Fasten Your Seatbelts, It’s Going to Be a Bumpy Ride

Military spending propelled economic growth in Virginia during the past decade. Now that rocket fuel has run out. Fox News reports that the Obama administration “has asked the military’s Joint Chiefs of Staff to cut the Pentagon’s budget request for the fiscal year 2010 by more than 10 percent — about $55 billion.”

It’s not clear how much of that will come of Virginia, but we can make an educated guess. Last year, the Department of Defense spent $56 billion here. If we absorb our “fair share,” we stand to lose $5.6 billion yearly.

Meanwhile, the Times-Dispatch notes that Virginia could receive as much as $5.8 billion in the Obama administration’s proposed “economic stimulus” package — about as much as we lose from the defense cutbacks. That pinata of pork would provide a one-time injection of some $750 million in transportation funding, $550 million for Medicaid, and $1.58 billion over two years as part of a fiscal stabilization fund. Then the money dries up and we’re back to Business As Usual.

Bacon’s bottom line: Virginia is hosed. Defense cutbacks will be long-term, while the “stimulus” package will provide only a short-term palliative. We will encounter real hardship.

We can deal with this bad news in a chronic crisis-driven mode, taking a series of stop-gap measures, or we can start dedicate ourselves to fundamentally reinventing our economy, our human settlement patterns and our governance system to make us more competitive over the long-haul.

Crisis-driven thinking, or long-term thinking? Which do you think will prevail? Hah! What a foolish question.

Update: Fox News might have gotten the story wrong. According to CQ Politics, the “cuts” are cuts only in the sense that they are reductions from some astronomical number some DoD bureaucrats had lobbied for. In actual dollars, measured against actual dollars spent last year, the Obama administration would match what the Bush administration recommended, which would be an actual increase.
So, before any one panics, we should make a point of ascertaining who’s got the story straight.

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17 responses to “Fasten Your Seatbelts, It’s Going to Be a Bumpy Ride”

  1. ahhhh yes… you see… Virginia has had the benefit of a built-in, long-term “stimulus” for decades while many of our neighbor states had to earn their economy the old fashioned way –

    …NOT by being the recipient of the Washington Money Tree…

    I don’t think Virginia gets hurt that badly because Washington DC/Nova has a lot more Fed presence than just the military….

    .. and Hampton Roads/Tidewater might feel some sting but their strategic location to the Oceans is going to insure a demand for their ports facilities.

    And it would seem to be that Virginia does have an opportunity to invest in it’s ports – perhaps even aspiring to become the LA of the east coast.

    And of course, along with that – invest in inter-modal land transportation – as LA and California have done.

    Virginia, is very fortunate in it’s geographic location… not only the center of the Fed Government, but the middle of the East Coast…

    a far, far better economic circumstance than the states land-locked in the middle of the country…

    In many respects, we don’t have to work that hard to benefit other than refrain from doing stupid things…. that discourages business activity.

  2. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Defense cutbacks, no surprise there. What will actually happen is the usual hit on personnel costs and parts, while everything else is pretty much business as usual. I see the military moving away from defined benefits to co-paid reduced pensions, health plan fee increases, and shifts in military end strength with further reliance on contract labor.

    Civil service will continue it’s downward slide, moving more toward a management overseer role instead of a broad spectrum of workers. Many government agencies are slow to see this trend, but DoD is well along the way to achieving this model as the command chain compresses.

    There is no such thing as ‘defense’ contractors. Over the past ten years, these companies have evolved into broad based service providers. Cuts in one area will be offset by opportunities in others. If reductions are needed, contractors will slash their back office overhead. That’s bad news for the Reston gang, but out here in spear point land things will continue with little interruption. Contracts are based on seats on site. That’s where the money is made. On average each contract worker allows the government to reassign 3 people to more pressing duties or allow force reduction. As things progress, I see less demand for technical specialist egomaniacs and greater reliance on MacGyver types who are adept at success in a diverse contract environment.

    Now I could be wrong. Obama and the Dems may really want to rebuild Big Government. But that would go against a trend that has been in place since the Nixon era.

  3. Anonymous Avatar

    Jim,
    You are missing some important points.
    (1) Defense cuts are understandable. The last round was a reaction to 9/11 which was what? Eight years ago?
    (2) You don’t even bring up the latest BRAC changes. Ft. Lee in Petersburg and Ft. Belvoir in NOVA are getting HUGE and sustaining increases, including a new Army hospital at Belvoir. These are not going to go away any time soon since theyt represent DOD consolidations that will last for decades, not just years.
    Maybe do a little more homework?

    Peter Galuszka

  4. Anonymous Avatar

    Peter – you are making some good points, but, IMO, underestimating the impacts on government contracting and that BRAC changes go both ways.

    Keep in mind, I am NOT criticizing cuts in defense spending in this post. I’ve argued for some time that they were coming. The problem is that, regardless of which party has been in power in Richmond, nothing is done to address the fact that, but for Uncle Sam’s spending, Virginia hasn’t got much going for it on a macro level.

