Mr. Market Says the Military Industrial Complex Will Be Largely Spared in Upcoming Grand Bargain

It’s been remarkable to witness the public complacency in the face of the certain-in-trajectory, less-clear-in-details “Grand Bargain” that Obama and Romney are determined to foist on the hapless middle class and poor in this country. In the first presidential debate, Obama flat out said he agreed with Romney’s position on Social Security (as in it needs to be “reformed” which is NewSpeak for cut). And both candidates have been eager to present themselves as responsible deficit cutters. In reality, it’s madness to cut government spending now. As we and other sites have written at some length, the economic rationale is dead wrong. Not only have households been deleveraging (mainly involuntarily, via defaults) but businesses have been net saving, which means government needs to take up the slack, or wages and GDP will fall, making the debt burden to GDP even worse (if you doubt me, this experiment has been run multiple time, in Latvia, Ireland, Greece, Spain, and Portugal, and the results in every case confirm that austerity in the midst of a balance sheet recession only makes matters worse). Even normally agnostic investors are making the case for more government spending. For instance, from Cullen Roche via Clusterstock:

The unusually slow recovery in private investment has meant the government’s needed to play a larger role than usual in the recovery. Private investment is still crawling out of a deep hole, recovering just half of the peak to trough losses during the crisis. A substantial decline in government spending at this point would almost certainly send the US economy into contraction.

And to make matters worse, the promoters of this scheme have been cooking the math to make the US’s situation seem worse than it really is.

But it appears that 20+ years of propaganda and perfecting of labor-abusing tactics are working. The trick used with unions, of protecting the old hands and taking the younger workers in at lower rates is being applied here. I’m at a loss to understand why the geriatric set isn’t outraged on behalf of their children. I’m likely to barely squeak in as part of the protected class, and I’m not particularly close to my younger brothers, yet I regard it as unacceptable that I get a deal and they don’t. And younger people have been convinced they won’t see any Social Security bennies, and so aren’t up in arms, even though, as Dave Dayen has pointed out, most pension plans (well, at below the CEO level) don’t come close to matching the economic value of Social Security.

This part of the deficit equation has been reasonably well covered on specialist sites, even if this sort of analysis is greatly underplayed in the mainstream media. But another part has gotten comparatively little attention: the fact that the military appears likely to be spared the budget axe. Remember, not only do Americans overwhelmingly approve of preserving Social Security and Medicare, so to do they favor cutting defense spending over other budget-paring options. Yet a sighting over the weekend by John Dizard of the Financial Times takes note of the fact that defense stocks have rallied nicely as the fiscal cliff approaches. What gives?

There are two possible explanations that come to mind. One would be that investors are looking forward to a period of merger and acquisition activity within the industry, which would lead to takeover premiums in buy-out deals, along with greater efficiencies in the use of capital…

The other would be that there might be some “contingency,” as they call wars now, in a future that’s foggy to us, but clearer to the market. Yes, everyone agrees that the American public, and the politicians, are war-weary, and want to do “nation building at home”. Also, both presidential candidates made clear in the last debate that they don’t want another war in the Middle East. That doesn’t mean we won’t have one…

Even so, one larger contractor, Northrop Grumman, has also seen its stock rise by over 22 per cent since the summer. Northrop is very active in developing advanced UAV’s, or drones, and is also known to…well, it’s hard to know all of what it does, because so much of it is paid for out of the enormous “black” budget.

When the Pentagon gets around to real procurement cuts, as distinct from the certain-to-be-bridged fiscal cliff, it will give relatively favourable treatment to the producers of these weapons of the future.

For all the political fulminating, there really aren’t many industries that have a more secure future than the US defence companies. They don’t have to make excessive capital spending commitments to secure their future; much of the development money and cost of new facilities are picked up by the taxpayer. No auto manufacturer really knows what its sales will look like in the first quarter of next year, but the defence contractors do. When spending cuts come, they will be spread out and comfortably financed.

The irony is that actually reaching the fiscal cliff would lead to mandated cuts in defense spending and would spare Medicare. At this point, it seems as if only an outside the box event will derail the rollback of Social Security and Medicare, just as Monica Lewinsky and the related impeachment drama derailed Clinton’s plans to implement these “reforms”. As distasteful as it might be in all other respects, at this point it may take a deus ex machina like an electoral college tie to save Medicare and Social Security from the chopping block.

This post was originally published at Naked Capitalism and is reproduced here with permission.

2 Responses to "Mr. Market Says the Military Industrial Complex Will Be Largely Spared in Upcoming Grand Bargain"

  1. falk burger   October 30, 2012 at 11:16 am

    Romney and Obama both like the military, and deficit spending in that area is likely to occur no matter who wins. Under Romney, this will result in a mother of all bubbles that will revive the glory of America in the sand-filled vision of ostriches. Under Obama, we will avoid the severity of that hangover, lurching more slowly toward oblivion. Speaking to members of my daughter's generation, I have more than once declared myself ready to get my old grey head cracked open by a police baton when they're ready to storm the barricades. But they're all too busy trying to get their lives on track…

  2. DeanAshby   December 26, 2012 at 2:33 am

    No matter how it goes, there will be some space for military-related spending. This won’t be stopped, nor will it experience any slowdown. Such spending will not be easy or self-explanatory, but hopefully, it will be made clear to the public as we move along.