Department of Defense and defense industry leaders have stepped up their warnings about the security and economic consequences of the $55 billion in automatic cuts to the DoD budget set to go into effect in early January 2013.  Another $55 billion in cuts to non-defense budgets would also occur in January.  Total budget reductions if Congress does not act to approve an alternative to sequestration, would be over the next nine years would be $1 trillion.

Last month Secretary of Defense Leon Panetta told the Senate Defense Appropriations Subcommittee that sequestration would “inflict severe damage on our national defense.”  Panetta said he was convinced that sequestration’s “meat-axe approach” to cutting defense “could hollow out the force.”

In a Pentagon press conference late last month, Panetta reiterated this warning telling reporters that the greatest risk to “the health of our force, the well-being of our servicemembers and their families—is the threat of this sequester.“  Panetta also spoke about the risk to the defense industry saying the defense industry and its employees have to know that DoD will have the resources necessary to implement the security strategy so they can plan appropriately.

At that same press conference, General Martin Dempsey, Chairman of the Joint Chiefs of Staff, said Congress and the administration “must come together to prevent this across-the-board, unbalanced cut that could jeopardize our ability to deal with the very real and serious threats we face.”

This week, the Aerospace Industries Association (AIA), released a study on The Economic Impact of the Budget Control Act of 2011 on DOD and Non-DOD Agencies.  The report, prepared for AIA by Stephen Fuller, Director of the Center for Regional Analysis, George Mason University, estimates that sequestration will result in 2.1 million lost jobs, and could increase the unemployment rate to over nine percent.  Of this total, federal employment losses would exceed 275,000.

According to the Fuller report, the automatic cuts would cause the loss of 1.1 million defense-related jobs.  Direct job losses would be 325,693, including 47,147 DoD employees. An additional 282,147 supplier and vendor jobs would be lost and 482,240 jobs resulting form payroll spending (so-called indirect jobs) would be lost.

Another 1 million jobs would be lost as a result of automatic cuts to non-defense spending.  This loss includes 420.529 direct jobs (including 229,116 federal jobs), 150,552 supplier and vendor jobs, and 476,268 indirect jobs.

Pentagon spokesperson George Little, responding to questions about sequestration and the AIA report, clarified that sequestration cuts “ would not affect current contracts funded with FY 2012 dollars” or “anything put on contract between now and September 30.”  He also reminded reporters that FY2013 funds put on contract between October 1, 2012 and January 1, 2013 would be affected by sequestration.

On Capitol Hill this week, former Vice  President and Secretary of Defense Dick Cheney met with House Republicans to discuss the impact on defense resulting from sequestration.

Yesterday, the House Armed Services Committee (HASC) held a hearing on the effects of the automatic cuts from an industry perspective.  Leaders from major defense contractors (Lockheed Martin, EADS North America, Pratt and Whitney, and Williams-Pryo) testified before the committee.  In his opening comments, HASC chair Rep. Buck McKeon (R-CA) noted that the impasse on reaching an agreement on an alternative to sequestration “has created a chaotic and uncertain budget environment for industry and defense planners.”

The witnesses agreed that if the automatic cuts are implemented  significant layoffs will occur, costs will go up, and contracts will be challenged and may be terminated.  Sean O’Keefe (CEO of EADS North America), former DoD Comptroller and Secretary of the Navy, called sequestration a ”recipe for endless argument, litigation and gridlock.”  He said cost increases resulting from sequestration could eventually exceed the savings were supposed to produce.