As Fiscal Cliff negotiations continue, much of the focus has been on tax hikes associated with the lapse of the Bush tax cuts.
While some on the left frame the tax hikes on the top two brackets as tax hikes on "millionaires and billionaires," we know better. Making $250,000 a year does not make you a millionaire or billionaire. If you've got that level of income, which is feasible for someone in their late twenties or thirties if they're working in banking, PE, or a related field, you're a HENRY (High-Earner-Not-Rich-Yet.) So, understandably, an Analyst with hopes of breaking into PE or a college student with Managing Director dreams doesn't want to see tax rates go up.
Now, if you read my post on Tuesday, then you know that I'm in favor of either going over the cliff or implementing the Bowles-Simpson plan. Both would entail higher taxes, but they'd hit everyone, not just the country's "millionaires and billionaires."
There would also be plenty of guaranteed across-the-board spending cuts. Mandatory cuts to defense spending have proven controversial, but are they? Will a $500 billion cut to defense spending over the next decade really hollow out our military, or is that kind of talk unwarranted?
$500 billion. It sounds gigantic until you put it into context. It's $500 billion over the next ten years. Instead of thinking of it as $500 billion, think of it as $50 - $60 billion a year for ten years.
$50 billion might still sound large, but considering the sheer size of the Department of Defense's annual budget, which topped $700 billion in 2012, it doesn't seem that big anymore. And, if you were to include defense-related activities conducted by other agencies along with interest expense on debt raised for past wars, total defense-related spending clocks in at over $1 trillion. Complete and utter madness.
Now, I am no dove. I believe in a strong military. I also believe in a smart military. What I don't believe in is using the military and defense spending as a roundabout jobs program.
It's no secret that the massive growth of the defense budget over the last decade led to growth at defense contractors. And it's no secret that much of the manufacturing of defense products takes place at home in the US, and it should. But, the fact that defense spending leads to manufacturing jobs in the States is not an argument in favor of outsized defense spending.
And while few have come out and said it so directly, the sheer madness of arguing that sequestration cuts will "hollow out our military," when we already spend more than the next 13 countries combined on our defense budget, should provide a few hints.
I find it hard to believe that "forcing military managers to buy fewer weapons, including four fewer F-35 aircraft, one less P-8 aircraft, 12 fewer Stryker vehicles, and 300 fewer Army medium and heavy tactical vehicles" and "delaying the new CVN-78 carrier, the Littoral Combat Ship program, and the DDG-51 destroyer procurement" equates to a hollowing out of our military. How many manned aircraft do we really need in this day and age? Given that a single F-35 costs over $150 million, the US is slated to buy over two thousand of them, and we aren't going to war with China or Russia anytime soon, I think we could find a way to cut a few. With the cost of a single F-35, you could purchase dozens of Predator drones. Dozens. The cost of unmanned vehicles, which have played a tremendous role in anti-terror operations and the ongoing wars, is next to nothing compared to the cost of manned vehicles. The ROI, so to speak, of UAVs blows the F-35 out of the water.
Why is there this assumption that we must continually build up an ever growing gigantic cold-war style military complex when our enemies are insurgents that don't wear uniforms and whose weapon of choice is a suicide bomb over a Russian MIG. Again, I'm not arguing that we should outright scrap programs like the F-35. I'm saying we should be more realistic about our needs. While the F-35 program might create jobs at home, is it worth the long-term costs to our debt and deficit? Would we truly be at risk if we only ended up buying one thousand F-35s instead of over two thousand? Not likely. The only thing that would truly be at risk are the top-line at Lockheed Martin and jobs associated with the program.
Now, I can understand the desire to make more targeted cuts to the defense budget, instead of across the board cuts, purely for logistical reasons. But, I'm not sure Congress is capable. They might agree with my thesis and the general idea that our military should be designed with current and future threats in mind, not Cold War ghosts. But, it doesn't mean they have the heart to cut funding to programs that create jobs in their districts. It's foolish and disappointing. It's also the reason why we need to either go over the Fiscal Cliff or implement a plan like Bowles-Simpson. The medicine might taste bad to the affected parties, but it'll make us all healthier in the long run.
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What does WSO think? Do you agree with my assessment of the ever-growing defense budget as a jobs program? Or is that not the case?
I'd also love to hear the Ron Paul / Libertarian view on this. I used to be on the bandwagon but am not sure I'd go as far as he'd like. Anyone want to argue his position?
i agree with your comments about the defense budget. it is bloated beyond imagination and enables unbelievably wasteful spending.
the problem is that the republicans have cultivated a culture of military worship that democrats are too impotent to resist. the result is near-zero opposition to anything related to defense including the budget. for a party that purports to be fiscally conservative this is pathetically hypocritical.
The problem is that the current military spending is serving as a kind of stimulus program to keep the economy afloat. Most economists still subscribe to Keynesian policy, and it's political suicide to argue against defense spending. Hiking taxes on everyone + removing unemployment benefits + reducing spending on a massive scale would destroy an already fragile recovery. Interest rates are still extremely low (even w/o the Fed they would be low), and until rates begin to rise, borrowing heavily is a bridge solution that we can live with. Going over the cliff may be fair, but it would have disastrous financial consequences. We would all feel it for at least 2-3 years.
