Bacon's Rebellion

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Repeat after Me: A Smaller Increase in Defense Spending Is Not a “Cut” in Defense Spending.

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by

James A. Bacon
in

Defense cuts may have less impact on Virginia’s economy than many commentators, including myself, have feared. Much ado has been made of what “sequestration” — automatic spending cuts imposed upon the defense budget if Republicans and Democrats can’t agree on any other form of debt reduction — will have upon the Old Dominion’s defense-dependent economy. Under sequestration, the feds would have to slash 10% from the $5 trillion in spending plans through 2021.

A widely quoted study published by George Mason University’s Center for Regional Analysis estimates that Virginia would lose 207,000 defense-related and non-defense jobs if such cuts were implemented.

But Tim Loughran quotes a contrarian view in “Peering over the Fiscal Cliff” published in the current edition of Virginia Business magazine (no link). According to Veronique de Rugy, a senior research fellow with GMU’s Mercatus Center, core Pentagon spending (excluding the cost of overseas wars) under a sequestration scenario would plunge all the way to$492 billion in FY 2013, a figure (adjusted for inflation) not seen since… 2007.

Oh, the horror!

Writes Loughran:

The Pentagon’s core budget currently is on track to rise about 2 percent every year through 2021, or a total of $5.27 trillion, according to de Rugy. If sequestration cuts are fully enacted — which de Rugy doubts will ever happen — the budget still would increase by an annual average of about 1 percent to $4.85 trillion.

That will represent a major slowdown since the post 9/11 boom in defense, intelligence and homeland security spending, and Virginia will lose a major propellant to economic growth. But growth in the range of 1.0 to 2.0 percent annually hardly looks like Armageddon in an economy struggling to grow 2.0 to 2.5 percent a year.

Assuming this is all accurate, my concern is for the longer term. There is no way to balance the federal budget without slashing domestic spending, reforming entitlements, reforming the tax code and cutting military spending. If Congress can’t muster the will to make real cuts in military spending — not just reductions in projected increases — it won’t have the cajones to cut much else. We may avoid sequestration. But can we avoid Boomergeddon?

— JAB

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  1. Peter Galuszka Avatar
    Peter Galuszka

    Ji,
    One big problem with the logic here: your statement “excluding the cost of overseas wars.” That’s a pretty big exclusion — some years ago the estimate of Iraq and Afghanistan which we have not yet begun to pay for is $3 trillion.
    How do you account for that?
    As for the Virginia Business piece, I found the writing and writing impenetrable. How does the GMU or the magazine define “core budget spending?”
    Against this backdrop, your otherwise worthy points are undercut by your breathless and somewhat inaccurate headline.

    1. James A. Bacon Avatar
      James A. Bacon

      I believe that GMU defines “core defense spending” as everything except overseas wars. That’s why I added that proviso — as explanation.

  2. Peter Galuszka Avatar
    Peter Galuszka

    That should be the writing and analysis impenetrable. Don’t they edit this stuff?

  3. Peter Galuszka Avatar
    Peter Galuszka

    I see. Wasn’t clear. It kinda undercuts GMU’s analysis, don’t you think?

  4. larryg Avatar
    larryg

    Here’s something else you don’t hear much about:

    http://www.usnews.com/news/articles/2012/06/12/military-soon-will-pay-more-for-former-soldiers-than-current-ones

    ” Military Soon Will Pay More For Former Soldiers Than Current Ones

    Study Group: As Force Shrinks, Personnel Bills Will Grow

    remember.. what other job allows you to retire on full pension and lifetime medical care for you and deep discount HC for your family no matter whether you served any time in a combat zone or not?

    It’s an interesting problem.

    The more roads we build – the higher and ever increasing the maintenance costs.

    the more people that retire.. the more pressure on SS and Medicare

    but the military ? that’s different, right?

  5. larryg Avatar
    larryg

    re: ” But growth in the range of 1.0 to 2.0 percent annually hardly looks like Armageddon in an economy struggling to grow 2.0 to 2.5 percent a year.”

    Is that what Allen, Cantor, and other GOP Va legislators are saying?

    Nope. These “fiscal conservatives” are demagoguing the hell out of the issue.

    Remember these are the very same guys who say we have a “spending problem” not a revenue problem.

    Used to be …(or maybe I was dreaming) that fiscal conservatives actually advocated fiscal conservatism.

    It’s ironic – now that the GOP has drop-kicked the RINOs out of the party that fiscal conservatism has become a sound bite concept.

