Defense Industry and the Federal Debt
I applaud Larry Farrell’s prescient “President’s Perspective” column in February, “Predicted Fiscal Train Wreck Fast Becoming a Grim Reality.” He starkly laid out the expected decline in future budgets. The statement by Adm. Michael Mullen [chairman of the Joint Chiefs of Staff] that we have an “unsustainable rate of defense spending” is the hard reality for the defense industry. The unchecked federal debt is the cause for this dire prediction.
It is hard to imagine the bad news to come when today we have a record 2011 defense budget and an administration and Congress currently outdoing each other to protect Defense Department funding. But the reality is that as the wars in Iraq and, arguably in Afghanistan, wind down, defense funding will no longer be sacrosanct. As the public eventually clamors for action on the crushing federal debt, politicians will quickly change their views. Current plans for procurement, force levels, and budgets will become historical footnotes. Recall the Niall Ferguson quote from Newsweek included in Farrell’s column: “This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force.”
The question for the defense industry is, “What can we do to keep our customer fiscally sound?” The answer is we need to help the country develop a timely and orderly debt solution process. And to do that, we need to help calm the intense political rhetoric that prevents any type of viable solution. The media, public and body politic need to be educated on the impact of the debt, and the necessary difficult steps to restore financial sanity.
A review of budget math leads to the inescapable conclusion that federal spending must be cut and revenues increased. One or the other is not enough. We can’t grow our way out of the debt with an improving economy because the hole is too deep. But much of the electorate has been convinced that there really is a free lunch, and someone else’s sacrifice will fix the federal debt. Ultimately, the rhetoric needs to change so that a politician can say, “We need to cut Social Security and increase taxes,” and not be vilified. As opposed to philosophical and cultural issues, the debt is straightforward and hard to argue. It is math, and is very predictable.
Defense companies can help shift the terms of the public discourse through education. We can convincingly argue that there is no free lunch, and it is better to pay now than pay later. We can let our political representatives know that we understand the short -term pain, but it is far better than the alternative train wreck.
We can discuss this during meetings with members of Congress, with letters to the editor of local newspapers, and at meetings with local media and politicians. We can educate our employees about the impact on our businesses of an unchecked debt crisis. Our businesses are respected and important, even vital employers in most congressional districts, and politicians and citizens listen to us. In many cases, we are experienced in dealing with the media and the political process as we have requested support for our programs over the years. We are powerful.
Some serious work has already been completed to lead the country to a successful bipartisan debt solution. The most noteworthy was unveiled in December 2009 by the non-partisan Peterson-Pew Commission on Budget Reform. Thirty-two former members of Congress, directors of the Office of Management and Budget, directors of the Congressional Budget Office, and a former chairman of the Securities and Exchange Commission worked for a year developing an approach to control the deficit. Their report has been lauded by reviewers, and provides a viable political path to controlling the budget within a specific time frame. The 31-page report is available online and should be required reading for senior defense executives.
The Senate bill to create a bipartisan fiscal task force co-sponsored by Sens. Gregg, R-N.H., and Kent Conrad, D-N.D., is also a viable model. It received a majority vote in the Senate, but was short of the filibuster-proof 60 votes. It is modeled after the Base Realignment and Closure (BRAC) Commission, which was created because Congress would not permit the Defense Department to close unneeded bases. In contrast to the president’s bipartisan debt reduction commission, the Gregg-Conrad bill was stronger as it would have required an up or down vote in the Congress.
Is helping to educate the public in order to permit progress towards debt solutions worth committing manpower and political capital? It depends on how you believe your business will perform in the inevitable train wreck of trillion-dollar deficits. How much is it worth to help ensure your only customer doesn’t go into financial collapse?
Ed Conant
Savannah, GA
The “President’s Perspective” in the February issue of National Defense was logically disquieting. It got me thinking about the biggest logical bomb we face — the national debt, a major part of which is owed to foreigners. No plan, scheme, or fund exists for the honorable payment of that $3.8 trillion at maturity. Most of us (actives, vets and other oath-takers) who were sworn to defend the nation and its Constitution are hard pressed to figure out how.
One idea floating around is to buy the debt (bonds) back, from foreigners. Then interest of roughly $185 billion annually would stay in the United States, where it belongs. It would take a little effort on the part of the Treasury to facilitate buying those bonds, but it's doable.
I remember 1943. As an eighteen-year-old draftee, earning $52 per month, I contributed about $12 monthly to buy stamps and bonds to support the war effort. I think today's potential bond-buying pool of over 400 billionaires, very many millionaires and well-to-dos, could easily bail out the government's obligation to foreigners if an appeal were made to their patriotism.
Consider China, the holder of the largest ($790 billion) bond block. They must realize they may not recover that principal from the world's greatest debtor. Rather than suffer a default, they may sell their bonds at a discount. If so, U.S. buyers’ costs would be less than their ultimate value to the buyer. During the remaining years to maturity, the buyers would receive annual interest aggregating $185 billion.
This does not eliminate that debt but it does stimulate the economy annually with $185 billion that otherwise would go to our creditors.
John Cragin
Joplin, MO