(3 of 4)
The biggest single item in Reagan's 1982 defense budget is $2.4 billion for development of the MX missile, the new mobile intercontinental ballistic weapon. Prime contractors include Martin Marietta, TRW, Rockwell International and Boeing. Construction has so far been delayed because the Reagan Administration wants to review whether the weapon should be based on land, in submarines or, incredibly, in dirigibles.
The largest new weapons system in the Reagan defense plan will be the $25 billion program to develop and build a new manned bomber to replace the vintage B-52s. Three and a half years ago, President Carter killed plans for such a plane, when he scrapped the B1, which was being built by Rockwell International. But the company will be back in the bidding for the new bomber with a modified design of the B1, now renamed the LRCA for Long Range Combat Aircraft. The Air Force is also considering a stretched version of the General Dynamics FB-111, a swing-wing bomber that can fly at twice the speed of sound and would cost approximately half as much as the B1.
The surge in new defense contracts will place a heavy strain on an industry that has been coasting along in second gear since the end of the Viet Nam War. Most companies cut payrolls sharply during the late '70s, and they now face shortages of both experienced aerospace engineers and blue-collar employees, including skilled production-line workers and tool-and diemakers. Says Hugh Johnson, vice president of First Albany Corp., a New York brokerage firm specializing in the defense industry: "Labor is going to be a real problem. Conservatively, the shortage of engineers ranges between 15% and 20%."
Even though contractors are spiritedly jousting for new contracts, manufacturing facilities will be strained to meet demand. A House Armed Services Committee report last year concluded that the "defense industrial base has deteriorated and is in danger of further deterioration in coming years." It warned that without the addition of new facilities, the U.S. will be "attempting the impossible: the re-establishment of a first-rate military force on a second-rate industrial base." John Richardson, president of Hughes Aircraft, admits: "The defense industry will be hard pressed because of shortages of critical materials and a declining network of industry suppliers."
Many economists have long considered defense spending inflationary because it increases incomes and demand in the economy without enlarging the supply of goods and services. Military expenditures also absorb capital investment that might have been used to increase productivity in other areas of the economy. The Viet Nam War, for example, is generally blamed for starting the current 15-year-long bout with inflation.
Budget Director David Stockman insists, however, there will be no repetition of that this time. He argues that the outbreak of inflation in the 1960s was caused by the combination of Great Society spending programs, Viet Nam War expenditures and the absence of a tax increase. As long as other Government spending is sharply reduced, Stockman maintains, the increased Pentagon expenditures should not add to price problems.