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Defense reductions and U.S. manufacturing.

The manufacturing sector should

experience a 125,000 increase in nondefense

employment between 1990 and 1994. However,

these gains should be more than offset by a

decline of 405,000 defense-related

manufacturing jobs. All the growth in U.S.

employment over the next four years is

expected to occur outside the manufacturing

sector. When compared to prior

demobilizations, the magnitude of today's defense-related

reductions will be modest. Normal

labor market adjustments, aided by existing

federal job assistance and training

programs, should facilitate the transition.

HOW MUCH military spending is enough? This question is one the United States has been wrestling with since the end of World War II. With limited resources available, the government must decide how much of the federal budget should be allocated to defense spending in order to ensure the security of the American people, protect our allies, influence world events, and at the same time encourage the social and economic development of this country. In a sense defense spending is much like an insurance policy; the amount of coverage or protection is dictated by how prosperous the economy is at the moment and the perceived risk of a military conflict in the future.

This report examines the proposed defense cuts and puts them in perspective. The Bush Administration's defense budget is analyzed with particular attention given to the Department of Defense (DOD) procurement plans and personnel cuts. Furthermore, estimates are made for the reduction in output and jobs lost in the private sector and selected manufacturing industries because of the defense cuts.


The defense budget for fiscal years (FYs) 1992-96 calls for military planning that takes into consideration the new realities of a reduced threat to the nation's national security and the necessity for cutting the huge federal budget deficit. Over the next five years, inflation-adjusted defense outlays are budgeted to decline 19 percent. Figure 1 shows inflation-adjusted national defense outlays since FY 1962 and the Bush Administration's budget projections through FY 1996.

When the total defense budget is slashed by nearly one-fifth, the cuts affect virtually every budget item, thousands of programs and weapons systems. To simplify the analysis, the defense budget is divided into six major categories: construction and housing, research, operations and maintenance, procurement, personnel, and an "all other" category. Figure 2 shows the dollar amount of each major defense category and its share of total defense outlays for FY 1991. The projected average annual growth rate for major defense categories through FY 1996 are illustrated in Figure 3. These two charts show:

1. The cost of operating and maintaining the facilities

and equipment of the armed services will comprise

29 percent of the defense budget this fiscal year

and is projected to decline 4.5 percent

annually -- after allowing for inflation -- over the next five

years. What has grabbed the headlines, though, is

DOD's announcement recommending the closing

of thirty-one major U.S. military bases, twelve

small facilities, and reducing operations at twenty-eight

other bases.(1)

2. Personnel outlays make up 26 percent of the FY

1991 defense budget. The demobilization plan calls

for reducing active duty personnel by 321,000 and

reserves by about 270,000 from FY 1991 through

FY 1995. As a result of these cuts, personnel

spending is projected to decline 3.8 percent annually.

3. Procurement spending also takes 26 percent of the

defense budget. However, unlike many other

categories, procurement is highly cyclical. There are

rapid buildups during wars (both shooting wars and

the Cold War) and significant spending cuts

afterwards. The FY 1992 defense budget reflects the

downside to the procurement cycle. Secretary

Cheney said the 1990s will "be a decade of

development, more than of production."(2) Real

procurement outlays are budgeted to decline at about a 7

percent annual rate over the next five years.

4. The Defense Department will spend $35.5 billion on

research, development, testing and evaluation

(RDT&E) this fiscal year, 12 percent of all defense

outlays. The RDT&E budget emphasis is on strategic

programs, intelligence, communications, and

developing the next generation of weapon systems.

Inflation-adjusted research spending is expected to

decline at a 3.3 percent annual rate for FYs 1991-96.

5. Also worth noticing are the changes to "other"

defense spending. The "other" category is primarily

for the nuclear energy program run for the military

by the Department of Energy (DOE). The whole

nuclear weapons complex is to be restructured in

response to reduced demand for nuclear defense



The procurement budget is the most important defense account for manufacturers. The design and manufacture of military hardware is a significant proportion of sales for many companies. In 1990, the top 100 defense contractors received $86.7 billion in prime contract awards, about two-thirds of the $130.8 billion of large, prime contract awards that year.(3) Many thousand more firms act as suppliers and subcontractors for the defense prime contractors. Table 1 details procurement outlays by major group through FY 1993.

