A good friend who works for one of the largest military contractors sent me an email yesterday complaining about the sequester -- the spending cut scheduled to occur on January 2 that was triggered when the anything-but-super committee failed to agree last November on a deficit reduction plan -- that expressed grave concern about the impact the reduction will have on his area.
This was his major point (material in parentheses is mine):
...we have a somewhat different issue regarding DoD. First, (there are) thousands of contracts in acquisition attached to many more thousands of contracts with sub-contractors. Saving a dollar may require terminating or cutting $1.10 to $1.20 of program. Second, we are starting to feel the effects now as (Department of Defense contracting officers) don't enter into contracts for already appropriated funds. Third, about a quarter of DoD funds (personnel) will be exempted meaning the full burden will fall disproportionately on the rest of the defense budget. Fourth, the cut will have to be applied to the remaining three quarters of FY13 thereby magnifying the impact. Fifth, since personnel are exempt, and there is no (base realignment and closure) function included, and since the cut drops the (FY13) spending profile significantly, DoD will not be able to shape the force structure, base structure, and end strength over several years as it would certainly prefer to do. Sixth, the current DoD bureaucracy has no experience in doing this and will be swamped by (a) huge contract adjustments, (b) huge reprogramming requirements, (c) the "Mother of All" Nunn-McCurdy reports, and (d) probably many other second and third order issues I haven't even thought of.
My message on the defense side has been that the issue is less the level one drops to in defense spending than the rapidity of the descent and the mindless mixture of the cuts and how they will have to be accommodated. It will take months to sort all this out - if not a year, if not two. Meanwhile, we'll all be forced to furlough a lot of people.
My immediate response was to ask "knowing this, why didn’t the military community put pressure on the anything-but-super committee to come up with a deficit reduction plan that would have prevented the DOD cuts from being triggered?” In other words, the contractor community has to take some of the blame for not recognizing the threat to the spending it is now so worried about.
But there are also much larger issues involved.
For example, as I’ve been saying for several years, as budget reductions become more likely, we’re going to find out just how popular federal spending really is and test that popularity against what currently is the presumed desire that taxes never be raised. My guess is that the current mania about maintaining taxes at their current levels will lose out to increased spending precisely for the reasons my friend alluded to in his email: job losses and profit reductions. That will align workers and investors politically in ways that hasn’t happened before.
Second, if my friend's email is an indication (and given his political and economic preferences, even though it’s anything but a representative sample I take it as a harbinger of things to come) it’s looks like it’s finally starting to dawn on people that spending cuts not only are not costless but actually will be quite painful. If that’s true, a big change in budget and national politics could just be around the corner.
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