Reagan’s $1.6 trillion defense program creates unforeseen problems
The full-page newspaper advertisement from Tenneco Inc. brimmed with pride. As its contribution to the Reagan Administration’s arms buildup,the company announced that it had delivered not one but two potent new neclear-poweredwarships to the U.S. Navy in a single day: the 93,000-ton aircraft carrier Carl Vinson and the 6,900-ton attack submarine Atlanta. Proclaimed the ads’ headline:MISTER PRESIDENT, WE HAVE BEGUN.
With a combined price tag of $1.63 billion, the cost of the two vesels is relatively cheapcompared with the more then $1.6 trillion in defense spending that the Reagan Administration plans to lavish on American industry between now and 1987. Inaddition to at least 130 new combat and support vessels for the Navy,the Administration’s shopping list calls for more than 3,900 jet fighters, bombers and transport aircraft, 8,880 tanks and cannon-carrying troop transports and,during the next decade, some 14,000 strategic and tactical bombs and missiles for the nation’s nuclear arsenal.
Pentagon defense planners last week told Congress that achieving the Administration’s strategic objectives may actually require more money than the President is proposing. Last December senior Pentagon staff officials estimated the shortfall at nearly 50%, or $750 billion.
For the major military contractors, the buildup will prove a bonanza. Many of them have excess factory capacity brought on by the recession, and they are already revving up unused production lines. Boeing, for example, which has been hard hit by the slump in domestic aviation, is at work on the cruise missile.
Even so, a growing number of economists have begun to warn that over the long term, the Administration may be asking for too much. The fear: that defense spending at anywhere near proposed levels will eventually create crippling bottlenecks at key choke points in private industry, reignite inflation and ultimately thwart the productivity surge that is essential for stable economic growth. Says Michael Evans, a Washington-based economist: “Until recently I assumed the economy could easily handle the buildup because of unused industrial capacity. Now I’m convinced there’s going to be trouble if it goes through as proposed.”
It would be reassuring to think of multibillion-dollar defense contracts as a tonic for cash-starved U.S. industries. For years businessmen and the Pentagon have rightly urged Congress to take a long view in planning its defense expenditures, using multiyear procurement programs in order to ensure the steady and smooth development of new weapons systems. Unfortunately, the explosive new surge in defense spending is coming just when factories and financial markets will find it difficult to handle the strain.
The greatest pressure in all likelihood will fall on precisely those industries (military aerospace, microelectronics) that are already running near capacity. Later in the decade, as the buildup moves into high gear, the resulting resources squeeze could cause severe shortages of everything from strategic materials such as titanium and graphite to sophisticated specialty machinery and, especially, skilled manpower.
Arms procurement is projected to grow 16% annually through 1987, vs. a 14% rate of increase during the peak Viet Nam War years. Injecting all those dollars into defense-related industries could wind up being like installing a turbocharger on the engine of a Model T. Since military spending increases first began to tail off in the 1970s, the industry’s infrastructure has seriously eroded. Hundreds of small foundries that made vital metal castings have gone bankrupt or have been forced to close by the Environmental Protection Agency (for excessive dust, smoke and chemical byproducts). Traditional smokestack industries such as steel and rubber have gone into a steep decline, losing their customers and even entire markets to more efficient overseas competitors.
Once the defense buildup begins in earnest, this erosion of productive capacity will probably start to pinch. The backlog for aluminum forgings used in military aircraft is expected to swell from 12 months to 24 months by the end of 1982. The waiting time for aluminum powder and other components in rocket propellants, now ten to twelve months, is expected to grow longer. The delay in supplying integrated circuits used in computerized missile-guidance systems is already 80 weeks in some cases.
The crunch will be most acute for the small manufacturers who supply major contractors. Hans Weiss of Manchester, Conn., whose Dynamic Metal Products Co. welds machined engine parts for the F-15 Eagle and F-16 Fighting Falcon jet fighters, has a two-year backlog of orders. He warns, “If subcontract work on the B-1 bomber comes here, we just won’t be able to take it on.” Apex Machine Tool Co. in nearby Farmington, Conn., which makes fixtures and gauges for giant lathes and milling machines used in aircraft production, is already running at 100% capacity. Says President James Biondi: “If orders start to pick up, it will stretch our lead time.”