    We have a lot of good people in the state, some fine schools, good colleges and universities, but we live at the whim of the federal appropriator. That and we subsidize the hell out of real estate development and trucking companies. Hardly something to build long-term prosperity.

    Now we will always have considerable spending in NoVA and HR for defense-related activities. But what happens when that spending slows?

    It’s time for the next governor to rationalize real estate development. We need more of it outside NoVA and lesser subsidies everywhere. Virginia needs an adequate public facilities law. We need to cut the non-teaching glut in our schools and colleges.

    Just starters.
    TMT

  5. Anonymous Avatar

    “On average each contract worker allows the government to reassign 3 people to more pressing duties or allow force reduction.”

    Gee, on that basis, government “stimulus spending” could cut the workers in the economy by a third.

    RH

  6. Anonymous Avatar

    Over the long term Defense spending has slid from about half the government budget to below 10%.

    I don’s see it falling much more.

  7. Anonymous Avatar

    let’s not get too carried away with doing things as California has done.

    “California’s ‘Green Jobs’ Experiment Isn’t Going Well”

    http://online.wsj.com/article/SB123336500319935517.html

    “Now, as the Golden State prepares to implement this regulatory scheme, employers are howling. It’s become clear to nearly everyone that the plan’s backers have underestimated its negative impact and exaggerated the benefits. “We’ve been sold a false bill of goods,”

    I think I told you so.

    RH

  8. Groveton Avatar

    Interesting thread.

    I think Darrell’s “tip of the spear” argument is wishful thinking. Reagan talked about a “500 ship Navy”. How many ships does the Navy have now? 283. Maybe defense cuts should come from the Pentagon before the fleet but history doesn’t really support that hope.

    Larry says that Virginia doesn’t really have much going for it beyond federal spending. Sadly, I think that’s true. As I said before, the last effective business development program run by Virginia leaders was the effort by George Washington and Thomas Jefferson to get the federal governemnt located on land owned by Virginia (and Maryland). There has been no systematic effort to develop focused markets in Virginia. There is no Silicon Valley like in Californai, no banink hub like in Charlotte, no union of universities like in Research Triangle Park, no tourism like in Florida (in fact, Disney was told to go away in Manassas). There are not even renments of industries that once were great like autos in Detroit, stock brokerages in New York or insurance in Hartford. I believe this business development defecit has been caused by a grossly inffective political elite in the state.

    So, here we are. Talking about how the state is heavily dependent on federal spending. We’re talking about how Virginia is poorly prepared for a slwodown in federal spending because (after 225 years) there has been little to no progress in developing areas of competence in other (non-fedeal) industry.

    Meanwhile, Virginia retains a strict adherence to Dillon’s Rule. Essentially, the philosophy of the state constitution is that localities should be subservient to the government in Richmond. This might make sense if the government in Richmond had a track record of success. However, just the opposite is true. Virginia’s political elite has put the Commonwealth is jeopardy of economic turmoil for the last two centuries.

    You guys wonder why I want to take power away from Richmond. Richmond has failed for over 200 years. The next 2 years will bring that failure into sharp focus. It’s time for a change in the Old Dominion. It’s time to neuter the politicians in Richmond and their puppet masters behind the scenes.

  9. Anonymous Avatar

    Gee, Groveton, Tell us what you really think.

    I think your analysis of business development in VA is spot on.

    But we still have to deal with the people who think that less of everything somehow equals more. Pretty soon we will all get to meet in the unemployment line.

    RH

  10. Anonymous Avatar

    “Australia is the latest place to question the idea that climate-change legislation will be a free lunch, or nearly so. In a report commissioned by the Australian parliament, independent consultants found that the government’s optimistic cost estimates for climate-change legislation suffer from loads of flaws …

    Australia’s government assumes the entire world will immediately agree to a comprehensive climate accord, and never calculated what would happen to Australian industry were it to be the only country in the region with strict climate laws.

    The bottom line, these studies say, is that regardless of what governments are saying, reducing economy-wide carbon emissions will almost certainly not be quick, cheap, or easy. Which makes an honest tallying of the costs and benefits all the more necessary to make climate policy work.”

    From Environmental Capital

    RH

  11. Anonymous Avatar

    Groveton — actually we do have one more industry — lobbying for business subsidies from non-federal taxpayers. A few weeks ago, BR had a post about the trucking industry's efforts to keep $200 million in gas tax subsidies for overweight trucks. Washington Transit Partners (including Bechtel) and the Tysons Corner land flippers have won huge present and future subsidies from the Dulles Toll Road drivers. The commercial building operators in Fairfax County are fighting to maintain eight figure subsidies from residential and business real estate taxpayers to land development and zoning services.

    So we do have something to fall back upon when Congress & President Obama cut back on federal spending on government contracting.

