Clinton Defense Cuts Deal California Economy Its Greatest Jolt

Southern Californians, like Job, are being tested by a remarkable string of disasters: drought, fires, riots, earthquakes.

In the midst of all the devastation, the media focused on President Clinton seizing the opportunity to come out and show how much he is helping California. After all, the President and the Vice President show up in California almost as frequently as Ronald Reagan did when he was President--and he was a Californian.

Clinton is determined not to fall prey to the charge of disinterest in domestic matters economic that plagued President Bush, and polls so far show California has responded positively to his attention.

But eventually, Clinton will have to confront a harsh reality: His budget policy--the tax increases, but even more the enormous defense cuts--is inflicting much more harm on California’s economy than the sum of all his efforts to help the state.

Here are the numbers: When Administration officials talk of Clinton’s five-year plan for California, they suggest spending several hundred million dollars--not counting the recent proposal for quake recovery. But this amounts to less than a penny on the dollar compared to the annual amount of income--and with it employment--that Clinton’s defense drawdown is sucking out of California.

Indeed, the President’s defense plans are the economic equivalent of the “Big One”--the hypothetical gigantic quake on the San Andreas Fault. A more prudent defense drawdown would be 100 times more favorable to the California economy than the sum of everything else Clinton is doing or proposing.

Clearly, some defense drawdown and reprioritization was in order following the end of the Cold War. Defense spending was 5.1% of Gross Domestic Product (GDP) in 1980. The Reagan buildup peaked in 1986, at about 6.5% of GDP, and a sizable drawdown was begun under Presidents Reagan and Bush.

But we are heading into uncharted water, with defense spending in the Clinton blueprint falling to 3% or less of GDP, levels not seen since the Great Depression. The reductions amount to $200 billion over five years from the amounts agreed to in the 1993 budget. Worse yet, the cuts get progressively larger, building to over $60 billion per year by 1998, unadjusted for inflation.

*

Since one out of five dollars America spends on defense--for personnel, bases and procurement, including aerospace--is spent in California, the added drawdown on a pro rata basis would cost California $8 billion on average over five years, growing to $13 billion per year by 1998.

Worse yet, the Clinton budget does not provide sufficient funds for Clinton’s own defense program! Defense Secretary Les Aspin told President Clinton that the Pentagon’s so-called bottom-up review will require $50 billion more over the next five years than in Clinton’s budget.

Private estimates are larger. That’s at least another $10 billion per year for the country--and roughly $2 billion per year and growing for California, bringing the state’s total hit by 1998 to at least $15 billion per year, about 1.5% of the gross state product.

Of course, the primary purpose of defense budgets should be to provide national security commensurate with America’s role in a dangerous and still volatile world. Many defense experts, such as former Defense Secretary Dick Cheney, believe the Clinton plan is extremely risky; Californians certainly have learned the devastating consequences of being unprepared for danger. The state must bear its fair share of a prudent defense drawdown, but it should not be forced to bear a disproportionate share of one that damages the nation’s security.

Even last month’s earthquake can’t compare to the Clinton defense plan in terms of the harm done to the state’s economy. The $15-billion to $30-billion estimate for quake damage is a one-time cost. The federal government will pay a hefty share for rebuilding infrastructure and emergency relief; the current estimate is $8.6 billion. Private earthquake insurance will pay part of the repair cost for about one-third of homeowners. Thus, a sizable fraction of the cost will be paid from outside the California economy.

If roughly $15 billion is borne by Californians, by borrowing or digging into savings, the annual cost equivalent is about $1 billion at current mortgage or home equity rates--less than one-tenth the annual cost of the Clinton defense drawdown. And the rebuilding--while expensive and inconvenient--probably will give a slight net boost to the California economy over the next year.

Most private experts believe, and recent economic data suggest, that California’s economy has about bottomed out.

Despite the strong drag of the defense drawdown, the state finally will start to grow after a long and steep recession in which half the job losses were attributable to the direct and indirect effects of recent and planned defense cuts.

*

Gov. Pete Wilson and the Legislature sent a good signal last year with job-creating business tax reforms and cuts and workers’ compensation reform, hopefully the beginning of the end of the anti-business, job-destroying tax, regulatory and legal environment in California.

If the state can get its fiscal and regulatory house in order and the Congress and President--perhaps prodded by my talented former Stanford colleague, Defense Secretary William Perry--move to a more prudent defense drawdown, the natural advantages of climate, ideal location for trade with Asia and Latin America, quality work force and entrepreneurial spirit and talent will once again make California a leading incubator of new business and employment opportunities, earthquake or not.