By Kenric Ward | Watchdog.org Virginia Bureau

FREDERICKSBURG —A new report says impending defense budget cuts could push U.S. unemployment back above 9 percent, but other analysts say military outlays would continue to climb.

Veronique de Rugy says defense cuts will be minor. Credit: Mercatus Center

Virginia — one of the top defense-contracting states — has a big stake in so-called “sequestration,” which would trigger a 10 percent cut in the Pentagon’s non-war budget beginning Jan. 2.

The “S”-word has sent shivers up the spines of Virginians who have benefited from the boom in defense spending, which has helped push the state’s jobless rate down to 5.6 percent.

Some 2.14 million U.S. jobs could be lost under sequestration, says a study released Tuesday by Stephen Fuller of George Mason University. Fuller is director of GMU’s Center for Regional Analysis.

Calculating a ripple-effect throughout the economy, the study included the non-defense sector.

“An already weak economy will be undercut as the paychecks of thousands of workers across the economy will be affected from teachers, nurses, construction workers to key federal employees such as border patrol and FBI agents, food inspectors and others,” Fuller states.

But Fuller’s research is not necessarily objective, as it was conducted for the Aerospace Industries Association, a consortium of defense contractors.

Veronique de Rugy, a senior research fellow at GMU’s Mercatus Center, notes that “2013 is the only year that there are actual (defense) cuts. After that, it’s a (budget) cap.”

“Sequestration is totally in line with the drawdown in costs. Contractors cannot feed on this forever. The Defense Department is not a jobs program,” she told Watchdog.org Virginia Bureau.

“The cuts will be more minor than people say, and there is a lot of unspent appropriated money laying around.”

De Rugy estimates that defense contractors are making “double” what they earned in 2000, and that the sector’s profits have quadrupled in the past decade.

“It’s a myth to say it’s suddenly going to be recession time for these guys. The industry is not going to go under.

“Some contracts could be canceled, but that’s one of the risks of having your entire business revolve around wartime activities. We’re not going to be at war all the time,” she said.

Skeptics of the sequestration apocalypse note a two- or three-year lag time between appropriations and actual outlays. That means the impact of the 2013 cuts will be neither instantaneous nor sustained, since budgets are scheduled to increase thereafter.

Todd Harrison, senior fellow of defense budget studies at the Center for Strategic and Budgetary Assessments, said, “The  sun will still rise on Jan. 3.”

He sees a more gradual fiscal effect over time, but also warned that small firms working on small margins could eventually feel the effects of sequestration.

A recent report from the Congressional Budget Office appears to support de Rugy’s analysis.

Even with the Jan. 2 cut, the Pentagon’s basic budget for next year will be larger than in 2006 , when adjusted for inflation, CBO said.

Still, Defense Secretary Leon Panetta has called sequestration’s cuts “doomsday.” House Armed Services Committee Chairman Buck McKeon, R-Calif., brands them a “catastrophe.”

Sunday, Virginia Gov. Bob McDonnell urged the Obama administration to curb the cuts.

“I think the president needs to lead on this, get Congress back and do something about sequestration,” McDonnell said on CNN’s “State of the Union.”

In a separate report, the National Association of Manufacturers estimated Virginia could lose 115,000 jobs in 2014 if the automatic defense cuts go through. Virginia ranks second among states with the most jobs at stake if the U.S. goes off the so-called “fiscal cliff,” according to the NAM study.

Yet the authorized spending amount is significantly more than the Pentagon received, on average, during the Cold War, and it is multiples of the defense budgets of China, Russia, Iran, Syria and North Korea, combined, says Winslow Wheeler, a defense analyst for the Project on Government Oversight.

“Both Democrats and Republicans want to rescue the Pentagon by adding money above the $469 billion level (of non-war spending),” Wheeler said.

Putting the debate into perspective, the CBO said defense spending in fiscal 2013 would, in inflation-adjusted dollars, remain “larger than the average base budget during the 1980s” in the Reagan-era defense buildup.

Beyond 2013, congressional budgets call for non-war defense spending to continue to rise.

“The cuts will be more minor than people say,” de Rugy says.