Ignore the Lofty Rhetoric--Cutting Budget Means Cutting Defense

The rhetoric, as usual, has the sound of trumpets: Passage of his budget bill, President Clinton says, means “we can truly say change has come to America.”

But the reality is less bold and more mundane. Now more than ever, despite politicians’ talk of courageous votes in Congress and curbs on entitlements, cutting the budget means cuts in defense. In Clinton’s presidency, the United States will decide to reduce its military dramatically, as it has done at other periods in its history.

The Defense Department is formally reviewing future U.S. military posture right now. Its conclusions will be argued about this fall and Clinton will present them in his first defense budget in January. (For convenience’s sake, the Clinton Administration accepted current-year defense totals from the outgoing Bush Administration.)

Already word is coming out that Clinton’s cuts will be severe--perhaps $70 billion more than has been projected so far. Defense will make up two-thirds of the spending cuts in the Administration’s budget program, says Sen. Sam Nunn (D-Ga.), chairman of the Senate Armed Services Committee.

That’s more than Nunn, who voted against Clinton’s budget bill, thinks is wise from a strategic standpoint. But he recognizes that, politically, defense is an easier budget cut than Medicare and other entitlements.

Aerospace industry experts agree that tougher times are to come. They expect further cuts in aircraft programs as the development of new planes, such as Lockheed’s F-22, is stretched out and production of existing aircraft is cut back from already meager levels.

The aerospace industry is sure to shrink. At a recent briefing, a Pentagon official struck fear into U.S. aircraft makers (Lockheed, which has acquired General Dynamics’ aircraft operations, Boeing, McDonnell Douglas, Grumman, Northrop and Rockwell) by saying, “We’re going to trim back to two companies.” He hastily corrected himself, saying, “I meant two basic aircraft,” but the message of an industry on borrowed time had been delivered.

California and other states dependent on defense will suffer further economic downturns and job losses. This state, which has already lost 150,000 aerospace jobs, is projected to lose 35,000 more by 1995--but those numbers could increase. “I reckon we’re only halfway through the downsizing of defense,” says Robert Paulson, head of McKinsey & Co.’s aerospace consultancy.

The Clinton budget will be a wake-up call for Wall Street. Defense stocks have performed well this year as investors saw that companies could make good money as old programs phased out and there was no need to invest in competing for new contracts. But now few aspects of defense contracting will be spared.

“Annual budgets for aircraft and tanks have already been cut to about $40 billion,” notes veteran analyst Wolfgang Demisch of New York-based BT Securities. “There’s not much more that can be cut without hurting U.S. military abilities long-term.”

So look for cuts to be made even in the Pentagon’s $30-billion research and development budget. Troop levels and operations and maintenance, which are two-thirds of today’s $276-billion defense budget, will be reduced.

Look for U.S. forces in Europe to be simply brought home and the armed forces to be cut to fewer than 1.4 million in uniform, from today’s 2 million, and the Defense Department’s 1 million civilian employees to be reduced 40% or more.

In fact, to keep employment up among defense contractors, the United States is actively seeking overseas sales--in Taiwan, Singapore and Malaysia, as well as in Saudi Arabia, Kuwait, Egypt and Israel in the volatile Middle East. Military exports this year may total $30 billion.

Massive reductions in the U.S. military have occurred before. After the Civil War, camps were built well outside the towns because people no longer wanted to see soldiers or be reminded of war; between World Wars I and II, military spending fell to 2% of the U.S. economy--less than half today’s level of 4.6% of gross national product.

Will defense go that low again? Perhaps not, but new thinking on the U.S. military posture is a departure from policies in effect since World War II. For the last 50 years, the United States has maintained a military able to fight two wars at the same time--one in the Pacific and another in the Atlantic.

Now the emerging policy sees the United States fighting only one limited combat overseas while holding off another conflict elsewhere. It is a policy that envisions no direct threat to the United States from any other nation. Thus, the “peace dividend” talked about since the Berlin Wall fell in 1989 seems about to be paid.

Yes, but how long can such a policy last in an uncertain world, where even today U.S. troops are actively committed because of troubles in Somalia, threats from North Korea and genocide in Bosnia? That’s a good question.

“In seven years, we’ll probably look back and conclude we cut too much from defense,” says one industry expert, who recalls that little more than a dozen years ago U.S. hostages were imprisoned in Iran and Ronald Reagan was elected to build up the military.

Reagan’s rhetoric of “morning in America” was supported by military spending, just as Clinton’s rhetoric of “change in America,” is supported by cutting it.

Always, there are drums behind the trumpets. Maybe, in the future, we should try to have a successful economy that doesn’t depend on military budgets.

Fewer Jobs

Projections show a 49% decline in defense jobs in California from the 1986 peak. But with the Clinton Administration planning deeper cuts in defense, jobs are likely to disappear even faster.

Source: UCLA Business Forecasting Project