Oct 26 2011

Economic Consequences of Defense Sequestration

Chairman Buck McKeon

The House Armed Services Committee met today for a hearing on the Economic Consequences of Defense Sequestration. Chairman Howard P. “Buck” McKeon make the following opening statement as prepared for delivery:

“The House Armed Services Committee meets to receive testimony on Economic Consequences of Defense Sequestration.  We are joined by a panel of top economists who will share three distinctive perspectives with the Committee – the macro economic impacts within the United States of further cuts to defense, the regional economic effects which may vary from state to state, and the global dynamics of further cuts to our military.

“The committee has held a series of 5 hearings to evaluate lessons learned since 9/11 and to apply those lessons to decisions we will soon be making about the future of our force.  These hearings also focused on the national security risks posed by sequestration.  We received perspectives of former military leaders from each of the services and the Joint Staff, former chairmen of the Armed Services Committees, outside experts, and Secretary Panetta and Chairman of the Joint Chiefs, General Dempsey.  Today, we will change direction and focus on the other side of the coin – the relationship between the U.S. military and the economy.

“As a fiscal conservative, I tend to oppose increasing government spending for the purpose of job creation.  But I think we must understand that the defense industry is unique in that it relies entirely on federal government dollars.   We don’t spend money on defense to create jobs.  But defense cuts are certainly a path to job loss, especially among our high skilled workforces.  There is no private sector alternative to compensate for the government’s investment.

“Secretary of Defense Panetta has said that cuts on the scale of sequestration will result in a 1% hike to unemployment and 1.5 million jobs lost.  The Aerospace Industries Association released a report yesterday, based on the analysis of Dr. Fuller, one of our witnesses today, that estimated just over one million industry jobs would be lost – based on cuts to procurement and R&D alone.  When one factors in the separation of active duty service members and DOD civilians, the number is quite close to DOD’s.  The impact is not proportional across all 50 states.  Dr. Fuller’s testimony suggests that nearly 60% of the jobs lost would come from just 10 states.  One-third of the lost jobs would fall in three states – California, Texas, and Virginia.  How does this translate to the larger economy?  In 2013 alone, growth in GDP would fall by 25%.

“But the economy could be affected further, as the U.S. military might no longer be seen as the modern era’s pillar of American strength and values.  There is risk that some within the international community would try to take advantage of the fragile American economy and the perceived limitations on our military’s ability to promote global stability. 

“In these difficult economic times, we recognize the struggle to bring fiscal discipline to our nation.  But it is imperative that we focus our fiscal restraint on the driver of the debt, instead of the protector of our prosperity.  With that in mind, I look forward to hearing from our witnesses today. 

“Now please let me welcome our witnesses this morning.  We have:

Mr. Martin Feldstein
George F. Baker Professor of Economics, Harvard University
President Emeritus, National Bureau of Economic Research

Dr. Stephen Fuller
Faculty Chair and University Professor, George Mason University
Director, Center for Regional Analysis at the School of Public Policy

Dr. Peter Morici
Professor of International Business
Robert H. Smith School of Business, University of Maryland
Director of Economics at the United States International Trade Commission

"Gentlemen, welcome to the House Armed Services Committee.  We know this may be an unusual venue for you and this is a first for us.  Thank you again for being here.  I’m sure there is much we can learn from you.”