Cold War Imperatives

Many Americans feared that the end of World War II and the subsequent drop in military
spending might bring back the hard times of the Great Depression. But instead, pent-up
consumer demand fueled exceptionally strong economic growth in the post war period. The
automobile industry successfully converted back to producing cars, and new industries such as
aviation and electronics grew by leaps and bounds. A housing boom, stimulated in part by easily
affordable mortgages for returning members of the military, added to the expansion. The nation's
gross national product rose from about $200,000 million in 1940 to $300,000 million in 1950
and to more than $500,000 million in 1960. At the same time, the jump in postwar births, known
as the "baby boom," increased the number of consumers. More and more Americans joined the
middle class.

The Military Industrial Complex

The need to produce war supplies had given rise to a huge military-industrial complex (a term
coined by Dwight D. Eisenhower, who served as the U.S. president from 1953 through 1961). It
did not disappear with the war's end. As the Iron Curtain descended across Europe and
the United States found itself embroiled in a cold war with the Soviet Union, the government
maintained substantial fighting capacity and invested in sophisticated weapons such as the
hydrogen bomb. Economic aid flowed to war-ravaged European countries under the Marshall
Plan, which also helped maintain markets for numerous U.S. goods. And the government itself
recognized its central role in economic affairs. The Employment Act of 1946 stated as
government policy "to promote maximum employment, production, and purchasing power."
The United States also recognized during the postwar period the need to restructure international
monetary arrangements, spearheading the creation of the International Monetary Fund and the
World Bank -- institutions designed to ensure an open, capitalist international economy.

Business, meanwhile, entered a period marked by consolidation. Firms merged to create huge,
diversified conglomerates. International Telephone and Telegraph, for instance, bought Sheraton
Hotels, Continental Banking, Hartford Fire Insurance, Avis Rent-a-Car, and other companies.

Changes in the American Workforce

The American work force also changed significantly. During the 1950s, the number of workers
providing services grew until it equaled and then surpassed the number who produced goods.
And by 1956, a majority of U.S. workers held white-collar rather than blue-collar jobs. At the
same time, labor unions won long-term employment contracts and other benefits for their
members.
Farmers, on the other hand, faced tough times. Gains in productivity led to agricultural
overproduction, as farming became a big business. Small family farms found it increasingly
difficult to compete, and more and more farmers left the land. As a result, the number of people
employed in the farm sector, which in 1947 stood at 7.9 million, began a continuing decline; by
1998, U.S. farms employed only 3.4 million people.
Other Americans moved, too. Growing demand for single-family homes and the widespread
ownership of cars led many Americans to migrate from central cities to suburbs. Coupled with
technological innovations such as the invention of air conditioning, the migration spurred the
development of "Sun Belt" cities such as Houston, Atlanta, Miami, and Phoenix in the southern
and southwestern states. As new, federally sponsored highways created better access to the
suburbs, business patterns began to change as well. Shopping centers multiplied, rising from
eight at the end of World War II to 3,840 in 1960. Many industries soon followed, leaving cities
for less crowded sites.

Policy decisions for a post-cold war

economy - United States economic
policies in relations to the changes in
Eastern Europe
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.

COPYRIGHT 1991 The National Association for Business

Economists
COPYRIGHT 2004 Gale Group