Sequester s Shadow on the Defense Industrial Base - Foreign Policy

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					        Sequester’s Shadow on the Defense Industrial Base
                                          July 12, 2012

Unless the President and Congress change current law, the men and women of the U.S. Armed
Forces soon will face an indiscriminate, across-the-board cut of more than $500 billion over the
next decade. Known as “sequestration,” this massive reduction in defense spending comes in
addition to the $487 billion in long-term military cuts already proposed by President Obama this
year.

Civilian and military leaders have repeatedly warned of the dangers of these deep defense
cuts. In a November 2011 letter, Secretary of Defense Leon Panetta cautioned lawmakers that
sequestration cuts will be “devastating” to national defense, yielding “[t]he smallest ground
forces since 1940,” “a fleet of fewer than 230 ships, the smallest level since 1915,” and “[t]he
smallest tactical fighter force in the history of the Air Force.” Moreover, General Martin
Dempsey, the Chairman of the Joint Chiefs of Staff, bluntly told the Senate Armed Services
Committee in February 2012, “I am prepared to say that sequestration would pose
unacceptable risk” to national security.

Although the multi-year process of sequestration does not technically begin until January 2,
2013, it is already casting a dark shadow on the future readiness and responsiveness of
America‟s defense industrial base. As Robert J. Stevens, Chairman and Chief Executive Officer
of Lockheed Martin, warned:

       “The sequestration process has occurred independent of any correlation with strategy,
       force structure, technology needs or operational reality.... The impact on industry would
       be devastating, with a significant disruption of ongoing programs and initiatives, facility
       closures and substantial additional personnel reductions that would severely impact
       advanced manufacturing operations, erode engineering expertise, and accelerate the
       loss of skills and knowledge, directly undermining a key provision of our new national
       security strategy, which is to preserve the industrial base, not dismantle it.”

Once such effects take hold, they will not be easy or inexpensive to reverse. What‟s worse, they
could have dire implications not just for the defense industrial base‟s future readiness and
responsiveness to the competitive and ever-changing international threat environment, but also
for the U.S. military‟s future combat capabilities in unforeseen crises. To help safeguard the
country‟s long-term national security, the White House and Capitol Hill therefore should act
quickly to responsibly reverse sequestration.

Sequestration’s Dangers to America’s Defense Industrial Base

Sequestration‟s dangers to the U.S. Department of Defense (DoD) are well known, but its
dangers to America‟s defense industrial base—especially the industrial base‟s future readiness
and responsiveness to the competitive and ever-changing international threat environment—
are less known, yet no less real. Indeed, while the process of sequestration does not formally
begin until January 2, 2013, it is already starting to have “shadow” effects on the defense
industrial base.

Sequestration‟s shadow creates great uncertainties for the Defense Department and the
defense industrial base—uncertainties that endanger much-needed efforts to modernize the
U.S. military‟s ships, planes, tanks, and other weapons platforms. As Secretary Panetta explained
in an August 2011 letter to Pentagon employees, “Platforms from the build-up of the 1980s are
reaching the end of their shelf life and must be replaced, and units and equipment that have
been stressed by a decade of combat must be reset.” As the Heritage Foundation‟s Baker
Spring and Michaela Bendikova elaborated:

       “The U.S. military will need to replace most of its equipment over the next 10 years, a
       result of a high operational tempo and an under-funding of the procurement accounts
       since the end of the Cold War. With uncertainty regarding year-to-year appropriations,
       DoD would not be able to credibly plan its activities over even a five-year period
       required by DOD‟s budget process, let alone the 10-year period covered by [the Budget
       Control Act of 2011, the law that mandates sequestration].”

Pentagon program managers, now facing the real possibility of severe reductions to near-term
congressional appropriations, will likely suspend major actions for current contracts and delay
bids for new contracts—even before sequestration formally begins. As the American Enterprise
Institute‟s Mackenzie Eaglen explained, the Defense Department‟s “soft shutdown” on spending
will delay procurement schedules and increase the risk that major programs will either be
rendered “unexecutable” in the near future, or further grow in cost to the point that they will
need to be reduced or canceled. Eaglen added:

       “... [G]overnment and industry officials will make certain assumptions in the absence of
       action by Congress regarding what will ultimately be appropriated. The expected lower
       amount will drive decision-making as defense officials obligate the dollars they ultimately
       receive. For instance, many construction projects may be canceled outright when they
       might have simply been delayed in previous budgetary cycles. Finally, operating at
       reduced funding for a fraction of the fiscal year means personnel and O&M [operations
       and maintenance] accounts will be short of dollars. The Pentagon will move money from
       other urgent priorities to cover the gaps in these „must-pay‟ shortfalls, shortchanging
       other priorities like modernization.”

In addition to putting future contracts at risk, sequestration also undermines current defense
research and investment opportunities. David Fitzpatrick, Managing Director at AlixPartners, a
leading business consulting and analysis firm, described the effect of sequestration as paralyzing:
“A lot of people in the industry and a lot of investment capital outside the industry are circling
opportunities right now.” Until sequestration is settled, the industry will remain “sitting on their
hands and their wallets.”

