TIME: Almanac 1993/TIME Almanac 1993.iso/time/021290/02121017.000

Text File | 1992-08-28 | 5.8 KB | 120 lines

                                                                                NATION, Page 22

The Peace Dividend: Myth and Reality


By RICHARD HORNIK


    When Isaiah prophesied that warriors would "beat their
swords into plowshares and their spears into pruning hooks,"
he did not add that a peace dividend would follow, at least in
the sense that Congress is eagerly anticipating. If the
Pentagon budget were cut in half, defense spending would fall
to about 3% of the gross national product. At that level,
military spending would practically cease to have a significant
impact on the overall economy, and $150 billion a year would
be freed for other uses.

    Some latter-day prophets, pointing to the boom that
accompanied Ronald Reagan's military buildup, might argue that
such cuts are not necessarily a good thing. Socialists have
asserted that capitalism thrives by creating a permanent
wartime economy. Will the U.S. economy slow down as Rockwell
shifts from producing the B-1 bomber to making flight-control
systems for commercial airliners?

    But a peace-driven boom or bust is not likely: as
demobilizations go, the newest one will be relatively puny,
even if Congress can persuade the Administration to try
something bolder than the 2.6% cut Defense Secretary Cheney
proposed last week. In 1945 almost two-fifths (39.1%) of the
American economy was devoted to winning World War II. Three
years later, U.S. military spending had dropped to just 3.7%
of gross national product, leading to a huge infusion of $68
billion into the postwar economy. The savings that followed the
Korean War (military spending dropped from 14.4% of GNP in 1953
to 10.4% in 1958) and the Viet Nam War (from 9.6% in 1968 to
4.8% in 1978) also involved a far larger proportion of the U.S.
economy than anything contemplated for the post-cold war
period.

    In fact, the U.S. has been enjoying a minor peace dividend
since 1986, when the Reagan buildup topped off at 6.5% of GNP,
and even that was a relatively modest level by wartime
standards. This year defense's share of the economy is 5.5%.
"The military burden, although significant, has been far from
overwhelming," says Murray Weidenbaum, director of the Center
for the Study of American Business in St. Louis. "The
reductions now contemplated would be merely an acceleration of
that negativesloping trend line."

    The easiest part of a slowdown will be converting soldiers
into workers. An economy that has produced 20 million jobs in
the past decade could absorb a massive demobilization, even if
it meant cutting the armed forces in half by eventually
releasing 1 million service members into the work force.
Certain firms and regions would certainly feel the hardship of
a defense slowdown, like the Boston area, with its
concentration of Pentagon suppliers such as Raytheon,
manufacturer of the Sidewinder missile; Long Island, with
Grumman, builder of the soon-to-be killed F-14 fighter; and
Kings Bay in south Georgia, where ballistic-missile submarines
are based. But the Government could soften the blow through job
retraining and other social and tax programs. Overall, American
productivity might benefit if military contractors competed
more for civilian customers and less for Government programs
with built-in profits.

    Special-interest groups are already lined up to grab
whatever savings result from defense cuts. Supply-siders will
argue for more tax reductions. Others will want to spend more
on the homeless, education or the war on drugs. States and
local jurisdictions are bidding for repairs in the country's
deteriorating infrastructure: roads and bridges, mass transit,
pollution-abatement facilities. A good case can be made for
increased foreign aid so that America's global position will
not shrink along with its military.

    The best possible use for any peace dividend is reduction
of the federal budget deficit. That might begin to restore the
U.S. economy to the good health it will need to compete with
Japan, the emerging European dynamo and increasingly vigorous
Asian countries like Taiwan and South Korea. America's abysmal
private saving rate (about 6% of GNP, vs. 16% for Japan) is not
sufficient to provide capital for private-sector investment,
particularly if Washington continues borrowing half the savings
to finance the federal deficit. Devoting the bulk of future
defense savings to erasing the deficit would be fitting, since
much of the Government's red ink stems from Reagan's sharp
military buildup.

    A reduction of the deficit would have a number of subtle but
important effects. Roger E. Brinner, chief economist of the
forecasting firm DRI/McGraw-Hill, projects that the lower
interest rates that would result from a smaller deficit could
produce a modest budget surplus by the end of the century, when
coupled with reduced defense spending. Economists believe that
lower interest rates would encourage productive domestic
investment, make U.S. businesses more competitive and thus help
reduce the trade deficit. Using only half that dreamed-of $150
billion peace dividend in the year 2000 for deficit reduction
would still boost the economy while allowing modest increases
in social and infrastructure spending.

    Despite America's fiscal recklessness in the 1980s, the
sudden end of the cold war has provided the nation at least a
modest opportunity to improve its economic health without
raising taxes or cutting already anemic social spending. The
nation has wasted such opportunities in the past, notably after
Viet Nam. It could all too easily squander its savings again.
Washington should provide leadership on this issue, not pliancy
to every special-interest group. The worst outcome would be for
the U.S. to beat its swords into more credit cards.