Sequestration

Dave Glantz, Director Research Services, Market Connections, Inc.

On Oct. 9, the Project on Government Oversight (POGO) blog posted an infographic and blog entry that they say “fight[s] against the myth of Pentagon spending as a job creator.” The post asserts that, based on historic data, sequestration cuts to Pentagon spending will not cause widespread job losses. The historic data they cite show a 3% reduction in the contracting workforce among the top 5 defense contractors from 2006-2011, a period in which those same contractors saw a 10% increase in contract dollars.

I take issue with the logic of the infographic’s argument.

That last five-year period (2006-2011) saw defense spending that covered a great many contracts, a lot of them associated with two major wars, including the longest war in US history (Afghanistan). Going forward, the next five-year period is likely to see fewer (planned) wars (we hope) and thus fewer, less expensive contracts.

Also, it stands to reason that over that very active five-year period of defense spending, the defense contractors themselves were able to identify efficiencies along the way that allowed them to complete their contracts with fewer personnel – I would imagine this to be the case for the longer term and more mature contracts especially.  In other words, like other industries, the contractors were able to raise more productivity per worker over time, and thus were able to shed some workers as playershad.com and when they saw fit.

But sequestration is supposed to hit contractors more suddenly, with immediate and indiscriminate program/budget cuts, with no advance notice of what exactly is to be cut or by how much. In many instances my guess is the contractor will not have the luxury of time to shed workers when and as they choose, and still remain profitable.  They may instead need to make that decision up-front, given the unpredictability of the environment and the conceivably reduced scope of any new programs that are approved or survive.

I don’t want to automatically take the side of the defense contractors, because even without sequestration they would have been aware (as we all are) that the winding down of two wars and a fiscally strapped federal government would lead to less business. Nor do I feel the Pentagon in particular is or should be seen as a Job Creator, because its budget (and consequent freedom to issue contracts) is authorized by Congress.

It is true that if the Pentagon suddenly reduces contracts by ten percent, then that action cannot help but be the impetus for job losses to the firms that supply the Pentagon with products and services. Indeed, the prospect of a big and sudden cut to budgets in ANY industry is likely to lead to equally immediate job losses. That’s very different from industry’s shedding jobs due to productivity gains over the course of many contracts from 2006-2011, an era of unprecedented defense spending.

At the same time, I don’t think it’s fair to label the Pentagon as a Job Destroyer. Like the contractors, the Pentagon is also looking for efficiencies over time, and it is only reasonable to expect (as the contractors do) that more can be built by fewer hands.  From that standpoint, it really isn’t in the interests of the Pentagon to encourage more hiring in the first place if fewer hands can do the work.

If anything, the label of Job Destroyer belongs to Congress for fashioning that 10% reduction as a massive, sudden and ill-conceived action that prevents the Pentagon itself from allocating funds as it sees fit to maximize the cost efficiencies of the programs it runs, and to cut programs it doesn’t need.

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