Disarmament & the Economy
We must release the human imagination in order to open up a new exploration of the alternatives now possible for the human community; we must set forth general and detailed plans, ideas, visions; in brief, programs . . . and make these . . . political issues.
—C. Wright Mills
Let us suppose that we are on the brink of disarmament. Let us suppose that minimum deterrence, pre-emptive strike, counterforce, retaliatory capacity, invulnerability, arms control, escalation, and all the other recondite notions of the cold war have been relegated by our political leaders to the dusty archives of history. Let us suppose that Polaris, Minuteman, and Davy Crockett are about to be turned into plowshares or preserved as curious museum pieces. Then what?
Some say that the result would be nothing short of economic catastrophe. From 1950—1959, $230 billion was spent on weaponry. In 1960, $46 billion of federal money went into defense, atomic energy, and space, and the budget for “fiscal 1964” will provide $54 billion for the same purposes. It is estimated that by 1965 well over three million people will be working in defense-related industries, and another four million will be working directly for the government, either in blue denims or uniforms. The argument that our prosperity—such as it is—can be traced to the stimulus of the cold war, and that the continued viability of our economy depends on preparation for war, thus appears to have a good deal of weight behind it. After all, did it not take a huge war effort to rescue us from the Great Depression? As John P. Lewis, the new member of the Council of Economic Advisers, once said: “Short of World War II, no adequate cure ever emerged or was contrived” to haul the economy out of the doldrums of the 30’s.
Imagine, therefore, the enormity of the economic problem we would face if disarmament were suddenly to emerge as an imminent possibility. At the moment, 6 per cent of the work force is unemployed, and at our skimpy rate of growth, the economy cannot even absorb normal increases in the labor force. How, then, would it be able to provide jobs for the perhaps four million persons who would be released from defense industries and the armed services in the event of disarmament? Many economists even think that the situation would be worse than it appears on the surface. For example, Leo and Betty Fishman, a husband-and-wife team at West Virginia University, suggest that the government, paralyzed by snail-like legislative procedures, would be unable to formulate a quick response and might (as some business troglodytes advocate) use the savings from defense to pay the federal debt. The consequences of this would be dire indeed. Debt repayments would increase the lazy cash of financial institutions and rentiers, and by a well-known Keynesian device called the reverse multiplier, income and employment would tumble head down. Now, suggest the Fishmans, add to the four million already jobless (despite a high-pressure defense effort), another four million released from armament work, plus still another four million discharged because the multiplier is running backward, plus a million newcomers to the labor force, and we are confronted by a total of thirteen million persons facing the same conditions that existed in the 30’s.
There are, to be sure, other economists who argue that this grim picture is overstated and who rather cheerfully believe that no administration would ever become so rigid as to be incapable of reacting to impending doom. No one, however, doubts that the economic problems attendant upon disarmament would be critically serious, and considering that disarmament is one of the stated goals of our foreign policy, it would be reasonable to suppose that top government bureaus and private research organizations in Washington are at this very moment busily engaged in studying these problems. But the sad fact of the matter is that apart from a few private individuals and a single small bureau—the Arms Control and Disarmament Agency—no one has done more than look at the economics of disarmament before turning away either in bemusement or horror.
The RAND Corporation, that den of powerful minds wrapped in their own assumptions, is casually uninterested. The Council of Economic Advisers assures us that it knows what must be done (merely turn a few Keynesian tap valves) and that it anticipates no real difficulty in educating Congress on the issues at stake. The Peace Research Institute, headed by former Ambassador James Wadsworth, concedes that planning for disarmament is important, but it just hasn’t gotten around to it yet. The Institute for Defense Analysis—another RAND-type group—regards the whole question as premature. The Joint Economic Committee staff is aware that grave problems may stem from defense cutbacks, but what can they do when Committee members have other cats to skin? In all of Washington, only ACDA, with its relatively low budget and undermanned research bureau, has issued any sort of report on the consequences of disarmament—and this was prepared by an outsider, Emil Benoit of Columbia University.1 Add a few more articles and studies by Benoit, Seymour Melman (also of Columbia), Kenneth Boulding of Michigan, the “country reports” submitted by other member nations to the UN expert panel on the economics of disarmament, and a London Economist survey, and the list of literature on the subject is virtually complete.
