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The Sky Won’t Fall If Sequestration Goes Through



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After this afternoon’s press conference, I think conservative defense hawks should be careful what they wish for. By exaggerating the impact of the sequestration cuts on the defense budget, they are giving President Obama important leverage to win revenue increases in exchange for overturning or postponing sequestration. 

It is no secret that I think that Congress and the president should allow the sequestration cuts to go through. First, independently of the debt deal, after years of fast growth the Pentagon’s budget should be on the table for review and potential cuts like everything else (even if it is not the main driver of our future debt). Second, these spending reductions won’t be anywhere as deep as many claim they will. The CBO projections (see Table 1.3 here, or Table 1.5 in the new CBO projections) about the impact of sequestration show that in the worst-case scenario (if all the cuts are applied to the baseline in the law), there will be initial reductions between FY 2012 and FY 2013, but that defense spending will continue to grow  in nominal terms for all years after. After sequestration, the FY 2013 defense budget will be comparable to its FY 2006 level (in real terms). Adjusted for inflation, over the next ten years, the spending is projected to remain relatively constant.  

Besides, post-war reductions of defense spending are common practice, no matter how difficult they may be. In fact, if anything, the proposed cuts are less aggressive than historical standards. Stimson’ s defense analyst Russell Rumbaugh  explained back in September 2011:

In the last three builddowns, the defense budget after 10 years has been about 30% lower than its peak: the builddown in the ‘50s took $2.3 billion out of the defense budget in ten years and left it 31% lower than it was; in the ‘70s, $1.2 trillion came out leaving the budget 28% lower; and in the ‘90s, $1 trillion for 31% lower. 

If the administration’s extrapolation of the debt deal of $350 billion savings actually came to be, the defense budget would only be 8% lower than FY11.  

Check out the chart on that page. It is very instructive. 

Now, there are two downsides to sequestration. First, across-the-board cuts aren’t the best way to shrink government, since they don’t allow prioritization — cutting less important missions and programs to fully fund more critical ones. In our current fiscal situation, however, imperfect cuts still beat the alternative, doing nothing.

The bigger problem is that if Congress were to cut the Pentagon’s budget as much as it could and should be cut, it would be somewhat of a hollow victory if changes aren’t implemented in the way the Department spends its money. We don’t want an expensive military, but we still need an efficient one. The good news is that both goals could be achieved if the Pentagon weren’t being forced just to cut spending, but also had the flexibility and ability to reshape its capabilities to address the current threats. Many experts across the political spectrum (see here and here, among others) have made the case that the military could engage in such reshaping to provide not only better defense to the American people, but cheaper defense, too.

Finally, Tyler Cowen’s piece in last Sunday’s New York Times raises many important points about the concern that defense cuts would have a large impact on output. 

One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.

Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption.

To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table.

The fact that lower GDP wouldn’t mean lower living standards is a key factor to remember, especially in light of the new CBO report. As I have mentioned before, there are other reasons to reduce spending independently of its short-term impact on GDP. 



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