Jobs + Jobs - Jobs + Jobs - Jobs = Jobs - Jobs or Jobs + Jobs, Maybe

Loren Thompson is making sense with this.

An especially troubling aspect of the present situation is that the cuts mandated by the Budget Control Act to reduce deficits could grow bigger if the president’s jobs bill passes, because the special committee would need to find additional savings to cover the price-tag for its package of tax changes and targeted spending. So in the current environment where legislators are trying to cut deficits and stimulate the economy at the same time, the government could end up destroying many thousands of good jobs to create lots of not-so-good jobs in areas like construction. What kind of a tradeoff is that?

He goes on.

So let’s do the math. The number of jobs created by defense spending varies depending on the nature of the activity and how much each job pays, but it’s a safe bet that at least one direct job is created for every $200,000 in spending. Thus, the $100 billion in annual military spending cuts that might be spawned by deficit-control legislation potentially accounts for 500,000 direct jobs. But that’s just the beginning, because numerous additional jobs are created in retail, construction, education and other pursuits as defense workers spend their income. Analysts argue endlessly about what this economic multiplier effect might be, however a very conservative guess would be that each direct job leads to the creation of at least one indirect job (the real number is probably over twice that). So even a restrained analysis suggests that $100 billion in defense cuts will wipe out a million jobs.

This finding corresponds loosely with the fact that the U.S. gross domestic product of $15 trillion currently sustains about 140 million jobs. But you can find plenty of research outside the defense sector supporting the notion that each job resulting directly from government spending produces additional indirect employment. For instance, an analysis by Reid Cherlin in the September 11 issue of New York magazine estimated that if the Federal Highway Administration spent a billion dollars on repaving roads, that would create 9,536 construction jobs, 4,324 jobs in supporting industries, and 13,962 “induced” jobs — meaning jobs unrelated to the roadwork that nonetheless were made possible by the spending of people engaged in it. In other words, roughly half of the jobs created were indirect, a result of the economic multiplier effect from federal spending.

Since defense workers in both the public and private sectors usually make more money than people employed in the construction trades, their spending probably has a stronger impact on the rest of the economy. That is especially true of those engaged in developing and producing military technology, since U.S. combat systems are high-tech products that contribute positively to the balance of trade (America is the largest exporter of weapons in the world). As I noted in a recent commentary for Forbes, it appears the military accounts for over a tenth of all domestic manufacturing.

Loren Thompson doesn't suggest it, but defense advocates on Capitol Hill would be very wise to have the CBO score the impact of defense cuts to the job market. If the President's priority is truly jobs as he claims, then cutting defense is counterproductive towards that objective. I tend to think the better reason for cutting defense is as part of the solution to solving the national debt crisis and cutting government spending across the board, and not a jobs issue, but because the Budget Control Act of 2011 doesn't actually cut government spending (rather it pays for government spending at current levels of debt) - I don't see how defense budget cuts are really solving any of the economic problems the nation is facing right now, nor how the absence of a foreign policy discussion by the Obama administration is going to miraculously create a viable strategy in the DoD for the 21st century.

I will add this... the economic modifier for shipbuilding scores higher than most manufacturing industries in the US today. The reason is simple - most of the supply chain for shipbuilding is in the United States, while much of the supply chain for aircraft and automobiles is not, and that detail is often ignored when discussing economic modifiers for various manufacturing sectors. This is particularly true of automobiles where the direct economic spending impacts are high, but that high direct spending ends up overseas for parts.

Shipbuilding is always a good government investment when it comes to jobs, which is why I strongly believe the Obama administration really screwed up their stimulus spending choices. They should have invested in shipbuilding, starting with heavy investments early on with the US Coast Guard (Icebreakers and Cutters) and building up towards bigger investments in the Navy - specifically T-AKEs and Virginia class submarines, although LPD-17s would be useful and the MSC ships that made up the Sea Base would have been optimal from an economic stimulus point of view. What a fantastic failure of a missed opportunity considering that government spending would have contributed more to GDP and had far greater direct/indirect/induced spending impacts towards positive economic activity than the low-wage earning projects favored instead.

I for one would be very interested to see how the CBO scores the job loss of the $350 billion in defense cuts already made vs the job creation found in the Presidents $447 billion job plan, but I also hope the CBO looks at impacts of additional defense cuts including the Budget Control Act of 2011 automatic trigger cuts. Defense spending jobs typically mean higher wages but also favor higher education. Are we really about to replace those with lots of low wage earning jobs that require little education and call it progress? What are the probable comparative impacts on tax revenue when we trade lots of high income skilled labor jobs for a higher number of low income non-skilled labor jobs? It's a rhetorical question, unless you're CBO, but I think we all know the answer...

Something tells me the damage to jobs due to defense cuts is going to be a lot higher than people realize, and spell very bad news for the economy next year. Note to future political leaders, cut defense in the first year, not the last year, of your elected term - because it's about to suck being an incumbent.