There’s a long-running debate among deterrence theorists about what influences the behavior of enemies more — certainty or uncertainty. Are aggressors more deterred when they know precisely what response their actions will provoke, or when the response is left to their imagination?
I am reminded of that debate when I read commentaries on how the deliberations of the congressional super-committee set up by the Budget Control Act are weighing down defense equities. The prevailing view seems to be that stocks will perform weakly until the outcome of the deliberations is clear, and Congress votes on whatever recommendations the committee decides to make.
The implication seems to be that once there is clarity, defense stocks can find a bottom. Well maybe. But would any political outcome really remove uncertainty as to what the future holds for military demand? The first installment of defense cuts mandated by the budget law is already taking effect, and the second installment won’t begin to bite until January of 2013, no matter what comes out of the super-committee. But during the intervening months, there will be an election in which control of the government may very well change hands.
So how much clarity will there really be going into 2012 about the future level of military demand? Not much, I’d say. If the Democrats manage to eke out a meager election victory and retain control of the White House — they’re sure to lose the Senate — then the budget law might actually remain in effect. If Republicans win everything, they’re likely to amend or repeal the law just as the second wave of defense cuts is beginning to bite. So with or without an enacted agreement from the super committee, there’s still going to be a lot of uncertainty going forward.
Beyond that, people need to understand that the Budget Control Act is just a law. The real reason we’re having a budget debate right now is that the U.S. economy has been in a steady decline for many years, and law or no law the capacity of that economy to sustain our present military posture is very much in question. It’s easy to assemble statistics demonstrating that defense makes a relatively modest claim on the economy — and therefore should be sustainable at today’s levels — but that ignores the way in which other types of federal expenditure have grown so that Washington now represents something like a quarter of the entire economy.
It also ignores how dependent many Americans have become on federal transfer payments, to the point where they care much more about their entitlements than they do about fighting terrorists. Recent studies have found that most Americans have no savings to speak of, so the slightest disruption of income flows can have a devastating effect on their well-being. If these voters have to make a choice between cuts to their federal benefits and cuts to military spending, it’s pretty obvious where they will want to see reductions made.
So in the absence of a much more vigorous economic recovery or some new security trauma along the lines of 9-11, there will be continued downward pressure on defense spending going forward — with or without a deficit reduction law. I’ve never been impressed by the kind of mechanistic thinking that says ten up years in defense spending will be followed by ten down years, but the notion that one law tells us everything we need to know about future levels of defense spending is just as improbable. The uncertainty about future levels of military spending will continue at least throughout next year, and the best reason for holding defense stocks will continue to be that the rest of the economy doesn’t look any more promising.
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