The military-industrial complex has been the biggest real sector of the American economy since World War 2. The total amount of money poured into defense (and defense related expenditures which wouldn't otherwise exist) is now over 1 trillion dollars annually. Utilizing this proper counting of expenditures (rather than official breakdown that shows defense as just 1/4 of the total budget), the federal government spends 1/3 to almost 1/2 of all money it gets on defense (one may argue that it is even more when costs of years of counter-insurgency warfare are added but let's look at the basics for now).
Millions of Americans get their paychecks either directly or indirectly from the government in this manner. As such, making rapid sharp cuts in the defense budget (under either ideological or budget balancing pretext) would greatly exacerbate dangers to social stability and American domestic national security. Even modest cuts in defense will throw hundreds of thousands of additional citizens out of work and push the current real level of unemployment (20% or 1 out of 5 Americans without a job) to being worse than during the Great Depression. Possibility of serious social eruption with real violence is increased if this final solid industrial pillar of US economy is touched. Even with rather overpriced weaponry, US is still the biggest weapons dealer on the planet. In addition to quantitatively unmatched weapons exports to satellite nations and ideological allies, the government's military purchases is the last thing keeping remaining top notch American factories from being shut down.
Although the corporate path to globalization has already destroyed most of the productive industrial capacity in America, the military related factories remain to churn out a wide variety of complex products in large quantities. These assembly lines (and the advanced machinery and managerial systems experts required by them) will be the last thing the Obama administration touches. That is the reason Obama has focused more on health care to reduce long term costs.
It was always inevitable that mechanization in time will reduce total global amount of human workers and constantly increase levels of total unemployment on an international level. It is against this backdrop that the federal government has to work to decide on what to save money on. Here is a fascinating letter to the president and a call to action from 1960s (highly recommended) by scientists warning of mechanization and its consequences. Some quotes are in order:
"Present excessive levels of unemployment would be multiplied several times if military and space expenditures did not continue to absorb ten per cent of the gross national product (i.e., the total goods and services produced). Some six to eight million people are employed as a direct result of purchases for space and military activities. At least an equal number hold their jobs as an indirect result of military or space expenditures. In recent years, the military and space budgets have absorbed a rising proportion of national production and formed a strong support for the economy."
"The problems posed by the cybernation revolution are part of a new era in the history of all mankind but they are first being faced by the people of the U.S. The way Americans cope with cybernation will influence the course of this phenomenon everywhere. This country is the stage on which the machines-and-man drama will first be played for the world to witness"
"* Surplus capacity and unemployment have thus co-existed at excessive levels over the last six years.
* The underlying cause of excessive unemployment is the fact that the capability of machines is rising more rapidly than the capacity of many human beings to keep pace.
* A permanent impoverished and jobless class is established in the midst of potential abundance."
It has been 40 years since the warnings of this report and 40 years of the government disregarding all recommendations within it (as well as very similar observations and recommendations made by Zbigniew Brzezinski in 1970). Since the government has not made a thrust towards utilizing its industrial base (when it still had it) to move into post-scarcity socioeconomics, what remains to be done is make sure the remaining factories keep running. That means reform of the military-industrial complex rather than massive cuts in it. People working for the defense sector can slowly be put to use nation building right here at home.
It is well understood that the defense sector is bloated and corrupt (Lockheed-Martin for instance makes sure to have offices, factories, and people employed in over 40 states to influence congressmen across the board). However, gutting this 60 year old industrial behemoth will not only increase danger from former soldiers stirring trouble but will also create a bit of a brain drain as defense related scientists go abroad. Considering that the funding for exotic weapons Research and Development has increased under Obama, perhaps the government is aware of this and does not want an American repeat of Soviet scientists selling flowers on a sidewalk for a living until finding work in China.
Most importantly, the same factories making advanced fighter jets, tanks, and communications systems can be retooled to serve national renewal just as car factories were retooled to make tanks during WW2. The recent fires in California for example, could not be brought under control because of inadequate amount of firetrucks (some of them 40 years old) and military-industrial complex facilities can be utilized to stamp out fire trucks and other equipment of tangible material use. Under this cover, the government can continue funding the defense associated industries while actually diverting substantial amounts of money to improving social welfare and quality of life. This would be the equivalent to making cuts in defense that are absolutely necessary while being politically doable (since right now major cuts are impossible in any event due to congressmen needing Lockheed corporate money as well as blue collar political support working on Lockheed owned assets).
The way things stand now once the dollar default occurs, military industrial complex will be rapidly reduced anyway. Since it is a lot more real and tangible than the now deflating financial sector, its demise will bring a lot more societal misery than can be imagined. That is why it must be reformed to be more than an advanced killing machine. A good way to go about it would be to:
1) Increase the number and scope of collaborative projects with European aerospace and military counterparts when it comes to weaponry. This way, the burdens of developing next generation platforms can be shared while keeping American scientists employed within NATO space. Just like Indians and Russians are now jointly working on supersonic BrahMos missiles, there is no reason why Europeans and Americans need to engage on separate jet, ship, helicopter, and missile research.
2) Use executive authority to make surviving car and airplane factories collaborate with cutting edge military production facilities. Since German style state capitalism is coming to United States in the near future anyway, it will not be a big jump from ordering car companies around to mandating collaborative production of 21st century civilian vehicles, planes, communication tools, etc. Even national health care problem can be rapidly solved if the coverage given to soldiers is expanded to provide for all Americans.
3) Declare a national emergency as a pretext (war on dingy infrastructure to beat the Chinese or some silly marketing phrase like that) for using the military assets in socially productive and creative ways. This is an unfortunate tactic but seems to work the best in this society rather than direct appeals to compassion and data. An American government that says "hey lets use our soldiers and our space assets to put up these broadband towers all over the country so everybody has faster Internet than Japanese do" would have much greater success than one that follows recent example of Finnish government by saying "all people have a right to the fastest Internet possible".
4) Of course who can forget about the 700 military bases US has around the world to maintain dollar dominance as a reserve currency. As the dollar declines, so should the number of American bases overseas.
Not using the military industrial complex as a vital tool of reform with the biggest potential (while first reforming the tool itself and taking enough control of it) would leave the federal government with few other options.