Mr. Market Says the Military Industrial Complex Will Be Largely Spared in Upcoming Grand Bargain

It’s been remarkable to witness the public complacency in the face of the certain-in-trajectory, less-clear-in-details “Grand Bargain” that Obama and Romney are determined to foist on the hapless middle class and poor in this country. In the first presidential debate, Obama flat out said he agreed with Romney’s position on Social Security (as in it needs to be “reformed” which is NewSpeak for cut). And both candidates have been eager to present themselves as responsible deficit cutters. In reality, it’s madness to cut government spending now. As we and other sites have written at some length, the economic rationale is dead wrong. Not only have households been deleveraging (mainly involuntarily, via defaults) but businesses have been net saving, which means government needs to take up the slack, or wages and GDP will fall, making the debt burden to GDP even worse (if you doubt me, this experiment has been run multiple time, in Latvia, Ireland, Greece, Spain, and Portugal, and the results in every case confirm that austerity in the midst of a balance sheet recession only makes matters worse). Even normally agnostic investors are making the case for more government spending. For instance, from Cullen Roche via Clusterstock:

The unusually slow recovery in private investment has meant the government’s needed to play a larger role than usual in the recovery. Private investment is still crawling out of a deep hole, recovering just half of the peak to trough losses during the crisis. A substantial decline in government spending at this point would almost certainly send the US economy into contraction.

And to make matters worse, the promoters of this scheme have been cooking the math to make the US’s situation seem worse than it really is.

But it appears that 20+ years of propaganda and perfecting of labor-abusing tactics are working. The trick used with unions, of protecting the old hands and taking the younger workers in at lower rates is being applied here. I’m at a loss to understand why the geriatric set isn’t outraged on behalf of their children. I’m likely to barely squeak in as part of the protected class, and I’m not particularly close to my younger brothers, yet I regard it as unacceptable that I get a deal and they don’t. And younger people have been convinced they won’t see any Social Security bennies, and so aren’t up in arms, even though, as Dave Dayen has pointed out, most pension plans (well, at below the CEO level) don’t come close to matching the economic value of Social Security.

This part of the deficit equation has been reasonably well covered on specialist sites, even if this sort of analysis is greatly underplayed in the mainstream media. But another part has gotten comparatively little attention: the fact that the military appears likely to be spared the budget axe. Remember, not only do Americans overwhelmingly approve of preserving Social Security and Medicare, so to do they favor cutting defense spending over other budget-paring options. Yet a sighting over the weekend by John Dizard of the Financial Times takes note of the fact that defense stocks have rallied nicely as the fiscal cliff approaches. What gives?

There are two possible explanations that come to mind. One would be that investors are looking forward to a period of merger and acquisition activity within the industry, which would lead to takeover premiums in buy-out deals, along with greater efficiencies in the use of capital…

The other would be that there might be some “contingency,” as they call wars now, in a future that’s foggy to us, but clearer to the market. Yes, everyone agrees that the American public, and the politicians, are war-weary, and want to do “nation building at home”. Also, both presidential candidates made clear in the last debate that they don’t want another war in the Middle East. That doesn’t mean we won’t have one…

Even so, one larger contractor, Northrop Grumman, has also seen its stock rise by over 22 per cent since the summer. Northrop is very active in developing advanced UAV’s, or drones, and is also known to…well, it’s hard to know all of what it does, because so much of it is paid for out of the enormous “black” budget.

When the Pentagon gets around to real procurement cuts, as distinct from the certain-to-be-bridged fiscal cliff, it will give relatively favourable treatment to the producers of these weapons of the future.

For all the political fulminating, there really aren’t many industries that have a more secure future than the US defence companies. They don’t have to make excessive capital spending commitments to secure their future; much of the development money and cost of new facilities are picked up by the taxpayer. No auto manufacturer really knows what its sales will look like in the first quarter of next year, but the defence contractors do. When spending cuts come, they will be spread out and comfortably financed.

The irony is that actually reaching the fiscal cliff would lead to mandated cuts in defense spending and would spare Medicare. At this point, it seems as if only an outside the box event will derail the rollback of Social Security and Medicare, just as Monica Lewinsky and the related impeachment drama derailed Clinton’s plans to implement these “reforms”. As distasteful as it might be in all other respects, at this point it may take a deus ex machina like an electoral college tie to save Medicare and Social Security from the chopping block.

