The Only Sensible Outcome For The Budget Summit: Slip The Gramm-Rudman Targets

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Introduction

Tomorrow, amid much fanfare and partisan posturing, President Bush is scheduled to convene a "budget summit" with congressional leaders. This meeting is intended to: (1) forge an agreement between the executive and legislative branches on the make-up of the FY1991 budget; (2) determine the manner in which that budget will be made to fit the deficit-reduction targets established by the Gramm-Rudman-Hollings amendment (known as Gramm-Rudman or GRH); and — perhaps most important of all — (3) provide a means of sharing the blame or, more accurately, of diffusing the responsibility for the unpleasant steps required to accomplish objectives (1) and (2).

The impetus for this hastily convened summit is the mounting evidence that the federal budget deficit this fall will be substantially greater than the current estimate of $104.5 billion. The significance of this projection is that it means the difference between the actual deficit and the target set by Gramm-Rudman for FY1991, namely $64.0 billion, will be much larger than had been previously anticipated.

The White House and the Congress have been unable to agree on what should be done to eliminate even the earlier, relatively modest $30.5 billion problem (the total shortfall is discounted somewhat, thanks to a $10 billion "cushion" built into the GRH mechanism). This impasse, reduced to its simplest terms, arose because the President refused to consider raising revenues in the fashion and to the extent congressional Democrats believed necessary, while the latter insisted that, in the absence of new taxes, defense spending was going to have to bear the brunt of the needed cuts.

Had the deficit not grown, the Bush Administration felt it was in a strong position. After all, it reasoned, the effect of a failure to arrive at an agreement between the White House and the Congress would, under Gramm-Rudman’s built-in automatic cuts formula, have been a $15.25 billion cut in defense expenditures — not appreciably worse than what was being proposed by Sen. Jim Sasser (D-TN), chairman of the Budget Committee. At a deficit of $104.5 billion, this appeared to be a relatively attractive way to keep the pressure on Capitol Hill to cut non-defense spending while avoiding the need to compromise on the President’s campaign pledge not to raise taxes.

Unfortunately, now that the deficit is certain to be well in excess of $104.5 billion (thanks among other factors to a combination of reduced corporate earnings and tax revenues, higher interests charges on the national debt, and the mushrooming of the costs of the savings and loan), this strategy no longer appears viable to the Bush Administration. Instead, the likelihood is that — assuming some sort of agreement can indeed be cobbled together by the budget summitteers — it will have the following features: It will raise taxes; it will severely reduce defense spending; and it will not produce comparable savings in domestic expenditures.

What’s Wrong With This Picture?

Under present economic conditions, such an outcome spells disaster for the national economy in general and for defense sector in particular.

Higher Taxes Would Cripple Economic Growth

Economic growth has been sluggish over the past six months. While it has just missed the poor performance (two consecutive quarters at or below zero real growth) that would allow an automatic waiver of the GRH targets, there is little doubt but that the imposition of additional taxes could help turn the present stagnation into full-scale recession.

Importantly, in creating the economic safety valve for Gramm-Rudman, Congress clearly recognized that, under essentially these circumstances, pressing forward with the tax increases and/or spending cuts necessary to meet GRH targets would be extremely counterproductive. It would be disingenuous — and potentially quite reckless — to argue that such a sensible principle should not now be applied in order to avoid plunging the Nation into recession simply because the economy performed a fraction of a percent better than the congressionally mandated standard.

The Defense Sector is Already in Recession

What is true for the overall economy applies in spades to that portion most directly involved in meeting U.S. national security needs. Five years of steady decline in defense spending have precipitated tremendous shrinkage in the industrial base and considerable economic dislocation. According to one recent study, compared with over 120,000 subcontractors involved in defense activities nine years ago, there are only roughly 40,000 so engaged today. Tens of thousands of jobs involving many of the most highly skilled employees in the workforce have been terminated.

The decreased level of spending on the military and programmatic reductions already endorsed by the Administration can be expected to accelerate this trend. Obviously, if Congress goes further — with or without a budget summit endorsement of still further defense cuts — there is every reason to believe that the relatively small number of key prime contractors still in the defense business will decline as well.