Over FYs 1991-96, procurement will decline from $79 billion to $59 billion measured in inflation-adjusted dollars, a 6.9 percent annual reduction in real procurement outlays. Procurement outlays which composed 26 percent of total defense spending in FY 1991 are projected to fall to only a 24 percent share of military outlays in FY 1996.


In late June 1990, Defense Secretary Cheney presented a plan to the congressional budget summit that reduced military forces by 25 percent over the next five years. Cheney's plan was in line with congressional proposals, because both houses had already expressed a desire to make cuts by at least that amount. The Secretary's plan did, however, commit the Administration to demobilization.

The proposed reduction in military forces is "less than meets the eye" because of the unique methods used to define such reductions under the federal budget process. The 25 percent figure used by Secretary Cheney came from comparing force numbers with the Congressional Budget Office's baseline figures. A more straightforward approach would compare the 1995 anticipated force levels with those of 1990, which yields a 20 percent reduction in active duty troops. Table 2 lists actual 1990 and proposed 1995 levels for active duty, guard and reserve, and civilian Department of Defense workers. Active duty forces will be reduced by 416,000 from FY 1990 to FY 1995 under the President's budget. Within the armed services, the Army would see the largest decline both numerically (215,000) and in percentage terms (29 percent). Navy and Air Force strengths are projected to fall about 13 percent and 19 percent, respectively, while Marine troops would be cut 13 percent by FY 1995.

In terms of inflation-adjusted dollar reductions, defense personnel outlays amounted to $79 billion in FY 1991 and are projected to fall to $64 billion in FY 1996. The 3.8 percent annual decline in the DOD payroll and retirement account is roughly the same rate of reduction as total defense outlays. Therefore, personnel spending will maintain the same 26 percent share of real defense spending in FY 1996 as it had in FY 1991.

There is substantial concern in Congress and among state and local officials that demobilization will create severe economic difficulties for local communities and the affected personnel. One way to assess the magnitude of the problem is to compare the Administration's proposal with the three prior demobilization periods. This comparison in Table 3 shows:

1. Proposed active duty troop reductions are only

about one-third of the annual rate which occurred

during the phase-down following the Vietnam and

Korean Wars.

2. Similarly, annual civilian DOD personnel cuts are

less than those of the post-Vietnam period, but

more severe than after the Korean War. The post-Korean

War period was, however, marked by rapid

growth in the entire federal establishment.

3. The decline in direct and indirect defense private

industry employment for the last three

demobilizations ranges between 2 and 2.5 times the number

of furloughed active duty military. The projected

loss of jobs due to the current demobilization is at

the low end of this range.

4. The expected 282,000 average annual reduction in

the defense workforce (83,000 active duty military,

36,000 DOD civilians, and 163,000 private sector

defense-related jobs) currently amounts to a little

over two-tenths of one percent of the U.S. labor

force. Even though the United States is in a

recession -- a pattern similar to that following both the

Korean and Vietnam Wars -- the effect on the

unemployment rate will be relatively modest in and

of itself. Nevertheless, reduced military spending

makes the business cycle worse and is likely to slow

the pace of economic recovery.

A recent study by the U.S. Department of Commerce found that defense and defense-related work occurs in virtually every sector of the economy.(4) In addition to the large defense prime contractors, there is a multitiered network of suppliers from a wide range of industries. As Figure 4 illustrates, defense-related output in 1990 composed 3.5 percent of total private-sector production of goods and services.(5) But because defense contractors are concentrated in manufacturing, defense output accounted for a much larger share, 6.7 percent, of the manufacturing sector's output.

Within manufacturing, certain industries are much more dependent upon defense work than others. Electrical machinery producers in 1990 received a little over 20 percent of their business from defense-related projects. Defense-related work also accounted for about 19 percent of the transportation sector's output and 11 percent of fabricated metal products. In contrast, defense work made up only 3 to 4 percent of chemical, nonelectrical machinery, and rubber and plastics output.


Over the four-year period 1990 to 1994, the private economy is expected to lose about 650,000 jobs (averaging about 163,000 per year) due to demobilization.(6) Unfortunately, the manufacturing sector will lose a little over 400,000 of these 650,000 positions. Some reduction in employment during the 1990-94 period, however, would have occurred even if real defense spending were to have been flat instead of declining. In the manufacturing sector, for example, output per worker is projected to increase at a 2.4 percent annual rate over the next four years. For this reason, in a no-output-growth environment, the number of jobs declines. When worker productivity is held constant, the number of jobs lost due solely to lower defense spending is estimated to be 540,000 positions in the private sector, with a loss of 325,000 jobs in manufacturing.

