Grundman appears as panelist at Center for Strategic and International Studies conference on “Defense in an Age of Austerity”

Steve Grundman appeared, together with David Berteau and Todd Harrison, on a panel discussion of the “Domestic Implications of a Defense Drawdown” at a conference on Defense in an Age of Austerity convened by the Center for Strategic and International Studies. Here’s CSIS’s account of what Steve had to say:

“Steve Grundman argued that, even if it is not possible to hold defense reductions to $450 million over the next 10-12 years, the additional cuts that might be associated with sequestration would not produce terribly devastating macroeconomic effects on growth and employment or microeconomic effects on the defense industry.  Such cuts would, however, present profound strategic issues for the U.S. defense posture.

“Grundman first noted that while many people view the “super committee” as a savior and sequestration as a cataclysm, it’s worth remembering that the Budget Control Act requires $1.2 trillion to be removed from deficit projections regardless of which course gets us there.  Consequently, even the super committee can only spare defense additional cuts if it is able to identify additional revenues or reductions from Social Security and Medicare. As a result, Grundman believes that there will be at least some additional reductions to projections of defense spending, even if sequestration is averted.

“Using the baseline of the actual momentum of defense programs implied by the fiscal year 2012 budget request (as calculated by the CBO), Grundman believes the worst case scenario should assume an aggregate reduction of 15% to the base defense budget, a figure which is squarely within the range of all of the different projections being discussed.

“Grundman then discussed the macroeconomic significance of these cuts for GDP, employment, and the solvency of the government.  The impact on GDP would be relatively small, reducing direct spending that the DoD puts into the national economy by $85 billion per year, or three-one-hundredths of a percentage point compared to today’s GDP. The impact of a 15% reduction would be more appreciable on employment, but not nearly as dire as other projections (viz., House Armed Services Committee, Aerospace Industries Association) that lend much greater credence than would Grundman to second-order (so-called “indirect”) effects on employment. Still, a 15% reduction in only direct, defense-related employment still would result in a loss of half a million jobs, adding one-third of a percentage point to the unemployment rate. In terms of fiscal solvency, Grundman expressed skepticism over the ostensible impetus for such dramatic reductions, pointing out that in the very week following passage of the irresolute Budget Control Act, global investors’ clamor to buy U.S. Treasury bonds drove their yields still lower than the already historically low levels between 1 and 2 percent.

“Turning to the microeconomic impacts, Grundman asserted that additional reductions in defense spending will focus disproportionately on the Pentagon’s investment accounts that fund R&D and Procurement, particularly if the reductions occur on a compressed timeline as a result of sequestration.  The resulting impact on the defense industry will be cushioned by the extremely healthy financial condition the industry currently enjoys after a decade of growth. On the other hand, the industry has now built up a substantial base of relatively inflexible assets that will constrain its ability to adjust rapidly to changes in both the size and composition of demand.  Changes to what and how the Pentagon wants to buy, Grundman surmises, may present the industry with an even greater challenge than adapting to reductions in how much.”