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Defense Cuts Bring Economy Into Balance

Presidential candidate Jesse Jackson gets applause from campaign crowds when he pokes pointed fun at the defense budget. First he asks how many in the crowd own a videocassette recorder--a product made in Japan. There is a great show of hands. Then he asks how many have a Pershing missile at home. No hands go up. “That’s our problem,” says Jackson, smiling, “What America makes, nobody wants to buy.”

On a more scholarly note, a book being widely praised in government and business circles is “The Rise and Fall of the Great Powers” by Paul Kennedy, a military historian who blames the decline of world powers from 16th-Century Spain to 20th-Century Britain on military overspending weakening the civilian economy.

Kennedy’s book is being hailed as an argument for cutting defense and shifting funds to the commercial economy--emulating Japan, which spends little on defense.

Whatever the arguments, the reaction to Jackson and Kennedy tells you that cutting the defense budget is now politically popular.

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The Reagan Administration’s recent $299-billion defense request was $33 billion less than it asked for last year. And military outlays will be flat to down for the next four to five years, says Joshua M. Epstein, a defense expert at the Brookings Institution. That doesn’t mean budgets will be slashed, just that they won’t grow as they did for more than a dozen years extending back to the Carter Administration.

What does that mean if you are an employee or an investor in the defense industry? Layoffs and cutbacks will be more common than hirings and expansion, as in any other no-growth business. And profits will decline, predicts analyst George Shapiro of Salomon Bros., the investment firm.

Shapiro doesn’t see stock prices falling much, but in the last down cycle--the post-Vietnam early 1970s--defense stocks sold at a tenth of their current prices.

Some companies may fare better than others. General Dynamics, for example, is working on projects for all three military branches and looks more secure to Wall Street than Grumman--which may wind up as merger bait in the industry’s expected consolidation.

Tight budgets may cause blurred vision. There will be calls to save money by bringing U.S. troops back from Germany. But real savings would be unlikely. First, European countries already subsidize the costs of stationing U.S. troops. Secondly, if the troops are brought back, new costs would undoubtedly be incurred for special quarters and transport to keep them ready to return to Europe in an emergency.

Some projects will get a close look. The next Congress may well kill the stealth bomber, say defense analysts in Washington, who report that “the knives are out in Congress for stealth” because of delays and growing costs on the secret Northrop project.

Not a ‘Consolation’

Still, a $300-billion defense budget is big--27% of total government expenditure, just under 7% of the gross national product. Is it necessary to spend so much?

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The answer may be yes. As Kennedy’s book explains, the issues are subtle and complex.

Japan may spend little on defense and have more for industry, but it remains militarily vulnerable and needs America to protect the oil supply lines from Arabia to Yokohama. If Japan were to build up its own military, however, it would disturb its neighbors--particularly China. So America patrols the sea, while Japan invests in U.S. Treasury bonds.

Soviet economic weakness is a threat, not a consolation, argues Kennedy, a Yale history professor. If its economy causes the Soviet Union to fall further behind the United States, Japan and Europe, is it likely to retire peaceably from center stage? No power ever has, observes the historian, without being defeated or weakened by war.

So the U.S. task is not simply to cut defense but to balance it with a civilian economy able to exercise world leadership within, as Kennedy puts it, “the limitations and opportunities of American power.”

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Keeping defense spending static while the economy grows can help. The budget, which is 7% of GNP today, could be less than 6% in five years. Maybe then America will not only make what Kennedy says the world needs but, in Jackson’s words, “what people want to buy.”


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