Congressional Budget Deal a Boon to Military Contractors

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President Donald Trump, Vice President Mike Pence, House Minority Leader Rep. Nancy Pelosi (D-Calif.), House Speaker Paul Ryan (R-Wisc.), Senate Majority Leader Mitch McConnell(R-Ky.), Sen. Chuck Schumer (D-NY), and Defense Secretary James Mattis in the Oval Office in December 2017. Photo by Olivier Douliery/Getty Images.

By Michael Tracey

The massive budget deal now speeding through Congress—to head off a threatened government shutdown—will funnel “historic” amounts of money to American military contractors already painting for Wall Street a rosy picture of the industry’s current economic climate.

A two-year budget bill that increases U.S. military spending by $160 billion during that time—more than it raises domestic spending—is expected to pass the Senate easily but faces a trickier path in the House. The boost goes beyond even President Trump’s insistence on a major increase in military spending.

The prospect of a spending increase—coupled with the Republican tax bill passed last year, and a variety of perceived military threats—has had executives at the country’s leading defense sector firms optimistic about their industry’s future.

One of the foremost priorities of the defense industry has been modification or rescission of the Budget Control Act of 2011, which was passed in response to fever-pitch level Republican complaints over the debt and deficit that dominated the party’s political and legislative strategy during Barack Obama’s tenure. The act led to the so-called sequester, which reduced annual defense spending levels that, while still the highest in the world, were seen as intolerably low by many in Congress.

Now, with the Senate leadership in both parties pushing an agreement which satisfies defense hawks’ demands to lift spending caps—along with Senate Minority Leader Chuck Schumer’s stated desire to fertilize the “sprout of bipartisanship”—the defense sector seems to be getting its deepest wish. Initial reports of the tentative spending agreement were greeted by a jump in military contractor stock prices.

In lobbying to eliminate the sequester, industry leaders had a friend in Secretary of Defense James Mattis, who reiterated the pressing need for budget reform Wednesday at an impromptu address before the gathered White House press corps. “We need Congress to lift the defense spending caps and support a two-year budget agreement for our military,” he said. President Trump issued a similar demand at his State of the Union address, proclaiming: “I am asking the Congress to end the dangerous defense sequester and fully fund our great military.” Sen. Bob Corker (R-Tenn.) observed Wednesday that the spending levels in the new bill exceed what even Trump had requested.

CEOs of leading defense giants seemed prophetic that this was in the offing. “We are encouraged by recent legislative activity,” Lockheed Martin CEO Marillyn Hewson said in a January 29 earnings call, predicting an upcoming “agreement which modifies the budget cap and provides the defense spending required to deliver to our military the resources vital to our national security.”

“As we address critical national security challenges and our military faces readiness issues and rapid advances by our near peers,” warned Northrop Grumman Chairman and CEO Wes Bush in a January earnings call, “it’s more important than ever that our nation returns to a more timely and productive budget process.”

“Our current capabilities and investments are aligned with Secretary Mattis’ modernization priorities and we look forward to helping the defense department execute its strategy,” Raytheon CEO Tom Kennedy said in a January 25 earnings call. He, too, said he was “optimistic” that Congress would pass a spending bill akin to what was agreed upon Wednesday.

Kennedy added that certain “demand signals” in the company’s “key growth areas” indicated a promising economic forecast. One such “rapidly developing growth area” he pointed to was “countering pure nation threats with advanced technologies.” This is in line with the new National Defense Strategy unveiled by the Trump Administration in January. Although the strategy isn’t necessarily a binding document and can even be summarily discarded as circumstances dictate, it does set an overall theoretical course for American foreign policy. The basic premise of Trump’s National Defense Strategy is a shift in emphasis away from counterterrorism, which has dominated since 9/11, and toward countering the alleged rise of what Kennedy referred to as “peer nations”—Russia and China.

Although they’re largely classified, such opportunities include development of technologies such as advanced long range missiles and high energy lasers as a means of asserting superiority over China and Russia. Raytheon’s “hypersonic” technologies would allow the U.S. to strike any target in the world in approximately one hour using conventional weapons.

The industry just won a major victory in December, with the passage of the GOP tax cuts. “Overall, we’re pleased with tax reform,” said Toby O’Brien, chief financial officer for Raytheon, in the company’s earnings call.

The tax cuts were largely pushed as job creators. As TYT reported at the time, however, industry executives routinely conceded that tax cuts had little impact on hiring. Hewson, the Lockheed Martin CEO, noted in celebration during her January earnings call that her company had been “one of the leading companies that has been pushing for tax reform” and would use the resultant savings in furtherance of “that purpose that our government put forward,” referring to job creation. She gave no specifics, however, but added that Lockheed Martin’s immediate intention was to use the benefits to pay off some of its pension obligations.

The prospective hike in military spending comes just days after the Senate Foreign Relations Committee held a dour hearing in which Defense Department Assistant Secretary Randall Schriver and State Department Deputy Secretary John Sullivan insisted that the U.S. engagement in Afghanistan was finally poised for success. Invoking phrases such as their intent to bring the “Taliban to the negotiating table,” impose a series of “benchmarks,” and work toward a “political settlement,” the hearing was reminiscent of comparable hearings over the past 16 years, with military personnel insisting that somehow, this time, things will be different. Schriver said the war will cost another $45 billion in 2018. Just this week, Politico reported that an outside audit found that the Defense Logistics Agency, the Pentagon entity charged with overseeing expenditures, failed to properly document $800 million in construction projects.

Though the spending deal brokered by Schumer with Majority Leader Mitch McConnell does include substantial spending on agenda items long favored by Democrats—such as a 10-year extension of the Children’s Health Insurance Program, $2 billion for research for the National Institutes of Health, and the largest infusion of federal dollars so far to address the opioid crisis—the package is also tailored to placate conservative interests, as evidenced by the relatively paltry expenditure on infrastructure ($20 billion). The deal also omits any resolution of the Deferred Action for Childhood Arrivals (DACA) program, which has been in limbo since last September. Should enough Democrats withhold support on that ground, it could imperil the legislation’s fate.

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