Silicon Valley Mounts a Defense-Budget Revolt

Robert Conot is the author of "American Odyssey," a history of Detroit and the American industrial experience

Resistance to the Reagan Administration's massive defense spending is brewing--of all places--in Silicon Valley. Since American electronics companies are a mainstay of the new high-technology military, one might think the industry would let its chips sell where they may. But there is a fresh realization that what may be good for today's balance sheets is bad for long-term economic viability.

Electronics enjoyed some apparent boom times during the last five years. Since 1980, domestic sales have almost doubled, from $127 billion to about $250 billion annually. Jobs have increased from 2 million to 2.5 million, to make the industry the largest manufacturing employer in the nation. In 1984, however, the industry awoke to a new reality: The Japanese achieved dominance in semiconductor sales and were marketing 70% of the new generation of computer chips in the United States.

Although military spending on electronics more than doubled from a 1981 level of $17.5 billion, the industry plunged into the deepest recession in its 30-year history. Pentagon contracts produce growth but don't contribute to sinew and muscle. Five years ago American electronics manufacturers had a $7-billion surplus of exports over imports. Last year they were $8.6 billion in the red. During the same period, the deficit vis-a-vis Japan increased from $3.8 billion to $17.6 billion. The accelerating imbalance of trade has cost an estimated 170,000 jobs directly, and another 400,000 indirectly. Ralph Thomson, the American Electronics Assn.'s senior vice president for public affairs, considers the industry's position comparable to that of American automobile manufacturers 30 years ago--in danger of seeing a major share of its market erode if it does not act to turn things around.

The key to the expansion of the electronics industry has been ingenuity, innovation and the availability of risk capital. The Pentagon, by far the biggest purchaser of goods and supplier of research and development in the non-communist world, is skewing free market forces by preempting an ever-larger part of the talent, research capacity and production facilities. Federal funding for basic research, vital for the development of new products, has been cut back in favor of applied research and development for specific military projects, such as "Star Wars." Today, 73% of federal research dollars, representing more than a third of all U.S. research and development expenditures, are going for defense.

Regis McKenna, the marketing guru of Silicon Valley, recently said that "America is bankrupting its commercial industries by spending disproportionate amounts of capital and human resources on the development and production of military weapons systems."

Even as the Pentagon has been diverting American electronics manufacturers to military production, the Japanese Ministry of International Trade and Industry has been orchestrating a peaceful world takeover. The diametrically opposite policies of the U.S. and Japanese governments, say American Electronics Assn. officials, have resulted in a distortion of the capital markets. American companies are forced to pay two or three times the interest rates that Japanese pay, a condition that won't be ameliorated until soaring government spending, budget deficits and trade imbalances are curbed.

Since many of its members are heavily engaged in military projects, the association treads warily. It is not a question of sacrificing national security for commercial competitiveness, it says, but of developing a policy that will accommodate defense while not disrupting consumer markets. The electronics association, joined by such organizations as Business Executives for National Security, the National Assn. of Manufacturers and the U.S. Chamber of Commerce, advocates that the privileged status accorded the Pentagon be revoked, and that military expenditures be subjected to the same scrutiny, competitive bidding and cost-effectiveness as private business; a spending cap would restore balance to the budget, reduce interest rates and make risk capital more readily available.

What is new about the groups coalescing to curtail military spending is that they are just as likely to be conservative as liberal, Republican as Democrat. Among their patron saints are Adam Smith and Dwight D. Eisenhower. They quote Eisenhower's admonition, "There is no way in which a country can satisfy the craving for absolute security, but it can easily bankrupt itself, morally and economically, in attempting to reach that goal through arms alone."

The candidate perhaps best qualified to bring this issue before the public in the 1986 elections is Ed Zschau, one of 11 contenders for the California Republican senatorial nomination. Zschau, multimillionaire founder of an electronics firm, former chairman of the electronics association and congressman from Silicon Valley, agrees on the need for a more balanced approach to defense spending. But since California receives $22 out of every $100 spent by the military, the issue is sensitive for him and his campaign has so far tended to skirt rather than focus upon the problem.

Given the unprecedented peacetime military expenditures, the effect on civilian production and distortion of commercial markets would seem to have been inevitable. Considering the military emphasis on high technology, the fact that the most heavily impacted industry is electronics can scarcely be unexpected. What is surprising is that so few people anticipated or have been concerned about the effects. The question now is whether Congress will stand up against Administration pressures before more damage is done, or whether Pentagon spending will be permitted to continue unchecked until it produces a massive case of economic indigestion.

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