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  1. ambrit

    Those who read their history know that there is another sort of ‘chopping block’ in our collective future if things get out of control. The Congress could just go the way of the Estates General.

  2. rjs

    preparing for all contingencies, defense spending was up 13% in the 3rd quarter and accounted for 0.7% of the 2.0% increase in GDP…

  3. casino implosion

    This is why I’m voting Green, lesser evilism be damned.

    I won’t have Obama’s slashing of SS and Medicare on my hands.

    1. lariocario

      I’m going Green too—while I’m a liberal, I’m sick of the Democratic Machine in my area while the GOP have gone into far-right orbit.

      If literally and impossibly my vote costs Obama the election, I don’t care.

      I’d rather be shot in the face by Romney and the GOP than stabbed in the back by the Democrats.

      1. casino implosion

        “I’d rather be shot in the face by Romney and the GOP than stabbed in the back by the Democrats.”

        My sentiments precisely.

        It’s human nature to abhor a traitor. Who did Dante place in the ninth circle?

      2. sleepy

        Absolutely right.

        I live in swing-state Iowa and will be voting for Jill Stein. Hopefully, Obama loses Iowa by my 1 vote and then loses the electoral college as a result.

        I’ve never really understood those folks who will vote for Stein only because they live in a solid red or solid blue state. Talk about throwing your vote away!

        1. Aquifer

          Glad to hear you don’t buy that “safe state” garbage, but methinks voting for Stein in any state, red, blue or purple isn’t throwing one’s vote away – we just have to work on turning the red, blue and purple into green …

          1. LeeH

            Concur. If nothing else, it signals what policies we actually approve, what stances we would like to see implemented. As the Green Party gets more votes, perhaps it will get more funding, and we can perhaps have Green Candidates at the State level – because it is only be submitting a substantial voting block to congress and the senate will we be able to start the changes we want/need…
            The after-the-election pressure we will have to exhibit will also be an important component if we truly want to bring these improvements about. But, I think everyone here already knows that…

          2. jrs

            The problem with Green candidates at the state level is the possibility is already being shut out by top two primaries. In the 3rd party debate the 3rd party candidates discussed this. It leads to a general election in which no choices exists besides the top two parties, often the top 1 party! The possibility is being shut down before it can even be exercised.

        2. alex

          Count me in. Not my fault that I live in solid blue NY, but I’m voting Green across the board. Good for Obama if he loses – that’s what you deserve if you abandon your supporters. The only way I might vote for Obama now is if he adopted a decent campaign slogan like “I’ll screw you, but not quite as bad as the other guy.”

        3. deanx

          I voted for Ralph Nader in 2000, you can’t/couldn’t really doubt his integrity.. but in the end, it was a vote I learned to truely regret.

      1. Synopticist

        Juist try not to blame anyone but yourselves when Romney shows his true colours.
        It won’t be the democrats’ fault, it’ll be yours.

  4. Brick

    The trick used with unions, of protecting the old hands and taking the younger workers in at lower rates has now started to backfire over the last six months. Old hands with their better pay and work conditions are now the first out the door, most likely having their job split into two part time jobs.

    Defence spending cuts seem likely to take in the form of the following.

    Replacing Miltary Pensions with 401K’s. (Reportedly being considered by the Pentagon)
    A switch to building up reserve armed forces over full time. (The all volunteer force – see Pentagon budget proposals)
    Replacing armed forces with automated or mechanised forces. (drones, new bomber, upgraded radars, electronic warfare).
    Reductions in pay rises.

    Most of cuts do not appear (See Pentagon budget in the link above) to be targeted at defense firms, so the share rally is not surprising.

    1. Neo-Realist

      In some cases, the job of the old hand isn’t replaced at all and that hand’s labor is split among the (cheaper) remaining employees.

  5. Norman

    As one of those over 65 collecting S.S., I suppose that we will be cut out of the budget? Perhaps we’ll be in line like that movie “Soylent Green”, which would be O.K. as far as the end result goes, i.e., at least the grandchildren would have a chance at having a better life than what may be in store for them soon. Why, even the old duffers like Mitt & the “O” would go, not to forget old Pete Peterson too. Hell of a way to do changes, but then, so is the guillotine.

