Arms and taxes

When MIT economist Lester Thurow appeared in a TV discussion a while ago, the transcript repeatedly spelled his name "Thoreau." It was an inspired mistake. The 19th century's Thoreau was a bit of an economist, too, at least when it came to knowing beans. He also penned the famous line: "Some circumstantial evidence is very strong, as when you find a trout in the milk." And today's Thurow feels the past provides evidence almost equally strong that something is wrong with a budget that would greatly increase military spending without similarly increasing taxes on private consumption.

Since this is no time for raising taxes, logic compels taking every precaution to ensure the military buildup does not sink the economy. Professor Thurow concludes bluntly: "The dangers of this budget are such that I can think of no priority higher for the nation's economic welfare than close and skeptical scrutiny of all new military expenditures to determine whether they are really needed."

But beyond evaluating each new expenditure there must be a testing of entrenched items and practices to see if they serve present needs. To consider but one current question, is the Defense Department wisely spending $7 million a day on outside consultants? According to the General Accounting Office, the Pentagon spent $2.6 billion on consultants in fiscal 1979, often retained through the influence of contractors, often chosen without competition, often doing management and policy jobs better done by the department itself.

In general, today's economic exigencies call for a vigorous attack on waste in procurement and production; a stretching out of programs, where this is feasible, to reduce their budgetary impact; a constant effort to tailor resources to objectives rather than rely on "more is better."

To join the crowd around Professor Thurow's current New York Review of Books article, "How to Wreck the Economy," is not to question the need to ensure that America's defense capability be second to none. It is to take a look at the potential economic consequences of massive added investment in arms as seen in one of those expert arguments that have to be answered if they are to be rejected.

If the American people want the contemplated defense buildup -- three times as big as the one during the Vietnam war -- they should proceed with their eyees open. They have two examples of previous military buildups to consider. One was during the Korean war when the government took such steps as dramatically raising taxes -- with such results as declining inflation. The other was during the Vietnam war when the government did not similarly raise taxes -- with inflationary results that are still being felt.

If the latter course is not to be repeated, according to the Thurow argument, the public will either have to curb the military buildup or accept the harsh costs of paying for it. Many other economist have said similar things. The administration sees its economic package as creating sufficient growth to take care of the situation. Professor Thurow adds a discussion of ramifications that should be part of the debate. Some of his points:

* The proposed increase in military spending, $181 billion over five years, is too much to be paid for by cuts in civilian spending unless major social programs are eliminated. If they are not, taxes must be increased to reduce private consumption.

* Rapid production of weapons puts the military industry in competition with civilian industry for capital goods, raw materials, and skilled manpower. Investment tax reductions give private investors an incentive to try to outbid the military for available equipment. The resulting inflation in capital goods prepares the way for inflation in consumer goods. The Vietnam years were bad enough for the economy, but then the new inflation was added to a rate of less than 2 percent rather than today's 11 percent.

* On the international scene the diversion of US resources to weapons weakens the country's competitive trade position just when it is trying to improve it. America's allies are not planning similar massive buildups, and more of their capacities will serve the marketplace. Meanwhile, the US buildup does nothing to increase America's ability to produce more goods and services down the line. Eventually an economy that loses out in civilian competition wouldn't be able to maintain an effective military industry either.

As in Vietnam days, according to economist Thurow, the results of the same mistakes would not immediately be obvious. The time to find ways of avoiding them is now.

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