The Sequestration Sideshow: Jobs and Pentagon Contracting in Context

This week another major defense contractor used its employees as political pawns in its campaign to halt planned reductions in Pentagon spending.

The Los Angeles Times reported on Monday “Northrop to shed nearly 600 jobs.” The article includes all of the industry’s talking points about “budget uncertainties,” “jobs lost,” and “more cuts,” and even uses the erroneously high $600 billion amount for defense sequestration (the correct amount is $492, as ProPublica’s critique of media using the $600 billion figure illustrated). Unfortunately, the article not only overstates the actual amount of Pentagon sequestration by more than $100 billion, it also fails to put Northrop’s job-shedding into context. For those interested in a little more balance in their sequestration news, here are a few facts to mull over before jumping on the contractor “doomsday” bandwagon.

First, Northrop has reduced its workforce every year since 2008, cutting thousands of workers every year during a time in which its Department of Defense contract dollars remained fairly constant. Employment figures from its SEC filings for 2008, 2009, 2010, and 2011 chronicle this downsizing. Northrop wasn’t the only defense contractor to cut jobs either. In the past five years the top five defense contractors—Lockheed Martin, Boeing, General Dynamics, Northrop Grumman, and Raytheon—collectively cut nearly 20,000 jobs while their contracts from the DoD increased by more than $10 billion. In short, if there is any connection between revenue and employment it has, at least recently, been in the opposite direction that Northrop would have us believe.

Second, while these firms have been cutting jobs they’ve been increasing the compensation packages of their top executives. For example, Northrop’s CEO, Wesley Bush, received a total compensation package worth more than $26 million last year. But even Bush trailed the top paid defense contractor CEO, David Cote of Honeywell, who received more than $35 million in total compensation last year.

Third, Northrop and the rest of the defense industry have an enormous backlog of contract work—guaranteed revenue from work yet to be complete—that will insulate their firms from reductions in planned Pentagon spending. At the end of last year Northrop had a $40 billion backlog—that’s nearly 3 times the value of its DoD contracts in 2011. The defense industry collectively has a $491 billion backlog, which incidentally is just a billion dollars less than the entire amount of defense sequestration ($492 billion).

Fourth, the immediate impact of defense sequestration on contractors will be marginal, at worst. The non-partisan Center for Strategic and Budgetary Assessments reports that defense procurement contracts would only be reduced by approximately 3.5 percent in 2013. And, numerous defense experts have argued that sequestration is manageable, as the Pentagon’s budget will ultimately climb back above current levels by the end of the decade.

In this economic climate we need a leaner, meaner military prepared to meet twenty-first century threats, not a large, bloated Pentagon bureaucracy that annually gives more than $350 billion to contractors who provide overpriced and underperforming weapons. And we need a media that will provide readers with all of the facts, not just the views of defense contractors.

Ben Freeman is an investigator with the Project On Government Oversight. Image by Flickr user heschong.

Follow @BenFreemanDC

Comments

[John]

My question is what exactly would the Pentagon end up losing in a budget cut? Aircraft that the Pentagon says it doesn't need? Nuclear weapons? Toilet paper? How big a cut would it be after eliminating waste and fraud are taken into account? How about closing some of the 700+ military installations the US has around the world? And, let's face it, what defense contractors are mostly worried about is a drop in their profits.

[Jack]

These pigs feeding at the trough need to be exposed for what they are. Many of these contracts they are given are being sent to foreign countries for manufacture. Cut the military budget until it will fit in a bath tub and then it will be the right size.

[Forums4Justice]

Total Federal Revenues (TREV).vs Defense Spending = % of Revenues
......in trillions.....
YEAR.....TREV..DEFENSE.. % of Revenues
FY1998 1.721 \ 0.256 = 14.9%
FY1999 1.827 \ 0.261 = 14.3% Glass-Steagall repealed
FY2000 2.025 \ 0.281 = 13.9%
FY2001 1.990 \ 0.291 = 14.6% Bush Tax Cuts for the wealthy
FY2002 1.853 \ 0.332 = 17.9%
FY2003 1.783 \ 0.389 = 21.8% More Bush Tax Cuts for the wealthy
FY2004 1.880 \ 0.437 = 23.2% Ninja
FY2005 2.154 \ 0.474 = 22.0% Ninja
FY2006 2.407 \ 0.499 = 20.7% Ninja
FY2007 2.568 \ 0.529 = 20.6% Ninja
FY2008 2.524 \ 0.595 = 23.6% Recession
FY2009 2.105 \ 0.637 = 30.3% Bush Final Budget
FY2010 2.162 \ 0.677 = 31.3%
FY2011 2.302 \ 0.679 = 29.5% Payroll Tax Cut
FY2012 x.xxx \ 0.662 = xx.x% Payroll Tax Cut
FY2013 x.xxx \ 0.xxx = xx.x%
http://1.usa.gov/Hl0pXR defense spending numbers extracted from CBO monthly reports
- other sources reflect considerably higher Defense Spending numbers

[I'm Not Romney]

While the writer freely flings aspersions or exaggeration, he demonstrates same, as well as inadequate understanding of this arena. Before he levitates: I agree fairly strongly that defense contractors are too fat and waste a lot, usually in connivance with contractors and Congress and careerists (flags, mainly).

The NG paring of staff could be from a lot of causes, some of which you allude to. But you overlook that almost any large company benefits from innovation and (if you can believe this) from IT. In NG's case, just tweaking the procurement system for subs and vendors--a critical system--saves a lot of employee labor. There are also innovations in aerospace on the factory floor, e.g., in fasteners, what used to be all "riveting," complex wiring installation, and electronic testing, for example. Most of these produce labor savings. You also seem to entirely miss the point that the subcontractors to NG are the ones who, net-net, lose the most staff -- more than the mothership--when efficiencies are exploited. You also seem to fall into the trap of the companies and Congress by, apparently, believing that defense contractors just might be, first of all, in the business of job creation rather than providing the hardware and systems and services for National Defense. Is that really what you think?
Sure, top exec comp. is ridiculously high, but nary a company will hesitate to pay big bucks while cutting staff. In a capitalist system, that is fine. And note that these salaries are all capped by the usual DoD regs. That means the bulk of of the inflated comp comes from the bottom line, not chargeable labor and overhead and other burden rates. The taxpayers are not footing the bill directly or to nearly the extent you claim and assert due to the actual, well-known, ways executive comp packages are funded. Do you understand that? Finally, you, like some Wall Street financial analysts (not the good ones) and many media people (are there any good ones left?) are taken in by the backlog figures. These need to be analyzed. When you break them down, even for hardware companies like NG, you will find that much, if not the majority of claimed backlog is actually UNfunded. Rather, it is subject to annual or biannual funding, options that need to be exercised, and various contingencies. The test is: are these backlog funds bankable? The answer is almost always: no, as evidenced by banks and other lenders of operating capital not willing to consider these programs/contracts as collateral. So why even talk about backlog if you do it in the loose way demonstrated in this post? What happened to POGO analytics? Is this the quality of your research?