If sequester actually happens and by February there's “no blood on the floor,” Congress might opt for another bad deal, says David Berteau, director of the International Security Program at the Center for Strategic and International Studies. “That, to me, is the scariest scenario of all . . . that Congress says it's not so bad, let's do it again.”
A grand bargain on taxes and entitlements remains the most permanent way to avoid such pain. But that still would mean tighter purse strings at the Pentagon. “I see no scenario in which the Defense Department isn't also in line for cuts,” Berteau says. At a minimum, that could mean an annual reduction of about $30 billion per year. “The benefit could be that it's not all [happening] right now.”
Wall Street might go along with a $30 billion annual reduction to defense spending if that was part of a larger agreement on taxes and entitlements, Callan notes. But yearly reductions of $50 billion or more “would likely prompt a negative defense stock reaction,” he writes in a note to investors.
Left-leaning think tanks in Washington are already looking at what choices a more substantial defense budget reduction would require. One of them, a recent report by the Stimson Center, looks at a “smoothed sequester” scenario calling for $550 billion in defense reductions over 10 years beyond what Obama asked for in fiscal 2013. The report advocates a strategy called “strategic agility” that prioritizes space, air and naval forces and could be executed under those budget constraints, it claims. If the Pentagon could find $400 billion in “efficiency” savings, which includes tackling military entitlements, it could make up the remaining $150 billion with cuts to Army and Air Force force structure, theater missile defense and nuclear forces.
Others in industry have already predicted a grand-bargain deal leading to about $750 billion total in cuts to defense growth, halfway between existing cuts and the total undersequestration.