Unwinding the Cold War Could Crank Up Economy
Peace is supposed to be bad for the economy, but don’t try telling that to Wall Street economist Larry Kudlow.
“I see so many positives from the ending of the Cold War,” said Kudlow, chief economist at Bear Stearns & Co. “You’re going to see a much stronger U.S. economy in the 1990s than most people expect.”
And that fundamentally optimistic view is supported both by the historical record and the assessments of other economists.
At worst, most analysts envision only a modest and relatively brief economic setback as the nation reverses the massive defense buildup begun in the 1980s. Beyond that, they generally foresee improved growth and prosperity with substantial benefits to the economy from the unwinding of the Cold War and sharply reduced U.S. military expenditures.
“The last person who believed big defense budgets were good for the economy was Caspar Weinberger,” said Jerry Jordan, chief economist at First Interstate Bank in Los Angeles. Weinberger, defense secretary for much of the Ronald Reagan Administration, repeatedly defended his military buildup as a valuable source of jobs and economic growth.
But, said Jordan, a former Reagan economic adviser: “That’s just a myth.”
Among the potential benefits of a substantial defense cutback:
--Progress in curbing the federal budget deficit.
--Downward pressure on interest rates.
--A historic opportunity to free up critical resources and human talent to address an array of pressing public and private challenges just as the nation is struggling with major economic and technological changes.
“We’ll be going from Star Wars to trade wars in the 1990s,” economist A. Gary Shilling said. Substantial cutbacks in defense spending could help lift America’s international competitiveness, many analysts believe.
Not All Optimistic
Not everyone is so optimistic. It’s hard to forget Southern California’s struggles in the early 1970s, when defense contractors were laying off tens of thousands of engineers and mechanics, or the far worse devastation in Seattle when Boeing Co. had to cut back during the same period. Many people do not need reminding that a national recession followed the end of both the Vietnam War and the Korean War.
Both downturns were mild, however, and the U.S. economy recovered rapidly afterward. The end of the Cold War probably will be no different.
By the mid-1990s, the United States could be spending less than 4% of its national output on defense, compared to about 6.5% at the 1986 peak. In today’s dollars, that translates into more than $150 billion a year.
To the extent that the funds are used to help reduce the federal budget deficit that now absorbs so much of the nation’s savings, interest rates could be lower than they otherwise might be.
“Far from being a source of economic concern, a substantial but phased-in cut in military spending can be a great boon to the nation,” Charles L. Schultze, a former economic adviser to President Jimmy Carter and now director of economic studies at the Brookings Institution here, told a congressional committee last month. “It has the potential of helping us deal with America’s No. 1 economic problem--namely a drastic shortage of national saving and investment, together with the high interest rates they bring in train.”
The chance to shift resources from military programs to private and public investment comes at a historically critical moment.
Given the major economic challenges from abroad, substantial cutbacks in the Pentagon budget could help lift America’s international competitiveness. The reason is that heavy defense spending often diverts scarce scientific and engineering talent and valuable research dollars from more productive commercial outlets.
“If the brightest engineers in Japan are designing video recorders and the brightest engineers in the United States are designing MX missiles,” said Lester Thurow, dean of the Sloan School of Management at the Massachusetts Institute of Technology, “then we shouldn’t find it surprising that they conquer the video recorder market.”
Consider some facts: Roughly 25% of America’s scientists and engineers are working on defense projects. In contrast to Japan and West Germany, which devote less than 10% of their government research money to military efforts, the U.S. government now spends 70% of its research and development money through the Pentagon. Before the 1980s, government research and development spending was split roughly 50-50 between military and civilian projects.
In the past, military research often nurtured potentially valuable technologies at early stages, providing the cash to develop such innovations as the transistor, the jet engine and artificial intelligence systems to the point where they also could become marketable products.
But recent studies at MIT and the UC Berkeley Roundtable on International Economics suggest that the value of such commercial spinoffs from Pentagon research has waned.
“Today civilian electronics is more sophisticated than military electronics,” said Kosta Tsipis, a professor at MIT who is studying the issue. “Defense R&D; is not ahead of the curve; it’s behind the curve.”
