Last year the Aerospace Industries Association took aim at the budget sequester on behalf of its members and mounted a visible and expensive campaign to prevent it. They ran out a study done by Steven Fuller showing that sequestration would lead to a million jobs lost and trigger a recession in some regional economies, like Virginia.

AIA issued alarmist statements and press releases about the coming economic doom. Their chorus was joined by Senators campaigning hard against the sequester, like Sen. John McCain, Kelly Ayotte, and Lindsey Graham. It was quite a road show.

In the front of the cheering section last year was Lockheed Martin CEO Bob Stevens, who warned, at the time, that sequester would lead to 10,000 layoffs at his large defense contracting company. He announced the intention of issuing WARN Act notices, which would let employees know their jobs would soon be in jeopardy.

Stevens left at the end of 2012, having withdrawn the WARN threat, but the recent comments that the new CEO, Marilyn Hewson, made to Politico suggest that the apple of corporate leadership has not fallen far from the tree.

So far Lockheed and Hewson say 50 employees have been affected by sequestration, and their major programs -- the F-35 and the Littoral Combat ship, among others -- have not been much affected. Hewson argues there could be worse to come, but DOD has still not provided detailed guidance for the industry.

It seems that CEO Hewson lives in the same echo chamber Stevens created last year. According to the Politico story, it is still the same scary world out there, with the same budget uncertainties and threat to the future of her industry that her predecessor described.

The world, she tells Politico, is a frightening place: "Abroad, new threats are rising, even as old threats become more menacing. Iran, we know, edges closer to nuclear statehood, and North Korea has already achieved it. The list of threats goes on and on."

Wait, "on and on"? So far she has listed two "threats," both old and well-known, and neither of which is more threatening to our security because of anything the sequester might cause in the Defense Department. I am curious to see what the "on and on" is about.

Does she mean China, toward which we are supposedly already pivoting and whose capabilities are far below ours? Does she mean "cyber warriors," who may be a problem, but are irrelevant to 95 percent or more of our military capability? What's the list? And is it real?

Or is a defense industry CEO whipping up a fervor encouraged by the community that lives in that fear stovepipe, but doesn't have a grip on what is going on in the rest of the world?

And then, there is that budget world, equally, if not more threatening, according to Hewson. Her predecessor, she said, was just campaigning for clarity last year, not playing politics. Let that rest; it was an election year and there is no such campaign going on this year.

But calling for guidance today suggests that Hewson is out of touch with what has actually happened as sequester has been announced and implemented. Someone should brief the CEO. Last year OMB provided two sets of guidance, making it clear that the major impacts of sequester would be felt in the operational accounts at DOD. Not in the acquisition accounts, which is where the vast bulk of Lockheed's business lies.

The reason Lockheed has only laid off 50 people is because its programs are not experiencing the hurt. Federal employees are, as the secretary of defense made clear on May 12 -- nearly 700,000 of them will get 11 unpaid days between now and the end of September (and maybe next year, too, if there is no budget agreement).

But the "memo" to industry about the sequester has always been that contract dollars are not affected as quickly, because the dollars already committed to contracts were not sequestered under the law. Makes sense the near-term impact would be minimal, although the defense industry and Bob Stevens were screaming louder than anyone.

Maybe what she is really worried about is not the sequester, but what is happening to the defense budget in general. We are in an obvious drawdown, long-term, and drawdowns affect everyone, including industry, because procurement dollars go down even more deeply than the overall budget. (They are already down more than 20 percent since FY 2010, while the overall budget, pre-sequester, is down only 10 percent in constant dollars.)

Industry leaders should get with this program, and many (even Lockheed) have begun to do so. But instead of wasting valuable time complaining about guidance and arousing fear, it would be good for long-term business to focus on this reality and plan accordingly.

Stay tuned this week for the Defense Department to shuffle those budgetary cards and deal them in new ways. Every year, the DOD encounters new needs and changing old needs and submits an altered spending plan to the Congress -- it's called "reprogramming" or "transfers." And every year, it shifts additional funds around without having to notify the Congress.

In addition, thanks to the sequester, the Pentagon may well take full advantage of the special, supplemental war budget it has asked for every year to recover as much as it can from budget cuts.

The Pentagon starts from a high spending base. Even after the cuts of the last three years, defense spending is a good $150 billion above the average for the last 60 years.

The DOD has some unusually generous opportunities to shift funds around. This year, they have a $7.5 billion opportunity -- the amount of funding they can legally reprogram across the budget to meet emerging needs, so long as they seek the approval of the armed services committees and their defense appropriators in Congress.