It is difficult to calculate the exact, cumulative effect of such a contraction. Beyond the near-term, adverse impact on unemployment, the national interest may be very badly served as attrition wreaks havoc on the industrial base needed to support technologically advancedcompetitive weapons development and procurements, to say nothing of that required for mobilization purposes. and

But the problem with the sort of radical cuts in defense spending advocated by many who will participate in the budget summit does not end there. As a practical matter, it is inconceivable that cuts of the magnitude being proposed in the Defense Department’s FY1991 spending plan by the Senate Budget Committee (-$21.3 billion in budget authority and -$9.8 billion in outlays) or the House of Representatives (- $23.9 billion and -$8.2 billion, respectively) can be made without significant cuts in personnel. Some estimates run as high as 100-150 thousand in additional people removed from the defense rolls.

Coming, as such cuts would, on top of the cut of 91,400 in active duty endstrength effected under the Bush budget request, this level of budget reduction is fraught with problems; not only will it entail further exacerbating the unemployment level by dumping onto the economy possibly hundreds of thousands of servicemen and women, many of whom will be relatively unskilled. It may also result in considerable upfront costs to the government for expenditures associated with personnel deployed overseas and in breaking contracts made with those serving in an all-volunteer force.

Sen. Sam Nunn (D-GA), Chairman of the Senate Armed Services Committee, appears to have recognized the dangers inherent in stripping such large sums from the defense-related 050 account. He has recommended taking no more than $18 billion in budget authority and $7 billion in outlays from the Bush request. Even this level of cuts would inflict real harm, but it would be far preferable to the more draconian reductions currently under discussion.

Unfortunately, neither Senator Nunn nor virtually any other member of the defense authorizing committees — those whose job it will be to put together the first, specific congressional plan for implementing whatever cuts are agreed upon — will be included in the budget summit. This fact contributes significantly to the prospect that, assuming an agreement can be fashioned by the summiteers which includes further cuts in defense spending, the implementing authorization legislation will not be able to pass muster on Capitol Hill.

Conclusion and Recommendations

These considerations prompt the Center for Security Policy to conclude that, if the budget summit is not to do real violence to the economic health and security of the Nation, the only possible outcome is to slip the Gramm-Rudman-Hollings targets for FY1991 and the outyears. Doing so has the double advantage of permitting the damage increased taxes and a deeper recession would inflict upon the economy to be avoided while maintaining a relatively robust defense establishment — a national asset that should be adjusted, if at all, with care so long as the international environment remains as uncertain and potentially explosive as it is at present.

The Center believes that such an asset is sufficiently important to the national interest that it should receive an appropriate allocation of the government’s resources. If the Senate Budget Committee plan were followed, however, the 050 account would receive only $217 billion (in FY1990 dollars) by 1995 — a mere 3.5 percent of projected GNP. This is a level substantially below that provided by President Carter and compares with the 4 percent of GNP the Cheney budget envisions. Given that the United States is spending some 11 percent of GNP on health care, a 4 percent investment in the future health and security of the Nation seems neither disproportionate nor unwarranted.

In that connection, the Center is convinced that the executive and legislative branches must give serious consideration to measures that would enhance the predictability and stability of defense expenditures. Especially at lower levels of defense spending, it is imperative that the most efficient uses of defense resources be realized. Such efficiency can only be realized if planners can receive — and bank on — a reliable projection of the Defense Department’s future spending stream.

Finally, it is incumbent on all those anxious to avoid unnecessary defense expenditures to resist policy initiatives that will add substantially to the defense burden the United States must bear. A particularly important example is in the area of technology security.

Historically, the United States and other leading Western nations have recognized that denying the Soviet Union and its allies access to sophisticated, militarily relevant (i.e., "dual use") technology helps reduce the West’s defense costs. Accordingly, a sustained — and highly successful — effort has been made since 1949 to control the export of such technology to the Soviet bloc.

In the absence of such controls, or on occasions when they have been disregarded, real and sometimes even staggering additional costs have been imposed on U.S. and allied defense establishments. The best known of such incidents was that involving the sale by Toshiba and Kongsberg of advanced machine tools and enabling software to the USSR for the purpose of producing extremely quiet submarine propellers. For an investment of approximately $18 million, the Soviets obtained what has been conservatively estimated to be a $10 billion degradation in Western anti-submarine warfare capabilities.

The United States can ill afford such a subsidy to the Soviet military establishment, particularly at a moment when its own investment in the research and development of defense technology is waning and there is negligible prospect of adding back additional funds to correct deficiencies created in this manner. A potentially decisive shift in the qualitative advantage upon which the United States has historically relied — and therefore, in the correlation of forces — could ensue.

And yet, the Bush Administration and some in the Congress are disposed to engage in a wholesale dismantling of the domestic and international mechanisms used to maintain effective controls on technology. All those concerned with obtaining maximum defense capability for the limited funds available should demand that this trend be reversed.

Center for Security Policy

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