US jump in arms outlays: What will it do to the economy?

In the mid-'60s President Lyndon Johnson tried to buy guns for Vietnam and butter for his great Society programs -- without raising taxes. What he got was inflation.

If President Reagan's economic program passes, the Pentagon will be doing a lot of shopping over the next few years. Some analysts say the economy is big enough to absorb the military spending, and the administration claims a business boom will eventually finance the guns through increased tax revenues. It also counts on the Federal Reserve System to hold the line on inflation through tight limits on the expansion of money.

But critics say the Reagan defense budget will distort the American economy, luring away much-needed capital, workers, and raw material from nonmilitary uses. And the defense industry itself, beset with backlogs and shortages, may not be able to stock its shelves fast enough to meet the Pentagon's needs.

The ability to sleep at night, safe from foreign attack, is a "good" that is difficult to measure in dollars. National security may require the defense sums allotted by Reagan.

But by any standards the numbers are huge, giving the Department of Defense an income "comparable to that of a small industrial nation," one analysts says.

According to administration figures, defense spending will jump from about $ 162 billion in fiscal 1981 to an estimated $256 billion in 1984. The increase alone is larger than the entire defense budget for 1978.

It is difficult to compare the proposed buildup with costs of Vietnam.

In constant dollars, Reagan's shopping list is considerably more costly than Johnson's was. Economist Lester Thurow wrote recently in The New York Review of Books that the "military buildup that is currently being comtemplated is three times as large as the one that took place during the Vietnam war."

But the buildup will be stacked on a sturdier foundation. America has more economic activity now than it did in 1964, when defense outlays were 8.2 percent of gross national product, the nation's total output of goods and services. Reagan's defense budget, by 1984, would be a 6.2 percent slice of the coutnry's output. One defense analyst cites Office of Management and Budget statistics, and calls the planned buildup "comparable."

"I wouldn't talk about it the way Lester does," says Prof William Kaufmann of MIT, who analyzed the defense budget for the Brookings Institution. "I'm not shocked by the principle of raising the budget more or less than Vietnam." But he adds, "I don't feel good about spending that much money."

In 1965 inflation was 1.7 percent. In these double-digit days that seems like nothing at all. By 1970 it had tripled, fueled by Vietnam-induced government deficits.

While the Air Force stocks up on cruise missles and admirals try on refitted battleships for size, the administration plans a tax cut of some kind to encourage investment. In their nightmares, liberal economists see these moves resulting in a deficit that will jolt the consumer price index upward once again --percent, not 1.7 percent.

Mr. Thurow claims that President Johnson's guns-and-butter-on-credit policies "wrecked the economy." No friend of supply-side economics, Thurow writes that if Mr. Reagan's "current program is carried out, he too will wreck economy."

Robert DeGrasse Jr., a director of the Council on Economic Priorities and author of a recent study on the military budget, says Reagan's plans represent "the most drastic shift in budget priorities since the Korean war and may profoundly damage efforts to revitalize the sagging US economy."

A Pentagon-sponsored summit meeting of the nation's top econometricians, held last fall, came to a different conclusion. They concurred that the economy is now big and tough enough, with enough unused capacity, to absorb the defense spending without undue harm -- perhaps one point added to the CPI. These economists met before the final outline of the Reagan program became clear, however.

"The Reagan defense program is ambitious," says Otto Eckstein of Data Resources Inc. "It will take great skill to spend it without creating some inflationary pressure."

Mr. Eckstein doesn't see defense spending pounding the economy into oblivion, though he says that "if they went a little slower, they'd be better off."

Aside from its role in any government deficit, defense spending distorts the economy, some economists contend. They claim a dollar spent of guns is intrinsically different from a dollar spent on social programs or consumer-oriented manufacturing.

"Military spending is a form of consumption," Thurow writes in The New York Review of Books. "It does not increase our ability to produce more goods and services in the future."

The building of weapons is a very specialized endeavor. A defense spending increase would affect relatively few industries, liberals say, diverting much-needed investment capital from the retooling needed for America to be competitive in world markets.

Rep. Les Aspin (D) of Wisconsin says, "The money Japan and others save on defense is being used to whip us in the free market that our defense is preserving for them."

In a recently released study, Mr. Aspin claims that "if just a small part of the Reagan defense budgets over the coming years were devoted to revitalizing American industry, the United States would be restored to its former competitive position."

Military hardware is built to performance standards far above what civilian markets require. It doesn't have to compete in a free marketplace, as consumer goods do.

"When the government buys, it is a sure-fire market," says Wazsily Leontief, New York University's Nobel Prize-winning economist. "It's as if consumers were forced to order goods their five years ahead and pay for them."

Since defense industries lack the disciplining hand of the marketplace, among other reasons, Mr. Leontief concludes, "Up until now the trickle-down [to consumer products] has been very small."

Supporters of the President's program point out that national security is in itself a consumer good, albeit one dificult to heft and wrap up for Christmas. And they point to such programs as VHSIC (very-high-speed integrated circuit), in which the Pentagon funds development of state-of-the-art micro-chips, an area with possible consumer spinoffs.

But many feel the Defense Department will hip-check civilian orders into the boards, crowding them out of needed goods and services. Thirty-eight percent of purchasing managers responding to a Purchasing magazine survey said they expect that a defense buildup will cause them supply problems. Of those who didn't expect difficulties, three-quarters had already made contingency plans oe expected other industries than their own to feel the pressure.Next: The state of the nation's defense industry.

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