    And Virginians? A lot of them are just plain clueless.

    It’s almost worth seeing Romney and Allen elected… to see what happens.

  6. DJRippert Avatar
    DJRippert

    Peter is right. The Virginia Business article is a mess.

    Here’s the most salient point for the purposes of this column:

    “The latest CRA study estimates Virginia would lose 136,191 jobs because of defense cuts while cuts to nondefense spending would reduce payrolls by 71,380. The Virginia job loss total, 207,571, would rank second only to California’s estimated losses of 225,464 jobs.

    But Veronique de Rugy, a senior research fellow at GMU’s Mercatus Center in Arlington, is skeptical of these high job-loss estimates. She offers a dissenting view on budget cuts, noting that, adjusted for inflation, national defense spending under the first year of sequestration would revert to its 2007 level.

    In her analysis of the BCA’s impact on future spending, de Rudy used National Defense spending, a federal budget category, It includes spending for many military-related items that are outside the Department of Defense but are considered defense spending under the Budget Control Act. Among other things, this list includes nuclear weapons research and production, Treasury Department payments for military pensions; interest on debt incurred in past wars; State Department financing of foreign arms sales and militarily-related development assistance.”.

    Why would you add pension payments and interest payments back into a budget total in the context of job cuts?

    How do the dollars spent on military pensions or on interest payments materially change the outlook for defense related jobs in NoVa or Tidewater?

    Jim Bacon has fallen for the oldest trick in the book – combining uncontrollable fixed costs with controllable variable costs.

    The CRA analysis separated out the uncontrollable fixed costs of things like pensions and interest because those costs will not be cut. Those are not the funds that provide employment for defense contractors. They should have been excluded from a calculation of the job loss impact of sequestration.

    Repeat after me, analyzing defense budgets at the aggregate level to draw regional conclusions is senseless.

  7. larryg Avatar
    larryg

    you need to read this: http://www.usnews.com/news/articles/2012/06/12/military-soon-will-pay-more-for-former-soldiers-than-current-ones

    to understand the concept of unfunded liabilities when it comes to DOD.

    We keep hearing about the “disaster” than will befall us with respect to Social Security and Medicare unfunded liabilities but have we heard much about DOD unfunded liabilities form the same folks who want to cut SS and Medicare to “save them”.

    How many of those folks want to cut DOD pensions and health care to “save” them?

    one word: H Y P O C R I S Y

  8. DJRippert Avatar
    DJRippert

    “How many of those folks want to cut DOD pensions and health care to “save” them?

    one word: H Y P O C R I S Y”.

    Why is this hypocrisy?

    The military pensions were a stated benefit of employment. As such, they represent an inducement for a man or woman to be employed in the military rather than seeking employment elsewhere. As such, they are comparable to teachers’ pensions or the pensions of government workers.

    As LarryG never ceases to repeat – Social Security is not a retirement plan. It is some kind of pay as you go (but ignore the surplus behind the curtain), mandatory, annuity program. Per LarryG, it is like all the other mandatory, pay as you go with a surplus, annuity programs (hint: there are no other such plans in the “real world”). It must be adjusted to fit new situations.

    Well, guess what?

    We have a new situation! Actuarial calculations indicate that the social security administration will only be able to pay 75% of present benefits once the surplus runs out.

    So, why are we waiting? Sounds like it’s time for one of those adjustments LarryG is constantly claiming needs to be made. Like … reduce SS payments by 20% so that everybody gets roughly the same payments – with or without the trust fund for as far as the (actuarial) eye can see..

    But that doesn’t suit the “greedy grays”. They want to draw down the system at 100% of the present payout until it drops to 75% for America’s younger workers. Never mind that the younger workers have paid a higher percentage of their earnings into the system than the “greedy grays” paid.

    Repeat after me – entitlement programs are ALWAYS political footballs. We can’t trust politicians to administer them. They should be reduced or abandoned. They NEVER work.

  9. larryg Avatar
    larryg

    ” Why is this hypocrisy?

    The military pensions were a stated benefit of employment. As such, they represent an inducement for a man or woman to be employed ”

    LIKE ANY OTHER benefit LIKE Social Security!
    do you realize that the military ALSO gets SS DJ?

    “As LarryG never ceases to repeat – Social Security is not a retirement plan. It is some kind of pay as you go (but ignore the surplus behind the curtain), mandatory, annuity program. ”

    It’s the SAME as the military insurance annuity that IS THEIR pension.

    you don’t understand this do you? It took a while to convince you that FICA funds SS – not the “trust fund”.

    but you simply do not understand that military pensions are ALSO annuities with disability and survivor options – just like SS.

