Jobs Issue Dominates Defense Cuts Debate : Congress: Some have second thoughts on 'peace dividend' benefits because of rising employment losses.


Michael L. Hughey is one of the first casualties of the post-Cold War peace.

Thrown out of work in August during a wave of layoffs by McDonnell Douglas Corp., the St. Louis area's biggest defense contractor, the 29-year-old metalworking specialist has looked high and low, but hasn't been able to find a comparable job--here or anywhere else across the country.

Over the past 10 months, Hughey and his family have had to move out of their comfortable apartment into a cheaper one rented to them by a friend. They have sold one of their two cars. They no longer carry medical insurance. And Hughey now sits home baby-sitting each morning while his wife, Kay, works at a lower-paying job.

"Sure, it makes me bitter," Hughey concedes.

As the debate over military spending moves into full swing on Capitol Hill, the specter of masses of Michael Hugheys losing their defense industry jobs across the land has become a congressional nightmare. Lawmakers who once called for sweeping cuts in Pentagon spending are suddenly having second thoughts because of the potential impact on local employment.

House Armed Services Committee Chairman Les Aspin (D-Wis.) says the jobs issue now is dominating the defense debate, dampening earlier congressional enthusiasm for exacting a bigger "peace dividend"--savings that could be used either to reduce the outsized budget deficit or to increase current spending for domestic programs.

"The real split in Congress is not between the hawks and doves, or conservatives and liberals," Aspin says. "It's between those people that have (defense contractors and military installations) in their districts and those that don't. . . . They are saying, 'Go slow. Wait a minute, you're talking about jobs.' "

Grab Bag of Subsidies

With the decisions on how far to cut defense spending now essentially over for this year, lawmakers have begun rushing to mitigate the expected damage by concentrating on new measures to help ease the transition--by helping contractors, defense workers and local communities re-equip and retrain themselves to adapt their production for peacetime commercial use.

Both the House and the Senate already have allocated $1 billion for such efforts, and last week, Aspin completed work on a detailed proposal for channeling the money into a grab bag of subsidies and programs. A special 21-member Senate Democratic task force headed by Sen. David Pryor (D-Ark.) unveiled a similar plan.

The proposals--both backed by their respective Democratic leaderships--are expected to be offered as floor amendments to the defense authorization bill later this week. A House study group led by Rep. Martin Frost (D-Tex.) is working on still another series of such measures, and New York Gov. Mario M. Cuomo is campaigning for allocating the $1 billion to the states.

Robert M. Rauner, who just retired as director of the Pentagon's Office of Economic Adjustment, which provides technical advice for such activities, says states and localities have begun setting up programs of their own, providing everything from tax incentives and locations for industrial parks to help in acquiring capital and technology.

The problem is, while there's no dearth of proposals for helping companies, workers and local communities cope with the economic impact of the defense cutbacks, both private experts and congressional strategists concede that there still is no clear consensus on what--if anything--really works, particularly in the face of a weak economy.

Indeed, the Bush Administration opposes any new spending to ease conversion, and some experts recommend proceeding cautiously, by beefing up existing programs that provide technical advice and modest grant monies. Others insist that direct aid programs such as those Congress is advocating will result in only marginal help. They argue that the real prescription would be to enact a broad economic stimulus package that could help spur the economy out of its slump and create sizable numbers of new jobs.

Paul E. Taibl, research director of the Defense Budget Project, a Washington-based research group, warns that the jury is still out on just what such conversion efforts really can achieve, and questions whether existing state and local programs would be able to absorb effectively a full $1 billion.

Here in St. Louis County, authorities have set up a regionwide program that federal officials say could serve as a model for restructuring efforts in Southern California and other areas that depend heavily on defense outlays.

The Clayton-based project--once called the St. Louis Economic Adjustment and Diversification Program--underscores the difficulty of adjustment programs. The program has won kudos for forging regional cooperation and producing a medium-term economic development plan, but it remains largely untested. So far, it has been limited to worker counseling, retraining and job-search efforts.

"What we have is a variety of ongoing experiments in various stages," says Fredric Raines, a Washington University economics professor who has been keeping tabs on the local effort. "They're beginning a lot of useful initiatives, but we still don't have a good idea of the overall direction we want to go."

Admittedly, for all the dire warnings, the cutbacks projected for the U.S. defense industry today are nowhere near as large as those that accompanied previous military contractions. After World War II, for example, 12 million men and women were thrown out of jobs in defense industries. The post-Korean and Vietnam war cuts each cost about 1.4 million jobs.

By contrast, most current forecasts suggest that even under the worst scenarios, job losses in defense industries over the next four years are unlikely to exceed 925,000. That averages about 231,000 jobs a year. During the late 1980s, the economy created that many jobs every month.

One problem now, however, is the economic slump, which has fallen heavily on white-collar and highly skilled blue-collar jobs that otherwise might be filled by displaced defense workers. And the economy is undergoing a broader restructuring that threatens to keep job growth lackluster for years.

What's more, economists admit that even though the problem may seem manageable enough from a national perspective, the impact is likely to be devastating in communities such as Groton, Conn.; Newport News, Va.; and Bath, Me., where the local economies are almost entirely dependent on defense spending.

