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Diverting Pentagon Money to Boost U.S. Competitiveness

The Cold War's demise is spurring new thinking about long-term solutions for this country's ailing economy.

Now that the public euphoria over the end of Soviet communism has subsided, a grimmer reality has become apparent here at home: Many years of bloated Pentagon budgets have exacted a heavy toll on America's economic health and competitiveness. While the United States has been spending a smaller percentage of its gross national product on government programs for education, roads, worker retraining and civilian research and development, its chief economic rivals, Japan and West Germany, have been boosting expenditures in these areas.

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The neglect of America's cities and poor has also been clear, as the Los Angeles riots showed.

But now a growing number of economists, members of Congress and former Pentagon officials say the United States has a unique opportunity to regain its economic strength by slashing the Pentagon budget by as much as 50 percent during the next decade and channeling much of the savings into programs to revive the country's competitiveness.

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Recently, for example, a group of 60 distinguished economists, including six Nobel Prize winners, urged that at least $50 billion a year in federal assistance should be given to state and local governments for long-neglected education and infrastructure needs. The economists noted that this kind of economic stimulus is urgent in the short run to spur a strong recovery from the recession, and in the long run to help boost the nation's lagging productivity and growth in income.

"Everyone agrees that the remedy for the long-run problem is more investment: in people, in infrastructure, in technology and in machinery," the economists said. The group suggested that the deficit could be expanded further to finance this program until the recession has ended, and that cuts in defense spending and higher taxes after a recovery is under way could be used to continue this federal assistance for several years.

This message is catching on in Congress. A few leading Democrats, including Sens. Edward Kennedy, James Sasser and Paul Sarbanes, have called for defense cuts roughly three times higher than the $44 billion that President Bush has proposed over the next five years. Their proposals call for using these funds for a broad variety of infrastructure and civilian research and development programs to spur long-run economic growth.

Likewise, Sen. Barbara Mikulski, D-Md., recently called for creating the environmental equivalent of the Pentagon's Defense Advanced Research Projects Agency, which has pioneered advanced defense research. Ms. Mikulski's call was prompted by the fact that the United States is now spending $75 billion annually to dispose of waste -- five times what the Japanese spend.

She also noted that while Germany spends 20 percent of its R&D; funds on defense, and Japan just 10 percent, the United States still spends some 60 percent of its R&D; money on Pentagon projects.

These concerns are hardly new.

More than two years ago in an open letter to Congress, 327 economists warned that the United States faced long-term economic problems because of a "third deficit," the paucity of public spending for economic infrastructure and human capital that are essential for a country's growth. They warned that this deficit will have a "crippling effect on America's future economic competitiveness."

Ominously, the letter went on to note that in the 1980s federal spending on science and civilian technologies was well below expenditures in the 1960s and 70s. Overall, federal public investment spending declined from 3 percent of the gross national product in 1978 to 1.8 percent in 1989. While the difference may seem negligible, an extra 12 percent in 1990 for public investment could have meant $65 billion more for programs to spur economic growth.

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Lester Thurow, the MIT economist, underscored the point clearly at a conference sponsored by the Economic Policy Institute in Washington. Think about what the rest of the world is trying to do connecting cities that are close to each other," he said. "The Japanese have their bullet train (that goes) 120 miles per hour. The French have the TGV that tested at 170 mph. The Germans have just put in a new high-speed rail link; it tested at 240 mph. . . . The fastest train in America goes slower today than the fastest train in America did in 1895."

And Jeff Faux, an economist and president of the Economic Policy Institute, noted in Congressional testimony in February that "a transportation infrastructure program should be aimed at the technology of the 21st century, such as high-speed rail transportation, electric cars, automated highways, vertical lift aircraft, etc."

More broadly, Mr. Faux said that each dollar spent on public infrastructure investment typically boosts private investment by 45 cents.

The crucial role that public investment plays in stimulating long-term growth including private investment has been underscored in recent studies by government economists. Alicia Munnell, chief economist at the Federal Reserve Bank in Boston, recently wrote that the drop in labor productivity has not been due to a "decline in the growth of some mystical concept of labor production or technical progress. Rather it has been due to a decline in the growth of public infrastructure."

Consider the changes in funds from public and private sources for civilian research and development. In 1978, the U.S. spent 1.6 percent of its gross national product on civilian research and development, while Japan spent 2.0 percent and West Germany 2.1 percent. But by 1988, the U.S. was spending only 1.9 of its GNP on civilian research and development, while Japan had upped its share to 2.9 percent and West Germany to 2.7 percent. The main culprit in the slower growth rate in the U.S. was federal spending for civilian research and development, which fell during these years from 0.6 percent of GNP to 0.4 percent.

Studies also show that the U.S. has fallen further behind in spending on education at a time when we can ill afford to lose ground. The U.S. ranked 14th out of 16 industrialized nations in spending on education from kindergarten through high school, according to a 1990 study by the Economic Policy Institute. Equally dismaying, federal spending for education and training programs has fallen in recent years, despite the increasing importance of them for America's economic health. From 1966-1975, federal spending on education and training averaged percent of GNP, but in the years 1982-1993, spending on these areas is projected to average 0.5 percent of GNP.

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"The irony is that we're funding our competition," says Rep. Barney Frank, D-Mass., who notes sadly that while the United States has been spending about 6 percent of its GNP on military goods, Japan spends only about 1 percent. "I think we can cut the military and intelligence budgets in half and still be the strongest nation in the world."

To facilitate the transition to a post-Cold War economy, comprehensive programs for defense conversion are urgently needed to ease the pain for workers, communities and businesses. Sen. David Pryor, D-Ark., has proposed as part of this year's defense authorization bill a $1.2 billion package of short- and long-term assistance for conversion efforts. He has also criticized the Bush administration for trying to eliminate the Commerce Department unit that provides adjustment aid.

"The government has a duty to help find a cure for defense dependence," says Mr. Pryor, who chairs a 21-member Senate task force on conversion. In May, that group called for several measures to retrain workers, to assist defense firms in switching to civilian work and to aid communities hurt by defense cuts.

The House defense authorization bill for fiscal 1993, passed last month, contained $1 billion for similar conversion programs.

Senate Majority Leader George Mitchell, D-Maine, told reporters, should be unacceptable to Americans that their government has a plan to help convert the economy of the Soviet Union from defense production to civilian production and has no comparable plan in our own country."

Peter H. Stone is a Washington reporter for Legal Times who writes on business and economic issues.



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