I am an economist by training and a financial advisor by profession. However, my passion lies in helping military vets and their families, and I volunteer with a number of organizations that place me in close contact with our military service members.
I was visiting a military installation on Jan. 30 when the news broke of the dismal and unexpected decline in fourth quarter GDP, down one-tenth of 1 percent. The decline was attributed primarily to a cutback in military spending. Defense expenditures fell by 22 percent, the sharpest decline since the end of the Vietnam War.
I asked my military hosts to explain the reason for this sharp downturn. While our reduced military activity abroad is part of the reason, they explained that a great many of the cuts were coming because of budgetary uncertainty. The Pentagon has for some time been living under the specter of massive sequestration cuts should Congress fail to act and produce a budget compromise. Even if a compromise were reached, defense officials know full well that their pocketbook is destined to shrink.
Not knowing exactly when and how large the cuts will be, the budget lords at the Pentagon have instructed military commanders everywhere to cut to the bone. TDY (Temporary Duty) travel to attend conferences and educational seminars has been slashed. Military training and exercises have been reduced dramatically so as to eliminate expenditures on fuel, ammunition and other items associated with wartime readiness. Recruiting expenditures have been curtailed to ridiculously low levels and military recruiters are now operating with a fraction of the money previously allocated to them. Liberty ports of call have been cancelled for almost all Navy ships and submarines deployed overseas or doing offshore training. These cuts reverberate throughout our economy.
In the absence of an approved budget, the Department of Defense is operating under a congressionally mandated continuing resolution that caps expenditures at 2012 budget levels. Meantime, military commanders are being forced to deal with inflationary increases, contractual commitments, and other rising expenses that have not yet been funded.
The bottom line is that all this uncertainly has led our military leaders to err on the side of conservatism and cut expenses wherever they can. They are now five months into their fiscal year and they don’t want to be caught short if and when Congress approves a dramatically reduced budget for them or if sequestration cuts kick in come March 1.
Driving back from my meeting on base, it occurred to me that the uncertainty our military now faces is no different than the uncertainty faced by the private sector over the past few years.
Gridlock over tax rates, a massive federal deficit and overbearing (and often unpredictable) cost increases tied to healthcare and other government regulations are causing U.S. businesses to proceed with great caution. Companies are reluctant to hire and expand their operations. Instead, cost cutting and improved efficiencies are driving much of the increase in corporate profitability.
Business expansion and risk-taking are muted because business leaders are skeptical of Washington’s resolve to fix real and growing problems, especially the ever-growing entitlement colossus. The government simply resorts to printing more and more money — and the proverbial can keeps getting kicked down the road.
The decline in fourth quarter GDP was a surefire sign that all this political bickering and foot-dragging has serious consequences. An economy that should be recovering at a 4 to 5 percent rate is instead growing at a lackluster 1.5 to 2 percent. Unemployment remains stubbornly high and many have dropped out of the workforce altogether.
A Defense Department that should be focused on meeting future threats and contingencies is instead worried about how to keep the lights turned on, how to fuel their vehicles, and how to train, equip and motivate a highly skilled workforce — one that is the backbone of our security and the guarantor of stability throughout the world.
Elections have consequences; but so, too, does the infighting, squabbling, and enormous philosophical divide that characterize our political parties. Until our leaders realize that “deal” is not an ugly four-letter word, our economy will continue to suffer. So, too, will our national defense.
Raul Mas Canosa is a financial adviser in Coral Gables.