Finally, while the concept of converting aerospace and weapons-producing firms into manufacturers of commercial products--such as electric cars or electronically guided "smart" highways--may seem attractive on the surface, analysts warn that it's far easier said than done, if history is any guide.

Murray L. Weidenbaum, a former White House economist who is director of the St. Louis-based Center for the Study of American Business, points out that defense firms are so used to operating under special rules--guaranteed reimbursement for high costs, for example, and little emphasis on marketing or sales--that they often are unable to make the transition.

Lawrence Korb, assistant secretary of defense for manpower during the 1980s, agrees. Defense-related companies have operated in a special environment and aren't easy to transform into ordinary commercial enterprises, Korb says.

Entire Region Jolted

The situation in St. Louis County is typical of that in many defense industry centers. Before the cutbacks, defense-related jobs accounted for 6.4% of the area's total employment and 8.4% of its wages. Besides McDonnell Douglas, about 720 defense-related companies--including General Dynamics and Esco Electronics--have local operations.

The squeeze began in mid-1990, when McDonnell Douglas, anticipating further cutbacks in the Pentagon's procurement budget, laid off 4,500 workers in an effort to "downsize" for the new era. In January, 1991, when the Defense Department canceled the Navy's A-12 attack fighter program, the firm laid off 5,000 more.

The layoffs--combined with the threat of a local Chrysler plant going under and the onset of a nationwide recession--jolted the entire region. Doomsayers began predicting that the area's unemployment rate, which stood at 6% of the local work force when the cutbacks began, would soar to double-digit levels.

Frightened, local authorities immediately formed a regionwide consortium with a mandate to develop a plan for easing the impact on the area's economy. The group, comprising 29 entities in Missouri and Illinois, surveyed defense firms and workers, evaluated existing programs and visited similar projects in New England. Within months, the program was under way.

To help laid-off workers find new jobs quickly, officials set up special "outplacement" centers offering everything from job-listings and counseling service to free use of personal computers and long-distance telephone lines and help in writing resumes. They agreed to underwrite courses at local community colleges to retrain workers for new careers.

To prod corporate leaders to begin thinking about conversion, they offered short courses in exporting and starting up new businesses. They have established several business "incubators"--consulting headquarters that provide advice and technical support for defense firms seeking to explore new areas of production and to sell their goods overseas.

But the biggest step is a plan to steer defense-related businesses into other sectors, from medical services to air transportation, that analysts here believe hold the promise of steady growth. Authorities say the task will require regionwide coordination of everything from education to technology sharing, and a special new loan fund to provide venture capital.

"You have to build your economy in ways that take advantage of your strengths," says Dennis Coleman, executive director of the St. Louis Economic Council and director of the conversion effort. "That's what we're trying to do here--to look ahead long-term, and see what we can do to improve."

Unemployment Down

At it turned out, the pessimists' worst fears never came to pass. Despite all the layoffs at McDonnell Douglas, the area's unemployment rate never reached double-digit levels, peaking instead at 7.6% in January and edging down to 6.4% today. Total job losses regionwide since mid-1970 have been held to 27,000--out of a total employment base of 1.2 million.

"Despite McDonnell Douglas, the St. Louis economy did no worse during the recession than other regions that were not as heavily dependent on defense industries," says Russ Signorino, research director at the Missouri Department of Employment Security.

How much the worker retraining portion of the program helped still isn't clear. Although authorities estimate that counselors have aided some 2,000 laid-off workers, the effort isn't widely known among ex-McDonnell Douglas employees, and many of those who have taken advantage of it say it has provided them only marginal help.

Moreover, while the St. Louis area has escaped major devastation as a region, a survey conducted last July suggests that about 55% of the laid-off workers still hadn't found new jobs. And that was before the general economic recession really sank in.

And relatively few ex-defense industry employees have found jobs that pay as well as their previous ones in the defense industry. David Dunavant, a laid-off computer engineer, is trying to break in as a consultant because the jobs he can find in commercial firms don't pay enough to support his family.

Even so, just setting up the Clayton-based program hasn't been easy. Although local authorities successfully put aside previous differences to work out a joint proposal, they found federal programs frustrating. Getting start-up grants from the Labor Department, for example, took up to eight weeks--"an eternity, to a person out of a job," Coleman points out.

There also were problems peculiar to the defense industry: In contrast to auto workers, who receive generous severance packages, laid-off defense workers have no safety net, and aren't able to subsist on their own very long. Many need retraining to do the same jobs in commercial companies.

Meanwhile, defense-industry casualty Mike Hughey is about to undertake a "conversion" program of his own: He is taking the test to become an entry-level air controller. Hughey concedes that the odds that he'll pass the exam are slim, but he says months on the job market have convinced him it's his only real hope of making a decent wage.

It's also a gamble, Hughey concedes: If he doesn't pass, Hughey will have to wait another 18 months before taking the test again, and by then he'll be past the 30-year age limit for qualifying as an air traffic controller. "This is my last shot," he says. "If I don't make it this time, I know I'm going to have to settle for a lot less."

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