And this week, the DOD may well come forward with a proposal as to how they intend to use the notification part of that flexibility. Their draft proposal for fund-shifting was leaked to Inside Defense last week, not clear by whom.

The Air Force might have had a reason to leak the draft, since they are paying a heavy bill for the Army's profligate spending on operations in Afghanistan. It seems the Army has underestimated the costs of moving things around in that country, as well as the costs of bringing it home (particularly given the Pakistani border shutdown, which throttled any deliveries via road for a few months). A whole run of Air Force programs may get a spring haircut to pay for these problems, including space-based infrared radar, modifications to the Reaper drone, and a number of other space and missile programs.

My conversations in the Pentagon suggest that neither the Navy (less impacted) nor the Air Force are all too happy about picking up the Army's tab. Mind you, it is war-cost estimates, in addition to the sequester dilemma, that's creating the need to shuffle money around.

Beyond the congressionally notified reprogramming, the DOD has substantial flexibility to move even more money around without telling Congress, so long as they stay within specific accounts and below certain monetary thresholds. Over the past 12 years, they have used this internal flexibility to shift around an average of $14.5 billion a year, according to the Pentagon's own budget execution tutorial. No reports, as yet, as to how much of that is taking place this year.

And right behind the reprogrammings, the Pentagon intends to send Congress a war supplemental -- known as the budget for Overseas Contingency Operations (OCO) -- and it's likely to be a whopper. Back last year, the Pentagon put a 2013 budget plug in for the war, which amounted to $44 billion. Then, this spring, when the DOD sent up its budget, they decided to hold back on sending the OCO budget.

So now we're waiting on yet another budgetary card to be dealt. And given the Army's bad checkbook and the squeeze that the sequester is putting on Pentagon spending this year, the temptation to use the OCO to fix things may just be too great. After all, the war budget is not subject to the DOD ceiling mandated by the Budget Control Act, which leaves room for a major reshuffle of the spending cards.

According to Comptroller Robert Hale, "the placeholder [for OCO] is $88.5 billion. I don't think we'll be above that. I don't know yet how much we will be below that."

Before the final reprogramming and the OCO budget get sent to the Congress, it behooves the Office of Management and Budget to take a good look at the details. The sequester, as I have said, is a lousy way to manage a budget, but the best opportunity the DOD has had in years to set the right priorities and bring some budgetary discipline to the Pentagon, something it has not had for more than a decade.

No dealing from under the deck should be permitted in this game.

Senator Harry Reid is about to become a magician. Next Tuesday he plans to introduce a bill that would eliminate the FY 2013 sequester, paying for it using ghost-like savings from the declining budgets for the Afghan war. And it sounds like the White House might just go along.

It's another parlor trick in a budget process full of such tricks, conjuring up savings and then, in this case, adding to the deficit by spending them. Let me explain, because it is all about scoring, but not about real money.

The Congressional Budget Office projects budgets into the future. When it does so, it has to start from something. Since this is a very conservative (small "c") organization, it properly starts from what is called "current law," or what the last appropriation was for something.

In this case, it is the last appropriation for the war. The Overseas Contingency Operations account, which funds the wars, was very high in the past -- nearly $180 billion at one point. The last time it was appropriated, in March this year, it was around $87 billion. So that is the current law number.

Now, when CBO looks into the future, it starts by saying $87 billion is the cost of the war. Since that is current law, the baseline for the future is $87 billion every year, plus inflation. Anything below that amount can be imagined to be "savings."

That's the parlor trick Sen. Reid is using. He is assuming current law, inflated, for the future, and then assuming that reality will be lower. The difference between the two numbers is the "savings ghost."

When Paul Ryan and the administration both used this trick in their budget proposals last year, they scooped up the budget "savings" and applied it, they said, to deficit reduction for the next 10 years.

There's just one problem: These savings are a phantom, a figment of Sen. Reid's imagination. The war is already winding down and everybody, including CBO, knows those numbers are fictitious.

But, ya know, they are easy, just sitting out there in fiction land waiting to be used, instead of knuckling down to the budget discipline the Congress and the White House ought to be enforcing.

And in this case, Sen. Reid doesn't intend to apply these savings to deficit reduction, which is bad enough. He intends to spend them, "fixing" the sequester, and, on the way, adding to the deficit.

