National Defense Digital

Oct 2012

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President's Perspective BY LAWRENCE P. FARRELL JR. Let's Face It: There Is No Shelter From the Fast Rising $$ Storm When one thinks of storms, a vision of destruction comes to mind — rain, wind, thunder and lightning. A fiscal storm, too, leaves trails of wreckage. Let's examine some of them, and what they portend. At the very top of the casualty list is the financial condition of the United States. Components of this are the debt, the deficit, the sinking economy and declining employment. One can observe upfront that people are ill-informed about these elements, owing first to their complexity and the fact that our press and elected leaders do a poor job of explaining the facts. The nation's $16 trillion debt is a major concern. Two com- ponents of this debt are publicly held — citizen bondholders, China and Japan — and internally held, like the Social Security Trust Fund. With a GDP of almost $16 trillion, the United States owes more than 100 percent of one year's GDP (think Greece). And with real unemployment disguised by arcane counting rules, U.S. government reporting greatly understates the depth of our employment crisis. Next is the deficit, projected by the president's budget to be $1.3 trillion this year. When one looks under the hood, this is truly frightening. The federal budget has two elements, mandato- ry spending (Social Security, Medicare, Medicaid, interest on the debt) and discretionary spending, which includes the budgets of every federal agency. Even if one eliminates the whole federal pie, receipts are still insufficient to cover the deficit. So calls to bring down defense spending and raise taxes on a few high earners do not address the structural shortfall. Much bigger adjustments in the mandatory portion of the budget must be formulated and implemented. By the way, as the Budget Control Act of 2011 brings down discretionary spending, the percentage of the budget consumed by mandatory entitlements continues to grow. Notably, the current level of unemployment appears to be structural in the sense that the lower value-added jobs have been shed by both industry and government. These positions are not coming back. One encounters employers every day who are seek- ing highly skilled employees, but they are not to be found in the ranks of job seekers. Our education system, from high school through college and especially community college and vocational education, is not preparing young people for the higher tech jobs of the present or the future. Both the country and defense are teetering on the brink. The Congressional Budget Office has analyzed the approaching sequester and the coming tax increases. CBO analysts opine that all this would greatly reduce the deficit, but throw us into reces- sion. On the other hand, if we fix it, deficits continue as before and debt continues to rise. Neither course appeals. It is clear that something much more fundamental needs to happen — maybe an overhaul of the tax code and an admittedly painful adjust- ment of entitlements. It appears that neither the administration 4 NAT I O NAL D E F E N S E • O C TO B E R 20 1 2 nor Congress has the appetite for any of this. As of this writing, Congress is planning a "clean" six-month stopgap "continuing resolution" that has no provisions for addressing the mandatory sequestration cuts set to take effect Jan. 2. In the meantime, defense faces a more than $50 billion reduc- tion per year if sequestration is allowed to occur. Cuts through 2017 of 21 percent are less than the 35 percent reduction after the Cold War wound down, but sequester makes the cut totally arbitrary — equal percentages by appropriation which has to be drilled down to program, project and activity. The 60 appropria- tions accounts and 17 shipbuilding lines will get hit at about 10 percent each. There is no provision for reprioritizing, and little flexibility. It is the worst possible way to make budget cuts. No explanation suffices to show how we arrived to this point. Defense today is around 3 percent of GDP, the lowest since 2001, and comprises about 18.5 percent of federal spending, which is on par with the 20-year average. So it would seem defense is afford- able. But nothing — including defense — is affordable for long with trillion-dollar deficits as far as one can see. The Federal Reserve has announced a new stimulus effort. With interest rates at almost zero in nominal terms — and nega- tive in real terms — one has to wonder what this will do but give a brief spurt to the markets. One Fed governor has dryly observed that if folks aren't buying homes and businesses aren't borrowing at these historically low rates, what can monetary stimulus do? What it does is add to the pile of money out there that is not flowing through the economy. Also rising hackles is President Obama's projection of interest on the debt in 2021 at almost a trillion dollars. Today, interest costs are around $225 billion per year. When they begin to rise — as surely they will — that 2021 number will be challenged and today's $1.3 trillion deficits might pale by comparison. A final observation: Defense has a lot of tired iron. Even cur- rent budgets are insufficient to underwrite either the new strat- egy or the present force structure. With or without sequester, the near term reality for defense is military forces will be smaller, and weapons a bit older unless planned acquisition catches up with aging systems. Every branch of the military needs to modernize their aging fleets. After the November contests, it is anyone's guess what the future will hold. Something to fear is that our government will find a way to craft a solution that satisfies the itch du jour but postpones the final reckoning. The real crisis, when it hits, will be much worse. What obviously is needed in Washington is a generous measure of statesmanship and not the intensely partisan gun slinging that has dominated national affairs of late. Email your comments to LFarrell@ndia.org

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