Since the early days of President Obama’s term, the defense industry has girded for the end of the Pentagon’s decade-long spending spree. Several executives publicly said they viewed defense cuts as necessary for the nation to get its fiscal house in order following the 2008 collapse of the economy. The tone was set by former Defense Secretary Robert Gates, who warned in 2009 that the money spigot was about to close, and ordered the termination of several big-ticket programs.
Many industry executives in fact agreed with former Chairman of the Joint Chiefs Adm. Michael Mullen who said that gaping budget deficits and piling debt are bigger threats to national security than any country or terrorist organization. To a degree, industry was willing to support the president’s proposed defense budget cuts on principle. Defense executives, not unlike managers in other sectors, fear budget deficits as they eventually cause interest rates to spike and the economy to spin out of control.
But over the past nine to 10 months, corporations have begun to lose confidence in government, and executives are faulting the president for not doing more to untangle the current morass that could leave many contractors sinking in the muck.
Industry officials are now blaming Obama for allowing the defense budget to become a pawn in a cynical budget game. As the Pentagon faces $52 billion in automatic cuts for fiscal year 2013 — beyond the $26 billion reduction that the administration already had sought — industry is turning on the administration for pretending the so-called “sequestration” threat does not exist.
Some executives throw up their hands in frustration as they hear Defense Secretary Leon Panetta’s fear-inducing declarations that the mandatory spending reductions would be catastrophic to the military, while the president insists that any legislation that repeals the cuts without revenue offsets would be vetoed.
Even those who are willing to give the president a break and blame Congress entirely for dysfunctional governing still knock the administration for persistent assertions that the Defense Department is not planning for sequestration.
Burying one’s head in the sand until Congress takes this up during the lame duck session is not an acceptable course of action for most Pentagon contractors, said one executive during a recent industry meeting. Not planning for sequestration is “unprofessional and it is bad government,” he said. “Industry can’t wait for the lame duck session.”
If the Pentagon has to take a $52 billion hit in next year’s budget, most of the pain likely will fall on weapon programs, companies fear. Payroll and benefits are less vulnerable as the president has the power to protect those accounts. For industry, this means that as early as October, companies must begin to notify unionized workers of potential layoffs or plant shutdowns. “For many companies, this is like Russian roulette with a round in every chamber,” the executive said. “Who do you notify when you don’t know what they’re cutting?”
Legislative gridlock in and of itself already has cost the industry billions of dollars, regardless of whether sequestration ends up being reversed by year’s end. Pentagon buyers are jittery about committing funds that they might not have next year, and for the past several months have been hesitant to execute contracts. A handful of large contractors are slashing costs as they try to save money to weather the storm. Mid- and small-size firms are in a more perilous situation, analysts said.
“There are certain companies that are the sole providers of subsystems on major acquisition programs that are at risk,” said Jeremy W. Devaney of BB&T Capital Markets. “If companies can survive the next 12 to 18 months,” they might be home free, as the budget picture for defense does improve later in the decade, according to administration forecasts, said Devaney.
Industry lobbyists have swarmed the Capitol in hopes of a breakthrough, with little success. Some have pursued freshman tea party Republican members who have worsened the gridlock by taking a hard line against raising any taxes to pay for government programs. “I believe many have no idea about the impact of this,” said one industry lobbyist. Things are not much easier with Democrats, who, according to the lobbyist, have “great concern” about sequestration but have kept quiet as they have been told to toe the party line.
Although the industry’s staunchest allies right now are Republican defense hawks such as Rep. Buck McKeon, their strident rhetoric against sequestration has not broken the logjam. Expectancies of a bipartisan deal that would scrap sequestration and offset spending cuts with tax revenues are rapidly fading, Devaney said. “We don’t view a grand bargain as a possibility.”
As many contractors see it, these games of budget chicken mark a tipping point in industry-government relations.
Contributing to their angst, Pentagon contractors believe, despite Panetta’s statements to the contrary, that the defense market is increasingly hostile. “They all say there is no war on profits but that is not true in practice,” one executive said. “Relationships are fraying.”
Unfriendly policies ultimately might be the least of the industry’s troubles. The automatic defense cuts — about $500 billion over a decade — are only a fraction of what the nation needs to bring its deficit under control.
“We really need $3 trillion to $4 trillion in savings to stabilize our debt,” said Jason Peuquet of the Committee for a Responsible Federal Budget.
Chronic political infighting aside, there may be an underlying reason why Democrats and Republicans are in no hurry to fix sequestration before the end of the year. In this campaign season, foreign and defense policies don’t sway most voters. “Absent a real crisis,” said a Center for Strategic and International Studies white paper, both parties appear content to make 2012 a domestic-issues election.