Center for Strategic Communication

The battle over defense spending continues to intensify, with the latest skirmish at the heart of one of the defense industry’s main pressure points.

Last week, the Obama administration effectively told government contractors that if they issued mass layoff warning notices ahead of the November election, as many threatened earlier this year, the companies would potentially lose out on recouping sequestration-related costs associated with cutting employees or shuttering facilities.

Hundreds of thousands of defense contractor workers could be warned that their positions may be lost — a notification coming right before they vote.

This move underscores two urgent elements key to the near-term future, and prosperity, of the industry.

The first: escalating stakes in the political fight over defense jobs. Whoever wins the Oval Office and controls Congress, will help determine whether the next phase in the defense industry’s trajectory is cyclical decline or something bigger and structural.

Politics more than policy may be the ultimate factor, and that is a long-term risk. Yet that is why major contractors are willing conjure the spectre of hundreds of thousands of layoffs if sequestration takes effect, an outcome that if it happens would be certain to be pinned on President Obama.

The second element is tied to the industry’s business model itself. If sequestration occurs, who shoulders the expense of its impact? Taxpayers? Or shareholders?

The Obama administration’s subtle threat in last week’s OMB memo speaks clearly to this as it appears to shut down an avenue for contractors to shift the cost of sequestration’s impact onto  taxpayers. That is a sure way to catch the attention of defense CEOs who are ever mindful of their shareholder responsibility. The upside of the past decade showed how far defense stocks, and executives’ stars, could rise.

The next 10 years, sequestration or not, will be a whole new test for corporate leaders, taxpayers and politicians alike.