It will be hard to resist this temptation; it's too easy. It is also wrong, exactly the kind of conjurer's trick that brings Congress into ill repute. It should be resisted, as the ghost of King Hamlet warned: "O horrible, O horrible, most horrible! If thou has nature in thee, bear it not."

Last night I saw upon the stair
A little man who wasn't there
He wasn't there again today
Oh, how I wish he'd go away

-- Hughes Means, 1899

The wishful thinking continues. The defense budget appeared today. It is another budgetary fiction, alongside past fictitious renderings from the five-sided building. And it will not survive the political process it is about to enter, as we head toward new fiscal cliffs and ideological disagreements over the federal budget.

The federal budget need not have waited the extra 65 days; it is something the administration could have sent up earlier because it ignored the event causing heartburn across the capital: the sequester, or the "little man who wasn't there."

For DOD, this means the request of $526.6 billion is $51 billion over the funds it now has available for this fiscal year.

Of course, the Pentagon and the administration are hoping the sequester dissolves in an outbreak of bipartisan good feeling that leads to a budget agreement sometime this summer. That good feeling has yet to show signs of life, with two budget resolutions in Congress that are miles apart and little incentive for either party to take them to a conference doomed to contention.

So we will have sequestration, probably through the fiscal year, setting a new baseline for DOD. That is not, in itself, a bad thing, but Secretary Hagel's budget ignores it. Instead, his budget assumes that the Army and Marines will stay on the path to the 490,000 and 182,000 troops already projected and the large "back office" can stay in place -- the 560,000 active duty forces who do not deploy, but are the "overhead drag" on defense efficiency.

There are other fictions in the defense request. Pay for these troops will grow one percent, which is lower than likely inflation. Perhaps, just perhaps, the fees retirees pay for healthcare will rise to something like one-tenth of what a non-military family of four pays for health insurance. A new round of base closures and consolidations has been requested. All things will not happen.

Why the fiction? Perhaps it is to punt the ball to Congress, where unreality seems to reign supreme. Let the Republicans increase defense at the cost of domestic spending, and run on that record in the 2014 elections. Make sure nobody can say the Democrats in the White House are soft on defense when those elections come.

But the curtain will have to be pulled from the fiction sometime this year; funding the government will not wait until next year. Once again, the appropriators may have to step in and the find the way to a spending deal nobody else wants to contemplate.

Defense budgets have been, and remain, a hostage to this larger budgetary discord. Rest assured that the man who isn't on the stair will keep reappearing until realism sets in and the few remaining grown-ups in Washington reassure us all that they can set a fiscal path that is clear and sustainable.  Meanwhile, the fantasy in defense-land will continue. Real reform -- a smaller back office, pay and benefits policies that are affordable and sensible, hardware costs that are under control -- will have to wait.

The federal budget is coming out next week. The defense part has been declared dead on arrival because it does not take sequestration into account, just works off of last year's request and projects about a 3 percent cut in the Pentagon's funding, year over year. It will go down farther.

But what is more interesting is the extent to which fear about defense is being replaced by realism about the sequester and declining defense budgets. Both may be more absorbable than the rhetoric has been suggesting.

The hyperbolic rhetoric about the sequester is starting to fade with the disappearing charm of Leon Panetta. There's a new boss in town, and the noises over the transom, at least, suggest that calm may be returning to Pentagon waters. Secretary Hagel is warning of "significant changes" and the need to confront them as budgets go down: "There's no way around it," he said last week. (Though I've got to worry if House Armed Services Committee Chairman Buck McKeon is happy with Hagel -- he's the guy who wanted the Senate to defeat the nomination a month ago.)

Realism is picking up steam in other places, as well. The Navy was going to keep ships in port, stop ship overhauls, and watch readiness tank before that full-year funding bill was passed. Now, with $4 billion more in operational funds than they had last year, it seems the Navy's worry-warts have been appeased and the planners can step in.

The chief of naval operations is on a more realistic message. Sequester is budget discipline: "It's causing us to make choices and prioritize anywhere from our operations to our maintenance to our investment accounts," Adm. Greenert told Navy Times.

Out there in the country, it seems "sequesteria" is starting to fade, as well. Taking a good look at defense dollars in California, Los Angeles Times reporter Jim Puzzanghera found that when you get away from the Aerospace Industries Association and George Mason Professor Stephen Fuller's "doomsday" megaphones, the local impacts of changes in defense spending are not that significant.

He quotes a regular student of the state economy, who points out that even beleaguered California has a $2 trillion economy, and it might face a $9 billion reduction in defense dollars.

