Who’s for dismantling the defense industrial base?

A perfect storm is brewing – one that threatens to devastate what is left of America’s military and its associated industrial base.  This would be a bad idea under the best of circumstances.  Events in Egypt and elsewhere around the world make clear that at present and for the foreseeable future, such a prospect invites calamity.

On the one hand, draconian defense spending cuts mandated by the so-called “sequestration” mechanism and deferred until the third and fourth quarters of Fiscal Year 2013 are just beginning to be felt.  They will shortly become even more dramatically experienced, not just by the military, but by businesses and employees across the country, as critical defense capabilities are hollowed out.  The ripple effect of deferring or canceling weapon systems and other modernization programs, reducing training, sacrificing readiness and terminating research and development will translate into tens of billions of dollars not spent by workers in the economy.

Worse is yet to come.  The Pentagon’s 2014 budget request is $52 billion over the 2011 limits, meaning that if the sequester remains on the books, destructive across-the-board cuts of over $50 billion will be required yet again this fall.

Various measures that might mitigate the impact of such cuts include: closure of more bases and facilities; downsizing and restructuring of the Defense Department’s civilian workforce; and scaling back military compensation, benefits and health care.  There is little evidence of the political will necessary to make such changes, meaning that additional slashing of the Pentagon’s already-depleted discretionary spending accounts will likely eventuate.

Another factor compounds the effect of these reductions on our vital defense industrial base:  National security-related manufacturing concerns are hard hit by the world’s highest corporate tax rate – a combined average federal and state rate of 39.2%.  In addition, by some estimates, major government regulations have cut the total value of shipments from U.S. manufacturers by up to $500 billion and lowered factory exports by 17%.  Projections suggest that output from American manufacturers will be further cut for these reasons by 6% over the next decade.

One of the few options available to help mitigate the cumulative effects of these factors in hollowing out our defense industries has been through exports.  Financing of some such sales – particularly in the commercial aerospace sector – has been guaranteed through the U.S. Export-Import Bank (Ex-Im). The Bank provides underwriting guarantees to help foreign customers of U.S. companies get the financing they need from commercial lenders to buy American products.  This has been achieved for many years at no cost to the taxpayer.  Indeed, in 2012, Ex-Im provided a return on investment of $1.1 billion to the Treasury after covering its expenses.

Incredibly, some otherwise-sensible U.S. senators have embraced a gambit that would effectively foreclose this contribution made to ensure that our exporters can compete head-to-head with foreign enterprises that enjoy comparable and, in some cases, far-larger export-financing support. Led by Senator Mike Lee (R-UT), they would halt the Export-Import Bank’s ability to approve hundreds of pending transactions, providing credit guarantees to 3,400 companies across the United States.  As many as 255,000 jobs could be affected, 88% of which are associated with small businesses.

This would be the impact of senators blocking the confirmation of Fred Hochberg to a second four-year term as president of the Ex-Im Bank Board.  Mr. Hochberg was overwhelmingly approved on June 6 by the Senate Banking Committee with a resounding bipartisan 20-2 vote.  By preventing the full Senate from doing the same, however, the Bank’s critics hope to deny the board the quorum it needs to conduct business.

Such cuts to Export-Import Bank loan guarantees, coming on top of sequestration-mandated reductions, will be ruinous for the defense industrial base. The Center for Security Policy has assessed the impact of the prospective Ex-Im cuts on each of the fifty states, in addition to $50 billion cuts per year associated with sequestration (see www.forthecommondefense.org). If foreign customers cannot find credit without backing from the Ex-Im Bank, those losses will grow significantly.  As an example, Texas could lose over $6.7 billion in defense spending in the next round of sequestration cuts, and an additional $4.6 billion in lost export sales.  Even a smaller state like Georgia is projected to lose over $951 million in sequestration cuts, and over $780 million in lost export sales.

Ronald Reagan’s philosophy of America securing “peace through strength” was built on the principle of a strong economy, as he eloquently stated in his first inaugural address: “It is not my intention to do away with government. It is rather to make it work – work with us, not over us; stand by our side, not ride on our back. Government can and must provide opportunity, not smother it; foster productivity, not stifle it. This Administration’s objective will be a healthy, vigorous, growing economy.”

The Ex-Im bank’s success in providing opportunity for America’s manufacturers has put Reagan’s principles into practice.  Fred Hochberg should get a Senate vote on a second term and the Export-Import Bank should be permitted, thereby, to continue its contribution to America’s future prosperity.