Is a Peace Deficit Ahead? without Funds Dedicated to Work and Research, Human and Physical Capital Released by Defense Cuts Will Lie Idle

By Ann Markusen. Ann Markusen is director of the Project on Regional and industrial Economics co-, with Joel Yudken, of "Dismantling the Cold War Economy. " | The Christian Science Monitor, April 24, 1992 | Go to article overview

Is a Peace Deficit Ahead? without Funds Dedicated to Work and Research, Human and Physical Capital Released by Defense Cuts Will Lie Idle


Ann Markusen. Ann Markusen is director of the Project on Regional and industrial Economics co-, with Joel Yudken, of "Dismantling the Cold War Economy. ", The Christian Science Monitor


MANY eyes are trained on the defense cuts to be debated in Washington this season. Some are hopeful that budget savings will fund badly needed infrastructure upgrading, new initiatives in environment and health, and the rising costs of a recession-triggered safety net. Others would use the projected peace dividend to lower the deficit, hoping that associated lower interest rates will reinvigorate investment.

But the bad news is that there may not be a peace dividend. Given the timing of these cuts, and depending upon how they are managed by government, the withdrawal of billions in federal expenditure on weapons and personnel could aggravate the current deficit problem by cutting deeply into tax revenues and triggering yet higher claims on publicly-funded safety nets.

Past differences in posture toward the dawning of peace are suggestive. Post-World War II adjustment had been planned since 1943. Government offered generous incentives to companies to retool and provided returning soldiers with the GI bill. Although military spending as a percent of GNP plunged from 39 percent to 3 percent, unemployment reached only 4 percent, far below the 15 percent of 1940. Almost 25 million workers, soldiers, and civilian defense employees were reabsorbed into the economy.

In contrast, the economy suffered recessions after both Korea and Vietnam. Government cut real spending by 10 percent between 1954 and 1957. Because no adjustment programs were in place, unemployment rose to almost 7 percent.

After Vietnam, Richard Nixon rejected Lyndon Johnson's plans for compensatory fiscal policies, and as the economy dipped sharply into 1970-71 recession, the jobless rate almost doubled.

The extent to which the prosperity of the 1980s was hitched to defense spending is not well understood. From 1980 through 1987, the defense budget climbed 42 percent in real terms, an unprecedented peacetime buildup.

Military outlays are more potent stimuli than other types of government or personal expenditure. Reagan-era spending was heavily skewed toward procurement and R&D contracts. The manufacturing sector got a big boost: Fully 57 percent of all private-sector defense-generated employment is in manufacturing, compared to only 17 percent in the economy at large.

Furthermore, ordering weapons systems kept dollar flows in the United States. The Pentagon "buys America," requiring high domestic content and paying for the construction of new plants if no domestic suppliers exist. Less of the defense dollar leaks out of the economy in the form of imports, and thus more domestic jobs and income are generated. …

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