CATO Study: Defense Cuts Unlikely to Hurt U.S. Economy

A new study says the defense sector is too small for cuts to have an impact on the broader economy.

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A new CATO Institute study says deep cuts to planned national defense spending are unlikely to have a crippling effect on the broader U.S. economy because the sector accounts for only a small slice of economic output.

Data examined for the libertarian think tank by scholar Benjamin Zycher "suggest strongly that the adverse effects of spending cuts would be small in the aggregate because defense spending is" less than 5 percent of the nation's gross domestic product.

"The defense sector is too small a part of the economy for changes in defense spending to have large aggregate effects on [gross domestic product]," Zycher, a senior fellow at the Pacific Research Institute and a visiting scholar at the conservative American Enterprise Institute, wrote in the report.

At issue are the economic effects that would be triggered by $500 billion in cuts to planned to kick in on Jan. 2 if Congress fails to send the president a package that includes deficit-reduction measures that total at least $1.2 trillion.

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Several groups of lawmakers have held quiet meetings behind the scenes aimed at finding a way to avoid those $500 billion cuts.

Several pro-military studies, including one commissioned by a top defense and aerospace trade association, have estimated a new batch of planned Pentagon spending cuts would cause more than 1 million jobs to be lost next year alone.

The Aerospace Industries Association and the International Association of Machinists and Aerospace Workers released a report in October that concluded further defense cuts would push the U.S. economy into a new recession.

But the CATO study casts doubt on those numbers and predictions.

"Such studies have tended to exaggerate the harmful effects of spending cuts and have ignored or understated the beneficial effects associated with redirecting resources to more productive uses," Zycher writes.

Zycher also acknowledges national defense cuts would lead to higher unemployment rates, especially in the short term. But he argues that it would be part of a net positive for the economy.

"The decline in the government demand for defense goods and services will engender a shift of resources to other sectors, whether public or private, and under the assumption that the smaller defense sector reflects a lower value of--or need for--defense output," states the CATO study. "The structural unemployment that results is part of a process of resource reallocation that yields greater productivity for the economy as a whole."

Still, pro-military hawks in Congress, like California Republican Rep. Howard "Buck" McKeon, the chair of the House Armed Services Committee, often cites the AIA-commissioned study as a warning against the $500 billion cuts.

McKeon told reporters in late June that if the new defense cuts are triggered, local economies will suffer. That means dry cleaners, grocery stores and other small businesses will be forced to cut staffs or even close for good. The CATO study says that would not be the case.

"If the budget dollars previously spent on defense services are reallocated to other government agencies, that increase in spending will offset the decline in defense outlays," states the CATO report.

The likely Republican counter to that argument can be found in a back-and-forth U.S. News & World Report had with a senior House Republican staffer last week. On the matter of whether the massive defense cuts would hurt the economy, the staffer suggested asking a family in his boss's district whether a lost job would be an economic hit to that family.

The CATO report says pro-industry studies like the one produced by AIA fail to account for a list of factors, including the effects freed-up capital would have on the broader economy.

"If government spending and borrowing are reduced by the amount of the decline in defense procurement, those who otherwise would have lent to the government can lend to others instead, who in turn will consume--or invest in--some other set of goods and services," states the CATO study, released Wednesday.

John T. Bennett covers national security and foreign policy for U.S. News & World Report. You can contact him at jbennett@usnews.com or follow him on Twitter.

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