First and foremost, as a fairly successful individual with a wife that is about to finish residency and start making a grown up pay check, our combined annual household income is overt $250k. Correct me if I am wrong, but I thought the new taxes are $225 for a single individual and $250 for married households. Regardless, we live comfortably but we are not wealthy, we are not rich, we do not have fuck you money but we are going to get taxed like we do. That is bullshit.
Regarding defense, it would due the industry and the government a lot of good to reorganize its budget rules and spend its money more responsibly. I have given this example a few times during this week, but it is important to keep reiterating so people outside of the industry understand:
A lot of money could be saved simply by stopping gluttonous spending.
I for one am for having the most powerful military in the world and continuing to feed it. Having the ability to delete a country with the press of a button gives you a lot of clout in the world and it is something we need to hold on to. The world hates us. I would hate to see how bad shit would be with a weak military.
The world loved America during the Clinton years, and he was a trigger-happy President. The world hated America during the Bush years, and he was a trigger-happy President. It's not as simple as that.
Cutting more from the defense budget isn't going to eliminate our ability to wipe our enemies off the planet. The entire world doesn't hate us, islamic fascism hates the west. And, a lot of the hate we face has been brought on by our own actions.
But, in all seriousness, we don't need things like 2,400 F-35s in order to strike fear into the heart of every nation on Earth. It's simply madness. Look at the god-forsaken F-22 program that was shut down. An insane boondoggle that cost billions and billions of dollars for no payoff whatsoever (unless you're Boeing.)
The one key thing a lot of people overlook is these contracts and buying of unnecessary items are due to contracts signed and defended by the old guard on both the government and the contractor side. Agreements and friendships that are older than you and I are responsible for the purchases of a lot of this unnecessary (and in a sense outdated) stuff.
Like I said in our interview, the way of the future needs to be unmanned vehicles but it could take the dying off of a generation for this to be truly found.
Or you'll get taxed at the same rate you would have under the Clinton administration, and only for income above and beyond $250K...
Partly agree on your comments pertaining to the budget. To name an example, I think it would be quite prudent to reduce our spending on some of our armored vehicle programs and spend a bit more on cyber defense -- an arena in which we're (by many accounts) woefully under-funded and under-prepared.
The political reality, however, is very different. I'm not going to debate the merits of having 10 aircraft carriers versus 11 aircraft carriers, but an aircraft carrier is a massive, massive undertaking. I am assuming that Newport News (the shipyard associated with the CVN program) has suppliers in every single state (i.e., every Senator has a big, fat incentive to continue funding the program). Although it might make sense to say, 'Hey, from a strategic perspective, maybe it makes more sense to put money into (insert favorite military program)," that's not the way the world works.
Moreover, there's the issue of maintaining industrial competencies. A carrier/tank/fighter jet production line isn't something that be turned off and on at the flip of a strategic switch. At a certain point, you need to order new tanks simply to ensure that we remember how to build tanks when they're needed.
(Obviously, this begs the economic question: How many of our nation's manufacturing resources are chasing defense work because it's subsidized? Would they be doing something different if they weren't rent-seeking in the defense industry? Or (more likely, in my view) how many of our nation's manufacturing resources simply wouldn't exist without governmental support?)
As Nefarious said, though, the best thing to do would simply be to revamp the way the government spends money.
Defense spending goes through cycles, ramping up during wartime and then a nice slow drawdown in the years following. Maybe, we take that 10 year drawdown and shorten it to 10 days. Chop chop chop. You always want to rip out that band aid real fast and just get it over with. You'll feel so much better afterwards!
I don't think we a nation can face the prospect of trimming the fat out of defense spending. Spending creates jobs in every facet of the defense arena. Military, Defense Contractors, the bars and clubs right outside the base. No matter where we slice, someone and their congressman/women are going to moan.
Additionally, American voters as a whole are not ready to face a Geo-political strategy that does not include a world wide military presence. Hell, the American foreign service and American intelligence communities have built a systemic strategy around it for the last 25 years. Go read the free weeklies at Stratfor.com, you should get a sense of the overall view we take in Geo-political strategy. Ever complex trading partnerships and financial markets seem to mandate, at minimum, a stronger Geo-political awareness(not necessarily action). Now explain a complete turn around to a person who's a stakeholder in the outcome. Also, I understand that its not a complete turnaround, but hyperbolic nature of the media cycle will make it seem so to the average voter. "OMG American hegemony is dead!!!" Please self insert a picture of someone pulling their hair out or Glenn Beck crying. Again.
It no wonder that Libertarians like Ron Paul get creamed in primaries when this topic comes up. Personally, I think we will go over the cliff. Or some brave souls will step up and make the hard choice...and then retire. The Libertarian position is not simply a smaller, leaner military(Canada-ish) but fundamentally a smaller America. Albeit an America with more liberties. How an libertarian thinks this is going to happen is on them. To say there would be massive layoffs and demoralization is an understatement. More like a systemic shock.
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