    Actually, I largely agree with your comments, excepting only the Dillon Rule comment. While the state government crowd has done nothing, as you say, I don't have a lick of faith that, even with full or partial home rule powers, the elected officials in Fairfax County would do any better. We face a huge fiscal crisis in Fairfax in part because the BoS increased spending on programs at rates well in excess of increases in income; overpaid workers under Pay-for-Performance; are supporting an elevated rail line through Tysons despite strong opposition from nearby residents, businesses and those landowners that actually want to build something at Tysons' stations (not the "flippers" or the "me too" landowners far from stations); and supported the 2004 state tax increases that shifted more dollars to Richmond and brought back a few more pennies.

    With this track record, I fear the locals would only make things worse with more power.

    But having said this, where are the creative ideas from candidates for governor? And where are the creative suggestions that will not lead to more corruption and taxpayer giveaways?

    TMT

  12. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “I think Darrell’s “tip of the spear” argument is wishful thinking. Reagan talked about a “500 ship Navy”. How many ships does the Navy have now? 283. Maybe defense cuts should come from the Pentagon before the fleet but history doesn’t really support that hope.”

    That’s the point. The Navy and Air Force are in heavy RIF mode. Meanwhile the Army has more missions than they have people, made even worse by their over reliance on reserves for key support functions. All of this has caused a reallocation of personnel and elimination of non-essential billets in exchange for contract workers. I’ve been on several contracts over the past few years, and every one reassigned military back to front line duties.

    http://www.navy.mil/search/display.asp?story_id=42099

    But it doesn’t stop with troops. The same thing has been happening across government in general. I don’t see Obama halting the process.

    http://www.whitehouse.gov/omb/budget/fy2002/mgmt.pdf

  13. Anonymous Avatar

    Maybe the federal government cutting back DOD spending is a good thing for Virginia. We can actually focus on building a substantial corporate base aka economy. A corporate base that isn’t heavily reliant on federal government spending. Off the top of my head I can think of 6 major NOVA corporations that are reliant on the fed gov’t because they get a majority of their revenue from gov’t activity, ie Computer Sciences or started out as ie gov’t Sallie Mae.

    Why settle being a government agencies hub when we can have corporations we can tax to death! Send the government to Maryland!

    So far, VA has attracted Altria Group, Meadwestvaco Corp, and hopefully Hilton Hotels Corp (Hilton is pending. Mariott is based in MD so I would guess they’d choose NOVA). With more effort VA can attract recent mergers, companies that are unsatisfied with their location, and new companies are just starting up or even companies that were divested/”spinned off” from a larger company.

    please note: corporation essentially mean Fortune 500-1000 company and/or multinationals. I’m not ignoring private companies but they don’t need to be as fat as public companies to operate. Once you go public, you automatically need lawyers, and accountants, human resources, and consultants just to survive since everything gets soo complex. Plus Mars Corp can choose to hire mostly family members for top positions, public companies typically don’t have that luxury.

  14. Anonymous Avatar

    Darrell,
    A point about Reagan and the 500 ship Navy. That was back in the early 1980s. The Soviet Union still existed and was heavily involved in such places as Afghanistan, Central America and Angola. They are a serious nuclear capacity that needed deterrence. They still posed a threat to Western Europe and their Navy could place missile subs off our coasts.
    Despite Putin’s and Medvedev’s saber rattling, today’s Russia is nowhere near the same threat. Maybe that explains the 200 plus ship Navy.
    Peter Galuszka

  15. Anonymous Avatar

    I think that during WWII we learned that the lifetime of a capital ship during an air battle is not very significant.

    It seems that about the only reason to have a ship today is to project airpower, or to protect the ship that does. Even the subs and frigates project air power.

    That, plus near shore engagements or landings, which is a whole different mission.

    I think we can do a lot more with a lot fewer ships than before, but that, of course increases the risk of loss per ship. We may have a Navy that is as capable in some respects, but a lot more risky.

    RH

    RH

  16. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “Maybe that explains the 200 plus ship Navy.”

    It’s not the number of ships I’m talking about. It’s the number of personnel available to man them. The Navy has been cutting shore billets so their end strength can meet Congressional standards. Those shore tasks are then contracted out. In addition, sailors are routinely assigned to Army units to alleviate the deployment rigors of the reserves. It’s called Individual Augmentation, aka a Navy Of One, to handle duties SWA theater contractors are not authorized to perform.

    The Abrams Doctrine, a response to prevent another Vietnam, created an Army heavily dependent on reserve forces in critical support roles like supply, MP’s and transportation. It worked well in peacetime, but as we have witnessed, isn’t worth a darn in a lengthy police action like this one. Especially when recruitment goes down the drain and there’s no draft. All the more reason why once you make a decision to go to war, you blow the hell out of everything and get it over with. Vietnam, meet GWOT with tied hands.

  17. Anonymous Avatar

    good points.

    RH

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