    “Per LarryG, it is like all the other mandatory, pay as you go with a surplus, annuity programs (hint: there are no other such plans in the “real world”). ”

    the military pension IS mandatory and DOD must pay those benefits.

    “Well, guess what?

    We have a new situation! Actuarial calculations indicate that the social security administration will only be able to pay 75% of present benefits once the surplus runs out.”

    DId you ACTUALLY READ THIS DJ:

    ” Military Soon Will Pay More For Former Soldiers Than Current Ones

    Study Group: As Force Shrinks, Personnel Bills Will Grow”

    “So, why are we waiting? Sounds like it’s time for one of those adjustments LarryG is constantly claiming needs to be made. Like … reduce SS payments by 20% so that everybody gets roughly the same payments – with or without the trust fund for as far as the (actuarial) eye can see..”

    do you KNOW what the unfunded liability is for military benefits?

    do you know if it is bigger or smaller than SS?

    “But that doesn’t suit the “greedy grays”. They want to draw down the system at 100% of the present payout until it drops to 75% for America’s younger workers. ”

    do you also call retired military and DOD personnel “greedy grays”?

    Do you realize that military folks can retire at 20 years, also get social security and Medicare?

    Do you think military folks are “greedy grays” also?

    “Never mind that the younger workers have paid a higher percentage of their earnings into the system than the “greedy grays” paid.”

    how about in the military? Do you think they have to keep paying higher and higher costs for their retired? Do you pay that?

    “Repeat after me – entitlement programs are ALWAYS political footballs. We can’t trust politicians to administer them. They should be reduced or abandoned. They NEVER work.”

    DJ – do you think military pensions and health care are “entitlements” once they retire if taxpayers are paying for them?

  10. DJRippert Avatar
    DJRippert

    LarryG – you don’t get it. At all. The good men and women in our military had multiple employment options. They chose an option that provided several stated benefits. They got rather slim pay, good benefits and a stated retirement plan. That was their employment contract with their employer. If they didn’t like the offer they could work elsewhere where they liked the offer better.

    Social security was never an offer. It was never voluntary and, in reality, it was never much more than yet another wealth transfer tax. Given the way it was established, expanded, funded and managed, nobody with an ounce of brains should have expected it to work for long. The politicians, predictably, used it as a political football and are currently draining the trust fund to buy votes from the “greedy grays” while leaving scraps for today’s twenty-somethings, thirty-somethings and forty-somethings.

    But nobody induced me to be an American by offering me Social Security. It was a tax and nothing more than a tax. The best I could hope was that BigGov wouldn’t screw it up but, predictably, they did screw it up. Ah well, they screw up most things so what’s new?

    The military’s retirement was an employment inducement. Only in the case of full bankruptcy should the employer be able to reneg on that promise. It is a contractual obligation to the individuals that served, not an idle promise by scam artist politicians to the gullible populace they claim to serve.

    There is a big difference between an employment contract and the empty promises of our hopelessly corrupt political class.

    Change the retirement benefits in the military for new recruits? Fine. You may not keep many career soldiers, sailors and marines. Reneg on the employment contract already relied upon by those currently in the military? Not fine. I’d rather see social security drained in order to pay military retirements than reneg on those promises.

    “DJ – do you think military pensions and health care are “entitlements” once they retire if taxpayers are paying for them?”.

    No. They are explicit parts of an employment contract for a particular set of positions. The fact that taxpayers pay for them is utterly irrelevant. The United States entered into an explicit employment contract with these men and women and the United States needs to honor those employment contracts.

    As for the trust fund “funding” social security – you should have taken that second semester of accounting – the one that described balance sheets.

    I know, I know, you didn’t study balance sheets because pay-as-you-go systems don’t need balance sheet accounts. So, what are those trillions of dollars in IOUs known as the SS Trust Fund?

  11. larryg Avatar
    larryg

    DJ – do you know what the unfunded liabilities are of the Military Pension Trust FUnd?

    do you know who pays for them? Do you know that just like other trust funds that Congress has “looted” them?

    Have you actually looked at the military pensions trust fund “balance sheet” guy? If you have then you know the unfunded liabilities, right?

    You keep thinking that the military is a private for-profit company and not a taxpayer-funded organization. You say the fact that taxpayers pay for pensions is “irrelevant”.

