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Eaglen: Sequestration Hurts Small Business More Than Big Business

The term “defense industrial base” doesn’t mean much to many people. But America’s shipbuilding, aerospace and defense manufacturing workforce employs more than 1 million people directly. And most of them work at small companies, not titans of industry like Lockheed Martin or Boeing. Speaking at the Heritage Foundation on Tuesday, Aerospace Industries Association President Marion Blakey estimated that 70 cents on the dollar of defense investments flow down the supply chain to small and medium-sized firms.

These small companies are ones like JWF Industries in western Pennsylvania, which makes parts for Army vehicles as a subcontractor. Some 450 “families” work at JWF Industries, run by John Polacek. He said that guys like him and those he employs will get hit first and hardest by the automatic defense budget cuts set to take place early next year.

“It’s the first-tier subcontractors like us that are going to feel the impact, and these guys [JWF employees] may not be here come January because of that,” Polacek told CNN. “The impact to this town is a lot more brutal than it will be down in the Beltway of Washington, D.C., because there are fewer jobs available here for these people to go get.”

Another small business about 160 workers large, Advex Corp. in Hampton, Va., provides parts and services to Huntington Ingalls’ Newport News Shipbuilding, a company building the U.S. Navy’s newest class of aircraft carriers. Advex President George Hill recently penned an article discussing how his small business invested in new technologies and equipment to modernize both their facility and production processes — all in the expectation that carrier funding would remain uninterrupted for the next several years. Now the uncertainty of sequestration’s defense budget cuts threatens those investments and could ultimately lead to “significantly increased prices for the labor, materials and components necessary to construct these aircraft carriers.” That means taxpayers would pay more for military equipment later after the effort to “save” money for debt reduction is implemented. Go figure.

Hill’s comments track those of Huntington Ingalls CEO Mike Petters, who recently warned that sequestration could wreak havoc on the shipbuilding supply chain. Petters explained that up to 60 percent of the firms who supply his yards are “sole source” — companies that may be the only possible provider for critical components. If sequestration breaks these links, his whole supply chain could crumble.

And the effect of these cuts won’t be limited to those who work directly at these small and medium-sized companies. They will also hurt small neighborhoods and local economies that interact with the defense economy. Deanna Smith runs Deanna’s Tobacco & Cigar Shop in Taunton, Mass. She benefits from the plant nearby because those employees often stop by her store after work. They are her “steady customers.” Faced with changing budget priorities this year, however, the General Dynamics facility is facing possible layoffs. If General Dynamics begins downsizing, Smith told the Boston Globe, she and other store owners in Taunton “will surely feel the loss.” Smith said these budget cuts hurt “everyone, because now those guys won’t stop in to a local sub shop to get something small on the way home, or they won’t come by here. It adds up.”

According to Deloitte, in a study sponsored by the Aerospace Industries Association, America’s aerospace and defense industry is “the largest net exporter, and one of the largest contributors to our nation’s gross exports at $89.6 billion.” These exports are especially valuable to a strong American economy bringing in foreign dollars to keep American workers on the job.

As Bruce Olsson of the International Association of Machinists and Aerospace Workers notes, America’s commercial aerospace business “is one of the sectors in which the United States enjoys a positive balance of trade with the rest of the world. We should be fighting tooth and nail to preserve that balance of trade.”

That’s why labor unions, trade associations and business groups, defense contractors, the United States Conference of Mayors, universities and others have all weighed in on the harmful effects of sequestration. And now, small-business owners themselves are jumping into the fray to alert Washington that these cuts hurt on the local level.

Business leaders in North Carolina recently sent a letter to their Congressional delegation urging action. In it, they worried that Washington does not clearly understand “the real impact that sequestration would have on small- and medium-sized businesses across North Carolina.”

A letter to Ohio’s Congressional delegation says: “Most of the damage from sequestration cuts would be at local businesses like the firms we lead. Between two-thirds and three-quarters of defense industrial purchases go to smaller suppliers, and three-quarters of all defense-related manufacturing jobs are at supply chain firms.”

These business owners go on to warn Washington: “That means the harm from sequestration cuts will flow quickly down to small and mid-sized businesses like ours. Sequestration could sound the death knell for many smaller businesses without the deep pockets and global business portfolio needed to weather such a storm.”

Signers include Ferco Aerospace Group in Franklin, Belcan Corp. in Cincinnati, X-R-I Testing in Cleveland, PCC Airfoils in Beachwood, Materion in Mayfield Heights and Meggitt Corp. in Akron.

Too many in Washington see the argument about sequestration as an ideological battle with the defense budget and tax reformers staring at each other from opposite corners. But that’s not how it looks on the front lines of our economy. And politicians threatening to take our nation over the “fiscal cliff” in order to make some political point need to understand that it’s Main Street businesses like these that will be smashed when we all hit the bottom.

Mackenzie Eaglen is a resident fellow for national security at the American Enterprise Institute.

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