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Not a Tsunami – Yet

By Steve Bell

Friday, November 15, 2013

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Last week, we wrote about some of the technical budget aspects that have muted the impact of the Fiscal Year 2013 sequester on national defense programs and the overall economy. We noted that in FYs 2014 and 2015 the impacts of the FY 2013 sequester would become more apparent, especially as the big defense contractors start cutting personnel.

Lockheed Martin’s announcement yesterday that it will eliminate 4,000 employees and close several facilities highlights our long-held contention that the sequester’s impact would prove to be a slowly increasing wave through the economy. Lockheed joins most of the other major defense contractors that have been slowly reducing head counts for the past year. These newly announced layoffs bring to 30,000 the number of employees that Lockheed, the largest defense contractor in America, has laid off over the past five years.

A second dramatic indication of the accelerating impact of the sequester wave comes from research done by Byron Callan at Capital Alpha Partners of Washington, D.C. Callan’s research indicates that actual defense outlays for investment accounts declined by 16 percent from October 2012-2013. As Callan warns, outlays normally vary throughout the year, but the trend this year has been clearly toward lower investment outlays.

Large defense contractors indicate that reductions in labor force of as much as 20-percent have been implemented over the past three years. The ripple effect of these cuts shows up dramatically in local economies. For example, at Wright Patterson Air Force Base outside Dayton, Ohio, losses of up to 6,000 employees could occur. For some businesses that are dependent upon spending from personnel at such bases and posts, losses of this magnitude will mean the end of the business.

We would draw special attention to a recent Government Accountability Office study of how the Department of Defense (DoD) handled the demands of the FY 2013 sequester. DoD found a variety of ways to mitigate the FY 2013 impact of the cuts, but most of those were “one-off” efforts that DoD cannot rely upon again in FYs 2014 and 2015. As both the Bipartisan Policy Center and GAO reported, FYs 2014 and 2015 will be more painful years for defense contractors, their employees, and local economies.

No, it’s not a tsunami yet. But these layoffs will bring increasingly obvious hard times to thousands of private-sector workers and government employees.

The sequester is a very bad idea. It needs to be repealed and replaced with long-term reforms to federal entitlement programs and our stifling tax code.

We are told that such a deal cannot emerge from the budget discussions now going on between the House and Senate. That increases the likelihood of continuing the sequester mechanism, which is a recipe for two things—short-term economic harm and long-term investment starvation.