Another problem is that defense spending, with its reliance on cost-plus contracting and its insulation from competition, often encourages inefficient industrial practices that are the last thing America needs in today’s fast-paced world of intense global competition.
For instance, the U.S. machine-tool industry, which has focused its attention on highly sophisticated machinery for aerospace manufacturers, has seen its markets at home and abroad sharply eroded by Japanese and West German tool makers who have paid more attention to cost and reliability.
The one cloud on the horizon, some analysts say, is the possibility that Pentagon research spending might be cut without a corresponding increase in federal dollars for non-defense research.
New Agency Urged
“The federal government has traditionally supported industry, dating back to the land grant colleges more than a century ago,” said MIT’s Tsipis. “If the Pentagon is going to cut back, we need to keep up our R&D; by setting up a new agency that could support research on environmental problems and help improve industrial competitiveness.”
For now, however, Pentagon planners are aiming to preserve their work on weapons modernization and advanced technologies, aiming to achieve most of the budgetary savings through cuts in force structure and manpower.
“If we get a fundamental shift in Soviet policy, we have to make sure that we have protected our (research and development) base,” Defense Secretary Dick Cheney said in a recent Times interview. Calling U.S. technological advantages over the Soviet Union “absolutely crucial,” Cheney said: “You’ve got to structure your investment strategy accordingly.”
Even so, that probably won’t lessen the demands for the government to turn its attention to the challenge of maintaining America’s economic strength as the importance of military strength lessens.
“If the Cold War has ended, why should we have a Cold War budget?” asked Seymour Melman, a retired academic who heads the private National Commission for Economic Conversion and Disarmament. “The whole industrial system of the United States is now in decayed condition. If we don’t make new productive investment, the United States is going to look very much second-rate.”
Other analysts, while disputing Melman’s claim of industrial ruin, agree that the issue should be on the nation’s agenda for the 1990s.
“You’re going to see a renewed political debate about industrial policy,” said David Hale, chief economist at Kemper Financial Services in Chicago. “Even if the money for military R&D; isn’t cut back too much, the Pentagon is going to play a reduced role in advancing future technology. A lot of people will want to see a civilian agency play a more direct role and help take up the slack.”
At the same time, it’s important to recognize that the impact of the impending Pentagon “build-down” will not be as drastic as past military cutbacks.
The U.S. economy is less dependent on defense spending today than it was at the end of the 1960s. After the Vietnam War, 1.5 million people left the military, 1.2 million left civilian positions at the Defense Department and the military share of the economy was cut almost in half in six years.
By contrast, Pentagon employment has declined by about 140,000 since the peak spending year of 1986, and officials are talking about further cuts of slightly more than 300,000 over the next few years.
The difficulty of economic adjustment in the early 1970s was compounded by the sharp influx of baby boomers out of schools and colleges into the work force. Unemployment rose in the 1970s as returning veterans were suddenly thrown into competition with civilians.
That situation has also turned around. In contrast to the 1970s, when the labor force was growing an average 3% a year, the work force today is increasing only about 1% a year. With unemployment already at a relatively low 5.3%, it should be far easier to find jobs for former soldiers and displaced workers than it was in the 1970s.
DEFENSE SPENDING UPS AND DOWNS
As a share of total economic output (GNP) for fiscal years.
Source: Department of Defense
WHERE THE MONEY GOES
Share of Pentagon spending on goods, services, and R&D; (excludes
military payroll)
Total spending R&D; spending Los Angeles-Long Beach 7.2% 19.7% Washington D.C area 4.2 5.4 Norfolk-Newport News, Va. 4.2 0 St. Louis, Ill. 3.8 1.1 Boston 3.1 9.1 Long Island, N.Y. 3.0 4.5 San Jose-Silicon Valley 2.7 4.5 Philadelphia area 2.2 1.5 Fort Worth, Tx. 2.1 2.4 Orange County 2.1 3.7 Seattle 1.7 3.9 Dallas 1.6 1.6 Denver 1.5 7.8
Source: Bruton Center for Development Studies, University of Texas at Dallas
