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Sequestration and Job-Shifting: Boeing Edition



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Yesterday, I mentioned some of the reasons why sequestration won’t have as large and devastating effects on jobs as many claim it will have. As I explained, the defense-cut opponents’ case rests on the assumption that cuts in military spending have large costs that are not balanced out by any benefits. Moreover, the dark scenario they paint about thousands of job lost due to the cuts assumes that the people whose jobs are affected by sequestration won’t be able to find jobs anywhere else — engineers working for weapons contractors, for instance, wouldn’t find new jobs working elsewhere, and the relevant capital wouldn’t get reallocated. But that’s not correct.

Case in point: Boeing. The company is one of the largest recipients of money from the Department of Defense. Of course, it also does a thriving business with commercial clients. As the following story shows, as defense spending is being cut, Boeing is reallocating a lot of its employees from the defense side to its commercial businesses. Here is the important part:

Dennis Muilenburg heads Boeing’s defense business. He told investors at a Barclays conference that no matter what happens with the across-the-board reductions known as the sequester, cuts are coming. So Boeing is trimming another $1.6 billion out of its defense business in the next couple of years, according to spokesman Todd Blecher.

“You know, over the last two years, we’ve come down about 9,000 people in the defense side of Boeing out of a roughly 60,000 person workforce. Those have been tough actions,” Muilenburg said. “But about 8,000 of those people have ended up in Boeing Commercial Airplanes as they’ve been ramping up.

A Boeing spokesman declined to say how many more defense-side jobs will be cut.

Muilenburg says he hopes Congress will be able to come up with an alternative to the sequester, so that the Defense Department can prioritize cuts. If that happens, he says Boeing contracts should fare well.

“We have programs executing on cost and schedule and those are the kind of programs that survive,” Muilenburg said.

Muilenburg says one bright spot helping to offset the declining U.S. budget is demand from overseas for military equipment. Boeing recently delivered the first of 10 C-17 airlifters to the Indian Air Force. Those are large planes made in Long Beach, California, that can carry tanks and troops.

Muilenburg says international customers right now make up 41 percent of Boeing’s defense backlog, which totals about $71 billion.

This type of job shifting will happen, and it will reduce the impact of sequestration on jobs, at least for the large defense contractors (where most of the cuts will be going, and which happen to be the most vocal opponents of sequestration). This job shifting has happened before. My understanding is that some of that happened during the 2009–2011 factory closures after the DOD cancellation of the F-22 program. Defenders of the program claimed that some thousands of jobs would be lost in the process but the reality was different. Rather than laying off workers, Lockheed first sent them from the F-22 line in Marietta, Ga., to the F-35 line in Fort Worth, Texas, for training. Then, the company shifted jobs to the supply chain of other weapons, primarily the F-35. (Plenty of job shifting also took place in the 1990s as a result of the BRAC base closures.) 

It is also worth noting that the impact of sequestration on major defense contractors will be softened by the fact that they have lots of contracts already granted and paid for. As you can see here, the Boeing’s defense backlog totals about $71 billion. (And, of course, I wouldn’t be surprised if a lot of Boeing’s international business is subsidized by the Ex-Im Bank.)

To be sure, the dynamics I described above may not be the case for every industry and every company affected by sequestration, but it is likely what’s going to happen to the biggest defense contractors. It certainly highlights some of the misguided aspects of the rhetoric we’re hearing about sequestration.



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