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October 2, 2012

Closing the Deal

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Yesterday, the Office of Management and Budget advised defense contractors to keep their workers in the dark about pending layoffs. Here’s the back story.

Spending cuts mandated by the Budget Control Act of 2011 are slated to kick in next January. Defense takes the biggest hit of all — more than $50 billion. This will force the Pentagon to curtail or cancel spending that, in turn, will force their contractors to lay off workers by the thousands.

Under the WARN Act, companies with over 100 employees are required to notify their workers of pending mass layoffs at least 60 days in advance.

Now, the administration views the act’s sequestration of Defense funds as a “nuclear option” for getting defense hawks to agree to support tax hikes. Essentially, it presents hawks with the choice of economically damaging tax hikes on the investor class or dangerous cuts to national security.

But earlier this year, major defense companies threatened a “nuclear option” of their own:  Jettison the Defense sequester, or we’ll have to send a bunch of workers to the polls clutching pink slips.

As soon as the industry started talking up the issue, the administration started talking it down. In July, the Department of Labor issued a declaration stating that sending out notices was “inconsistent with the purpose of the WARN Act.”

Then Congress got into the act, cranking out legislation requiring that the government spell out the exact impact of the sequestration cuts. The White House countered that requirement by issuing a report that did little more than spell out the math in the law.

Now, it seems, the administration is trying to kill the WARN Act warning once and for all. Last week, the OMB informed contractors that, not only could they skip giving workers the mandatory notice, but that the government would make the contractors whole — with taxpayer money — for any costs they incur by ignoring the law. “Government agencies would pay contractor employee compensation costs resulting from terminated or modified contracts due to sequestration,” CFOs were assured in a September 28 memo.

Senators McCain, Ayotte, and Graham immediately cried foul, issuing a joint statement that raised “questions regarding the legal authority of OMB to interpret the WARN Act as it has, and to obligate the Federal government to pay billions of dollars of potential claims from private contractors arising as a result of this interpretation.”

But industry officials appear to have bought it. Lockheed Martin, one of the nation’s largest defense contractors, abruptly shelved its plans to issue layoff notices.

So that’s one nuclear option off the table. What’s next?

It is clear the president thinks that, if he wins the election, Republicans will cave on tax hikes in a lame-duck session. He is betting he will never have to make good on the OMB promise to cover everyone’s legal bills.

The industry, with the OMB statement in hand, can claim they have done “due diligence” and sit on the side line. They’ll just watch how things play out.

But this drawn-out game of budgetary “chicken” does have some definite losers. Defense readiness and capabilities are already being undermined by the “soft” sequestration — the armed forces have already pulled back on activities, operations, and contracts in anticipation of the budget crunch. Further, small and medium companies without the deep pockets to weather the months of uncertainty ahead are facing very tough choices.

Regardless of how the budget battles play out, damage has already been done to our defense industrial base and to troop training and readiness. All of the political jockeying about the WARN Act has done nothing to preserve, much less promote, a strong national defense.

— James Jay Carafano is director of the Heritage Foundation’s Allison Center for Foreign Policy Studies.

First appeared in National Review Online's "The Corner."

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