What if Peace Breaks Out?

The Economic Impact of the Defense Industry in the South

By Mike Randle

Health care reform apparently is big business. Before and after President Obama signed the landmark health care reform bill into law on March 22, opponents howled that its price tag -- $938 billion over 10 years -- will ultimately bankrupt the country.

But compared to defense spending, the cost of the new health care bill is chump change. For example, if spending by the Pentagon increases at the rate it has since 2006, the price tag for defense will be the same as health care -- $938 billion -- but for one year, not 10. Currently, military spending is six times what the federal government spends on education. So, if health care and education are big business, how would one describe the size and scope of the defense industry in this country?

This cover story is not an opinion piece on the pros and cons of a large, well funded military. What it will try and do is simply analyze the defense industry's economic impact on the American South and what the effects might be if "peace breaks out."

If you have already read my editorial on page 8 of this issue, you discovered that the South recently passed Japan as the second-largest economy in the world. That couldn't have happened without gross product contributions made by the military. Last year, the South landed more Department of Defense (DoD) contracts than any other U.S. region, by double. Over $110 billion in DoD contracts were made in the South in 2009 with the West, the South's closest rival, landing $55 billion.

Department of Defense Annual Spending

Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

*Total $708 $693 $667 $667 $601 $535 $479 $468 $437 $345 $316

* In billions of dollars, including Overseas Contingency Operations Funding and Non-War Supplemental. Source: DoD

Counting all money spent by the Department of Defense and all of its divisions in the U.S. in 2008, including payroll, retirement, construction contracts and grants among other items, states in the South received $267.8 billion in military and defense related expenditures. Far behind the South in second place in DoD total expenditures was the West with $108.6 billion.

Payroll outlays to active duty military personnel, the Reserve and National Guard, retired military and civilians working for the DoD totaled $146 billion in 2008. Of that total payroll, almost 60 percent, or $83.7 billion, were wages paid to 1,456,695 people in the military or working for the military in the American South. It should be noted that the 1.45 million is approximately 55 percent of the U.S.'s total military personnel of 2.70 million. 

Total Defense Expenditures by U.S. Region

South West Northeast Midwest

$267.8 Billion $108.6 Billion $70.7 Billion $51.1 Billion

Source: DoD

There is a perception that much of the South's U.S. military contribution consists of basic training, or the training of new recruits or "grunts." That perception exists because nine of the 10 largest military bases in the U.S. are located in the South and much of the training for personnel in major wars over the last four or five generations occurred in the region. Huge military training bases such as Fort Hood, Fort Benning and Camp Lejeune are the primary contributors to Texas, Georgia and North Carolina respectively being the home to 30 percent of the nation's active duty military personnel. In all, the South is home to 62 percent of all active duty military personnel and almost 300 of the 440 military bases in the continental U.S.

But the South is also where 55 percent of the military's civilian personnel work and live, including the upper echelon technical workers that are inventing new technologies on a daily basis. Alabama, Maryland, Mississippi, Tennessee, Virginia and West Virginia are the only Southern states with larger civilian military employment totals than active duty personnel.

Of course, Huntsville, Ala. is home to the Redstone Arsenal and the U.S. Army's Aviation and Missile Command, Maryland has one of the largest Homeland Security and defense clusters in the country and Mississippi is where all kinds of sophisticated defense industry design and manufacturing are done. Tennessee is where the Arnold Engineering Development Center is located, the most advanced and largest complex of flight simulation test facilities in the world. The U.S. military is headquartered in Virginia (Pentagon) as is the CIA. And West Virginia has a growing white collar military employment base because of its proximity to D.C.

But just because a state is home to more active duty personnel than civilian personnel doesn't mean it is not on the cutting edge of defense-based innovation. There are few places in the world where more "Secret Squirrel" defense work is performed than in Florida, Georgia, Louisiana, Missouri, North Carolina, Oklahoma and Texas, states in the South that have large numbers of active duty personnel.

Being the largest U.S. region in defense expenditures obviously means that defense-related manufacturing is a major player in the South's gross domestic product totals. Advanced warships, aircraft carriers, nuclear submarines, unmanned aerial vehicles (drones), current and next generation military aircraft, and a wide variety of missiles and other arms are all currently being manufactured and assembled in the South by the world's largest defense contractors, such as Lockheed Martin, Boeing, Northrop Grumman and Raytheon.

In fact, of the top 10 Department of Defense spending programs, nine of them either have their primary manufacturing or assembly base in the South or were designed and developed in the region, or both.

