Investing Caffeine

The Impoverished Global Babysitter

November 21, 2010 at 11:30 pm Leave a comment

I don’t mind being a babysitter for the world, as long as I get paid for it. Unfortunately, not only are we paying to be the nation’s global defense babysitter, but we are also paying for the protection responsibility with unsustainable borrowings.

I don’t want to be a cold-hearted neighbor to our friends and allies, but it is all a matter of degree. Collecting a vacationing neighbor’s newspaper and mail, and watching for any potential suspicious activity is all part of being a conscientious, dependable neighbor, but where do you draw the line? As a good neighbor, should I also be responsible for paying for and installing a security system on their premises? Or how about getting my 16 year old nephew to spend the night at my neighbor’s because of some scary noises heard during the previous night?

For politicians to say we need to cut spending but defense spending is off the table is hypocritical. Bruce Bartlett, columnist at The Fiscal Time, had this to say on the subject:

“No one is saying the defense budget is the sole source of the deficit, but the fact is that it has risen from 3 percent of the gross domestic product in fiscal year 2001 to 4.7 percent this year. That additional 1.7 percent of GDP amounts to $250 billion in spending — almost 20 percent of this year’s budget deficit. And according to a recent Congressional Research Service report, the cost of wars in Iraq and Afghanistan alone accounted for 23 percent of the combined budget deficits between fiscal years 2003 and 2010.”

Even the government should have learned one of the prime lessons from the 2008-2009 financial crisis: tough times require the necessity to do more with less. Whether you are talking about a large corporation like $173 billion valued General Electric (GE), a small mom-and-pop coffee shop, or a middle-class family of four, the moral of the story is bad things eventually happen to individuals, corporations, and governments that live beyond their means. The crisis was exacerbated by excessive borrowing to achieve the higher standard of living and operations.

New Heightened Sensibility?

The initial deficit reduction proposals crafted by the bipartisan commission headed by Erskine Bowles and Alan Simpson should be lauded, regardless of how much Congress decides to dilute the $4 trillion in budget cuts over the next 10 years. The plan may not garner votes for politicians, but these types of necessary cuts will place our country on firmer ground and provide a more sustainable path to prosperity. More specifically, the plan would bring the federal budget deficit down to 2.2% of GDP (Gross Domestic Product) by 2015 and reduce the country’s debt to 60% of GDP by 2024.

Building Flying Rolls Royces

Bowles and Simpson appear to get it, but our bloated government doesn’t seem to understand. If I were running an unprofitable company with a lot of debt, would it be a good idea to develop a new flying Rolls Royce car fleet (with questionable utility) for my employees? Common fiscal sense would dictate the answer to be “NO.”

Regrettably our government has answered “yes” by building a ridiculously costly flying Rolls Royce fleet of its own under the name of Joint Strike Fighter (the F-35 program from Lockheed Martin Corp. [LMT]). This absurdly priced program – the costliest in our country’s history – is projected to cost up to $382 billion for 2,443 aircraft over the next two decades (Reuters). This translates into a whopping $156 million per aircraft. Cost overruns have already come in 40-90% higher than expected over the last nine years, and the price tag continues to rise. The state of the art jet program is touted as a Swiss army knife (flexibility to be used by all three branches of the military), but may actually turn out to be a butter knife due to the program’s questioned utility (see great PBS video here).

So like any company, individual, or government, there is something called prioritization. By cutting fat in less critical areas, a portion of those savings can be redeployed to INCREASE spending in the areas that matter. I won’t wade into the relative merits (or lack thereof) related to Afghanistan and Iraq expenditures or appropriate troop levels, but suffice it to say, I’m certain spending can be cut in many areas to make room for our country’s primary defense priorities.

I’m no defense expert but when faced to deal with a murky, inconspicuous issue of terrorism (cave dwelling insurgents and bomb-making sleeper cells), intelligence collection and international coordination make more sense than building $150 million flying Rolls Royces, which are better suited for fighting an obsolete cold war than finding terrorist needles in a global haystack.

Crotch Costs

Layer on the new TSA passenger flight costs associated with crotch fondling pat downs and the costs related to buying miniaturized shampoo and gel containers, one wonders if tax-payer money can be more efficiently spent. For what it’s worth, the FDA has approved the latest body scanning machines with no health concerns, so if an airport worker gets his/her jollies by ogling an overweight out of shape passenger like me, then so be it. The fact of the matter is that estimates show 99% of passengers choose the innocuous body scan, which displays a white, ghost-like naked computer image to the agent. For those worried about self image issues or privacy concerns, perhaps the airports can set up a meet-and-greet room option for passengers to become better acquainted with the agent before passing through the scanner.

Freeloaders Cutting Spend

Source: The Financial Times

Domestic defense spending cuts become especially touchy when discussed in concert with European spending reductions. Take for example German plans to slash $10.7 billion in defense spending by 2014 and British spending cuts of 10% to 20% (around $6 – $12 billion). Europeans are labeled by Americans as socialists because of their lengthy paid vacations, maternity leaves, and generous healthcare benefits. More power to them and I desire all those things for myself and my family too, but I just don’t want my taxes to pay for others’ benefits when our country cannot afford those same wonderful benefits for ourselves.

While our Defense Secretary, Robert Gates, has been talking a good game with respect to a $100 billion in savings cuts, these cuts should be put in the context of a $567 billion budget for 2011 and a $700 billion estimated 2015 budget. As it turns out, these $100 billion in cuts are not cuts at all – Gates is also talking out of the other side of his mouth by saying he wants to continue increasing overall defense spending.

Is the size of spending appropriate? According to SIPRI, an independent international research institute, the U.S. defense budget accounts for 54% of the world’s total military spending, when our population only represents less than 5% of the world’s total. If that is not a disproportionate subsidy to the rest of the world, then I do not know what one is? The real longer term threat is not Iran or North Korea, but rather China. I’ll go out on a limb and say we can probably hold our own for a while, considering China is still only spending about 15% of what we spend on defense.

As I stated earlier, it is more important than ever to do more with less. Corporations are clearly doing that now by cutting spending, while still able to create record profits. The government has to get on board with trimming fat in all areas of our government…including defense. Coordinating intelligence and combining resources across the globe is crucial if we want to get more bang for our buck, while still devoting adequate resources to fend off the real and immediate evil threats of terrorism. Babysitting is an important duty and responsibility, but as impoverished Americans we are not capable of providing that service to the whole world free of charge.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in GE, LMT, Rolls Royce, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Government, Politics. Tags: Alan Simpson, Bruce Bartlett, defense spending, deficit, Erskine Bowles, F-35, federal debt, Lockheed Martin, military spending, Robert Gates.