The ticking sequestration time bomb
posted at 12:05 pm on March 19, 2012 by Bruce McQuain
Last week, Bob Stevens, CEO of Lockheed Martin, made a rather startling announcement that has gone all but ignored in the media. Addressing sequestration, the legal requirement to cut 10% of all spending across the board (due to the failure of the so-called “Supercommittee” to reach agreement on intelligent spending cuts), Stevens said:
“It’s inducing an incredible amount — an unprecedented amount — of uncertainty in industry,” Stevens said, noting that the automatic cuts would slash $53 billion more from defense spending in the fiscal 2013 year, which begins October 1, on top of $47 billion in cuts already planned.
Stevens pointed out that it is already having a chilling effect on industry. It is also having other negative effects. For instance Lockheed Martin’s F-35, the next generation Joint Strike Fighter, has seen its procurement schedule slowed down. That has many effects that include hiring decisions and a probable increase in cost. It is also making the 9 partner nations for the project rethink their decision.
Although the sequestration cuts won’t go into effect until January of 2013, industry can’t afford to wait until then to act.
“We’re not going to hire; we’re not going to make speculative investments; we’re not going to lean forward,” Stevens told the luncheon at the Hart Senate office building, where a huge three-foot digital display ticked off the days, hours, minutes and seconds left until sequestration kicks in.
He said aerospace and defense companies were cutting overhead, curtailing research spending and capital investments, consolidating facilities and laying off workers to implement cuts already proposed for next year.
“This is a serious matter that we should not wait to address until the lame duck session or January 2013,” Stevens said in an impassioned speech to the group.
House Armed Services Committee Chairman Howard “Buck” McKeon agrees.
During an exclusive February interview McKeon expressed concern that sequestration, unless fixed immediately, would have a devastating effect, whether successfully addressed or not. The Department of Defense has already been hard hit by spending cuts directed by the Obama administration. A total of $487 billion has already planned to be cut for the next 10 years. McKeon pointed out that their research indicates that those budget cuts will cost the economy about 750,000 jobs (military, DoD civilians, Defense contractors).
Sequestration cuts will double that number. Defense will go from cutting $50 billion a year to $100 billion. McKeon says that there are certainly savings to be made. Pointing to the current defense budget the Chairman says, “If you can’t find savings in $600 billion dollars, shame on you.”
But McKeon said that these current defense budget cuts are really all we can afford. “We not only cut defense, we took the waste, we took the fraud, the abuse, the muscle, and we’re into the bone.” More cuts, such as those directed by sequestration would be devastating to our defense posture.
The Chairman pointed to what he felt were the two probable scenarios that will likely play out concerning the sequestration question.
The first scenario finds Congress continuing to work on a solution to sequestration through the year but being unsuccessful. Defense contractors, being prudent and having to answer to their boards, begin pulling back early in the year, laying off workers and doing all that is necessary to get ready for the cuts well in advance of January. When sequestration kicks in, they’ve already reduced their workforces to address it. Jobs in the hundreds of thousands are lost.
In the second scenario, Congress works through the entire year trying to fix it and is successful at the last minute. Congress, of course, is famous for its last minute fixes. But they have consequences. While those 8% cuts to defense, for instance, don’t have to be made now, the damage is already done..
As mentioned in the first scenario, prudent businesses have already acted and layoffs have already occurred.
Said McKeon, “And then you come to January and say, “Oh, we told you we weren’t going to do this, we told you we were going to fix this, why did you do that?”
Contractors can’t afford to wait to act based on hope. They have to act based on probability, and as each day passes the probability of a fix decreases. If they’ve not already made the cuts necessary to address the reality of sequestration well before the end of the year, they’re not using sound business practices.
McKeon understands that. Obviously, so does Lockheed Martin’s Bob Stevens. Marion Blakely, President of the Aerospace Industries Association said that additional defense spending cuts would “wreak havoc” on both the defense and aerospace industry and warned that cuts to the industry that is responsible for 2.2% of the GDP and 3.5 million jobs might trigger a double-dip recession. She also said the industry was already “suffering the effects”.
Companies are legally obligated to give workers 60 to 90 days notice of impending layoffs. That means all around the defense and other industries, plans are being made that must be implemented soon. Everyday that sequestration isn’t addressed means a day closer to seeing those plans executed and the layoffs begin.
Rep McKeon has introduced legislation to address the problem now. His bill, HR3662, “Downpayment to Protect National Security Act” has 70 cosponsors. It holds off sequestration’s effects on defense by reducing the Federal workforce, through attrition, by 10% over 10 years. For instance if an office of 10 loses one of their workers due to retirement or other reasons, they can’t hire a replacement.
It is a common sense solution, and it looks like the Ryan budget adopts the Chairman’s proposal, holding off sequestration by drawing savings from other areas.
What is clear is that in poor economic times such as those we’re experiencing now, it is not prudent to be shedding jobs at the rate sequestration cuts will require. And it is equally clear that it isn’t at all smart to be cutting so deeply into our defense posture. As one senior military leader recently said, “in 37 years of service, I have never seen a time as
dangerous as today.”
Congress needs to address this problem now, not in December. By then it will be too late.