In preparation for sequestration, Boeing has closed a facility in Kansas in order to protect
research and development spending. Lockheed Martin not only has slashed millions of square
feet of real estate, but also plans to slash millions more. And other companies are delaying
important investment and hiring decisions. David Hess, President of Pratt & Whitney, UTC‟s
engine-making unit, lamented the uncertainty, observing: “No one wants to hire. No one feels
there‟s enough certainty to make significant capital investments. We‟re all kind of waiting on
the sidelines to see what happens.”




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As Lockheed Martin CEO Robert Stevens, one of sequestration‟s most outspoken critics, warned,
“When there is increasing uncertainty in the long-term horizon, it constrains the application of
research-and-development dollars.” Mick Maurer, President of Sikorsky (another UTC company),
concurred: “We are reluctant to make certain commitments and investments not knowing what
will happen.... Why would I hire a bunch of employees if there is a chance six months after I
bring them in I would have to let them go?”

Furthermore, sequestration‟s shadow is already beginning to erode a crucial component of the
defense industrial base‟s readiness—namely, its specialized supply chain. As Matthew Mulherin,
President of Newport News Shipbuilding and Corporate Vice President of Huntington Ingalls
Industries, told the House Armed Services Subcommittee on Seapower and Projection Forces in
March 2012:

       “We are finding that many in the supply base have decided that it is no longer in their
       economic best interests to participate in this marketplace.... When suppliers determine
       that they can no longer rely on future work, or conclude that the regulatory and
       contractual environment is unavailing of profitable contracts, they must adapt and turn
       to other opportunities.”

When elements of the defense industrial base‟s supply chain disappear, they will not be easily
reconstituted or replaced. In a May 2012 hearing before the Senate Armed Services
Subcommittee on Readiness and Management Support, the four Vice Chiefs of the U.S. Armed
Forces reiterated concerns about the impact that sequestration‟s shadow will have not only on
the defense industrial base, but also on the military‟s future combat capabilities. For example,
General Philip Breedlove, the Vice Chief of Staff of the U.S. Air Force, warned:

       “[O]n the industrial base, there are some very key capabilities out there that are already
       very much at risk. And in the aviation business, the number of [corporate] houses that
       can do stealth have reduced. And another cut to the capability and the effort that
       we‟re putting into those stealth capabilities could cause us severe problems in that
       industrial base.”

This mirrors a June 2012 statement by Lockheed Martin‟s Robert Stevens: “The widespread
disruption of across-the-board cuts with significant layoffs means our industry will suffer a loss of
learning, a loss of talent and an erosion of quality.”

The specter of sequestration threatens the U.S. defense industrial base at a time when China,
Russia, and other military competitors are ramping up their defense industries. Indeed, the
Office of the Secretary of Defense observed in its 2012 annual report to Congress on Chinese
military developments that “China‟s defense industry has benefited from China‟s rapidly
expanding civilian economy, particularly its science and technology sector.”

In turn, military competitors will seek to translate improvements in their defense industrial base
into strategic advantages. For example, General David Deptula (ret.), the Air Force‟s former
Deputy Chief of Staff for Intelligence, Surveillance and Reconnaissance, described worries about
the potential erosion of U.S. air superiority:

       “The United States has owned a monopoly on stealth for the last 25 years, and now, as
       both the Russians and Chinese acquire that same capability, you‟re going to see that
       advantage we used to hold disappear very quickly, and that is going to have a very
       significant effect on our current operational plans.”




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Similarly, Seth Cropsey of Hudson Institute, who served previously as Deputy Undersecretary of
the Navy, cautioned lawmakers about the dangers of losing U.S. naval superiority:

       “American naval forces need to remain larger than the combined power of its as-yet
       smaller potential competitors because of their ambition, their prospects for increasing
       wealth, and the possibility that their asymmetric strategy will diminish our current
       advantage. The U.S. is also the only seapower with a trans-oceanic, global reach. This
       allows us to project power, deter war, and communicate with our allies around the
       world—all at the same time. Surrendering this ability lays open the world‟s strategic
       chokepoints to chaos or the will of states that possess an idea of international order that
       is wholly different from our own.”

In sum, while a strong U.S. defense industrial base is a sine qua non to sustaining and modernizing
America‟s military forces, the shadow of sequestration is already threatening to undermine the
defense industrial base‟s readiness and responsiveness.

Uncertain Prospects for Reversing Sequestration

Conventional wisdom holds that lawmakers on Capitol Hill may ultimately modify sequestration
during the so-called “lame-duck” session of Congress that will occur between the November
2012 election and the beginning of the next presidential term. Recent news reports suggest that
lawmakers are meeting to find alternative reductions to federal spending in an attempt to stave
off sequestration‟s sudden impact. Moreover, the Worker Adjustment and Retraining
Notification (WARN) Act of 1989 may create an “x-factor” in the calculus of politicians. Under
the WARN Act, large-scale employers must give a minimum of 60 days notice to employees
whose jobs are being targeted for possible termination. It is therefore significant that a 60-day
notice before the start of sequestration would fall on November 2, 2012, four days before the
presidential and congressional elections.

