The two ways this could go

While the nation's capital burns with gossip about David Petraeus and his love life, the fiscal cliff is not far away. I don't often wade into the waters of broader federal budgeting, but people are beginning to explore the endgame of this Beckettian drama and a few wonder about its implications for the defense budget. Defense is just a residual issue here; the big top is focused on revenues and entitlements.

Paul Krugman says the whole cliff fracas is a diversion, especially at the leading edge of a recovery; keep spending until the economy is healthy.

Unfortunately, the political system and the march of law and time are inexorable. Those pesky Bush tax cuts expire at the end of the year, so something must be done, either to extend them or to split them in two, the way Obama proposes: families with over $250,000 of income get a higher rate -- up from 35 percent to 39.6 percent -- while everybody else keeps the lower rates in the original legislation.

A few other items are lying around, needing urgent repair before damage is done. The Alternate Minimum Tax is not indexed for inflation, so more middle-income families (including yours truly) will get whacked next April, unless the AMT is at least "band-aided" for the 2012 tax year. America's doctors are surely going to lobby against letting their Medicare reimbursements fall, which happens at the end of December. It seems like very few Americans are going to lobby to perpetuate the 2 percent reduction in the payroll tax for Social Security, so maybe that is gone; the same may be true for the extension of unemployment benefits, now that the economy is headed to recovery.

The long poles in the circus tent are sequestration, the likelihood that we will again bump up against the debt ceiling toward the end of 2012 (with Treasury vamping to postpone the problem into February), and the threat of a government shutdown on April 1, in the absence of final appropriations.

The debate is all about these issues, especially whether the White House and the Republicans in the House are prepared to put the biggies on the table: revenues and entitlements. Defense is the side-show, even though the "defenders of defense" have danced up and down for more than a year, trying to make it the main event.

It seems to me likely that one of two scenarios plays out over the next six weeks (or 14 legislative days, if you count that way). Either way, it will be sausage, not a Grand Bargain.

Option One: Dive off the cliff. The president lets the tax cuts expire and sequester happen. The Office of Management and Budget defers the impact of the sequester by apportioning funds to agencies at the level appropriated in the current continuing resolution (which goes until March 27, 2013), so spending does not actually take a whack right away.

The new Congress comes in and starts with the functional equivalent of a clean slate -- tax rates have gone up, the sequester has happened (but the impact is deferred). They start a new round of talks with the president, leading to an agreement that kicks the can down the road. The agreement is a framework on the issues that matter: revenues and entitlements. The framework sets targets for both, raising revenues and lowering entitlement spending projections. But there are no details: these are left to the Senate Finance Committee and the House Ways and Means Committee to fill in by a given deadline. Over to you, David Camp and Max Baucus.

In this scenario, discretionary spending is a residual issue. Perhaps the agreement lowers the "caps" set out in the Budget Control Act of August 2011 to make the numbers work. Defense dollars fall below the numbers projected in the current caps. David Leonhardt thinks so; so do I.

Advantages of Option One: it sets new baselines for revenues and for discretionary spending. Anything the next Congress does to change those baselines looks good, because Congress can claim that it lowered taxes (from the new baseline) and that it raised spending (from the baseline).

Disadvantage: The markets may not be happy, sending the stock market into a tailspin nobody wants.

Option Two: this same deal is reached before the end of the December. Disadvantage: the new Congress is cut out and there are no new baselines for revenues and discretionary spending.

Advantage: the markets like the agreement and the recovery appears to continue. It has the same effect on discretionary spending: it is a residual. To get the overall number, defense still goes down below the current caps, possibly even in FY 2013.

Either way, from the view of someone in the defense business, the consequence of defense being a side-show, with reductions needed to get the whole package to line up with the existing or new spending targets, is that defense budgets continue to go down.

Just what I always thought.

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National Security

How'd that defense jobs circus work out for you?

With the end of the election campaign, the season of sequestration and budget deals is upon us. But was sequestration -- the "fiscal cliff" -- and its supposedly devastating impact on defense a big issue in the election itself? Clearly, some folks thought it would be. The Aerospace Industries Association drummed up a major study arguing that going over the cliff could cost a million defense jobs. The National Association of Manufacturers argued the same.

Some analysts took these claims seriously and argued that defense workers could actually determine the outcome of the election in key states. Loren Thompson of the Lexington Institute wrote: "The simple truth is that Obama lacks many of the electoral advantages he had last time around, so obscure issues like sequestration of the military budget could be decisive in a tight November race. That argues for doing something now to avert sequestration, rather than waiting for action by a lame-duck session of Congress after the election." He pointed in particular to Florida, Virginia, North Carolina, and Pennsylvania as states that could be swung by defense workers and could, in turn, decide the race.

Senators John McCain, Kelly Ayotte, and Lindsey Graham actually cooked up a "defense jobs" travelling show around these claims, going from base to base and plant to plant to rally defense workers and communities in the hopes that Mitt Romney would become president and stem the tide of cuts.

I wondered how that actually worked out, so, with the help of my intrepid colleague, Nate Levine, I took a look at where the McCain-Ayotte-Graham side show set up its tent to see how much of a difference it made.

The "defense jobs" circus visited Fayetteville, North Carolina, a state Romney carried 51-48, so maybe defense workers made a difference there -- or maybe not.

But it goes downhill from there. The circus travelled to Tampa, Florida, where the the last statewide count had the president ahead by 43,000 votes. It spent time in Norfolk, Virginia, but the president carried the commonwealth 51-48. It went to Merrimack, New Hampshire, but Obama prevailed there 52-46. And Nellis Air Force Base, Nevada, a state the president carried 52-46. And Colorado Springs, Colorado, a state he won 51-47. And Dayton, Ohio, but the whole state went 50-48 for the president. It didn't go to Pennsylvania, but the president scooped that one up, too.

If you focus on some of the key congressional districts where these bases and plants are located, the picture is pretty much the same. The Democrat in Florida carried the district. The Republican in North Carolina won. The Democratic incumbent in Virginia won, as did the Democrats in New Hampshire and Nevada. And the independent in Colorado.

What these outcomes suggest is something I have been arguing for some time, and, by now, it is pretty obvious: This election was not about defense. A very large and expensive lobbying effort to make it about defense failed. It was about the economy, yes, and jobs, and debt, and the deficit. But it was not about defense. That is a pretty clear signal that at least the part of the sequester theater that focused on a "doomsday" for defense was not very compelling when the rubber hit the road. And it suggests that the decisions about a budget deal may include more cuts to defense than anyone projects so far.

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