COLUMN ONE : Legacy of Failure in Defense : More than $2 trillion was spent in the 1980s on a massive buildup. With cancellation of the A-12 plane and other troubles, critics say the country didn’t get much in return.

After spending more than $2 trillion during the 1980s to improve the nation’s defense, the Pentagon does not have much to show for it--beyond a defense industry that lies in financial shambles.

The wreckage of the Ronald Reagan Administration defense programs is scattered across the nation’s ledgers--including such troubled weapons as the “Star Wars” defense system, the P-7 patrol plane, the B-2 bomber, the C-17 cargo jet and the Sgt. York gun.

The Pentagon in the 1980s launched many more weapons programs than could ever be supported in later budgets, former top Pentagon officials say--resulting in a painful legacy of technical problems, delays and a few outright cancellations. In some cases, weapons were out of date by the time they were built; in others, there was not enough money to complete what had been started:

--After investing more than $23 billion in the B-2 bomber, for example, the Air Force has just two airplanes that can fly. The cost of the planes has increased so fast that the Pentagon has been forced to stretch out the production schedule, driving the price up even further. Similarly, the C-17 appears to be headed for a massive cost overrun.

--The $28-billion fleet of B-1 bombers is grounded because of jet engine problems, the latest in a series of technical woes.

--The Pentagon has spent an estimated $20 billion on “Star Wars” and is nowhere near deploying any of the lasers or energy beams that were conceived to defend the nation against an enemy missile attack.

--The Defense Department was forced to cancel the Navy P-7 patrol plane and the Army Sgt. York anti-aircraft gun when the cost for each began to spiral out of control and questions were raised about whether they could accomplish their missions.

Clearly, Monday’s cancellation of the A-12 attack plane--which represented a direct loss to taxpayers of $3.1 billion, the money invested by the Navy in the failed effort--was hardly an isolated case.

“For whatever reason, the fact that so many contracts are in default at so many defense corporations could be a national disaster in the long run,” said Donald Hicks, former undersecretary of defense. “We have a terribly poor acquisition system.”

If a war erupts in the Persian Gulf, the Air Force plans to use B-52 bombers designed in the 1950s to massively bomb Iraq, even though the B-1 and B-2 bombers were promoted as having important capabilities for conventional warfare. Indeed, few of the programs undertaken in the 1980s will make weapons available for use in a conflict any time soon.

Although defenders have credited the rapid buildup with hastening the end of the Cold War, many experts foresaw early in the 1980s that the Pentagon’s acquisition plans were fundamentally flawed. By some estimates, it would have required annual defense budgets of $500 billion to $600 billion to buy all the weapons that were started early in the Reagan era, far more than the $288-billion budget this year.

When the buildup peaked in 1985 and the budget began to decline, the response was not to kill some programs to preserve the health of the remainder, but rather to put everything on a starvation diet.

“There were early warning signs as early as 1982 or 1983, but those people who raised them were branded as disloyal,” recalled Lawrence Korb, former assistant secretary of defense. “People did not want to face up to the implications. Other than the Navy ships, we didn’t really increase the force structure of the country.”

The Navy set a goal of having 600 ships, but funds ran out by the time the service had 580. Now, it is mothballing ships at a rapid clip to save money and envisions having a fleet of just 483 by 1995, Korb said.

“We got less than what we bargained for,” Korb said. “We started with way too many programs than we would ever have been able to successfully bring to a conclusion under any of the budget scenarios. And when a report saying so was leaked to the Washington Post, Weinberger ordered his top deputies to undergo lie detector tests.”

Then-Defense Secretary Caspar W. Weinberger, now publisher of Forbes magazine, could not be reached for comment Tuesday.

Reagan Administration officials calculated that Congress would not go along with a massive increase in defense spending unless the Pentagon cracked down on seemingly wasteful purchasing practices and got tough about contractor abuses.

