Inside Extreme Scale Tech|Tuesday, September 2, 2014
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Sequestration and the Impact on Defense, Manufacturing, the Economy and Jobs 

Unless Congress acts to reverse its own legislation, sequestration will force automatic federal spending cuts of $1.2 trillion over the next decade, split between defense and non-defense outlays. The 2011 Budget Control Act triggered the cuts after a bipartisan Joint Select Committee on Deficit Reduction–the “super committee”–failed to reach agreement on reducing the federal deficit last November.

Under the budget caps and sequestration, real defense expenditures will decline progressively from 2012.  According to a NAM report, compared to the status quo, real defense spending will be 9 percent lower in 2015 and almost 11 percent lower by 2022. The consequences of these cuts will have a negative impact on economic growth, especially in the short run. By 2014, GDP will be almost 1 percent lower with both the budget caps and sequestration.  The report also points out that 1,010,000 private sector jobs, including 130,000 manufacturing jobs, will be lost in 2014;   and total job losses will increase the unemployment rate by 0.7 percent.  Certain industries will be hit particularly hard, with the aerospace industry losing 3.4 percent of its jobs, the ship and boat industry losing 3.3 percent of its jobs and the search and navigation industry losing 9.3 percent of its jobs.

Another report done by the Center for Regional Analysis at George Mason University, estimates even higher job loss at 2.14 million if sequestration occurred, adding 1.4 percentage points to the current unemployment rate.  The breakdown of this analysis includes the loss of 473,250 defense industry manufacturing workers, 98,593 construction workers, 82,898 retail workers, 48,059 health care workers and 15,025 state government jobs. The biggest job loss would occur among federal workers: 617,449, from food inspectors, to FBI agents and diplomats.

Sequestration cuts in the defense budget would be especially devastating to the economy because of the sector’s importance to local economies across America.  An estimated $86 billion would be removed from the economy from defense cuts alone, reducing economic growth by 25 percent. The nonpartisan Congressional Budget Office warns that defense sequestration cuts could help push the economy into another recession.

The impact on employment from cuts in defense spending includes both the loss of jobs at defense contractors – due to a decrease in purchases for equipment, supplies and services, as well as additional job loss at firms that supply the direct defense contractors.  These small and medium sized companies are the backbone of the manufacturing sector and are integral to the economic health of the country.  The job loss numbers also reflect the impact of the follow-on job losses including those in the defense manufacturing supply chain and those employed in the military.  The resulting lower disposable income and reduced consumer demand will impact innovation, reduce risk taking as well as investment in new technologies and products.

According to the Worker Adjustment and Retraining Notification (WARN) Act, the defense industry is required by law to provide employees with 60-day notice of an impending layoff, therefore, many defense contractors see that they have an obligation to start issuing layoff notices in as early as November, a week before the presidential election.  While some argue that the notices are done at the start of sequestration, not in early November, many companies aren’t taking any chances.  Most congressional Democrats and Republicans as well as the Obama administration have come out against broad cuts to the defense budget. Secretary of Defense Leon Panetta, who recently advocated for large cuts to Pentagon spending over the next decade, says the sequestration cuts would “hollow out” the Armed Forces by canceling needed modernization of air, land and sea equipment and drastically reducing research and development of new technologies.  In addition, if production of weapons systems is halted, it is expensive and time consuming to bring them back on-line and many in the supply chain will not survive the stoppage.

In short, sequestration, while attempting to address the nation’s financial challenges, will have a devastating impact on the defense sector, harming our national security while also severely damaging an important part of the manufacturing sector.  Sequestration could have far-reaching negative consequences for the U.S. economy at large. The looming cuts in defense procurement will have a multiplier effect throughout the manufacturing economy, affecting large defense contractors, but more importantly, tens of thousands of small and medium-sized manufacturers in the defense supply chains and millions of workers throughout the United States.

Hopefully Congress can address these fiscal challenges so that both the economy and our nation’s defense can survive and thrive.

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