Is a Peace Deficit Ahead?

Without funds dedicated to work and research, human and physical capital released by defense cuts will lie idle

MANY eyes are trained on the defense cuts to be debated in Washington this season. Some are hopeful that budget savings will fund badly needed infrastructure upgrading, new initiatives in environment and health, and the rising costs of a recession-triggered safety net. Others would use the projected peace dividend to lower the deficit, hoping that associated lower interest rates will reinvigorate investment.

But the bad news is that there may not be a peace dividend. Given the timing of these cuts, and depending upon how they are managed by government, the withdrawal of billions in federal expenditure on weapons and personnel could aggravate the current deficit problem by cutting deeply into tax revenues and triggering yet higher claims on publicly-funded safety nets.

Past differences in posture toward the dawning of peace are suggestive. Post-World War II adjustment had been planned since 1943. Government offered generous incentives to companies to retool and provided returning soldiers with the GI bill. Although military spending as a percent of GNP plunged from 39 percent to 3 percent, unemployment reached only 4 percent, far below the 15 percent of 1940. Almost 25 million workers, soldiers, and civilian defense employees were reabsorbed into the economy.

In contrast, the economy suffered recessions after both Korea and Vietnam. Government cut real spending by 10 percent between 1954 and 1957. Because no adjustment programs were in place, unemployment rose to almost 7 percent.

After Vietnam, Richard Nixon rejected Lyndon Johnson's plans for compensatory fiscal policies, and as the economy dipped sharply into 1970-71 recession, the jobless rate almost doubled.

The extent to which the prosperity of the 1980s was hitched to defense spending is not well understood. From 1980 through 1987, the defense budget climbed 42 percent in real terms, an unprecedented peacetime buildup.

Military outlays are more potent stimuli than other types of government or personal expenditure. Reagan-era spending was heavily skewed toward procurement and R&D contracts. The manufacturing sector got a big boost: Fully 57 percent of all private-sector defense-generated employment is in manufacturing, compared to only 17 percent in the economy at large.

Furthermore, ordering weapons systems kept dollar flows in the United States. The Pentagon "buys America," requiring high domestic content and paying for the construction of new plants if no domestic suppliers exist. Less of the defense dollar leaks out of the economy in the form of imports, and thus more domestic jobs and income are generated. Fiscal policies based on tax cuts or social spending trickle down to create lower-paid service jobs and higher levels of imports.

Given this punch, the current recession is easier to understand. Once defense outlays peaked in 1989, the impetus for growth evaporated. Future uncompensated defense cuts, which could reach another 40 percent of the defense budget and eliminate another 2.5 million jobs by 2001, would deepen the current recession and immensely complicate recovery. The Congressional Budget Office predicts that the Bush cuts proposed in February would yield negative GNP growth every year from 1992 through 1997, and many bel ieve the cuts will be larger than that.

The Bush administration appears to be serving up a "cold bath" reminiscent of what is happening in the Soviet Union. Mechanisms in place for helping industries, companies, workers, and communities to adjust are piecemeal and only modestly funded. Only half of the $200 million appropriated almost two years ago has been released to the Departments of Labor and Commerce from the Pentagon.

Defense contractors are lobbying hard for new "mid-intensity" weaponry and the "US as global cop" foreign policy that goes with it. Promoting arms sales for embattled contractors appears to be the only vigorous conversion activity the administration has in mind.

Selling arms, slowing the cuts, or designing fancy new weapons are not the answer. We do not need nor can we afford the extravagant defense spending levels of the 1980s. They have cost us commercial leadership in the world economy, starving other sectors of low-cost capital and high-quality science and engineering talent.

Political leaders, from mayors to Congress to presidential candidates, haven't faced the severity of the problem. The recent Senate refusal to dismantle the budget wall proves it. We need an aggressive, counteracting fiscal policy that will translate military savings into programs that set out new visions. The candidates are clear, including environmental protection and cleanup, improved health care, and time-saving and non-polluting transportation modes. Such spending would not only create jobs and meet

human needs. It would also engender technological leadership in new sectors which could restore American competitive advantage internationally.

Without a new vision, and funds dedicated to work and research, human and physical capital released by current defense cuts will lie idle, dragging down tax revenues and multiplying unemployment claims. The Peace Dividend could turn out to be a Peace Deficit.

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