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Policy decisions for a post-cold war economy.

National security policy requires maintaining superiority while pursuing agreement with the Soviet Union. As defense outlays can be curtailed, the military force structure must be conformed to the reduced funding made available, defense companies must be down-sized, a social safety net must be maintained for laid-off workers and affected communities and adequate support provided for science and technology The real peace dividend will come from redirecting defense savings away from government-supported consumption and toward the private sector.

NATIONAL POLICIES for the 1990s must be developed for a world vastly different from that which faced decisionmakers in the 1980s. I would like to focus on the changes that flow from the end of the Cold War with the Soviet Union, but also take into account recent developments in the Middle East.

Sensible planning for the decade ahead transcends the business cycle. Believing in the specialization of labor, I will focus primarily on the economic ramifications of national security policy.

The most sensible strategy for the United States is to pursue an understanding with the Soviets while we maintain overwhelming superiority over any third nation. The Iraqi invasion of Kuwait and its aftermath underscore the urgency of that basic proposition. Consistent with that goal, I foresee an incremental approach to arms reduction, closely keyed to firm evidence of real change by the Soviets. Little bas been forthcoming on their part in terms of reducing their strategic arsenal. it is the military threat to Western Europe which has evaporated, with Eastern Europe becoming our buffer.

In the international arena, we are seeing the benefits of cooperation with the Soviet leadership on matters of mutual interest. Yet the United States must be prepared to reverse course if the Soviet government changes its mind, or is replaced by a more aggressive group.

All in all, the most reasonable basis on which to plan is the expectation of continued decline in U. S. military spending, at least over the coming five years. The possibility of a conflict breaking out of the magnitude of Korea or Vietnam remains the province of contingency planning. However, U.S. defense cutbacks will likely be far more modest than the 50 percent cumulative reductions urged earlier this year when a peace dividend loomed so large in public thinking. Much more likely, the cuts in the military budget will be in the 2 to 5 percent a year range in real terms.

This curtailed level of defense outlays necessitates a variety of adjustments. But perspective is necessary. The magnitudes of change involved are much less than was the case following the end of the Korean or Vietnam Wars. Then military spending represented a far larger share of the national economy than it does today.

Four clusters of policy decisions need to be made:

1. Conform the military force structure to the reduced funding made available by Congress.

To fit within fiscal reality, the President and the Pentagon leadership still have to take those difficult actions that have been avoided since the mid-1980s - substantially reducing the number of aircraft, missiles, ships, and other weapons that are bought each year.

Stretching out production schedules and squeezing contractor payments do not constitute a viable long-term alternative. The former raises unit costs and the latter erodes the defense industrial base. The mismatch between the military's plans and congressional appropriations, according to the General Accounting Office, exceeds $110 billion. It can only be resolved by cutting future spending to fit the budget cloth. Congress should not make this task more difficult by shielding pet programs from the pruning knife.

Some of the cuts that should be made are obvious. The Navy is spending $1 billion for a series of additional "home ports" to support a 600 ship fleet. But the current fleet is less than 500 ships and that number is "sinking." Local interest groups find it easy to confuse pork with patriotism.

In voting lower appropriations for defense, the Congress should avoid setting in motion a new stop-and-go cycle in military spending. Serious threats to the national security are changing in form but they surely continue, notably the proliferation of nuclear and conventional capability in the third world.

2. Downsize the defense companies so as to maintain their financial strength and their ability to respond to future national security threats.

Trying to get commercial payoffs from military products is an enticing concept. But the sad history of attempts by major military contractors to enter the commercial marketplace underscores the need for government to refrain from subsidizing that process.

Individual defense firms, like companies in other industries, have no particular claim to maintenance of their present size, or even to their continued existence - nor do their employees possess any special rights to the jobs now generated by defense spending. Most of these firms will find that a more modest scale of operations is also more efficient in the decade ahead.

Most defense industry leaders are declining to support proposals for government to "assist" them in converting to civilian markets. They understand that the best concept for conversion is to take the defense industry down slowly. This advice is consistent with the response of one corporate leader who, when asked by the Soviets how to convert a tank plant into a refrigerator factory, replied, "Tear down the tank plant and build a new refrigerator factory."

