Can taxpayers count on a "peace dividend"?

If the cold war is over, why aren't factories, military bases, and laboratories converting to civilian work? What's going on is a permanent war economy in which military activity is large and continuous, and the military output is treated as an ordinary economic product. How did a national consensus that favored defense, as during World War II, get transformed into a permanent war economy?

A good place to start is with NSC-68, "The Report by the Secretaries of State and Defense on United States Objectives and Programs for National Security," April 7, 1950. In its economic conclusions, this policy paper - often attributed to Paul Nitze - concluded that ". . . one of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living. After allowing for price changes, personal consumption expenditures rose by about one-fifth between 1939 and 1949, even though the economy had in the meantime increased the amount of resources going into government use by $60-65,000,000,000 (in 1939 prices)."

This memorandum showed that, during World War II, the U.S. had guns and butter. It also drew the unwarranted inference that the American five-year experience with World War II could be a generalized relationship - that the economy could deliver both guns and butter continuously.

Thereafter, an ongoing process of military-technical expansion was set in motion. Entire new industries were established to manufacture large aircraft, nuclear-powered submarines, short- and intercontinental-range missiles, electronic laboratories and factories to multiply the lethality of available and projected weapons, and, finally, a network of laboratories and connections that reaches into every major university.

Dwight D. Eisenhower implemented the major recommendations of NSC-68 and so participated in the enlargement of military budgets and the construction of a vast military-industrial network. By the completion of his two terms as president, however, he was wary of the declared goals of his successor, John F. Kennedy, to eliminate a "missile gap" vis a vis the Soviets that Eisenhower knew to be non-existent. At the same time, he was indignant at the implications of Kennedy's election campaign that Eisenhower, the old general, was not looking after the U.S.'s military security properly.

Eisenhower intimates have indicated that he was wary of the unlimited ambitions of his "brother officers" and used the plea of fiscal responsibility to hold their ambitions in check. All that is crucial background for understanding his famous Farewell Address, delivered from the White House on the evening of Feb. 6, 1961, just before the Kennedy inauguration. It was, in effect, a warning to the nation about the policies of his successor. In this address, Eisenhower noted the following:

". . . We annually spend on military security more than the net income of all United States corporations.

"This conjunction of an immense military Establishment and a large arms industry is new in the American experience. The total influence - economic, political, even spiritual - is felt in every city, every statehouse, every office of the Federal Government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources, and livelihood are all involved; so is the very structure of our society.

"In the councils of govemment we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

"We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. . . .

". . . [We] must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

Kennedy did exactly what Eisenhower wamed against, greatly expanding the military and its allied industrial and research establishment. With Robert McNamara in charge, die Department of Defense was reorganized after the fashion of a multi-division industrial corporation. A central administrative office, of unprecedented size, was established in the Pentagon to govern the affairs of tens of thousands of contracting industrial establishments, as well as hundreds of military bases and laboratories at home and abroad. The full effect of the rapid military buildup became the heritage of Pres. Lyndon Johnson and his successors.

Ten days after Lyndon Johnson was swom in, I visited the White House in the company of James Farmer, the president of the Congress of Racial Equality. Johnson wanted a memorandum defining what should be done by way of major economic development and compensatory spending for black Americans and a statement of where the money could come from. I delivered such a memorandum a few days later. It now is known that the Great Society program, launched by Johnson with much fanfare, accounted for a mere eight percent of the government's combined expenditures for its war in Vietnam and its war" on poverty.

Johnson and his associates shared the core political myth of American society: * The U.S. has indefinitely large resources and therefore can afford both guns and butter. * Money is wealth. * The money value of what is bought and sold is the proper measure of growth, independently of the absence of use-values for consumption or further production. * Concentration of income among the very wealthy is a spur to productive investment and therefore to increased employment and production of new wealth.

This conventional wisdom failed to take into account one of the points in Eisenhower's Farewell Address - that the military budget had become the largest capital fund in the American economy, each year exceeding the net profits of all U.S. corporations. However, this capital fund was used to create money-valued goods and services (hence "growth") that lacked usevalue for consumption or further production. The core system of bipartisan conventional economic wisdom began to collapse like a house of cards as economic, and particularly industrial, depletion showed up with increasing intensity during the successive regimes of Presidents Richard Nixon, Gerald Ford, Jimmy Carter, Ronald Reagan, George Bush, and now Bill Clinton. The consequences of the assumptions made by Kennedy's "best and brightest," the architects of Johnson's Great Society, and the succession of Republican and Democratic strategists haunt and severely restrict Clinton's political-economic capabilities.

Robbing the civilian

economy

By 1990, the value of the weapons, allied machinery, equipment, and buildings held by the Department of Defense was 83% as great as the money value of all the plants and equipment of America's manufacturing industry. From 1947 to 1990, the combined U.S. military budgets amounted to 8.7 trillion dollars. By contrast, the combined value of plants and equipment of U.S. industry plus that of the civilian infrastructure amounted to 7.3 trillion dollars. This reflects a dense, long-enduring concentration of capital-type resources on products and services without either consumption or production values. Hence, it is no mystery why cities, streets, highways, schools, and dwellings crumble; why water supplies become poisoned; and why entire civilian industries decay and disappear.

