Sequestration’s Shadow on the Defense Industrial Base

Unless the President and Congress change current law, the men and women of the U.S. Armed Forces will soon face an indiscriminate, across-the-board cut of more than $500 billion over the next decade.

Known as “sequestration,” this massive reduction in defense spending comes in addition to the $487 billion in long-term military cuts already proposed by President Obama this year.

Civilian and military leaders have repeatedly warned of the dangers of these deep defense cuts. In a November 2011 letter, Secretary of Defense Leon Panetta cautioned lawmakers that sequestration cuts will be “devastating” to national defense, yielding the “smallest ground forces since 1940,” “a fleet of fewer than 230 ships, the smallest level since 1915,” and the “smallest tactical fighter force in the history of the Air Force.” Moreover, General Martin Dempsey, the chairman of the Joint Chiefs of Staff, bluntly told the Senate Armed Services Committee in February 2012, “I am prepared to say that sequestration would pose unacceptable risk” to national security.

Although the multi-year process of sequestration does not technically begin until January 2, 2013, it is already casting a dark shadow on the future readiness and responsiveness of America’s defense industrial base. As Robert J. Stevens, chairman and chief executive officer of Lockheed Martin, warned:

The sequestration process has occurred independent of any correlation with strategy, force structure, technology needs or operational reality.… The impact on industry would be devastating, with a significant disruption of ongoing programs and initiatives, facility closures and substantial additional personnel reductions that would severely impact advanced manufacturing operations, erode engineering expertise, and accelerate the loss of skills and knowledge, directly undermining a key provision of our new national security strategy, which is to preserve the industrial base, not dismantle it.

Once such effects take hold, they will not be easy or inexpensive to reverse. What’s worse, they could have dire implications for the defense industrial base’s future readiness and responsiveness to the competitive and ever-changing international threat environment and also for the U.S. military’s future combat capabilities in unforeseen crises. To help safeguard the country’s long-term national security, the White House and Capitol Hill should therefore act quickly to responsibly reverse sequestration.

Sequestration’s Dangers to America’s Defense Industrial Base

Sequestration’s shadow creates great uncertainties for the Department of Defense (DOD) and the defense industrial base—uncertainties that endanger much-needed efforts to modernize the U.S. military’s ships, planes, tanks, and other weapons platforms. As Panetta explained in an August 2011 letter to Pentagon employees, “Platforms from the build-up of the 1980s are reaching the end of their shelf life and must be replaced, and units and equipment that have been stressed by a decade of combat must be reset.” The Heritage Foundation’s Baker Spring and Michaela Bendikova elaborated:

The U.S. military will need to replace most of its equipment over the next 10 years, a result of a high operational tempo and an under-funding of the procurement accounts since the end of the Cold War. With uncertainty regarding year-to-year appropriations, DOD would not be able to credibly plan its activities over even a five-year period required by DOD’s budget process, let alone the 10-year period covered by [the Budget Control Act of 2011, the law that mandates sequestration.

Pentagon program managers, now facing the real possibility of severe reductions to near-term congressional appropriations, will likely suspend major actions for current contracts and delay bids for new contracts—even before sequestration formally begins. As the American Enterprise Institute's Mackenzie Eaglen explained, the Defense Department's "soft shutdown" on spending will delay procurement schedules and increase the risk that major programs will either be rendered "unexecutable" in the near future or further grow in cost to the point that they will need to be reduced or canceled:

[G]overnment and industry officials will make certain assumptions in the absence of action by Congress regarding what will ultimately be appropriated. The expected lower amount will drive decision-making as defense officials obligate the dollars they ultimately receive. For instance, many construction projects may be canceled outright when they might have simply been delayed in previous budgetary cycles. Finally, operating at reduced funding for a fraction of the fiscal year means personnel and [operations and maintenance] accounts will be short of dollars. The Pentagon will move money from other urgent priorities to cover the gaps in these “must-pay” shortfalls, shortchanging other priorities like modernization.

In addition to putting future contracts at risk, sequestration also undermines current defense research and investment opportunities. David Fitzpatrick, managing director at AlixPartners, a leading business consulting and analysis firm, described the effect of sequestration as paralyzing: “A lot of people in the industry and a lot of investment capital outside the industry are circling opportunities right now.” Until sequestration is settled, the industry will remain “sitting on their hands and their wallets.”

