OMB Guidance Contains Positive Message For Contractors
White House budget director Jacob Lew released fiscal 2013 guidance to government departments and agencies on August 17 that has reinforced the pessimism of many in the defense sector. The guidance directed federal managers to submit budgets for 2013 that were five percent and ten percent below enacted levels for the current fiscal year. Unless the Department of Defense is exempted from the guidance -- as some agencies are -- that would imply spending levels in the fiscal year beginning October 1, 2012 of $477-503 billion (not counting supplemental spending for overseas contingencies). Those amounts are far below the $571 billion that the Pentagon was previously planning as its base-budget level for fiscal 2013.
Bad news for defense contractors, right? Possibly. But if you read the OMB memorandum carefully, there is a hidden message of hope for arms makers. The guidance explicitly states that department heads should identify investment programs worthy of increased funding because they promote economic growth or contribute to operational efficiency. Most next-generation weapons actually satisfy both of those criteria. They contribute to growth by creating high-tech, well-paying jobs with spillover effects into the broader economy, and they promote efficiency by reducing the maintenance and sustainment costs associated with keeping legacy weapons in a high state of readiness.
Consider the military's biggest R&D program, the F-35 Joint Strike Fighter. F-35 is frequently criticized for its high costs, but most of those outlays end up being distributed to tech workers at hundreds of companies scattered across the country who support F-35 production. The final product will eventually generate hundreds of billions of dollars in export earnings as it is sold to overseas friends and allies, while meeting the diverse warfighting needs of three U.S. military services. And while critics deride the trillion-dollar bill that the Pentagon will allegedly have to pay for sustaining the F-35 across a 50-year operational lifetime (it's actually less than half that amount in today's dollars), few of them realize that the cost of sustaining existing fighters over the same period would be four times higher. That's right, $4 trillion, using the same methodology employed to construct the F-35 sustainment estimate. So pressing ahead with F-35 will create a lot of jobs and save a lot of money.
Prime contractor Lockheed Martin tried making the same point before the Pentagon canceled the more expensive F-22 fighter two years ago. That program had 95,000 direct and indirect jobs associated with it. But back then policymakers thought the economy was headed into a recovery, and now they realize economic problems may be more structural. So Washington is going to have to rethink its whole approach to promoting growth, because that is the only way our fiscal house can be put in order. Part of that re-thinking has to include a clearer understanding of how military outlays impact the broader economy, since defense is the biggest source of discretionary spending in the budget. If the White House is really serious about creating jobs, stimulating exports, promoting competitiveness and saving money, then it needs to keep next-generation weapons on track, because that's the one place in the federal budget where all of the economic growth themes converge.