DoD Programs Spending $2 Billion or More

Missile Defense F-35 Joint Strike Fighter Carrier Replacement F-22 Raptor Virginia Class Submarines Future Combat System DDG 1000 Destroyer C-17 V-22 Osprey Space-Based Infrared F/A-18E/F Hornet

$9.4 (Huntsville, Ala.) $6.9 (Fort Worth, Tex.) $4.2 (Newport News, Va.) $4.1 (Marietta, Ga.) $3.8 (Newport News, Va.) $3.3 (West Point, Miss.) $3.2 (Pascagoula, Miss.) $3.0 (Long Beach, Calif.) $2.7 (Fort Worth and Amarillo, Tex.) $2.3 (Huntsville, Ala.) $2.0 (St. Louis, Mo. )

* In billions of dollars. ** 2009 Budget Request. Source: DoD

The economic benefits of defense are also heightened, particularly on the manufacturing side, because they are not generally outsourced or off shored to other countries. While U.S. companies have outsourced all kinds of manufacturing, such as textiles, apparel and electronics, to countries like China and India over the last 15 years, Lockheed Martin, Boeing, Raytheon or Northrop Grumman won't be building missiles, submarines, advanced warships or jet fighters in those two low-cost manufacturing locales any time soon. Obviously, the Department of Defense wouldn't allow it.

For example, last year I visited the big Pratt & Whitney/Rocketdyne plant (United Technologies) in Palm Beach County, Fla. The company designs and manufactures all kinds of rocket engines at the facility for NASA and others. Sharing space in the plant was Sikorsky Aircraft, which had three helicopter assembly lines that were walled off from each other. At the time, Sikorsky was operating a line of helicopters going to the United Arab Emirates, a line for the Canadian Coast Guard and one line was producing U.S. Army Black Hawk attack helicopters. I asked the company tour guide why the assembly lines were walled off and he told me something to the effect that foreign nationals, when they visit the plant to check on their 'copters, can't observe the Black Hawk line "because we can't sell our most advanced technology to foreign nations."

What if Peace Breaks Out?

So, it is readily apparent that the defense industry is a major contributor to the American South's economy and that contribution is growing, in large part because the U.S. has been at war for eight long years now. But what if peace breaks out? What would be the economic effect, particularly in the South where the DoD spends well over half of its money annually in contracts and about 60 percent in its total U.S.-based wages?

We asked Dave Dickson, Executive Director of the Richmond-based Virginia National Defense Industrial Authority those questions. "The Department of Defense is a significant contributor to Virginia's economy and undoubtedly the South's as well. This is true whether or not we are at peace or in war," Dickson said. "If you look at the DoD budget over the past 10 years, you will quickly notice that the base budget has increased from $297 billion in Federal Fiscal Year '01 to $531 billion in FFY '10. The South, as a region, plays a considerable role in DoD's basing, housing, logistics and operations. This will continue," Dickson said.

Dickson went on to say, "If peace breaks out, our armed forces will need to 'reset,' meaning replace assets lost in the Iraq and Afghanistan wars through combat and the strain of today's wars. Restocking will keep the DoD procurement folks busy as well as business and industry."

A similar refrain came from Jeff Thompson, Executive Director of the Alabama Aerospace Industry Association. "Alabama's aerospace and defense industries are very engaged in supporting soldiers and battle forces," Thompson said. "Certainly, the activity level in the state increases during war times, but much of the effort on our military bases and in our defense contractors supports the readiness and preparation of security for our country, which doesn't end when a specific conflict is resolved. New systems are being designed, existing systems upgraded and current capabilities improved every day and these efforts are expected to ramp up as battlefield support winds down. Every person engaged in this industry that I have met, without exception, prays for peace but helps our nation prepare to keep our country safe," Thompson said.

Predictions that DoD funding and support will remain strong in war or in peace can only be based on recent history, as Dickson noted. But the last time "peace broke out" of great magnitude in this country was at the end of the Cold War in 1991. That year, defense employment in the U.S. topped six million people. By 1995, it had dropped to less than five million and by the time 9/11 occurred, defense employment in the U.S. was below four million. Today, defense employment is about 2.7 million, with about one million of those being active duty military.

So it is obvious that sheer employment numbers are not what America's defense industry is about today. What it is about though is money, and plenty of it. Defense spending in 1991 or at the end of the Cold War was right at $300 billion. By 2000, or the year before 9/11 occurred, defense spending had dropped to about $250 billion. Today it is almost $700 billion.