In preparation for sequestration, Boeing has closed a facility in Kansas in order to protect research and development spending. Lockheed Martin has not only slashed millions of square feet of real estate but also plans to slash millions more. And other companies are delaying important investment and hiring decisions. David Hess, president of Pratt and Whitney, UTC’s engine-making unit, lamented the uncertainty, observing: “No one wants to hire. No one feels there’s enough certainty to make significant capital investments. We’re all kind of waiting on the sidelines to see what happens.”

As Stevens, one of sequestration’s most outspoken critics, warned, “When there is increasing uncertainty in the long-term horizon, it constrains the application of research-and-development dollars.” Mick Maurer, president of Sikorsky (another UTC company), concurred: “We are reluctant to make certain commitments and investments not knowing what will happen.… Why would I hire a bunch of employees if there is a chance six months after I bring them in I would have to let them go?”

Furthermore, sequestration’s shadow is already beginning to erode a crucial component of the defense industrial base’s readiness—namely, its specialized supply chain. As Matthew Mulherin, president of Newport News Shipbuilding and corporate vice president of Huntington Ingalls Industries, told the House Armed Services Subcommittee on Seapower and Projection Forces in March 2012:

We are finding that many in the supply base have decided that it is no longer in their economic best interests to participate in this marketplace.… When suppliers determine that they can no longer rely on future work, or conclude that the regulatory and contractual environment is unavailing of profitable contracts, they must adapt and turn to other opportunities.

When elements of the defense industrial base’s supply chain disappear, they will not be easily reconstituted or replaced. In a May 2012 hearing before the Senate Armed Services Subcommittee on Readiness and Management Support, the four vice chiefs of the U.S. Armed Forces reiterated concerns about the impact that sequestration’s shadow will have not only on the defense industrial base but also on the military’s future combat capabilities. For example, General Philip Breedlove, vice chief of staff of the U.S. Air Force, warned:

[O]n the industrial base, there are some very key capabilities out there that are already very much at risk. And in the aviation business, the number of [corporate] houses that can do stealth have reduced. And another cut to the capability and the effort that we’re putting into those stealth capabilities could cause us severe problems in that industrial base.

This mirrors a June 2012 statement by Stevens: “The widespread disruption of across-the-board cuts with significant layoffs means our industry will suffer a loss of learning, a loss of talent and an erosion of quality.”

The specter of sequestration threatens the U.S. defense industrial base at a time when China, Russia, and other military competitors are ramping up their defense industries. Indeed, the Office of the Secretary of Defense observed in its 2012 annual report to Congress on Chinese military developments that “China’s defense industry has benefited from China’s rapidly expanding civilian economy, particularly its science and technology sector.”

In turn, military competitors will seek to translate improvements in their defense industrial base into strategic advantages. For example, General David Deptula (ret.), the Air Force’s former deputy chief of staff for intelligence, surveillance, and reconnaissance, described worries about the potential erosion of U.S. air superiority:

The United States has owned a monopoly on stealth for the last 25 years, and now, as both the Russians and Chinese acquire that same capability, you’re going to see that advantage we used to hold disappear very quickly, and that is going to have a very significant effect on our current operational plans.

Similarly, Seth Cropsey of Hudson Institute, who served previously as Deputy Undersecretary of the Navy, cautioned lawmakers about the dangers of losing U.S. naval superiority:

American naval forces need to remain larger than the combined power of its as-yet smaller potential competitors because of their ambition, their prospects for increasing wealth, and the possibility that their asymmetric strategy will diminish our current advantage. The U.S. is also the only seapower with a trans-oceanic, global reach. This allows us to project power, deter war, and communicate with our allies around the world—all at the same time. Surrendering this ability lays open the world’s strategic chokepoints to chaos or the will of states that possess an idea of international order that is wholly different from our own.

In sum, while a strong U.S. defense industrial base is a sine qua non to sustaining and modernizing America’s military forces, the shadow of sequestration is already threatening to undermine the defense industrial base’s readiness and responsiveness.

Uncertain Prospects for Reversing Sequestration

Conventional wisdom holds that lawmakers on Capitol Hill may ultimately modify sequestration during the “lame duck” session of Congress that will occur between the November 2012 election and the beginning of the next presidential term. Recent news reports suggest that lawmakers are meeting to find alternative reductions to federal spending in an attempt to stave off sequestration’s sudden impact.