I've been eyeing the California defense economy for more than 30 years, and the trend has been clear. Contractors started moving out of Los Angeles and planting stakes in places like Arizona and New Mexico more than 20 years ago. The bad news was they were leaving, and jobs went with them. The good news turns out to be that now when the defense industry starts to sniffle, LA does not catch a cold. Economic diversity has set in, and growth in other sectors has, over the years, filled the job hole.

Sometimes defense is just made to look bigger than it really is. Oh yes, the defense budget is large. At over $600 billion, how could it not be; it's the highest over the past few years it has ever been in constant dollars. That will help cushion the effect of the drawdown on the military -- there's lots of room for consolidation and choice.

But, all the models aside, it is not going to sink the economy. It just plain isn't as much of the economy as it used to be: nearly 10 percent of the Gross Domestic Product in the 1950s, to an average of 3.8 percent at the height of the Bush war effort over the past decade. Defense has stayed large -- very large -- but the economy has grown exponentially.

Fear makes a good story; realism and planning are a better reality. Maybe we're coming back to earth.

It was a meat axe, Armageddon, a doomsday machine. It would sacrifice our military readiness, lead to America becoming a second-rate power. At least that was the Panetta version.

Nobody doubts that the sequester is a serious change in the vector of the defense budget, which would go down another 8 percent this year, as it rolls in over the Pentagon beach. And nobody doubts it poses management challenges to the Pentagon.

But after March 1, the Pentagon rhetoric cooled. The new secretary of defense took an adult view; sequester is a challenge to be managed, not the end of our national security.

He was helped by the passage of the new defense appropriation for FY 2013, which made it through Congress before the deadline of March 27. Almost every reporter who writes about the new spending bill is wrong -- it does not add any unusual flexibility to the Pentagon's normal spending practices, and, especially, it does not "shift funding" from the weapons and research account to the Pentagon's beleaguered operating accounts.

Instead, Congress largely passed the defense budget the administration asked for more than a year ago (yes, more than a year ago), which, quite rightly, asked for $12 billion more for the operations accounts (along with healthy funding for weapons and research) above the amount they had in FY 2012.

Congress actually reduced the president's budget request for military operations by $1.5 billion, leaving the Pentagon with $10.4 billion. But they didn't "shift" anything around to get there; they just provided most of what the president wanted in the first place. No gold star for Congress there.

But increasing the operations budget was exactly what the Pentagon wanted. And one payoff is that increasing this funding is starting to make sequester a bit more manageable.

The Emily Litella moments (remember, "Never mind"?) for the Pentagon are starting to appear. The Navy didn't send the carrier Harry S. Truman to the Gulf, but they did send a Littoral Combat Ship to Singapore.

Two of the services warned they would suspend funds for soldiers to take college classes while on active duty, but, after Congress and the soldiers jumped up and down on that and said no, the program was restored.

The Air Force announced it would have to suspend flying training for some air squadrons, but somehow found the operating cash to send bombers from the United States to South Korea in a show of force to the troublesome government of North Korea.

And this week, the biggie for the "never mind" observers -- those 22 days of civil service furloughs have suddenly become 14 days. A service or two actually wanted to suspend the furloughs altogether, but didn't out of solidarity with everyone else.

Maybe sequester is becoming what it was all along: a "BRAC" (base-closure process) for the defense budget. A kind of "hand of God" that came down from the sky and forced the Pentagon to make the choices it should have been making anyway.

I keep going back to what former Chairman of the Joint Chiefs Adm. Mike Mullen said when this defense drawdown began, more than two years ago: "The budget has basically doubled in the last decade. And my own experience here is that in doubling, we've lost our ability to prioritize, to make hard decisions, to do tough analysis, to make trades."

But even if the Pentagon survives sequestration, and it will, the long-term budget planners in the five-sided building have still not awakened to the reality it imposes. Reports are that the new FY 2014 budget request will ask for more than $526 billion, a tiny step down from FY 2013, but one that leaves out any consideration of the sequester.

Time to absorb the sequester message and plan accordingly.

The budget crunch on defense and foreign policy has me thinking: While Congress is off on its merry pursuit of Passover or Easter and the White House is preoccupied with bringing peace (again!) to the Middle East, this is a good time to think about how we really ought to engage the world.

Not the phony baloney about the "indispensable nation," attributed to Madeleine Albright and believed by too many in Washington. There are plenty of folks ready to dispense with us, especially after the travesties in Iraq and Afghanistan.

