How Lethal the Cutbacks? : Why the economy will absorb the defense-industry shakeout

Trying to pull off even one big economic change would overwhelm most regions of the world. Southern California is taking on two at a time--one on each shoulder. The region is already moving to convert major parts of its defense manufacturing base to a peacetime footing. At the same time, it is launching a major new war, this one against dirty air. Of the two, the defense transition may be the easier.

With the collapse of the Warsaw Pact, the need for super-transport planes to rush troops to Europe is fading. So is the demand for combat aircraft and short-range missiles to support allied ground forces or to block Soviet efforts to reinforce Warsaw Pact troops.

Aircraft and missiles are the very weapons that California has been so good at building as the country’s great arsenal of World War II and the Cold War. They also are the very weapons that the Pentagon and the White House have marked in the past week for major budget reductions, cuts that could jar many aerospace engineers and craftsmen loose from good jobs.

Late last year The Times concluded, after analyzing what evidence was available, that California’s economy was healthy enough and growing fast enough to make the defense transition without widespread hardship. Has Defense Secretary Dick Cheney’s move to trim production of California’s B-2 bomber or its C-17 troop transport changed that? Not materially, say most of the state’s major economic forecasters. In fact, Wells Fargo Bank recently revised an earlier estimate of the number of new jobs that will be created in the state this year upward by 50,000, to 350,000.

Virtually alone among California economists, David Hensley, of UCLA’s business forecasting project, leans in the other direction. But he does so mostly, he says, because he worries that too many people have been lulled into believing that Southern California will have a free ride in the transition from Cold War to peace.

It will, in fact, be a bumpy ride for some. During most of the Cold War, engineers and craftsmen have been high-tech nomads, migrating among aerospace companies as contracts ran out and projects were completed at one plant and new contracts and projects started at another. With so many projects likely to be slimmed down or canceled altogether, retraining for peacetime jobs will replace migration as a career way of life.

But a chronic shortage of engineers and skilled workers may mean that, with proper retraining, few workers should experience a drop in living standards. The shortage may intensify as the nation turns its attention to high-tech solutions to smog and transportation and to building rail systems, bridges, schools and other underpinnings of industrial society.

What’s more, savings in the defense budget will not be put in a mattress. They will be used to draw down the national debt and support social programs, another potential big plus. John Oliver Wilson, chief economist for the Bank of America, estimated in March that $2 of every $3 in defense cuts will resurface in California as some other federal expenditure.

What economists see pulling California through its loss of defense contracts is the engine of general growth. Economist Wilson said in March that the California economy should generate about 300,000 new jobs in each of the next five years, more than enough to offset losses of 38,000 jobs a year because of defense cuts.

The winding down of defense work in the state is not just beginning: It has lost about 25,000 jobs a year to Pentagon budget cuts since 1987. A serious national recession would shatter the forecast--but at the moment economists can agree only that the country has gone an uncommonly long time without a recession, not on when the next might fall.

As before, Sacramento and local governments must work to help cushion the shock of big defense-job losses. Nor is it wise to ignore the chance that upheaval will be more widespread than the forecasters now suppose.

But the central facts in all of this are that Southern California would not want to turn back to the defense-contract-rich Cold War, even if it could. Less is known about how efforts to clean up the air will affect economic prosperity: They could dampen growth or inspire a new climate of business optimism. But this region should not abandon a promise of blue skies just because the newest assault on smog may bring disruptions in living habits. California has never settled just for keeping up with change. Its style is to force change, and that style will see the state through any choppy times ahead, as it has in the past.

California Economy----1990-94 An optimistic forecast New jobs created annually: 300,000 Defense jobs lost annually: 38,000 Forecast by Bank of America