Reagan's defense muscle building boosts economy for now. . .
When President Reagan was elected and announced his goal of 10 percent annual increases in real defense spending, there were gasps of dismay. Some economists said it would disrupt the economy - prompting another burst of grim inflation.Skip to next paragraph
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But so far that has not happened. With a deep recession occurring in 1981 and '82, there have been no serious capacity shortages. In fact, the economic consequences of Ronald Reagan's arms buildup, like so many other recent financial events, are going the President's way. The sharply higher defense spending has already been felt in higher demand for goods and services, and thus an improved employment and income picture. That has been welcome, both during the recession and in the early stage of the recovery this year.
The brunt of the potential negative results of higher defense spending - including higher inflation, bigger federal deficits, and lower industrial productivity - will probably not show up until after the 1984 election, if at all, experts say.
The general agreement among economists, at least about the short-term impact of the spending buildup, is in sharp contrast to a heated debate on the military and foreign policy consequences of the administration's defense spending program. These arguments have been fueled by the Soviet Union's withdrawal from European nuclear arms control talks and by ''The Day After'' television show, which beamed images of nuclear war into 100 million US homes.
''So far the impact on the overall economy has been positive,'' says Douglas Lee, manager of defense economic services at Data Resources Inc., an economic consulting firm. ''There is enough underutilized capacity in the economy right now that defense spending has not caused any problems'' with shortages of key goods like electronic components or forgings.
The concern over bottlenecks and shortages is ''not now (but) over the next couple of years,'' notes Gordon Adams, director of the Defense Budget Project at the Center on Budget and Policy Priorities, which is often critical of administration defense policies.
''I don't see any major (negative) impact and I don't expect one,'' says Theodore Crackel, a defense expert at the conservative Heritage Foundation. ''Congressional action to increase the (fiscal 1984) budget 4.5 percent is not going to make any drastic'' difference in the economy.
This year Congress chopped about in half the administration's request for a 10 percent gain in inflation-adjusted spending. When Mr. Reagan came to office, however, he got Congress to pass a midyear boost in the fiscal 1981 budget, which was already in progress. And Congress approved inflation-adjusted increases in outlays ''on the order of 8 percent'' in fiscal 1982 and '83, says Mr. Lee. The result is that outlays in fiscal 1984 are scheduled to be $233.2 billion, up 32.8 percent from fiscal 1980.
And figures for outlays, or dollars spent in a given year, understate the true economic impact of the defense buildup. Roughly one-third of the defense budget is going into procurement of equipment. In such purchases, spending in the first year is typically only 12.5 cents of the procurement dollar, with heavier outlays coming in subsequent years as production work progresses. So even if the President cannot persuade Congress to spring for new programs, those already in the pipeline will push up spending 3 to 5 percent on an inflation-adjusted basis for the next four to five years - ''without an act of political courage'' by Congress in killing some defense programs, Mr. Adams says.
Increased military spending has obviously boosted defense industry sales and profits, with the gains of an individual company depending both on the strength of nondefense sales and on how heavily it must invest to attract more military business.
In the aerospace sector, the higher defense budget has generated ''somewhat better revenue and earnings, but I don't think that there has been a dramatic increase in defense industry profits overall,'' says Wolfgang Demisch, a vice-president at First Boston Corporation, an investment banking firm. Lower commercial sales and changes in the tax rules applying to defense contracts have held down profits, he adds.