As $500B Budget Cuts Loom, Desperation and Denial Overtake Defense Sector

The U.S. defense sector is wading into the choppy waters of desperation and denial over additional cuts.

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Spending a few hours around Pentagon and defense business officials these days requires mentally ingesting a disorienting cocktail that is one part desperation and one part denial.

Defense Department and industry officials are using ever-escalating rhetoric and floating increasingly dire scenarios for what would occur if the Pentagon is forced into another batch of decade-long budget cuts.

The $500 billion in cuts to planned spending are slated to kick in come January if Congress fails to pass a package with at least $1.2 trillion in federal spending cuts. And while lawmakers still have nearly 10 full months to avoid those new defense reductions, the hysteria in defense circles already is heating up.

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Defense Secretary Leon Panetta has referred to the process under which the additional cuts his department would have to enact as "devastating." Pro-military South Carolina Sen. Lindsey Graham, himself an Air Force Reserve officer, has said failing to void the $500 billion in cuts would be akin to "shooting ourselves in the foot." Brett Lambert, U.S. deputy assistant defense secretary for manufacturing and industrial base policy, last month said cuts that big would equal "fiscal castration."

Add to the list "assisted suicide."

That was Deputy Defense Secretary Ashton Carter's Thursday morning contribution to the growing sense of hysteria among DoD officials and industry representatives.

The comment drew nervous laughter from Wall Street and industry attendees who were jammed into an ballroom inside an upscale hotel just outside Washington, D.C.

"Assisted suicide--that's just ridiculous," says Gordon Adams, who ran defense budgeting for the Clinton White House. "This process is a deliberate political framework to get a deal after the election in November.

"I don't even know what Carter's objective is. Is it to scare the bejesus out of people?" Adams says. "We've got the world's only global military, so he's not going to scare anyone. It's just empty rhetoric."

"It'd be great if we had all of the money we want," Carter said. "Well, we don't have all the money we want."

That frank assessment drew no nervous chuckles from members of the audience at the conference, sponsored by Credit Suisse and McAleese and Associates. This time, the room was eerily silent and jarringly still.

Yet the sound was somewhat deafening--that of an entire industry slowly waking up to several painful realities.

One is confirmation that the post-9/11 defense spending spree is finally over. Another is a cold water-to-the-face feeling that many in the defense sector often refuse to even discuss privately: Shoddy program management and industry greed caused a slew of weapons cancellations that will prevent defense firms and their employees from profiting as handsomely as they could have.

The Pentagon soon could have "more [weapon] programs than we can pay for," House Armed Services Committee ranking member Rep. Adam Smith, a Washington Democrat, told the conference. "Some are going to have to go," he said, creating such a silence that the buzz of the lights overhead was audible.

Carter added to the defense sector's collective consternation Thursday, saying bluntly that the additional cuts from planned spending "would be disastrous for our partners in industry." Again, a jarring silence swept across the ornate ballroom as the deputy secretary's words hung in the climate-controlled air.

He even invoked the words of war, instructing his private-sector allies to "look up from the foxhole" and adjust to an era of smaller budgets.

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Just as strong as the hysterical rhetoric stemming from the sector's collective desperation are pockets of utter denial that Congress might fail to pass a broader debt-reduction package that would void the defense cuts.

Citing discussions with industry executives, Robert Spingarn, a senior Credit Suisse analyst, said he detects the defense sector has so far chosen to ignore the possibility that the $500 billion in cuts just might happen. In fact, most firms have done little--or no--advanced planning for a scenario under which their biggest customer would have an even smaller slice of the federal pie, he said.

Yet it remains unclear just how a bitterly partisan Congress of more ideological stalwarts in both parties than in several decades will find enough common ground to get a debt-reduction bill to the president's desk.

Smith told the conference that congressional Republicans remain staunchly opposed to raising taxes. Smith and his Democratic mates, on the other hand, insist they will vote down any package that omits new federal revenue streams.

For its part, the American public wants it both ways: lower taxes without cutting most federal programs, Smith said, citing opinion polls. "There is a level of denial in the country and the Congress that we have to get past," he said to an again silent room.

The denial exists not just in the boardrooms of defense firms and living rooms of American families but also the Pentagon's E-Ring, home to the offices of its senior leaders.

Panetta left lawmakers in both chambers slack-jawed when he told them repeatedly the Pentagon had yet to begin thinking about how it would implement $500 billion in additional funding reductions.

Panetta has since said the department will begin such planning this summer. But Panetta, a former White House budget director and House Budget Committee chairman, has a rather simple reason for not starting the planning for what he has called a "doomsday scenario."

"Secretary Panetta," Carter explained, "thinks it won't happen because it's so dumb."

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