Many economists have maintained that lumping together all money-valued activity (without regard to use-value) creates the illusion of rendering the effects of military economy invisible. Notwithstanding the dominance of the government's military arm - which transformed the U.S. economy into a military form of state capitalism - the proper basis for understanding the economy, and for prescribing macroeconomic policy, is the theory of a perfectly competitive market.

The President functions almost as a chief executive officer presiding over a central administrative office in the Pentagon, which runs the affairs of 32,000 prime contracting establishments and employs 2,700,000 people in military industry. At the same time, owing to the guns-and-butter and allied assumptions that had prevailed so long, the Federal government is in severe financial straits. Finally, the sheer scale of the Federal managerial establishment has not been understood properly. Thus, in a report to Pres. Bush in 1989, Secretary of Defense Richard Cheney noted that the combined military and civilian staffs concerned with acquisition for the Department of Defense added up to 583,000 people. That is a centralized control organization that makes the former Soviet Gosplan program look like a mom-and-pop store.

The long duration of America's war economy led to the creation of a military-specialized corps of managers, engineers, and technicians. The managers are expert at negotiating with the Pentagon and operating industrial, base, and laboratory facilities in keeping with the cost-plus tradition. Engineers with long experience at serving the military's requirements typically have a trained incapacity for designing and producing to civilian requirements. Thus, the military often have required and accepted product complexity and limited reliability that would be unacceptable in civilian products that must meet tests of salability, durability, and economy.

While people can be retrained to new occupational skills, that is not a welcomed experience, especially among men and women who have spent all or most of their working lives in the service of the Pentagon. Indeed, the prospect of having to reconstruct a part of their identity is resisted - even if unaccompanied by any draconian economic pressures. The main resistance, even to conversion planninglocal or national - comes from the top managers of the military economy and the main contractor firms.

Top managers of major enterprises, regardless of whether the head office is in a private corporation or a government department, strive to maintain and enlarge their decision-making power. Accordingly, the top managers of America's permanent military economy have been on a collision course with proposals for conversion planning and for a major "peace dividend" appropriate for the end of the Cold War.

In their zeal to justify the scale of their organizations and proposed military budgets, U.S. military chiefs point to the variety of security "threats" for which military methods are appropriate. This reasoning often omits reference to the role that U.S. weapons sales and military training of foreign officers plays in creating security threats in the first place. The U.S. government played a major role in the arming of Iraq, and the military disarray in Somalia was made possible by American and Soviet competitive arming of Somali factions to purchase political allies.

To convert the work at factories, laboratories, and bases, specialists on economic conversion have identified three core requirements. First, the planning for a changeover to civilian work must be done well in advance of physical execution. Second, the conversion planning must be done locally in each case, as it is out of the question for any centralized agency to master the myriad details of conversion planning in thousands of factories, laboratories, and bases. Third, the detailed planning process at each factory, base, and laboratory is carried out best by a joint management/ labor committee that would represent the full array of knowledge and commitment for establishing a viable economic entity.

All this must be accompanied by occupation retraining, especially for managers and engineers, since their work is influenced heavily by the long habituation to the cost-plus style of operation characteristic of the Pentagon's operations. Competence in cost maximizing is precisely the obverse of the cost minimizing requirement for civilian products and services.

Instead of such conversion operations, Bush and Clinton have preferred a strategy termed "diversification," with the main tasks of reorientation "adjustment" being left to each individual. Diversification of any particular firm can include a new military /civilian investment mix achieved by buying into civilian operations rather than actually altering any of the military-serving work. Adjustment has very doubtful feasibility, when made the responsibility of each individual. Thus, in the characteristically high-density areas of military industry work, individual occupational retraining has severely limited prospects. "Retraining for what?" is the hard question where the main activity of the region has been work on behalf of the Pentagon.

To all this, Bush and Clinton have added a major recommendation for "dual-use" technology, suggesting that the military industry firms strive to diversify toward technologies that have both military and civilian application. The limitations of this idea are quite severe because it is unfeasible to design something with an eye to both minimizing and maximizing cost. Dual-use research and investments would constitute a sort of halfway house for military contracting factories and laboratories, with the military component necessarily dominating the field, as that is the source of the familiar and large finance-capital support.

The Clinton Administration has added a major factor of centralization of control by putting a Pentagon agency - the Advanced Research Project Agency - in charge of the largest block of research and grant funds for new technology (mainly dual-use) and community impact studies. The executive branch has undertaken yet another approach in response to obviously reduced requirements for Cold War weapons. Foreign military sales promotion activity has been given a fresh impetus via the large military assistance and sales staffs at U.S. embassies.

Congress' role

At the side of the military industry managers in the executive branch, there is the crucial role of Congress acting as treasurer and marketing manager. The former function involves the formal voting of funds for military budgets. The latter entails continuing work by members of Congress and their staffs to channel Pentagon contracts, military bases, and laboratories to their communities. In these ways, individual Congressmen have taken on major responsibilities for employment and income in their respective districts and states, thereby having developed a major managerial stake in the size, composition, and allocation of the national military budgets. Since economic conversion would interfere with these arrangements, most Congressmen have refused to set in motion the advanced planning required for competent conversion operations.

