Pentagon Budget Cuts: Who Loses, Who Wins?

President Obama has told incoming Secretary of Defense Leon Panetta to reduce military spending by 5 percent. That sounds modest. But given the enormity of the military budget, it will drain $33 billion a year from an already-struggling economy.

The Defense Department accounts for almost 20 percent of federal spending and about half of all discretionary spending. It employs 3 million people, including 700,000 civilians. All that makes it an attractive target for budget-cutters, according to the Bedford Report, which provides investor analysis of the aerospace and defense industries.

Panetta has to find ways to cut total costs by $400 billion over the 12 years. How he goes about it will affect everything from the size of the bar tabs run up by sailors in Pensacola, Fla., to how many F35s get built in Texas, and to how many Abrams tanks rumble off General Dynamics' assembly line in Sterling Heights, Mich.

Hardly any state would be unaffected. Up to 18 percent of Hawaii's economy, for example, is dependent on or linked to Department of Defense spending, according to a 2011 study by the Rand Corporation. Joe Marino, president of the Florida League of Defense Contractors, says military spending contributes about as much money to his state as tourism.

Mackenzie Eaglen, research fellow for national security with the Heritage Foundation, expects the coming reduction in military spending to exceed 5 percent a year. "It could be closer to 10 percent," she says. The coming cuts, she adds, "won't be limited to weapons systems. I fully expect to see the growth in ground forces eliminated"—perhaps 100,000 fewer active service members over the next five years.

The most vulnerable part of the workforce, she thinks, are civilians working for the Defense Department in Washington, D.C. "That's because they're the most highly paid." Growth in this sector has been virtually "unchecked" in the past decade. "The number of civilian reports to the [defense] secretary, for example, has grown almost 50 percent."

It's possible, she says, that one or more bases will be closed here and abroad. Closings already scheduled include Maine's Brunswick Naval Air Station and, in Washington, D.C., the Walter Reade Medical Center.

"With the volume of cuts ahead, a domestic base closing is possible and the closing of an overseas base is probable," thinks Eaglen. Don't expect, though, to see any new domestic closings in the next two years. "A domestic base closing would be politically untenable in an election year."

Production lines for all the following military aircraft are already set to close: C-17 (Long Beach, Calif.); C-130 (Marietta, Ga) and F-18 (Seattle, Wash.). Also under attack: the F-35 Joint Strike Fighter, produced by Lockheed Martin at sites that include Fort Worth, Texas. The most expensive weapons program in U.S. history, it became even more expensive in July when additional costs of $771 million were announced, earning the censure of Sen. John McCain, a long-term critic of the program.

The Congressional Budget Office has proposed cutting the F-35 program altogether, which it says would produce a savings of $27 billion over the next five years and $260 billion longer-term. CBO recommends that the Pentagon, instead of continuing with the F-35, upgrade F-16s and F/A-18s to give them some of the costlier plane's capabilities.

Other CBO recommendations include such unspectacular but cost-effective changes as consolidating into one entity the three duplicative systems of military commissaries and retail stores that now serve current and retired military.

Gordon England, a former secretary of the Navy and former deputy secretary of defense under George W. Bush, advised Panetta in New York Times op-ed piece to "resist the temptation to quickly kill procurement programs" or to make "proportional cuts to programs across the board."

He suggests the new Secretary instead find savings by sharing weapon development costs with U.S. allies. "Manufacturing equipment for the American and foreign militaries simultaneously saves Washington money because more units are produced and overhead costs are shared," he says. Further, it could create "thousands of American jobs."