CALIFORNIA COMMENTARY : Defense Cuts Put Money Elsewhere : The state’s only real problem is the recession; It can otherwise prosper even with a much smaller military sector.

Southern Californians are worried that defense cuts will pose a threat to the regional economy, but those fears are not really justified. In fact, defense cuts may provide an opportunity to refocus the region on competing in the changing global economy.

Imagine the impact of being able to cut our spending on clothing ($200 billion a year) in half--for example, because clothes lasted longer or we were satisfied with fewer style changes. As a nation we would suddenly have $100 billion in “free” money because we no longer desired as much clothing. We would treat such a change as a positive and eagerly anticipate our new spending opportunities.

The same logic holds for cuts in defense spending. The cuts result from a change in the world environment that makes previous defense spending levels too high, relative to our other choices. The United States can now redirect spending to any of several more highly valued areas, such as private investment or spending on education and transportation. Redirecting funds from defense to non-defense investment can increase our future economic prosperity. Most economists agree that more investment spending aimed at increasing productivity is needed if the United States is to be competitive in the world economy. Our future prosperity is linked to investment in education, new equipment, transportation and research and development.

What about the impact on jobs in Southern California? Isn’t defense spending vital to the region’s economic health? It is important to keep two distinctions in mind:

--The difference between the overall job level and what happens to particular jobs, and

--The difference between making the transition during a recession and dealing with defense spending cuts in a booming economy.

Defense savings don’t disappear--they get re-spent elsewhere. History says that Southern California can survive these shifts and prosper. In 1969, direct defense jobs accounted for 20% of the region’s economic base--in 1991 the comparable share was 10%. Between 1969 and 1978, defense jobs dropped by 50%--steeper than expected today.

What happened in the 1970s? Between 1970 and 1980, jobs in Southern California gained 30%--higher than the national 25% increase. A large defense sector in decline did not block regional prosperity in the 1970s; a smaller transition need pose no danger in the 1990s.

Recession is the problem today--not defense cuts. Southern California lost 60,000 defense jobs between 1986 and 1989. The economy was strong so unemployment fell each year and the region outpaced the nation in job growth. Today’s defense cuts look ominous because no new jobs are being created. What the region needs today is a strong national anti-recession policy--not a slowdown in defense cuts.

To see what the region needs to compete in the world economy of the 1990s, consider a few simple questions. Do France, Germany, and Japan need high defense spending to create jobs? No. Do France, Germany, and Japan need high defense spending to create a high wage manufacturing sector? No. Do France, Germany, and Japan invest more than the United States in education, R&D; and public infrastructure. You bet! Do other countries have policies that help individuals and firms make the economic transitions dictated by world market trends? Yes, they do--and so should we.