    1. Neo-Realist

      If the medicare is cut to the bone, they’ll count on more seniors not paying out of their pockets for needed medical care and dying sooner, potentially relieving the SS trust fund of enormous expenditures.

      Soylent Green–A potential GMO Corporate Cash Cow! Possibly to be eaten by our grandchildren?

  6. jake chase

    What seems to be going on beneath the surface is a mad dash to save the Bush tax cuts benefiting the truly rich. Propaganda about how we cannot ‘afford’ medicare and social security is always coupled by how ‘essential’ is the military extravagance, always justified by a need to support our ‘heroic’ troops. The fact that it is all preposterous, mendacious, transparently false, etc., hasn’t prevented one hundred years of advertising from accomplishing commercial miracles, and the current wave of political propaganda is likely to have the same effect, until the bewildered majority finds itself utterly impoverished. I give it about five years.

    Those who don’t believe this should walk into any MacDonalds five minutes after watching one of the ads. As Yogi Berra said, you can observe a lot just by watching.

  7. Malmo

    Looking at your BLOGROLL and I don’t see that crackpot, Karl Denninegr’s blog anymore. That’s a relief. H’es been pounding the pavement pinning not for Peterson style cuts but rather is advocating for zero deficits, period. Thank goodness you’ve dropped any association with that quack. The Grand Bargainers look like angels in comparison.

  8. mutt50

    War is a business, and it’s very profitable for the elites. Their only “concern for the troops” is that they cost too much, what with health care and injuries and all. So maybe we can make it robotic, and use people mainly for orderlies/servants for the General/CEO types, so they don’t get too tired protecting our freedoms and everything.

    1. OpenThePodBayDoorHAL

      Let’s call it what it is: the Military Welfare Complex. Though while we’re looking for lost revenues, instead of taking it from the poor and the sick, let’s take it back from the healthy: corporate America. These are the biggest tax cheats by far:
      Honeywell: $2.5 billion in profits in the last 3 years. Taxes paid in the last 3 years: $377 million in tax refunds
      Verizon: $32 billion in profits for the last 3 years. Taxes paid: tax refund of $951 million
      Same: Mariott, Microsoft, AT&T, Boeing, Oracle, Eaton…the list is endless:

  9. vtek

    articles such as this one

    strongly suggest to me that a war against iran is all but certain in the immediate aftermath of the election, once president romama can drop this pantemime of democracy. a war is just about the surest way to avoid the “sequestration”, so it’s not surprising that “defense” stocks are rallying.

    ths silver lining is that i think this war will be a turning point of sorts.

    1. Neo-Realist

      I still tend to think that the potential blowback for a severe global economic reccession that would result from a asymmetrical funhouse war with Iran and the reluctance among many of the military and intelligence elites-The Iran Report–to deal with Iran militarily for concern of a potential exercise in futility and body count as well as the pushback they have and will continue to bring to the fore, does not make a war with Iran certain by any means. That doesn’t mean the Pentagon won’t take some contingency measures just in case something flares up–false flag from other warmongering actors?

      Ya know, even the kleptocrats living in tax sheltered tropical islands may not be safe from such a war, so expect those elites to push back behind the scenes as well.

      1. vtek

        i hope that you’re right but i am increasingly pessimistic. concern for civil unrest back home seems like a quaint relic of a naif past these days. enough draconian laws have been passed to deal with any discontent with brutal efficiency and almost no accountability. occupy was a good preparation for the new way of social management.

        i don’t think they fear us any more, but i hope that’s their miscalculation. eventually, even the most hardened goons will refuse to fire on their family and friends.

  10. Lambert Strether

    I like the “Mr. Market” formulation as a theme/analytical frame. It’s a good way to connect the financial and the political, particularly the politics of the permanent government. “Political” “economy” eh? And it ties in nicely to NC’s strengths in finance while giving those not so strong in finance (like me) more critical thinking tools.