A squeeze on domestic suppliers will almost automatically send more business overseas. The U.S. once dominated the world market for machine tools, but last year 36% of new machines were installed by foreign suppliers. A surge in demand could make the U.S. even more dependent on overseas machinery. Says James Gray, president of the National Machine Tool Builders Association: “A rapid, massive mobilization will undermine us. If the Defense Department isn’t concerned about the health of the American machine-tool industry, then it damned well ought to be.”
Even more worrisome is a growing lack of experienced workers in high-tech fields. Post-Viet Nam cutbacks in defense procurement sent enrollments in engineering schools plummeting. Though that is now changing, the number of graduates is still far too small to handle the projected demand. Executives at Eaton Corp.’s AIL Division frankly admit that their company will have to raid other electronics firms to find the engineers and computer experts needed to make controls for B-1 bombers. Asserts Economics Professor P.M. Scherer of Northwestern University: “This means either a bloody battle to divert engineers from other businesses into defense, or a very slow process of adjustment.”
The long-term problems posed by the buildup will be worsened by the corrosive effect of defense spending on the economy as a whole. Money spent on men and materiel soaks up available resources but provides little in the way of productive goods and services. Marion Anderson, director of Employment Research Associates, a Lansing, Mich., consulting firm, has concluded that while $1 billion invested in missiles creates 14,000 jobs, the same amount would mean 48,000 positions in a labor-intensive area like hospitals.
Since the Pentagon is increasingly interested in high-technology products with narrow military applications, there seems little prospect for productive new civilian and consumer-market spinoffs. In addition, a new report by the Council on Economic Priorities, a nonprofit research group, pointed out last week that the U.S. aerospace industry, which has depended heavily on Air Force contracts, is seeing its position as the world’s leading producer of commercial aircraft being slowly but steadily eroded. Meanwhile, Airbus Industrie, a multinational European consortium of planemakers best known for the 270 passenger Airbus A300, is pushing energetically into overseas markets that once were virtual U.S. fiefdoms.
The inflationary pressures of Pentagon procurement are perhaps the most worrisome element of the big Reagan buildup. Inflation has been coming down sharply in recent months, and last week the Labor Department reported a drop of .1% in. producer prices during February, the sharpest decline in six years. Surging defense spending could undo much of that progress.
The potential damage goes far beyond cost overruns and sloppy budgeting. Because the Pentagon in effect is able to pay whatever is necessary to obtain a product or service, it forces up prices for civilian industries that compete for the same resources. James Capra, senior economist of the New York Federal Reserve Bank, says with blunt certainty, “Demand from the buildup will mean a higher inflation rate for the next few years than would be the case without it.”
Charles Schultze, former chairman of the Council of Economic Advisers, makes the point that $20 billion spent on, say, Social Security or unemployment compensation would represent less than 1% of the U.S.’s gross national product. By contrast, the same amount of money if spent on weapons procurement would constitute perhaps as much as 20% of the output of the defense contractors, creating price-boosting jolts that would be magnified many times over as they rippled out into the general economy.
So far, the Reagan Administration has down-played the dark side of its defense buildup. In the economic report of the President, Murray Weidenbaum, chairman of the Council of Economic Advisers, in effect admitted the new dangers but argued that careful planning, tight management and accurate cost estimates could reduce their impact. Yet it is precisely those three qualities that have traditionally been most lacking in defense spending.
In budgeting the nation’s defense dollars this year, the President and Congress must consider not only the national security but also a fragile economy and an industrial base that has been ravaged by inflation and neglect. It will require both sensitivity and restraint to prevent the requirements of defense from tipping the national budget, as well as the economy, in a direction that could prove ruinous.
—By Alexander L. Taylor III. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York
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