“Weinberger was fed up with the defense industry because he was convinced that it was undermining his whole defense buildup with its $500 hammers and toilet seats,” said Robert Costello, former undersecretary of defense for acquisition. “The defense industry did not clean up its act, which led to the backlash”--primarily fixed-price contracts, reduced profit margins and tighter payment schedules.

“But the government shot itself in the foot,” Costello concluded. “The way we spent the money and ran the contracts, we put the defense industry into shambles.”

For all the warning signs, money was so abundant during the early 1980s that no task seemed too big--even “Star Wars,” formally known as the Strategic Defense Initiative.

“There were a tremendous number of false starts and tremendous overhead” in the $20-billion “Star Wars” program, said John Pike, director of the space policy project at the Federation of American Scientists. “When the program was announced, one was left with the impression that we would have something deployed by now.”

Michael Rich, a vice president at RAND Corp., said that, although the procurement system was repeatedly reformed during the 1980s--with such requirements as warranties on products--little improvement occured in the fundamental methods by which the Pentagon acquired weapons systems.

“The changes never went to the heart of the problem,” Rich said.

RAND, for instance, argued that the military was spending too much money early in development, before problems were identified and corrected. Production was often rushed before development was complete. The biggest technical problems were in electronics, which should have been developed before the aircraft or ships that would use them. And prototypes that could have red-flagged defective designs were seldom built.

The good news, Rich said, is that the Air Force’s advanced tactical fighter program is embodying some of these concepts.

Defenders of the buildup say the $2-trillion Pentagon budget during the 1980s played a key role in ending the Cold War, though many experts assert that the Cold War was bound to end with Soviet economic collapse in any event.

“What did we get? Peace,” said Ronald Hertenstein, research director for Forecast Associates, a defense industry market research firm. “Nobody can say what the price of peace should have been. We have paid a whole lot more in past years and failed to get peace. We have a different world order now.”

But the way in which the transition was managed gives the Pentagon and the defense industry little to be proud of, one congressional staff member said Tuesday.

“We got into a spending war with the Soviet Union and we were able to spend them into bankruptcy before ourselves,” said the aide, who declined to be identified. “There was never any analysis of what forces we needed to counter their forces.”

To be sure, the military services purchased additional quantities of ammunition, spare parts and existing weapons, such as F-16 and F-18 jet fighters. Clearly, the quality of recruits improved too as military pay increased. But the system fell down on big-ticket weapons.

If the taxpayers have little to show for the military buildup, the defense industry may be in even worse shape, saddled with enormous debts and weak profits. Even before the cancellation of the A-12, McDonnell Douglas and General Dynamics were judged by the Pentagon to be in weak financial condition--possible bankruptcy candidates, in fact.

“I don’t know if the American public is outraged, but the shareholders of these defense firms certainly are,” said Jack Modzelewski, a defense industry analyst at Paine Webber. “This has been abysmal.”

Even with a war looming days away, McDonnell Douglas shares were hammered down $7.50 a share to close Tuesday at $31.25, and General Dynamics fell $2.50 a share to close at $22.50.

In addition, the nation’s two largest bond-rating agencies put the firms’ debt on “watch” to assess the impact of the A-12 cancellation on them.

Moody’s Investors Service Inc. and Standard & Poor’s put the debt of both companies under review for possible downgrade. McDonnell’s debt has already been downgraded twice.

The entire defense sector has been sliding on Wall Street for more than a year.

The biggest culprit has been fixed-price development contracts signed in the 1980s--a misguided attempt to force contractors to hold down costs.

The contracts were used to develop very high-risk, exotic technology, the cost of which was impossible to predict when the contracts were signed. Ultimately, defense firms overran their contracts and were forced to absorb the losses.

“The industry had enormous increases in sales and profits in the early 1980s and was willing to put itself into high risk, fixed-price contracts,” said Hicks, the former undersecretary of defense. “Those were the seeds of the problem. And today, unfortunately, some of our biggest and best are signed up for them.”