3. Maintain the social safety net for laid-off defense workers and the affected communities.

There is a great deal of uncertainty and fear in many localities concerning the future of the employees at defense plants and military installations. Yet, the most likely outlook is for the great majority of them to keep their current jobs. Defense spending is staying at historically high levels, albeit lower than now.

Consistent with that outlook, significant increases in unemployment are occurring in centers of defense production. More layoffs can be expected.

However, that is not justification for the federal government providing special benefits to unemployed defense workers. They should be treated as generously as - but not more or less generously than - people who lose their jobs because of sluggish housing sales resulting from tight monetary policy or from reduced mining due to more stringent environmental regulations.

The scientists, engineers, and technicians that constitute a large fraction of defense payrolls do not need federal "make work" programs. They are among the most mobile members of the labor force. While defense is a national problem, economic adjustment is largely local. In any event, responses to defense cutbacks are best initiated in the private sector.

Many defense-oriented communities take the position that the nation owes them something special because of their unique "contributions" to the national defense. When we recall the vigorous lobbying efforts those same communities made to get a base or defense contract located in their vicinity, we can quickly dismiss such obviously self-serving arguments.

4. Provide adequate support for science and technology.

A reduction in defense spending - because the military is such a large promoter of science and technology - means a cutback in federal support for research and development.

The curtailment of investment in science and technology is troublesome for reasons that extend far beyond the military sector. R&D is a major contributor to economic growth and rising living standards. Moreover, the high-tech industries, which in many cases are synonymous with the major defense contractors, account for much of the positive elements in U.S. competitiveness in world markets.

There are some sensible things that government can do within existing budget constraints to shore up the high technology sectors. The capability for industrial innovation on the part of the major defense prime contractors and subcontractors is not maintained by relying on federal subsidies. Rather, it is promoted by a competitive private enterprise economy in which governmental obstacles to entrepreneurship and innovation are kept to a minimum.

It is ironic that Congress continues to tighten its regulation of defense companies, and of business generally, just as Eastern European nations are throwing off the shackles of governmental controls so that they can move closer to that free economy model they associate with the United States.

This is the time to administer a massive dose of deregulation to the military procurement process. That would simultaneously reduce the overhead costs of defense contractors and increase their ability to transfer new technology between civilian and military products. One modest step is for the Department of Defense to reduce the barriers it has erected between defense and commercial technology.

Efficiency can be served by stripping out the host of special provisions that require military contractors to act more like government bureaus, doling out benefits to designated classes of beneficiaries, than private enterprises delivering innovation and technological progress.

The effectiveness of military procurement can be raised by removing the myriad of restraints and directives imposed by members of Congress anxious to protect the defense jobs located in their states or districts. Forcing the military to buy weapon systems they do not need is the most inefficient way of providing benefits to constituents. It sets the wrong tone for all that follows. How can the people responsible for military acquisition follow the highest ethical principles when the entire process is designed by members of Congress who treat the military budget as the nation's biggest pork barrel?

The prosperity of the United States does not require any particular level of military activity. Our productivity and competitiveness will suffer if defense spending is used to prop up the prosperity of any region or industry. Also, reduced defense spending is a very direct way of bringing down the budget deficit.

The real "peace dividend" in terms of a stronger American economy in the 1990s will come about by redirecting defense savings away from government-supported consumption and towards the private sector, where civilian R&D and investment are best undertaken. That indeed is a compelling case for accompanying defense reductions with austerity in civilian government budgeting.

* Murray Weidenbaum is Director of the Center for the Study of American Business at Washington University, St. Louis, MO. These remarks are drawn from a forthcoming book sponsored by the Twentieth Century Fund on the changing defense economy and were presented at the 32nd Annual Meeting of The National Association of Business Economists, September 23-27, 1990, Washington, DC.
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Title Annotation:United States economic policies in relations to the changes in Eastern Europe
Author:Weidenbaum, Murray L.
Publication:Business Economics
Date:Jan 1, 1991
Words:1706
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