By now everyone has had a chance to review where we stand with the debt agreement reached in early August. This post is simply a way to document the process and consider where it may be heading, and specifically how that will impact the maritime services.
The White House fact sheet on the deal notes a $350 billion reduction to the base DoD budget over the next ten years that is part of the initial +$900 billion in discretionary spending cuts. The cut is similar to the President's April 13 speech, where $400 billion cut in national security spending was proposed over 12 years. The $350 billion reduction is intended to be implemented after completion of the current DoD roles and missions review, which is expected to be completed by October of this year.
The bipartisan debt deal includes a trigger that adds another $1.5 trillion in total spending cuts, which are to be identified by the new super committee. The super committee is to report its recommendations by November 23 and by no later December 23 Congress is expected to vote on the committee recommendations. If the super committee proposal doesn't pass by December 23, an automatic trigger to ensure that at least $1.2 billion in cuts over ten years will kick in. Within this $1.2 billion cut, the White House fact sheet says "If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made."
The super committee consists of the following Senators and Representatives.
- Rep. Jeb Hensarling of Texas (Republican and committee co-chair)
- Sen. Patty Murray of Washington (Democrat and committee co-chair)
- Rep. Chris Van Hollen of Maryland (Democrat)
- Sen. Jon Kyl of Arizona (Republican)
- Sen. John Kerry of Massachusetts (Democrat)
- Sen. Pat Toomey of Pennsylvania (Republican)
- Sen. Max Baucus of Montana (Democrat)
- Sen. Rob Portman of Ohio (Republican)
- Rep. Xavier Becerra of California (Democrat)
- Rep. Dave Camp of Michigan (Republican)
- Rep. James Clyburn of South Carolina (Democrat)
- Rep. Fred Upton of Michigan (Republican)
Moving ahead, there is a timeline to watch this unfold from a DoD perspective.
September
In September Congress will return from vacation and are likely to be dominated by the politics of a new Obama job program. To date the Obama administration has been able to get passed all previous economic related bills, so there is no reason to expect this one (whatever it is) would get passed. I have no idea what the Obama administration will recommend, but it is hard to believe the Obama administration would recommend anything favorable to the maritime services.
That doesn't mean they shouldn't. I strongly agree with the economists who have been critical of the Obama administrations implementation of Keynesian economics, because I believe it has been a spectacular failure primarily because the focus on service related jobs has done almost nothing to create legitimate supply chains throughout the economy with the government investment. Several economists have noted that most of the money headed to the private sector ends up going to suppliers that are outside the United States, and have thus far produced far less economic impact (and jobs) than the administration was hoping for. The only manufacturing industry in the United States where money is almost guaranteed to hit suppliers in the United States is shipbuilding, which ironically is largely a government dependent manufacturing sector anyway. It is hard to imagine a scenario where the Obama administration would consider the option of increasing spending in shipbuilding as a jobs program for manufacturing. If they did, building Coast Guard vessels would be as much if not more important priority than building Navy ships, but the likelihood the Obama administration would try something as intelligent as spend government money on the shipbuilding sector as a jobs program is fairly close to zero. One of the primary reasons is because shipbuilding could takes years to produce desired economic results, and it is hard to imagine the Obama administration has a long term vision for jobs with an election only 15 months away.
By the end of September, the FY12 budget will pass. The House approved budget is $544 billion, but events have likely changed this. It is estimated the final DoD budget will be somewhere between $513 and the $544 billion in the House bill. I suspect the low number will ultimately win given the recent budget cut in the debt deal.
October
Sometime in early October the details of the DoD strategic review will begin to leak, and we will know a lot more about where we are with the future budget. I think I can speak with everyone that the notes by Tim Walton as discussed by Bryan McGrath are troubling. It is hard to imagine a scenario where a "strategic review" conducted by the Pentagon begins with the starting place of budget division 1/3 Army, 1/3 Air Force, and 1/3 Navy/Marines and is taken seriously in this political climate, but that is exactly what Under Secretary of the Army Westphal implied with his answer.
As I have mentioned before, the only way the public will know whether the Pentagon has conducted a legitimate strategic review of roles and missions is if the review details are politically untenable by the vast majority of politicians. It is my sincere hope that throughout the entire month of September the Navy comes out swinging slapping the Army around as a bloated service that needs to be downsized considerably. Undersecretary Westphal is only fooling an uninformed public when the Army claims they can't make dwell time when at the same time they are sending forces to Iraq instead of Afghanistan (see here and here). Don't get me started on the high numbers of people in the bloated Army yet to make a deployment, nor how all of the strategic objectives in Afghanistan are military objectives - not political or economic objectives. The Navy can cream these guys in a public debate, if they try.
But they won't, and we all know it. The think tank community, which is 70-80% retired Army, will encourage 'strategic' policy that keeps the balanced budget approach towards DoD funding. Here is the one ultimate truth, if the DoD proves incapable of producing a real strategic review that makes serious choices based on strategy, and member of the House or Senate that defends the DoD should be called out and probably voted out of office. If the starting place for a DoD strategic review is a 1/3, 1/3, 1/3 budget division, then strategy isn't guiding DoD choices. That basically means the DoD cannot justify their budget of any size, so no total amount of cuts can be regarded as too much. No matter what conclusions the DoD reaches in their review, if it begins with an arbitrary budget division as a non-negotiable starting place, any plan the super committee regardless of how deep the cuts will be just as viable as a DoD plan. October is going to reveal more about the character of DoD leadership than anytime in the last 10 years of war, because for the first time in the 21st century the DoD faces an existential threat - themselves.
October 14 is the deadline for for each committee in the House and Senate to convey their recommendations to the Special Committee.
November
By no later than November 23 the Special Committee is to vote on its report to enact additional cuts towards the $1.5 trillion goal. The politics and political rhetoric leading up to November 23 is unlikely to be coherent, so until we see the final deal on November 23 everything else is just noise.
December
The Budget Control Act of 2011 requires Congress to vote on the Super Committee recommendations no later than December 23, 2011.
Additional Thoughts
See the polls for yourself, the fact is nobody sees defense as the top priority. That doesn't mean folks don't care, only that there are aspects of politics today that have more importance. The nation has been here before, in Vietnam, and depending upon your study of history you can presume how that outcome will be similar to the outcome in this case.
I thought it was noteworthy that both times Ron Paul mentioned militarism of the United States during last weeks Republican debate, the crowd cheered.
Finally, I believe it is difficult to believe that defense will somehow avoid the massive cut. I do not believe the strategic review will be a legitimate review, so I don't see a scenario where the DoD makes a good case for itself. I do believe it is entirely plausible that the final vote on the super committee fails to pass, which kicks in the $884 billion triggered cut. I also believe it is entirely possible that the cut can exceed current levels of suggested cuts if politics begins moving the super committee towards a budget cut greater than proposed $1.5 trillion. It is important to note, the massive $2.4 trillion in cuts will only pay for the budget through March of 2012 and not actually cut much of anything - rather reach a balanced budget through that time frame. If the GDP of the US doesn't grow by 3% as CBO predictions require for all these numbers to work, the cuts to the DoD could go much, much higher.
The number of scenarios that end worse than expectations number greater than the number of scenarios where the DoD doesn't take a major budget cut, and in the context of a poorly conducted strategic review, I have very little faith this will end as optimistic as some presume it will. As Stephen Carmel suggested in his recent speech, the shipping industry is not seeing high volume - indeed is seeing very low business activity for this time of year. All global economic signs, of which the shipping industry is only one, suggests the economy is going to get worse before it gets better. Is the DoD preparing for the worst? Show me one sign, any sign, that they don't need to.
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