I had to laugh recently when Restoration Hardware got sued for making an aluminum chair identical to one that has been sold to the U.S. Navy since World War II. The home furnishings retailer's price was $129 while the manufacturer of the original is selling theirs to the military for $450. It brought to mind Sen. William Proxmire's "Golden Fleece Awards" for those toilet seats and screw drivers the military tends to lap up at outrageous prices.
The so-called "sequestration" arising out of congressional gridlock will cut all government spending by roughly 8 percent on Jan. 1. At the same time, tax rates return to what they were before the Bush tax cuts. However, this "fiscal cliff" might not be so bad if it brings in more money and reduces government spending.
To focus on just the military, its current budget is now $700 billion a year (a $250 billion annual increase over the past 10 years) so the sequester cut of roughly 8 percent, would mean $56 billion of annual savings -- as much as all the other cuts combined. Since the current $700 billion is more than the rest of the world's entire combined defense budget, we can probably make this cut and not see a drop in our level of safety. It's a far cry from the immediate pain that comes from having to fire teachers and police officers while forgoing the repair of a sagging infrastructure and closing parks.
Cutting military spending is not that easy, because there are military contractors
And then there are those nuclear weapons. We maintain approximately 10,000 of them now at an annual cost of $18 billion. We can cut that figure by 8 percent and not lose sleep at night. In fact, we might be safer.
Just before we entered the Bosnian war, Madeline Albright asked Colin Powell why we bothered to maintain such an expensive military if we weren't prepared to use it. We know what happened next. A bloated military will find things to do, so a collateral benefit of reducing military spending may be to reduce the inclination to go to war. That $700 billion, by the way, does not include the cost of wars or the cost of caring for wounded veterans. If we make a single exemption from sequestration, it should be to fully fund the Veterans Affairs Department.
So, there is a bright side to the fiscal cliff if it finally gives us a handle on military spending. Once cuts have been made, the areas that generate the most immediate gratification will be the first ones to experience a comeback. For example, a few bridges collapsing on the interstate and the effects of the cuts to national education programs -- not to mention future demands on FEMA -- should prompt a groundswell of public support to bring that money back.
Where does the money come from to fund the most obvious needs? A growing economy in spite of increased taxes, like the one that persisted during the Clinton era, should provide the seed crystal in the rain cloud. Consider, for example, the current turnaround in the construction industry, which dwarfs any other industry in the country. A consensus states that the fiscal cliff fallout will reduce the gross national product by 4 percent, but with GNP growing at 2 percent and rising this doesn't sound like some apocalypse to me. The productive consequence may be one of finally getting a handle on out-of-control military expenditures. For its part, the Navy should exercise some leadership by example and start buying its chairs from Restoration Hardware.
Any initial shock of the fiscal cliff might wear off quickly, then, as collateral benefits come into play. The most important engine that impacts corporate profits and business growth is the cost of borrowing money. The continuation of historically low interest rates should far offset any cliff-triggered increase in tax rates. Add to this the savings in military spending and we could be launching the gilded age of the century.
Steve Butler is CEO of Pension Dynamics. Contact him at firstname.lastname@example.org or 925-956-0505, ext. 228.