Congress to Defense Industry: We Can't Save You

By Sandra I. Erwin
Defense hawks on Capitol Hill havetried for months to pressure congressional leaders to call off the dreaded deficit-reductionlaw that mandates automatic budget cuts of $1.2 trillion — half for defense — over the next decade. Pro-defense Republicans on the House Armed Services Committee held hearings, hosted town hall meetings andposted videos on YouTube.
Nothing has worked, conceded a panel of lawmakers speaking to industry executives and investors June 21 at the Bloomberg Government Defense Conference, in Washington, D.C.
The political factions are so far apart that the chances of averting the so-called budget sequester before year’s end are slim to none, said Rep. James P. Moran, D-Va., who sits on the House Appropriations Committee.
“We're not talking,” Moran said. “There isn’t a deal in hand.”
House Republicans have ruled out raising tax revenues to partially offset the cuts. And Democrats have drawn a hard line against protecting the defense budget at the expense of social services or food stamps.
It’s time to face the reality that the political process has reached a dead end, said Rep. J. Randy Forbes, R-Va., chairman of the House Armed Services Committee’s readiness subcommittee.
Politicians’ tired buzzwords such as “let’s be bipartisan … let’s put everything on the table” are pointless, said Forbes. “Regardless of what you put on the table, right now we don’t have a table.”
The defense industry — which has lobbied intensively against the cuts, arguing that they willtrigger massive layoffs and weaken the U.S. economy— is going to have to be even more aggressive, said Rep. Peter Welch, D-Vt., chief deputy whip and member of the Homeland Defense and Foreign Operations Committee’s national security subcommittee.
Budget problems that should be solvable are now caught in a pitched ideological battle, and even the threat of losing defense industry jobs is not enough to end the standoff in Washington, Welch said.
Defense companies need to fight harder, he said. “The defense community has more credibility” than other sectors, Welch told the Bloomberg conference. “You’re in all of our districts, [you provide] real jobs, people want to support a strong defense posture. You guys have to go big, go bold. That’s my view.”
As if the news for defense contractors weren’t bad enough, panelists noted, efforts to ward off defense cuts also face a steep public relations battle as Americans become increasingly disengaged from the budget debate.
“When you talk to the public, there’s a glaze that comes across people's eyes when you use the word sequestration, so we stopped using it,” said Forbes. But it is not clear that even the more people-friendly term, massive defense cuts, gets the message across, he said. “This is a political crisis.”
Although sequestration would amount to about a 10 percent reduction from the defense budget next year, the pain would be borne disproportionately by Pentagon contractors because President Obama already directed that all personnel accounts be exempt from the automatic cuts. Congress also has moved to shelter war funds from sequester. The upshot is that the portion of the budget that is not being protected — mainly procurement of new equipment, research and development — will see a 15 percent cut, said Dov S. Zakheim, a former Pentagon comptroller and a senior advisor at the Center for Strategic and International Studies.
Weapon modernization and combat readiness are not high priorities, he lamented. “We’re on track to spend more on veterans than on active military in the next few years.”
Zakheim echoed other panelists’ pessimistic outlook. “I don’t think this Congress can cut a deal,” he said. “If it could it would have done it by now.”
Defense industry can’t even count on the support of defense hawks such as Sen. John McCain, R-Ariz., who opposes the automatic cuts but continues to call for the termination of big-ticket military programs such as the F-35 Joint Strike Fighter, the USS Ford aircraft carrier and the Littoral Combat Ship.
These three programs alone are tens of billions of dollars over budget, McCain groused. “The American people should be far more angry than they are.” The biggest problem for Pentagon today is not budget cuts but the acquisition system, McCain said. “Once a program reaches a certain point and has enough constituencies around the country you cant’ stop it. Some of these programs need to be stopped.”
The culture is riven with corruption, said McCain. “We have a revolving door between Pentagon and industry. … There is an environment where overruns are not a major concern.”
McCain has joined Sen. Patty Murray, D-Wash., to draft bipartisan legislation that would compel the Obama administration to articulate in detail in the coming weeks the impact of sequestration cuts, both for defense and non-defense programs.
In their fight against sequestration, defense industry leaders have pointed out that the more troublesome issue for contractors are not budget cuts per se, but that fact that the Pentagon is not planning for the reductions and has not provided any clues on what programs might be targeted once the ax falls.
“There is no guidance,” said Brett B. Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy.
He recognized that, amid the uncertainty, “people gravitate to the most negative behaviors.”
Lambert’s comments suggested that the Pentagon is not overly alarmed by the prospect of suppliers going out of business or choosing to exit the defense market as a result of the spending cutbacks.
“[Companies] are part of an economic structure,” Lambert said. “My fiduciary responsibility is to the taxpayer and the war fighter. Theirs is to the shareholder.” Lambert’s office is studying potential “points of failure” in the supplier chain, but only will act to protect a vendor if the product it provides is absolutely essential and cannot be obtained elsewhere.
After 10 years of rapid spending growth and with wars winding down, the industry has to shrink, said Gordon Adams, a former White House budget official and currently professor of international relations at American University.
A fear-mongering campaign about loss of jobs is purely political theater, he said. “We are in a defense builddown.” Sequester is poor fiscal policy, but “it’s not the end of the world.”
Lambert, in an attempt to lighten the somber mood in the audience, compared the budget crisis to Thelma and Louise. “It’s a great movie. But it ends poorly.”

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, DOD Budget, Procurement