    Really? I thought you were all over the deficit and debt and fretting over the sequester.

    Do you think those issues are not related to the military pensions?

    Do you realize that very shortly, there will be MORE military retirees than active duty?

    will you start calling military retirees “greedy grays” when that happens?

    So you favor us continue to spend more than we take in to continue to pay for a military that continues to add to the deficit and debt

    while at the same time you attack Social Security which is a gnat on a dogs butt in terms of it’s impact to the budget – UNLIKE military pensions.

    You oppose the CONCEPT of SS as an excuse for supporting deficit spending for military pensions.

    totally inconsistent.

    there are SEPARATE issues.

    Social Security comes from FICA NOT tax payers.

    Military Pensions come from TAXPAYERs and you apparently support of going into 16T of debt to continue paying.

    when do we get serious about balancing the budget?

    doesn’t this spending for military pensions add enormous debt to “our kids” as much more more than MediCare?

    Oh by the way, when military retirees hit 65 -guess what the military does to their health care? Do you think they kick them off and tell them to go get Medicare?

    1. DJRippert Avatar
      DJRippert

      Larry – when were you ever guaranteed a specific payout from Social Security? Never?

      Now, when were military people ever promised a specific payout for their pensions? Every time they agreed to serve “another four years”?

      The problem with rescinding the promised military (or teacher union) retirements benefits is that the soldiers, sailors, marines or kindergarten teachers can’t go back in time and re-evaluate their employment options now that they know the promised retirement benefits were only a joke.

      Change the retirement plans going forward? Fine. Take away the retirement benefits promised as an inducement to serve for existing military personnel and retirees? Not fine.

      Also, please don’t put words in my mouth. The payout from Social Security should be immediately reduced so that the payout remains level after the trust fund is exhausted. Why should people getting paid benefits today get 25% more than the poor souls who will reach retirement age just after the trust fund is gone?

      1. larryg Avatar
        larryg

        “when were you ever guaranteed a specific payout from Social Security? Never?”

        you’re guaranteed schedules benefits until/unless reforms not made. It’s NEVER defaulted.

        “Now, when were military people ever promised a specific payout for their pensions? Every time they agreed to serve “another four years”?”

        who’s paying for this? You’re opposed to the concept of SS but what do you think about taxpayers paying for pensions instead of business and people can retire with full benefits at 20 years.

        “The problem with rescinding the promised military (or teacher union) retirements benefits is that the soldiers, sailors, marines or kindergarten teachers can’t go back in time and re-evaluate their employment options now that they know the promised retirement benefits were only a joke.”

        true – but how do you deal with THE FUTURE? Do you CONTINUE like now?

        this is part of what the sequester is about. Do you agree we should continue the current path for DOD?

        “Change the retirement plans going forward? Fine. Take away the retirement benefits promised as an inducement to serve for existing military personnel and retirees? Not fine.”

        no – FORWARD. what is YOUR PLAN for REFORM? You always choose the most destructive path – why?

        “Also, please don’t put words in my mouth. The payout from Social Security should be immediately reduced so that the payout remains level after the trust fund is exhausted. ”

        you still do not understand the trust fund do you? The trust fund buys you time to make reform. why do you pick the most destructive paths ?

        “Why should people getting paid benefits today get 25% more than the poor souls who will reach retirement age just after the trust fund is gone?”

        is that what you favor also for military pensions?

  12. larryg Avatar
    larryg

    re: trust funds

    here’s some homework for those who think only Social Security has a trust fund or unfunded liabilities:

    DoD MILITARY RETIREMENT TRUST FUND
    http://comptroller.defense.gov/cfs/fy1998/50_MRTFCFO98.pdf

    and the big difference is that taxpayers are paying for the military pensions.

    this is a huge CURRENT COST …. AS WELL AS .. an unfunded liability for the future that makes the social security unfunded liability “problem” look like small potatoes.

    What people do not seem to understand is that DOD has a huge ENTITLEMENT problem of it’s own … hiding in plain sight as we blather on about civilian “entitlements”.

    Keep in mind also – that NOVA runs on DOD spending for both active duty AND retired DOD civilian and military.

    DJ wants to “fix” SS by penalizing people who have done nothing other than pay into it their whole life while basically ignoring a much worse and expensive problem with DOD pensions/annuities.

    DJ – you should also – talk to a DOD retired person and ask them what it says on the check they get each month – “pension” or “annuity”.

    You should also ask them what happens to their “fund” if they die 5 years into retirement and have no designated survivor .

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