Although they have been largely abandoned in new contracts, existing fixed-price contracts--like the A-12--are threatening major contractors with billions of dollars in additional losses and perhaps permanent financial crippling.

“These fixed-price contracts have been an unmitigated disaster,” aerospace analyst Paul Nisbet at Prudential-Bache Securities said.

The A-12 fiasco is already shaping up as the largest battle in history between the Pentagon and its contractors. The Pentagon on Tuesday demanded an unprecedented $1.9-billion refund from McDonnell Douglas and General Dynamics.

Pentagon spokesman Pete Williams said the government so far has in hand $1.2 billion in goods, such as software and plans, after the $3.1-billion payment to the contractors.

The firms have submitted $1.4 billion more in claims for A-12 work, officials said.

Williams said the government would refuse to pay any more bills for the A-12 and would seek to recover the money already spent.

The effort to recover money already paid is likely to touch off years of legal battles. Under terms of a contract “default,” which Cheney invoked in killing the A-12, the government is entitled to recover some, but not all, costs incurred by the contractor.

“The companies would still be paid for direct labor and items that have been delivered. But they clearly will not recover any profit,” said Kathleen A. Buck, former Pentagon general counsel, now an attorney in private practice in Washington. “It’s going to be a complex process, sorting through what costs will be paid and what will not be paid. But certainly the companies will not be made whole.”

“We are dealing with the two largest contractors in the country, whose production facilities are a critical part of the defense industrial base,” said Gordon Adams, director of the Defense Budget Project in Washington. “We do not have a strategy yet in the Department of Defense as to what parts of the defense industry are critical in the 1990s, which must be maintained, which can be let go.”

Williams said the strength of the defense industrial base and the financial health of major contractors are “always a concern” to the Defense Department.

“However,” he said, “the specific decisions about specific contracts have to be made, fundamentally, on whether that contract is a good deal for the government. And the picture with the A-12 is that we had a contract under which the contractor was not performing--was not doing the design, the assembly, the tests and various other requirements of the contract.”

Military contractors fared exceedingly well in the early years of the Reagan Administration buildup, when defense spending was growing rapidly, Adams said. But since 1985, procurement budgets have fallen by an average of 7% to 8% a year, many contracts have been completed and a large number of defense suppliers have failed.

A study by the Center for Strategic and International Studies found that of the 118,489 defense firms or divisions operating in 1982, 80,482--about 60%--had left the industry by 1987.

“Now we’re into the next generation of hardware programs, and the budgets just can’t support them all,” Adams said. “The problems of the A-12 are reflective of the problems of this new generation, both management and budgetary problems.”

He cited the B-2 bomber, the C-17 transport, the Army’s new LH helicopter and a number of costly high-technology missile programs as other strains on the Pentagon’s management abilities and its falling budget.

The Pentagon can no longer afford the “hands-off management philosophy” of the Weinberger era, Adams said. And Defense Secretary Dick Cheney has clearly signaled with the A-12 cancellation that he will not tolerate cost overruns at a time when he cannot shoehorn the department’s critical programs into shrinking budgets.

THE DEFENSE BUILDUP’S RUBBLE Project: A-12 attack plane Cost: $3.1 billion Prime contractor: General Dynamics / McDonnell Douglas Status: Canceled Project: Sgt. York anti-aircraft gun Cost: $1.8 billion Prime contractor: Ford Aerospace Status: Canceled Project: P-7 patrol aircraft Cost: $300 million Prime contractor: Lockheed Status: Canceled Project: B-1 bomber Cost: $28 billion Prime contractor: Rockwell Intl. Status: Grounded Project: B-2 Stealth bomber Cost: $23 billion Prime contractor: Northrop Status: Behind schedule / over cost Project: C-17 cargo jet Cost: $2.5 billion Prime contractor: McDonnell Douglas Status: Behind schedule / over cost

Ralph Vartabedian reported from Los Angeles and John Broder from Washington.