While there will be job losses as a result of demobilization, the nondefense portion of the economy will start to grow again once the current recession ends and should provide employment opportunities for some of those who are displaced by the defense cutbacks. All the growth in employment over the next four years is expected to occur outside manufacturing. The private sector should add 5.43 million nondefense jobs (an average 1.36 million positions per year) between the years 1990 and 1994. When this figure is reduced by about 650,000 for the defense-related jobs that are lost, total private employment is forecast to rise 4.78 million from 1990 to 1994.

The manufacturing sector, however, is likely to realize a 125,000 employment increase in the nondefense sector which will be more than offset by a 405,000 decline in defense-related jobs. Therefore, under relatively optimistic economic assumptions, the manufacturing sector is expected to lose 280,000 jobs from 1990 to 1994.(7) Manufacturing employment will shrink as a percent of all jobs. This continues a trend in recent years of declining manufacturing employment even as manufacturing output remains relatively constant as a share of gross national product.(8)

Defense and nondefense employment growth for selected major manufacturing sectors are shown in Figure 5. Some observations about future employment prospects in manufacturing are:

1. Metals, nonelectrical machinery, and electrical

machinery can expect lower employment in both the

defense-related and nondefense segments in the

1990-1994 period. Defense cuts will accelarate the

downward trend in employment in these sectors.

2. Nondefense employment growth in fabricated

metals is not able to compensate for the loss of defense-related

jobs in that sector.

3. In the transportation equipment, chemical, and

instruments industries, there is a net gain in

employment over the next four years; however, the

increase in jobs is very small compared to that

anticipated without the defense cuts.

4. There are relatively small defense-related

employment effects in the rubber and plastics industries.

Total employment is expected to increase from 1990

to 1994.


During the 1980s, adjustment to unemployment caused by rapid structural change in response to global competition was facilitated by improvements in worker adjustment programs.(9) These existing unemployment assistance programs are adequate to handle the defense-related downsizing; if new programs were to be introduced, they are likely to be counterproductive. Because it normally takes several years to implement a new labor market or social assistance program, dislocated workers are likely to have adjusted already to their initial layoff by the time any new programs are up and running. In addition, experience with prior labor market adjustment programs and the general unemployment insurance program in the United States shows that targeting such programs for selected groups of workers tends to retard necessary adjustments to economic change.

The key to successful workforce adjustment is economic growth. In the event that defense expenditure reductions exceed the amount specified in the Omnibus Budget Reconciliation Act, all the additional expenditure cuts should be used to reduce the federal budget deficit. Once the U.S. economy recovers from the current recession, the benefits of slower growth in federal government spending and less stringent requirements for borrowing should contribute to achieving inflation and interest rates that are lower than otherwise would have been possible. Lower costs of capital should encourage more capital formation in the private sector in the future and thus help create a stronger, more competitive U.S. economy with an overall higher standard of living.

Table 1
 Procurement Outlays by Type
 (billions of FY 1991 dollars)
 1990 1991 1992 1993
 Fiscal Years
Aircraft $27.2 $26.3 $22.2 $18.9
Ships 11.5 10.9 10.9 9.9
Missiles 16.6 15.3 13.1 11.7
Tracked Vehicles 2.9 2.7 2.2 1.4
Other 26.1 23.9 22.9 21.5

Source: Budget of the United States Government, Fiscal Year 1992.

Table 2
 Department of Defense Manpower
 (end strength in thousands)
 FY 1990 FY 1995 Reduction
 Personnel Percent
Active Duty 2,069 1,653 416 20
 Army 751 536 215 29
 Navy 583 510 73 13
 Air Force 539 437 102 19
 Marines 197 171 26 13

Part-time Guard
 & Reserves 1,128 906 222 20
Civilian DOD 1,073 893 180 17

Source: An Analysis of the President's Budgetary Proposals for Fiscal
 Year 1992, Congressional Budget Office, March 1991, Table
 IV-3; Statement of the Secretary of Defense Before the House
 Armed Services Committee, February 7, 1991, Chart 8;
 Budget of the United States Government Fiscal Year 1992,
 Table A-3.