Nonetheless, several factors may create formidable obstacles to any effort to reverse or delay
sequestration.

First, Senate Majority Leader Harry Reid (D-NV) has refused to bring to the Senate floor legislation
passed by the House of Representatives that would replace the first year of sequestration cuts
with alternative reductions to federal spending. Senator Reid has gone so far as to embrace the
sequester, stating: “Sequester's a tough pill to swallow, but it's a balanced approach to reduce
the deficit that shares the pain as well as the responsibility.

So far, neither President Obama nor Senate Democrats have offered any concrete legislation to
avert sequestration despite repeated statements from senior defense officials about the
sequester‟s disastrous impact. As former Pentagon Comptroller Dov Zakheim noted:

       “Despite the urgency of the sequester‟s challenge, the administration continues to sit on
       its hands. No draft legislation has emerged from the White House that would at least
       postpone the sequester for a reasonable period to enable Congress to try its hand at
       another effort to reduce the deficit. The administration‟s allies on the hill, particularly in
       the Senate, have been equally nonchalant about the coming programmatic and
       economic disaster.”

Second, it is far from certain that a so-called “grand bargain” to stave off sequestration can be
worked out among the House of Representatives, the Senate, and the President during the post-
election, lame-duck session of Congress. Indeed, the agenda for the lame-duck session is



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already becoming filled with highly contentious and divisive issues—in particular, expiration of
the Bush tax cuts, expiration of the temporary payroll tax relief holiday, expiration of the annual
“tax extenders” break, Medicare “Doc Fix,” the farm bill reauthorization, the transportation bill
reauthorization, the fiscal year 2013 appropriations bills, and the possible need to increase once
again the federal debt ceiling—that will reduce what little time there is for sequestration fixes to
be considered.

Third, the outlines of the debate over the national debt have been well established, and there is
little reason to believe that they will change. Both the President and Congressional Democrats
have repeatedly stated that they will not support any deal to resolve sequestration that does not
include tax increases—an option viewed to be unpalatable to Congressional Republicans.
Given the events of 2011 that gave rise to sequestration in the first place, it remains to be seen
whether conservatives and liberals will be able to bridge their differences during the brief lame-
duck session.

The outcome of the November 2012 election is anything but certain, and once again may yield
a deeply-divided government. Nonetheless, lawmakers on both sides of the sequestration
debate may decide to gamble for a better post-election bargaining position, and postpone
major legislation to deal with sequestration. Yet the consequences of procrastination for
America‟s military and defense industrial base are real and severe. As the Heritage
Foundation‟s James Carafano counseled: “Finding alternatives to cutting essential military
capabilities, without raising taxes or further ballooning the federal deficit, is prudent and
necessary. It is the kind of next step we ought to demand from Washington.”

Conclusion

As the shadow of sequestration looms already over both the U.S. military and the nation‟s
defense industrial base, it is time for Congress and the President to act. “The sequester is not
meant to be policy,” former Director of the Office of Management and Budget Jack Lew
insisted last summer. “Rather, it is meant to be an unpalatable option that all parties want to
avoid.”

It is clear that if the process of sequestration is fully implemented, the U.S. military will lack
adequate resources to defend the United States and its global interests. As the American
Enterprise Institute‟s Gary J. Schmitt and Thomas Donnelly warned:

        “… [under full sequestration] America‟s defense „burden‟ will drop to just over 2.5
        percent of GDP in a decade. This is a remarkable figure—half a percentage point lower
        than the lowest level reached in the post-World War II era and well below even the post-
        Cold War average. With this level of resources, the United States simply cannot continue
        to play the role it has over the past 60 years in keeping the great powers at peace and
        helping provide the global security environment that has seen America prosper.”

The question of how best to reduce America‟s federal debt and annual budget deficits will
remain a contentious issue. Yet surely both Democrats and Republicans can agree that the
men and women of the U.S. Armed Forces—and the defense industrial base that provides them
the cutting-edge tools they need to keep the country safe—should not be held hostage to
politics.




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                                         About Defending Defense

The Defending Defense Project is a joint effort of the Foreign Policy Initiative, the American Enterprise
Institute, and the Heritage Foundation to promote a sound understanding of the U.S. defense budget and
the resource requirements to sustain America‟s preeminent military position. To learn more about the effort,
contact Robert Zarate (rzarate@foreignpolicyi.org), Charles Morrison (charles.morrison@aei.org), or James
Carafano (James.Carafano@heritage.org).

   The Foreign Policy Initiative      The American Enterprise Institute        The Heritage Foundation
 11 Dupont Circle, NW, Suite 325             1150 17th St, NW                 214 Massachusetts Ave NE
     Washington, DC 20036                  Washington, DC 20036                 Washington, DC 20002
       Tel: (202) 296-3322                  Tel: (202) 862-5800                   Tel: (202) 546-4400




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