Moreover, the Worker Adjustment and Retraining Notification (WARN) Act of 1989 may create an “X factor” in the calculus of politicians. Under the WARN Act, large-scale employers must give a minimum of 60 days notice to employees whose jobs are being targeted for possible termination. It is therefore significant that a 60-day notice before the start of sequestration would fall on November 2, 2012, four days before the presidential and congressional elections.

Nonetheless, several factors may create formidable obstacles to any effort to reverse or delay sequestration.

First, Senate Majority Leader Harry Reid (D–NV) has refused to bring to the Senate floor legislation passed by the House of Representatives that would replace the first year of sequestration cuts with alternative reductions to federal spending. Senator Reid has gone so far as to embrace sequestration, stating: “Sequester’s a tough pill to swallow, but it’s a balanced approach to reduce the deficit that shares the pain as well as the responsibility.”

So far, neither President Obama nor Senate Democrats have offered any concrete legislation to avert sequestration despite repeated statements from senior defense officials about its disastrous impact. As former Pentagon comptroller Dov Zakheim noted:

Despite the urgency of the sequester’s challenge, the administration continues to sit on its hands. No draft legislation has emerged from the White House that would at least postpone the sequester for a reasonable period to enable Congress to try its hand at another effort to reduce the deficit. The administration’s allies on the hill, particularly in the Senate, have been equally nonchalant about the coming programmatic and economic disaster.

Second, it is far from certain that a so-called “grand bargain” to stave off sequestration can be worked out among the House of Representatives, the Senate, and the President during the post-election lame-duck session of Congress. Indeed, the agenda for the lame-duck session is already becoming filled with highly contentious and divisive issues—in particular, expiration of the Bush tax cuts, expiration of the temporary payroll tax relief holiday, expiration of the annual “tax extenders” break, the Medicare “doc fix,” the farm bill reauthorization, the transportation bill reauthorization, the fiscal year 2013 appropriations bills, and the possible need to increase once again the federal debt ceiling—that will reduce what little time there is for sequestration fixes to be considered.

Third, the outlines of the debate over the national debt have been well established, and there is little reason to believe that they will change. Both the President and congressional Democrats have repeatedly stated that they will not support any deal to resolve sequestration that does not include tax increases—an option viewed to be unpalatable to congressional Republicans. Given the events of 2011 that gave rise to sequestration in the first place, it remains to be seen whether conservatives and liberals will be able to bridge their differences during the brief lame-duck session.

The outcome of the November 2012 election is anything but certain and once again may yield a deeply divided government. Nonetheless, lawmakers on both sides of the sequestration debate may decide to gamble for a better post-election bargaining position and postpone major legislation to deal with sequestration. Yet the consequences of procrastination for America’s military and defense industrial base are real and severe. As The Heritage Foundation’s James Carafano counseled: “Finding alternatives to cutting essential military capabilities, without raising taxes or further ballooning the federal deficit, is prudent and necessary. It is the kind of next step we ought to demand from Washington.”

Conclusion

As the shadow of sequestration looms already over both the U.S. military and the nation’s defense industrial base, it is time for Congress and the President to act. “The sequester is not meant to be policy,” former director of the Office of Management and Budget Jack Lew insisted last summer. “Rather, it is meant to be an unpalatable option that all parties want to avoid.”

It is clear that if the process of sequestration is fully implemented, the U.S. military will lack adequate resources to defend the United States and its global interests. As the American Enterprise Institute’s Gary J. Schmitt and Thomas Donnelly warned:

[Under full sequestration,] America’s defense “burden” will drop to just over 2.5 percent of GDP in a decade. This is a remarkable figure—half a percentage point lower than the lowest level reached in the post-World War II era and well below even the post-Cold War average. With this level of resources, the United States simply cannot continue to play the role it has over the past 60 years in keeping the great powers at peace and helping provide the global security environment that has seen America prosper.

The question of how best to reduce America’s federal debt and annual budget deficits will remain a contentious issue. Yet surely both Democrats and Republicans can agree that the men and women of the U.S. Armed Forces—and the defense industrial base that provides them the cutting-edge tools they need to keep the country safe—should not be held hostage to politics.

About Defending Defense

The Defending Defense Project is a joint effort of the Foreign Policy Initiative, the American Enterprise Institute, and The Heritage Foundation to promote a sound understanding of the U.S. defense budget and the resource requirements to sustain America’s preeminent military position. To learn more about the effort, contact Robert Zarate (rzarate@foreignpolicyi.org), Charles Morrison (charles.morrison@aei.org), or Steve Bucci (Steven.Bucci@heritage.org).