Economists disagree over costs of massive defense spending cuts

The World

The Congressional Super Committee has called it quits.

Its members cannot agree on a plan to cut the ballooning deficit. That failure should trigger $1.2 trillion in automatic spending cuts, spread evenly between domestic programs and defense spending. The cuts would take effect in 2013.

The big loser would be the Pentagon, slated for an additional $500 billion in cuts over 10 years. Many are concerned about how that will impact military readiness. But there’s also concern over how defense cuts would cost American jobs.

Many Republicans estimate 800,000 jobs would be lost if the current military budget is cut by $500 billion.

Michael O’Hanlon, author of the new book “The Wounded Giant: America’s Armed Forces in an Age of Austerity,” said the number’s not unreasonable.

“We have about a million and a half people in uniform in the active force. We have about another million in the national guard and reserve. So that’s two-and-a-half million total,” he said. “Roughly another 3 million who are in defense industry or the contractor workforce … and then on top of that of course you have all the people locally who near a military base run a hot dog stand or a sandwich shop.”

When you add it all up, you’ve got about 10 million jobs that depend on spending by the Department of Defense, either directly or indirectly, he said. If the Pentagon’s budget is cut by 10 percent, roughly what the automatic cuts would amount to, you could in lose 10 percent of those jobs. About 1 million jobs, gone.

“In the short term at least,” he said.

That’s a scary number, especially in a down economy. But it doesn’t necessarily mean a million jobs would be erased from the economy as a whole. The money saved on military spending could be spent elsewhere.

Stephen Biddle at the Council on Foreign Relations used the example of a sandwich maker near a military base who loses his job.

“If you spend less on defense and in exchange you spend more on, let’s say, education. And the result of that increase in education expenditure downstream is some well-educated person who otherwise wouldn’t have been, opens a successful software company in New Jersey, hires a bunch of people, those people will eat sandwiches at lunch,” he said.

That’s down the line a few years, though.

Biddle said it’s hard for policymakers to think that way. After all, the sandwich maker near a military base is a real person, with a real story. The sandwich shop near a New Jersey software company is an economic hypothetical.

Also compounding matters is there’s no way to be sure that a dollar cut from defense will be spent in another area. But paying down the federal deficit isn’t necesarily a bad thing either.

“It’s generally believed that the higher the federal deficit, the more disadvantageous interest rates are in the economy,” Biddle said.

So, cutting defense spending could lead to easier borrowing for small businesses and potentially for homebuyers. That said, home mortgage rates are already near all-time lows.

Either way, there are clear economic losers if military spending is cut. But there are also winners. They’re just harder to find.

Overall, Biddle said, military spending isn’t the best way to stimulate the economy.

For instance, a great deal of military spending goes toward buying capital equipment: tanks, guns and fighter planes. On the other hand, when an airline buys a new jet, they’re buying a piece of capital equipement that will generate more income and business activity in the United States.

“When the Air Force buys an F-35 – unless they’re going to sell joyrides in the cockpit, which they’re probably not going to – that’s not a purchase of capital equipment that’s going to generate more income and more economic activity within the United States,” Biddle said.

That’s not to say military spending doesn’t help the economy in many ways. Loren Thompson, of the Lexington Institute, said it depends on the goal.

“If you’re trying to stimulate technological innovation, defense spending is very important,” he said.

Satellites, jet engines, and the Internet – drivers of the modern economy – all were started by military research.

“If you’re trying to create jobs, large numbers of jobs, it’s not as efficient because the money tends to go into a relatively small number of high-paying jobs, rather than a larger number of jobs in areas like construction or education,” Thompson said.

O’Hanlon agrees that military spending is not the best job creator, in the long term.

“But in the short term, when we’re in this kind of a fix, and we’re almost looking for excuses to stimulate the economy – and of course the 2009 stimulus bill did just that – it makes sense to be attentive to the fact that any kind of cut in government spending could have a negative effect right now,” he said.

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