Not the "declining power," which is only the shadow side of aggressive, neoconservative interventionism. It's all about our power, you see. With it, we "shape" the international environment (or just write the rules ourselves when we are being really outrageous). Without it, global security is done for and anarchy will break out -- terrorists on all fronts, nuclear weapons on every corner.

How about some plain old common sense? The United States is just another country -- a big one, with big interests and big capabilities, but still just one in a world crowded with countries and problems that need to be solved. We cannot write all the rules; we can influence some of them. We cannot shape neighborhoods whose traumas and dilemmas are up close and personal to them (see Israel-Palestine, or China-Japan). Too often in the last 10 years we have tried to write the rules, only to create new adversaries or stir up old ones.

I am not making a plea for withdrawal, but for modesty -- modesty in ambition and expectations. It's a good moment for modesty. Everyone's resources are stretched; internal dilemmas (some with external instigators -- see Russian money and Cypriot banks for a nice synergy) are barking at every national and regional door.

John McCain called people who see wisdom in modesty "wacko birds" the other day, and Stephen Kinzer picked it up in his Guardian column today.

Well, count me a wacko bird, who wants neither to intervene with the Marines or special operations forces, nor to withdraw, but rather to remain engaged.

I will add my own twist to the wacko-bird manifesto. As we define more modest engagements, we need to demilitarize our foreign policy machinery so that we don't define every issue as solvable with military force. The Pentagon and the uniformed military should not define the framework for our global engagement; they should proudly and competently support our statecraft.

We should be sending advisors to governments seeking to create effective, efficient, and accountable governance, not sending "security" trainers to beef up other countries' militaries and internal police forces before local civilian officials know how to handle them.

We should have a diplomatic and foreign assistance capability that can prevent and resolve conflict and advise on governance, not one that backs away from this kind of engagement and restricts itself to representing the United States and reporting on events. And we should use this capacity modestly, for the task is large and we cannot "shape" it either alone or in our image.

A changed perspective on how we engage the rest of the world is a big part of the answer to the endless thrashing about of the past 20 years. Liberal international interventionists have had their day, and paid the price. Conservative regime changers have shamed themselves adequately (though to read the reviews on Iraq 10 years later, there seems be a shortage of shame. Doug Feith? Really?)

Time for the wacko birds. Sign me up.

Amid all the hyperbole about sequestration's impact on national security, it is interesting to note that, after next year, the defense budget will actually begin to grow again.

Makes no sense, you say? You thought sequestration cut defense? Indeed, it does. If you take the FY 2013 defense budget that was just passed by Congress and let the sequester happen, the Pentagon's funding will have been cut roughly 23 percent in constant dollars (including war costs) since it peaked in FY 2010.

But take a closer look.

Under the defense budget that Leon Panetta proposed to meet the "caps" that the Budget Control Act (BCA) originally imposed on discretionary spending, the Pentagon would get about $5.1 trillion over FY 2013-2021. But if the sequester holds, lowering those caps through FY 2021, DOD will get only about $4.6 trillion. In other words, sequestration will lower the military's projected funding by about $460 billion.

But, if you go year by year, the picture looks a little rosier. In FY 2014, the defense budget ticks down, again, about 2 percent below FY 2013 -- the first fiscal year subject to sequestration. That further reduction happens because in January legislators shoved some of the adjustment in the BCA caps off into FY 2014, instead of taking all of it in FY 2013.

Then, something interesting starts to happen. According to CBO scoring (the best in town, sorry OMB), the defense budget starts to go up again, about 2 percent growth per year. Take out the inflation, it creeps upward about half a percentage point every year from FY 2015 to FY 2021, in constant dollars.

This would be good news to the Pentagon. Of course, it would rather not have the sequester -- aside from a few Tea Party types, who does? -- but the automatic cuts sequestration brings are a one-time thing. Once we are in the FY 2014 budget-planning cycle, the Pentagon has less money but 100 percent planning flexibility. So it can actually make choices and move monies around without a meat cleaver over their heads. And, if the numbers hold, the defense budget will start to grow again.

The tricky bit for Pentagon officials is that they have to start cutting spending now. Unfortunately, the FY 2014 budget they are about to send Congress assumes that the sequester will be lifted. So when the budget comes, CBO officials (bless them) are going to say, hey, the new Pentagon budget for FY 2014 is something like $50 billion above its cap. And we will start the defense budget hysteria all over again.

Stay tuned for the fun.