Wean Economy From Its Military Profits
Wars often stimulate the economy, but over the long term the Persian Gulf conflict probably won’t reverse what probably will be an extended decline for California’s massive defense and military establishment.
War or no war, this state will have to wean itself away from the enormous economic benefits bestowed by the huge military buildup of the Ronald Reagan years.
It was great while it lasted. Defense-related spending in California runs about $50 billion a year and involves perhaps a million civilian employees and 330,000 military personnel.
American defense spending may have distorted the U.S. economy, but California was among the lucky beneficiaries. Economist Ann Markusen, who co-wrote the forthcoming book “The Rise of the Gunbelt,” notes that defense spending with prime contractors in California runs at 210% of the national average on a per-capita basis. And we get more than just money.
“The buildup of these industries has relocated our technological expertise away from the heartland,” says Markusen, and into the “gun belt,” especially California, which gets an amazing 40% of all prime defense research and development contracts.
The good news is that our economy is diversified, and other kinds of spending and investment are more productive than money poured into armaments and military salaries. The bad news is we’re still pretty heavily hooked on big defense spending--especially from Los Angeles to San Diego--so this is going to hurt.
Military spending accounts for nearly 8% of California’s gross state product, down from 14% at the height of the Vietnam War. But David G. Hensley, acting director of the UCLA Business Forecasting Project, cleverly observes that just 10% of Texas’ gross product was energy-related before falling oil prices sent the state into a bad recession. Similarly, he says, the securities business was just 5% of New York state’s economy when the October, 1987, stock market crash apparently triggered the recession there.
Defense outlays rose from $134 billion in fiscal 1980 to an estimated $303 billion 10 years later, contributing mightily to a series of staggering federal deficits, diverting resources from other needs and, arguably, hobbling American competitiveness. But that was before the Berlin Wall and the Soviet empire fell to pieces.
Now, even as we fight a war against Iraq, the Pentagon has canceled such untenable major weapons systems as the Navy’s A-12 attack plane. Joseph Campbell, a Paine Webber investment banker and aerospace specialist, sees inflation-adjusted defense spending down 50% by the turn of the century.
Since California gained disproportionately from the big-money twilight of the Cold War, it probably will suffer disproportionately from any retrenchment--the amazing apparent success of our technology-based weapons notwithstanding.
“The outlook for Southern California defense firms is bleak,” says Michael Beltramo, a Los Angeles defense-industry consultant, even after the Persian Gulf War.
Furthermore, California firms get a sizable share of so-called black-budget contracts for classified work. Beltramo says black-budget items are easy to cut because their secrecy means they don’t have the vocal constituency that springs up around regular defense programs.
The state’s big defense contractors know all this; real defense spending (authorized at $276 billion this fiscal year) has been declining for a couple of years now.
In Redondo Beach, for example, TRW’s Space and Defense Sector has had falling sales and employment since 1987. To cope, the company is trying to exploit its sophisticated defense technologies elsewhere. A leader in high-tech security systems, TRW is using defense personnel and computer technology to create a security system for the New York Stock Exchange and sold security engineering to the Japanese for a big new airport.
John Mellen, director of strategic planning at TRW Space and Defense, sees real annual defense spending in 2000 at perhaps $200 billion. He says military contracts will be just 70% of TRW Space and Defense versus 85% today.
Similarly, Hughes Aircraft in Los Angeles hopes to double the proportion of its business from non-defense sources within this decade.
Such behavior should add stability to these companies--and to the state’s economy. Meanwhile, California’s prosperity will depend to some extent on the fate of just a few giant programs, such as the Northrop B-2 bomber and the McDonnell Douglas C-17 transport plane.
But does lower defense spending really threaten California’s economy? The Center for Continuing Study of the California Economy, a private consulting firm, thinks not. Chairman Robert Arnold says the whole country is better off with less defense spending, and California’s economy is phenomenally robust. UCLA’s Hensley, by contrast, is markedly more skeptical.
Either way, the key question seems to be: What’ll we substitute? Do we beat our swords into plowshares? Or with so many of us destined for careers flipping burgers, are we better off beating them into spatulas instead?
