Defense Spending in the 1990's - the Effect of Deeper Cuts

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Defense spending in the 1990's-- the effect of deeper cuts

In recent years, the United States has placed a strong emphasis on military preparedness and development of future weapons systems. Real defense spending climbed from $159.2 billion in 1977 to $265.2 billion in 1987, increasing the Defense Department's share of real gross national product (GNP) from 5.4 percent to almost 7 percent. The rise in defense spending as a proportion of overall Federal purchases of goods and services was even more striking, jumping from 68.7 percent in 1977 to 78.1 percent by 1987.

Combined with continuing pressure to ease the Federal budget deficit, the thaw in East-West relations and the startling political changes in Eastern Europe have led to widespread discussion of defense cuts. This arcticle offers two new scenarios for defense spending based on the moderate-growth version of the Outlook 2000 economic projections, issued by the Bureau of Labor Statistics last fall. (1)

The first scenario envisions an annual reduction of 4 percent in real defense outlays from 1989 to 2000. The second scenario assumes that defense spending will remain constant (in 1982) dollars). Five alternatives to the first scenario-- low-defense--are set forth, and three to the second scenario--high defense.

This analysis also examines detailed industry and occupational employment projections under three of the new defense alternatives. Finally, the effects of spending less on conventional arms or less on highly sophisticated weapons are assessed.

The earlier Outlook 2000 projections had assumed that defense purchases of goods and services, stated in 1982 dollars, would decline at an average annual rate of 1.3 percent, from $262 billion in 1988 to $225 billion in 2000-- an overall decrease of about 14 percent. As part of the spending decline, it was projected that the level of military forces would drop from 2.1 million to 1.9 million, Defense Department civilian employees by 14,000, and private defense-related employment by just over 1 million jobs between 1988 and 2000:

Most of the employment decline was in the private sector because, for the most part, the cuts were assumed to be accomplished by trimming purchases of goods or services, rather than by cutting the armed forces or civilian defense employment.

The increases in defense spending over the 1977-86 period occurred primarily in the areas of research and development and in material purchases. Defense Department civilian employment increased slightly during the 1980's. For the reason, most of the declines that BLS assumed for the 1990's occur not in direct employment levels (either military or civilian) but in material purchases. The effect of this cost-cutting on private sector employment is exacerbated by the fact that may of the largest spending cuts were expected to occur in manufacturing industries with projected high productivity growth:

As shown, three-fifths of the drop is attributed to lower defense spending, but over one-third is projected to result from productivity--output per hour--increases.

In 1988, 2.9 percent of total private wage and salary employment was estimated to be related to defense expenditures. (2) The estimate includes both direct defense expenditures, such as purchases of aircraft or supplies, and indirect expenditures, such as employment generated by purchases made by defense suppliers. By the year 2000, total defense-related employment was projected to decline by one-third, and, as a consequence, would be only 1.7 percent of total private wage and salary employment. Nearly 60 percent of this decline was projected in manufacturing.

The real spending cutbacks had the effect of changing defense spending from 6.6-percent share of GNP in 1988 to a projected 4.3-percent share by 2000, the lowest proportion since 1980, when defense spending accounted for only 5.1 percent of production. …