Even though Clinton's first military budget totaled $264,000,000,000, this is rather different from the magnitude that would have prevailed had the Reagan/Bush Cold War planning operations continued. In those terms, the military budget would have been far greater than 400,000,000,000 by 1994.

As the Department of Defense has cut back on the Reagan/Bush military extravaganza, reductions in military industry firms and their employment have become a striking feature of the country's main military industry concentrations. The largest military aerospace contractors (General Dynamics, Lockheed, Martin Marietta, Rockwell, Northrop) - all with major concentrations in Pentagon workhave tended to follow the lead set forth by Stanley C. Pace, CEO of General Dynamics. In testimony to the U.S. Senate Armed Services Committee (May 4, 1990), he stated basic company policy as follows: "As individuals are laid off, assist them in transferring individually into the commercial culture world, or into govemment, or into academia. I believe money spent on trying to convert a tank plant, or a missile plant, or a submarine plant to commercial products will be wasted."

There is an altogether different perspective among many of the smaller contracting firms and subcontractors. Among the managers of these units, there has been a certain amount of self-starting activity for seeking out alternative products and markets. Obviously, the chiefs of these smaller enterprises are not in the position of the top managers of major firms who obtain vast salaries and are cushioned for retirement by notably generous arrangements.

General Dynamics management showed its hand when it shut down its Navy A-12 manufacturing facility in Fort Worth, Tex., in 1991. Upon hearing from the Department of Defense that the contract was to be canceled, management announced on the public address system of the plant that everyone working on the A-12 was laid off as of five p.m. that day and that medical benefits would terminate as of midnight.

Unlike the top managers of major military industry firms, workers, middle managers, and engineers have little to hope for except the opportunity to participate in an economically viable enterprise. Therefore, without initiative by management for competent economic conversion planning, the trade unions of several plants have negotiated for the formation of joint management/labor conversion committees to examine the resources available and possible alternative products and their markets. This has been done at the Unysis Company in Wisconsin and at the Pratt & Whitney aircraft engine factory in Connecticut. This idea as a strategy for trade unions also was given prominent attention at a 1993 meeting on economic conversion sponsored by the Industrial Union Department of the AFL-CIO.

What could converted factories produce? For a start, $165,000,000,000 a year could be spent on needed public works, as recommended by the National Commission for Economic Conversion and Disarmament. These outlays include $30,000,000,000 each for housing and the Department of Education; $26,000,000,000 for repair of roads, bridges, water, and sewer systems; $23,000,000,000 for preschool programs, facilities repairs, and other education needs; $17,500,000,000 for radioactive waste cleanup; $16,000,000,000 for toxic waste cleanup; $12,500,000,000 for miscellaneous health costs; and $10,000,000,000 for electrification of the U.S. rail system.

Taking the last item as a case in point, if the government were to organize capital investment for electrifying a national rail system, this would require an investment of not less than $10,000,000,000 a year over a period of at least 10 years. Such a program probably would be modeled after the $100,000,000,000 investment now under way for setting up fast electrified train service linking the main cities of Western Europe. Since the U.S. does not possess the industrial facilities and the workforce needed to design, construct, and manage such a high-speed electric rail system, construction of an entire set of new industries would be required.

All calculations about the employment effects of such a project should take into account a considerable multiplier effect that can be expected. Studies on multiplier effects from employment in manufacturing production indicate that, for every 1,000 new jobs in manufacturing, 4,100 additional ones are expected in supporting and servicing the core industrial operations.

Finally, it is important to understand an essential difference between the conversion problem at the close of World War II and the one that confronts the U.S. in the 1990s. By the end of 1945, the U.S. economy had been on a high-level military concentration for five years. Virtually all the workers, engineers, and managers at the factories doing the war work had prior civilian industry experience. These plants proceeded to convert back to civilian operations, almost all of which were familiar.

Within the Federal government, the War Production Board (WPB) that had centrally managed the enormous military program gave way to the Civilian Production Administration. John D. Small, chief of CPA, sent Pres. Franklin D. Roosevelt a report on Dec. 6, 1946, From War to Peace: Civilian Production Achievements in Transition." The national apparatus for governing the U.S. World War II economy was turned about: ". . . As it was the primary job of WPB to mobilize the nation's industry to win the war as quickly as possible, so it was CPA's chief function to demobilize controls and speed transition to a normal peacetime economy. . . ."

Since the end of the Cold War, the government and the corporate managers of America's permanent war economy have been holding on, with great tenacity, to their positions of power and privilege and have stonewalled all major proposals for economic conversion planning and operations. Pres. Clinton is fully empowered by the Constitution to set in motion conversion planning operations. On his decision alone, he can order the establishment of management/labor alternative use committees to undertake planning for the contingency of conversion in every Defense and Energy Department-serving factory, base, and laboratory. The fear that now envelops the prospect of military budget reduction thus could be replaced by the anticipation of launching civilian-useful jobs with blue-print-ready plans in hand.