By Lynn Reaser
The headlines are ominous. The rise of the Islamic State, attacks in Gaza, demonstrations in Hong Kong, Russian intervention in the Ukraine, and the emergence of China as a military power underscore the need for a strong U.S. defense. Yet, budget pressures have pushed in the opposite direction, with military spending steadily falling as a share of gross national product. San Diego’s economy is caught in the crosshairs of this debate.
Defense Spending and San Diego
The end of the Cold War hit San Diego’s economy hard, but the region has bounced back with a diversified base. We have various technology sub-industries, health care, tourism, and education. The region also benefits from a strong culture of entrepreneurship and innovation, which supports a large array of small businesses. This granularity gives the region stability and makes it less vulnerable to shocks that might impact other regions heavily reliant on one firm or industry.
The military still has a bigger footprint on San Diego County than any other sector. Defense-linked dollars will total about $25 billion in 2014. In the sixth annual Economic Impact Study that Pt. Loma Nazarene University just completed for the San Diego Military Advisory Council, we found that defense spending accounts for $1 out of every $5 of the region’s total gross regional product. After accounting for all of the ripple or multiplier effects, defense outlays are responsible for 22 percent of all jobs in the area.
Sequestration: Round One
Sequestration, dictating large cuts in defense spending, began early in 2013 as a result of the inability of Congress to find a path to rationally reduce the budget deficit over time. The law required across-the-board reductions in defense spending of about 10 percent. Subsequent actions reduced that percentage and some flexibility was granted over where the budget cuts were made.
San Diego weathered the storm relatively well, but there were impacts and further effects will be experienced down the road. Defense contracts were slashed by 22 percent, although backlogs cushioned the immediate impact substantially. Increases in retiree and veterans benefits helped to hold the overall amount of defense-linked dollars to the region relatively steady. Speak to any military official, however, and you will hear of the damage done to training, maintenance, and repair budgets. As we all know, these reductions in short-term costs will come at the expense of much larger required outlays in the long run.
Sequestration: Round Two
Congress gave us a two-year respite from sequestration, although the defense budget remains tight and uncertainty prevails. Once again, we have started a new fiscal year on Oct. 1 without a budget, with a continuing resolution funding the government through Dec. 11. This means that spending will be constrained to last year’s levels.
In Fiscal Year 2016, which is now less than a year away (beginning on Oct. 1, 2015), sequestration will return unless Congress again acts. That will mean lower caps on the amount of “discretionary” defense spending (budget items, such as procurement contracts, that Congress must explicitly approve). On a year-to-year basis, the figures actually do not look draconian as they basically will remain flat. However, relative to prior expectations and expenditures that may be necessary to adequately address multiple global threats, the military appears to be woefully underfunded.
Keep in mind that defense discretionary spending now accounts for only about 13 percent of total federal spending. Clearly, the U.S. budget problem cannot be solved by decimating the defense segment. Social Security, Medicare, and overall health-care spending are the ultimate threats and solutions to our budget problems.
San Diego’s Outlook
How will San Diego fare? We possess important buffers with our strategic geographic location and our unique ecosystem of defense contractors, subcontractors, and research firms. The rebalancing of U.S. Naval forces to the Pacific, our possession of two-thirds of the nation’s air training space, our expertise in unmanned systems and cyber security, and our special operations forces represent key assets.
The national economy’s improvement has cut the deficit dramatically and Congress might decide to “kick the sequestration ball down the road.” But, there are no guarantees. San Diego will be competing with other defense regions for a share of a smaller defense pie. Locally, we need to work with the military to support its current operations. Nationally, we need to work with our political leaders to gain support from Congress. A vital synergy between San Diego and the military now exists, but the future strength and character of that link is by no means assured.
Lynn Reaser, Ph.D., is chief economist for Point Loma Nazarene University at the Fermanian Business & Economic Institute.