It was less than 10 years ago that a new President named George W. Bush tapped Donald Rumsfeld as Secretary of Defense to remake and redefine America's military. In short, Rumsfeld was brought in to cut military spending dramatically. Then 9/11 happened. Rumsfeld's job description suddenly changed.

In an article published by Time Magazine on May 10, 2001, Tony Karon wrote, "It's not hard to see why the Bush Administration asked Rumsfeld to do a second tour of duty in the job (Rumsfeld was Secretary of Defense under former President Gerald Ford). An important consideration was the Bush Administration's promise to remake the military. The $300 billion a year behemoth evolved to meet the threats of the last century, but the war it was built to fight ended in 1991. Since then, the challenge has been to redefine its strategic mission and rebuild its capabilities accordingly -- a process that will inevitably involve some painful cutting of projects dear to the hearts of generals, politicians and defense industry lobbyists," Karon wrote.

Karon went on about Rumsfeld's job to cut military spending in 2001 by writing, "A Democratic Administration led by a draft-dodger (a reference to former President Bill Clinton) was never going to persuade the generals to let go of their pet projects or the legislators to trim the military pork for the folks back in the district. The Bush Administration needed a Defense Secretary with nerves of steel and impeccable hawkish credentials to break the bad news to the military, and stare down the backlash on Capitol Hill." Remember, Karon's Time Magazine article was published just 120 days prior to 9/11. 

So, within months of the terrorist acts on 9/11, apparently the axe was about to fall on many military projects all across the country, setting up an economic impact on the South and elsewhere that will never be known. In fact, it probably could be argued that if 9/11 hadn't occurred, defense spending could have dropped to less than $200 billion a year for years under the Bush administration. If that happened, there's no question that the South's economy would have been impacted dramatically as a result of peace breaking out.

Peace breaking out might not come soon enough, but it certainly has its support group. President Obama won election partly on an anti-war platform. The war in Iraq is winding down. The U.S. government, state governments and local governments, as well as most of their citizens, are facing debts rarely if ever seen in the nation's history. And while there isn't as much anti-war sentiment in this country as there was just two years ago, that sentiment will most likely return at some point for the simple fact that many will wonder how in the world we are going to keep paying for all of these defense related expenditures. 

That being the case, the federal government is kind of in a Catch-22 situation when it comes to the defense industry. It's obvious that without current defense-related employment and capital investment, the nation's and the South's economy would suffer, maybe even dramatically, if peace broke out and defense spending dropped to $200-$300 billion a year as it did in the late 1990s. Does the federal government even consider a drop in defense funding of that magnitude if peace breaks out when the country and the world wobbles in economic recovery and 10 percent unemployment rates remain? It's not just a financial dilemma, it is one filled with many moral issues.

On the other hand, the annual investment in defense today represents about five percent of total U.S. GDP. That doesn't sound like much, but look at it this way: We ranked the top five world economies at the beginning of this article, noting that the South's economy is the second-largest with $5.13 trillion in gross product. If the Department of Defense was a country, its current annual spending would rank it as the 17th-largest "economy" in the world, or a total expenditure that is about 15 percent of all goods and services produced in China last year.

Conclusion

If peace does break out it probably will affect the South's economy in less noticeable ways at first, but don't tell that to some local economies in the region. While major defense contractors like Lockheed, Raytheon, Boeing and Northrop Grumman will be charged with "resetting" the military after war, less significant contractors will see their deals terminated.

For instance, in late February, the Navistar Defense plant in West Point, Miss. was awarded a $751.5 million contract to build more than 1,000 MRAPs (Mine Resistant Ambush Protected Vehicles) as quickly as possible. The deal is a boon for east central Mississippi in that over 400 workers will be brought back to the plant after receiving a similar contract two years ago. However, between contracts, the plant sat idle for months.

The new vehicles, which are much better protected from bomb blasts than the Humvee, will be used in Afghanistan. While that contract is certainly huge -- as large as the cost of building a new automotive assembly plant -- once the last MRAPs ordered by DoD roll off the line at Navistar's West Point, Miss. plant, the deal is done and so are the jobs at the facility. And if peace does break out, those jobs will never come back.

All in all, if peace does break out, something we all hope for, let's also hope that prosperity breaks out at the same time. Because if both happen simultaneously, many of the jobs and investments potentially lost in the South as a result of significant defense cutbacks, may be gobbled up by the commercial side, specifically by the aviation and aerospace industry. But that is another story altogether, one that we will write about in our bonus issue in May titled, "The American South: The Center of the New Aerospace Universe." Go to www.SB-D.com/Aerospace to view an e-card on that issue.