BY VERONIQUE DE RUGY
For all the hand-wringing over sequestration, the dire predictions of politicians and special…
Everyone should know by now that many of the promised benefits of “stimulating” the economy with increased government spending never materialize. The good news is that most of the threatened economic harm from cutting government spending — such as those made prior to sequestration — never materialize either.
Just four months ago the president, federal officials, lobbyists, and government contractors warned that sequestration would inflict an immediate and devastating disruption to the economy and crucial government services. The Obama administration even issued specific and seemingly apocalyptic predictions about the immediate impact the cuts. But obviously, the sky hasn’t fallen on us yet.
In fact, when the Washington Post put the administration’s predictions to the test by surveying various federal agencies, it found that only 11 of the 46 predictions had come to pass. For instance, the Post reported that “prison guards and FBI agents weren’t furloughed. Americans didn’t get stuck at border crossings. And hundreds of thousands of low-income women and children didn’t go hungry.”
The Department of Defense and its special interests also made a host of frightening claims about the devastating impact of defense cuts on the economy. You may recall studies produced by George Mason University’s Stephen Fuller last year on behalf of the Aerospace Industries Association.
His work looked at the impact a $45 billion reduction in procurement spending in FY2013 brought on by the implementation of both the Budget Control Act caps and sequestration would have on the economy and jobs. He concluded the cuts would result in economy-wide sales losses of $164 billion in FY 2013 — an $86 billion reduction in GDP, and a loss of more than a million jobs.
It is difficult to overstate the impact these predictions had on the industry. Every major defense contractor spent months on the Hill, testifying before Congress about the devastating effects these cuts would have on their bottom line, which would in turn force them to fire people, hurt the economy and precipitate the collapse of the industrial base.
Take Lockheed Martin, for example. The firm is the world’s largest defense contractor and one of the biggest beneficiaries of the government’s largess. It was also one of the loudest voices against the defense cuts and their impact on the economy, claiming, as a recent piece in the Washington Post reminded us, “sequestration would wipe out $825 million in revenue this year.”
However, this week brings some evidence that, in this area too, the impact of government spending cuts were dramatically overblown. In particular, defense contractors’ bottom line seems to be doing just fine. Five months after the start of sequestration, Lockheed Martin, for instance, reported that “its profit rose 10 percent, to $859 million, during the second quarter even as revenue dipped slightly.” The same is expected when other contractors like Northrop Grumman and General Dynamics announce their profits.
This, of course, isn’t to say that sequestration won’t have any impact in the long run on contractors’ profits. It is to say that the FY 2013 impact of sequestration was overhyped. More important, even if contractors’ profits were going down, it wouldn’t necessarily mean that our country’s security was in jeopardy. Even though national defense is a core mission of the federal government, not every defense dollar increases our security.
Better yet, reductions in defense spending may actually improve economic growth. In a recent paper that assess the economic effects of defense spending and defense cuts in particular, Harvard economist Robert Barro and I found that “While the impact of across-the-board federal defense spending cuts on national security may be up for debate, claims of these cuts’ dire impact on the economy and jobs are grossly overblown … [O]ver five years each $1 in federal defense-spending cuts will increase private spending by roughly $1.30.”
To conclude, for all the hand-wringing over sequestration, the dire predictions of politicians and special interest groups proved grossly overblown. Far more and far deeper spending cuts are needed. We cannot allow another round of baseless scare tactics to derail what must be done.
VERONIQUE DE RUGY, a Washington Examiner columnist, is a senior research fellow of the Mercatus Center at George Mason University.