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Defense Industry Says $1 Trillion Cut Equals 1 Million Lost Jobs

Businessweek - October 25, 2011, By Roxana Tiron

Oct. 25 (Bloomberg) -- The defense and aerospace industries are warning that the U.S. will lose 1 million jobs and $59.4 billion in wages and salaries tied to the their businesses if Congress’ supercommittee fails and automatic cuts are imposed.

The Aerospace Industries Association -- a trade group which represents Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp. -- plans to use the figures in its lobbying campaign to persuade lawmakers to avoid a scenario in which the defense budget could be cut by $1 trillion over the next decade, according to AIA spokesman Chip Sheller.

The figures come from a report prepared for the AIA by Stephen Fuller, director of the Center for Regional Analysis at George Mason University in Fairfax, Virginia, and Economic Modeling Specialists Inc., a data analysis firm based in Moscow, Idaho.

The “study shows the dramatic and devastating impact these cuts would have, not only on our industry but on the economy at large,” AIA president Marion Blakey said today in a prepared statement.

The House Armed Services Committee plans to hold a hearing tomorrow on the impact of planned and potential defense spending reductions. Fuller is scheduled to be on a panel of economists testifying.

The Pentagon already faces roughly $450 billion in budget cuts over the next decade as a result of White House directives and the budget control act that President Barack Obama signed into law Aug. 2.

Automatic Trigger

A special congressional committee has been tasked with finding $1.5 trillion in budget cuts. If Congress fails to act on cuts identified by the panel, the budget law requires an automatic reduction of an additional $500 billion in defense spending, not including interest. Those cuts would start taking effect in fiscal 2013.

The AIA’s analysis lumped together the impact of the $450 billion in cuts already planned plus the additional $500 billion that may be imposed. The report didn’t break out the incremental impact of the two elements, according to a summary of the findings.

In fiscal 2013, Pentagon research and development and procurement accounts would be reduced by $45 billion if the automatic cuts take place, according to Fuller’s analysis. The analysis looked at 14 sub-sectors of the defense and aerospace industry and did not include the Pentagon’s operations and maintenance accounts.

A $45 billion reduction in defense spending in 2013 would cut the growth of the gross domestic product by 0.6 percent, according to Fuller.

Job Losses

“The 10-year defense budget cut will be felt in terms of layoffs starting in 2012, escalate and conclude by 2014,” Fuller said.

The U.S. employment base would lose about 1 million full-time jobs. About 325,745 of those would be lost directly or indirectly from the defense contractors. About 653,570 jobs, or 65 percent of all losses, would be caused by “induced spending effects generated” by the defense and aerospace industry “as a result of changes in payroll spending across all sectors of the economy,” according to Fuller.

The $45 billion in cuts would lead to $59.4 billion in wage and salary losses, Fuller said. The majority of those losses, or $48.4 billion, would occur outside of the military equipment supply chain in areas such as retail, construction, health and education as well as leisure and hospitality, according to Fuller.

Regional Impacts

Ten U.S. states would account for 58.5 percent of the job and income losses. California would lead with about 126,000 lost jobs, followed by Virginia with about 123,000, according to the analysis. The other eight states are Texas, Florida, Massachusetts, Maryland, Pennsylvania, Connecticut, Arizona and Missouri. The cuts in jobs are calculated proportionally to where those jobs currently are.

The economic impact of Defense Department spending reduction for military equipment “will significantly exceed the initial dollar value of these spending reductions as measured by lost jobs and personal income, reduced non-wage expenditures and a decreased rate of economic growth,” Fuller wrote in a summary of the research findings.

The report gives an “incomplete picture of the impacts of defense cuts,” said Kevin Brancato, a defense economist at Bloomberg Government, who read the report. “Much of the money not borrowed for defense will be spent in other sectors of the economy.”

‘Devastating’

Several key lawmakers have urged the supercommittee to avoid further cuts to the defense budget beyond the roughly $450 billion already planned and have raised alarm about the impact of the automatic cuts on military capabilities and the defense industrial base.

The leaders of the House and Senate Armed Services Committees have called for no more cuts in defense while Senator Daniel Inouye, the chairman of the Senate Appropriations panel, said that cutting defense more than already planned would be “detrimental” to national security. Defense Secretary Leon Panetta on multiple occasions said that automatic reductions would be “devastating.”

-- Editors: Terry Atlas, Steven Komarow
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The information above is for general awareness only and does not necessarily reflect the views of the Office of Economic Adjustment or the Department of Defense as a whole.