  11. BDog

    Typical nonsense, that the government spends, spends, and spends and the only way out is to keep spending. Giving your precious government more money and wanting them to spend more is the definition of insanity. Governments taking your money with the threat of jail or gunpoint is evil. And Yves is their biggest cheerleader. We have seen nothing but corruption out of DC and your answer is to give them more money and for them to keep spending. The reason our country is failing is because our federal government has become so large and so corrupt it has become a leach on society. Your economic baseline and core thinking are bankrupt. Democrats and republicans are destroying this country, social security is just another pool of money to plunder, so let’s just keep giving it to them. Let me know when you think it is ok to cut deficit spending, meanwhile you will continue to devalue our currency (another evil tax). And if your answer is to keep spending until we kick start growth, let me know what happens when growth never gets above 2 or 3 percent. I’m sure they are feverishly looking for another bubble to blow.

    1. Jonathan

      The forced birth bubble may be next? Seems that lately the GOP is taking their assigned role and pushing their pro-natalism, pro-unplanned-parenthood platform harder than usual at the state level.

  12. KST

    “I’m at a loss to understand why the geriatric set isn’t outraged on behalf of their children.”

    That makes two of us. From conversations with my own parents the feeling is that they paid into it their whole lives and are now owed it. But, given the dire state of the federal budget something HAS to be done, and I’m the one who gets buried.

    The great irony here is that I (and my cohorts) will contribute more to social security in my lifetime of work than my parents did. When I started working at 16, the SS tax rate was where it sits now: 12.4%. When my parents started working, it was in the 8-9% range. As time goes on, I fully expect that rate to increase given the rhetoric coming from Washington. Therefore, my effective rate over my working career is going to be much higher than it was for my parents. But somehow I don’t deserve it like them. Interesting logic.

    1. Lambert Strether

      Well, I’m outraged. And inter-generational outrage is the only way forward…

      I’m curious to see how the conversation with your parents went. It sounds distressing.

      (They did pay into it, and that’s a source of outrage; I paid for my parent’s retirement as well as my own, under the famous Tip O’Neil/Ronald Reagan compromise, so now they want to take that away?

      However, by MMT, we know that taxes do not “fund” spending and so the outrage although correct on the basis of promises made, is not correct in terms of the real operations of the money system.)

    2. Mary Bess

      I’m 68 and I AM outraged at the idea of tiered benefits, which is just another way to undermine these popular and necessary programs. It’s clear that the generations that follow will need SS and Medicare as much or more than current beneficiaries.

      A point of clarification: SS is not a retirement account. It’s an insurance, although benefits accrue with the number of years one has contributed.

      Are we really going to stand for this “grand bargain” baloney? How about stripping members of Congress of the health and retirement benefits so generously provided by the taxpayers they plan to screw over?

  13. telee

    It should be pointe out that during the presidential debates Marth Raditz asked the candidates a question where she assumed social security is broke and must be cut. A few days ago on NPR’s Morning Edition, Gov. Rendell was asked a question about the need to cut social security since it was broke to which Rendaell was in agreement. This morning on NPR’s Diane Rheem show she asked her guests a question that assumed cuts in social security was necessary. Ths in spite of many economists such as Krugman, Stiglitz, Dean Baker, Robert Kuttner etc. saying that social security’s problem are minor and that raising the cap on FICA would strengthen the program. Social security was pay go program until it was changed under Reagan to collect money for the future by raising FICA tax while having every excess dollar transferred to general gov. revenue. In essence it funded the budget shortfall created by the Reagan tax cuts. It raised taxes on everyone but the rich. Another case of using the news meadia and political anaysts to manufacture consent that we need social security cuts. What a rip off!!!!!!

    1. rob

      It is amazing how this propaganda campaign of the elites like the kock bros, and pete petersens…which many on the left associate with the right(and it is…)is SO inserted by the left(npr/diane rheem,etc)at every turn and it isn’t even questioned….this is the real propaganda…people who know better don’t listen to fox entertainment, but they don’t get that the “liberal” media prays at the same altar.

  14. Garrett Pace

    “I’m at a loss to understand why the geriatric set isn’t outraged on behalf of their children.”

    Here’s something. From an interview with Wendell Berry:

    Fisher-Smith: You’re a grandfather now. Can you tell me something about what you feel the obligations of the older man are towards the younger?

