at the military as a big jobs program. It's to ask what the country wants defense strategy to be. If the U.S. is faced with the necessity of cutting defense, then it makes sense to ask what missions ought to be scaled back or jettisoned. In a series of reports this year, the most recent of which came out on Tuesday, the doves at the Project on Defense Alternatives have at least attempted that, even if not all their ideas are good ones. The aerospace industry? Not so much.

It's natural for defense cuts to raise anxiety in a military-industrial complex that's reaped a decade of cash windfalls. And it's just as natural for defense companies to cherry-pick arguments to support their revenue. That's all in the game. But unless they're also willing to accept big tax hikes to finance their continued desired spending, then it's hard to see how reports like this get around Winston Churchill's (or maybe Sir Ernest Rutherford's) famous aphorism: "Gentlemen, we have run out of money. Now we have to think."