Table 3

Prior Demobilizations

Average Annual Reductions in Personnel
 (end strength in thousands)
 Active Duty Civilian Dept. Defense-Related
 Military of Defense Industry Employment
World War II (1945-48) 3,559 586 7,492
Korean War (1952-55) 234 25 575
Vietnam War (1968-73) 259 61 585
Cheney Plan (1990-95) 83 36 163(*)

Source: National Defense Budget Estimates for FY 1991, Department
 of Defense, March 1990, Tbl. 7-6; Statement of the Secretary
 of Defense Before the House Armed Services Committee,
 February 7, 1991, Chart 8; Pentagon Reports Progress of
 Management Improvements, News Release of the Office of
 Assistant Secretary of Defense, April 25, 1991.

(*)Estimated by the author for the 1990-94 period. The procedure used to obtain the industrial sector detail is explained later in this paper. [Figures 1 - 5 Omitted]


(1)DOD estimates that the base closings announced April 12, 1991, would cost $5.7 billion during fiscal years 1992-97 but would save the taxpayers $6.5 billion in operating savings during the same time period. In FY 1998 and thereafter, the annual savings from the base closings would be $1.7 billion a year. (2)Statement of the Secretary of Defense Before the House Armed Services Committee, February 7, 1991, p. 10. (3)100 Companies Receiving the Largest Dollar Volume of Prime Contract Awards in Fiscal Year 1990, a Report of the Department of Defense, March 1991. Prime contract awards include mostly procurement and research, development, testing and evaluation contracts; however, they also include parts of other defense categories as well. (4)David Henry, Industrial Output Effects of Planned Defense Spending 1990-1994, Office of Policy Analysis, U.S. Department of Commerce, February 1991, p. 6. Using an input-output model, the Commerce Department staff paper estimated the impact of the proposed defense cuts on defense and nondefense output by industry from 1990 through 1994. (5)Output is defined as industry shipments plus inventory change. All output figures are expressed in billions of 1982 dollars. (6)Employment growth was estimated in the following manner. Employment by industry is available for 1990 from U.S. Department of Labor, Employment and Earnings, March 1991. Dividing 1990 employment into industry output from the Commerce Department study cited in the previous section yields a productivity measure -- the number of jobs per unit of constant-dollar output for each of 131 industry sectors. The next step is to forecast the number of jobs required to produce a unit of output in each of the industry sectors. MAPI uses the U.S. Department of Labor publication, Outlook 2000, Bulletin 2352, April 1990, as the basis for jobs per unit of output growth projections through the year 1994. In this publication, the Labor Department projects the growth rate for the number of jobs per unit of constant-dollar output over the period 1988 to the year 2000. The annual growth rate over this twelve-year period was applied to the 1990 figures. The estimated employment per unit of output is multiplied by the projected defense-related and nondefense output to obtain employment levels. This procedure is repeated for each of 131 industrial sectors. The information is aggregated for presentation purposes. (7)The Commerce Department analysis used a gross national product forecast of 2.9 percent average annual growth over the 1990-1994 period. The nondefense output figures were proportionately scaled back to reflect a 2.4 percent average annual growth in the economy between 1990 and 1994. However, the FY 1992 economic projections are still more optimistic than the consensus of private economists, according to the Congressional Budget Office report, An Analysis of the President's Budgetary Proposals for Fiscal Year 1992, op. cit., Table II-2. (8)This lack of employment growth relative to the rest of the economy can be explained primarily by the relatively high labor productivity rate in manufacturing. Over the 1990-94 period, manufacturing labor productivity is projected to increase at a 2.4 percent annual rate versus only 0.8 percent per year in the private nonmanufacturing sector. (9)One of the most effective programs was the Job Training and Partnership Act of 1982. In 1988, the adjustment assistance component of this Act was strengthened substantially. This Act now provides training and job search assistance to workers dislocated because of structural economic change.

Daniel J. Meckstroth is an economist with the Manufacturers' Alliance for Productivity and Innovation (MAPI) in Washington, DC. The author is indebted to Ken McLennan, MAPI President, for his helpful comments and to Diane Threlkeld and Donna Windsor for their editorial assistance. A longer version of this study first appeared as a MAPI Policy Review PR-116, May 1991.
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Author:Meckstroth, Daniel J.
Publication:Business Economics
Date:Jan 1, 1992
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