    Berry: The obligation is very great and moves two ways. The old have an obligation to be exemplary, if they can–and since nobody can be completely exemplary, they also have an obligation to be intelligent about their failings. They’re going to be remembered in one way or another, so they have an obligation to see that they’re remembered not as a liability or a great burden, but as a help. And of course the young, the inheritors, have an obligation to remember these people and live up to them–be worthy of them. So it’s an obligation that goes both ways, and it’s inescapable. Once you become involved in this sequence of lives, there is no way to escape the responsibility. You inherit, and in turn you bequeath an inheritance of some kind.

    Fisher-Smith: Isn’t there a wholesale attempt to escape these obligations underway now? I’m reminded of the bumper sticker I see on retired people’s motor homes on the highways, which say, “We’re spending our children’s inheritance.”

    Berry: We’ve noticed that bumper sticker too. The problem with that is that it’s a lot truer than the people who fly that particular banner understand. They’re not just spending the money that a particular set of young people would inherit, but they’re participating, as we all are, in the squandering of our natural and cultural inheritance. So, that’s passed off as a joke. But, of course, most people have no choice; they simply can’t escape this escape from history and responsibility. They’re not just moving around, they’re being moved around. This phenomenon of mobility is now maybe our major social institution.

  15. abprosper

    Of course the military is least liable to be cut, they are the biggest threat. Don’t pay them and you risk a long overdo Junta or worse, them deciding the system is no longer worth preserving and them not showing up if/when the hackfest starts

    Also as per jobs, the idea of the stable job is dead ,long term anyway. Even if outsourcing and imports were eliminated, machines are quite close to being able to do half or more of everything.

    This is a big big deal since jobs are the only means we have to determine who gets the goodies,

    This is a very big problem since the entire edifice runs on money and all those goodies the rich enjoy (and some of them for the rest of us) could easily fail do to lack of inputs (such as the troubles we are having with maintaining weather satellites So far we are managing at the cost of a trillion a year but if that stops? Look out.

    Really uprisings while scary are not the big fear, those can be put down, managed or accommodated. Whats at issues is a society where too many people think they can’t get ahead , don’t care anything about their neighbors or that society and where people won’t bother trying.

    Japan is bad enough, they basically are on a slow extinction course do to birth rates but they have social comity to burn and are peaceful and safe The US does not have those assets and we could longer term simply fail.

    This is of course is on no one in the elites agenda the few that aren’t psychopaths are either short sighted, old or just stuck on stupid.

    The real fix is not tenable either, some combination of closed borders, heavy education subsidy, social credit and national health care is expensive (we are highly tax phobic) and being both a left\ right mix and painful to both elites is unthinkable.

    My advice, keep working to the best but a little prepping is not a bad thing either.

  16. steelhead23

    Its a sure sign the economy is headed to hell… I am having a hard time discerning whether this piece is a lamentation over the ongoing rout of the middle class, or timely investment advice. Whether this is Yves intent or not, the message I am getting from this is the perception that we enjoy government of, by, and for the People is a freakin joke. When the proles prefer ploughshares to machine guns, our elected officials, in obedience to their true masters, pump out machine guns.

    As the late, great George Carlin would say: Its a big club… and YOU ain’t in it!

  17. Curtis

    This is the September before WWII, so enjoy what you can before the bottom drops out. There is no way our children or grandchildren will have anything . There’re about 7 times too many people on earth in relation to the resources that earth can provide. Our society is like a Pacific salmon swimming up stream for the last time. One last primal orgasm followed by death of everything.

  18. Ep3

    I see two things playing out that affect both generations’ opinions on SS. Old ppl are now convinced that the only way to save their offspring from insurmountable govt debt burdens is for SS and Medicare to be cut. But no one is saying that. Its just “govt spending”.
    Then, both generations share this fantasy belief that the new savior of ppl in retirement is the magical 401k. Old ppl have forgotten what happened in the great depression. Young ppl think they are gonna strike it rich by running up student loan debt for a slightly higher paying job than minimum wage. And then that anything a young person buys will only increase in value where when they reach retirement, everything they own will be paid for and worth far more than invested (the old wives tale of the box of baseball cards hiding in the closet that “unknowingly” held several babe Ruth rookie cards. What ppl don’t realize is that with nothing to fall back on, a steady job, SS, unemployment & welfare, those ‘future valuables’ get sold sooner than preferred for far less than potential value just to pay the bills).
    It’s a propaganda campaign to eliminate those benefits.

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