Benoit, Boulding, and Melman have done heroic work in trying to arouse public interest in what could happen in the event of disarmament. The first two writers have been nursemaid and godfather to the Research Program on Economic Adjustments to Disarmament (READ) which recently issued a perceptive and useful symposium on the transition to a complete peace,2and Melman, of course, has been a kind of St. John shouting in the canyons. But there has scarcely been so much as an echo in response. A few private citizens in Connecticut have tried to study the issues: Women Strike for Peace has some local committees at work; the Friends have published one or two brochures; and here and there a major defense contractor has wondered how to penetrate an ordinary comsumer market. In the main, however, the important people simply do not care.
The history of what happened to Senator Hubert Humphrey’s report on the effects of disarmament illustrates the sort of attitude that evidently prevails in high places. As far back as 1961, Humphrey had argued in his special subcommittee on disarmament that a study of adjustment problems was essential. The “enormous unfulfilled demand for commodities and labor shortage as well” after World War II and Korea contrasted sharply, said he, with the “substantially satisfied demand and . . . unemployment” today. Consequently, he canvassed some four hundred manufacturers to determine the plans they might have on their desks for conversion to non-military production. The replies were quite interesting: a fair number of respondents deep in defense work called for “an orderly reduction over a reasonable period of time,” with “extensive government planning to deal with the economic problems of disarmament.” (Of course, it was not clear from the replies whether these companies were prepared to accept directives from a central planning body or merely wanted to shift the cost burden to government.) Interestingly enough, Humphrey’s study also revealed an extraordinary concentration of defense contracts, with four firms reporting over one billion dollars in defense business and eight firms reporting from $500 million to a billion.
Yet the report was suppressed. The official story in Washington is that some of the subcommittee members feared it might be used by Soviet propagandists, although Secretary of Defense McNamara saw nothing awry in it. Senator Symington was disturbed by the chance that the survey might be quoted out of context to “back up the Marxian theory that war production was the reason for the success of capitalism.” Subsequently, both he and Senator Aiken insisted on placing a “confidential” stamp on the document, limiting its publication to 150 copies and burying it so effectively that it is now almost impossible to turn up a copy. Humphrey argued in vain that public understanding of the issues was at stake, that most of the data had been shared with the UN experts in any case, and that a number of copies already were circulating among sundry federal departments and on the Hill. Finally, on October 5th of last year, irritated beyond words at his colleagues’ behavior, Humphrey exploded in the Senate, giving away the major conclusions of the report.
There are, then, several schools of thought on the economics of disarmament. First, we have the uninterested, which includes most of the agencies that ought to be interested. Then there is the self-interest school, which includes certain industrialists who prefer Pentagon projects but are not unwilling to enjoy a slice of arms control and disarmament funds. Senator Humphrey, on the other hand, is a leading spokesman for the “we-can-do-it-but-let’s-not-be-stupid-about-it” group—small, fortunately articulate, and probably making the most sense; here we may include the Melmans, Benoits, and Bouldings. The extreme worriers are typified by the Fishmans. And finally we have the “let’s be rational” school, exemplified by William Royce of the Stanford Research Institute, who argues tautologically that the industries now engaged in making missiles or electronic components will have little difficulty under disarmament if they find something else to do, and who further intimates that since the Russians can’t be trusted to keep an agreement, all planning for disarmament must be predicated on a slow process of transition with phased reductions stretched perhaps over a decade.
The assumption of a phased reduction in arms, while attractive mainly for reasons of Hochpolitik, is on other grounds open to serious question. The London Economist, in its well-documented survey,3 makes a cogent argument for a changeover period lasting no more than two years. The quicker the changeover, says the Economist, the less likelihood of error would there be. Also, rapid disarmament would have a more salutary psychological impact, for the exhilaration of an unarmed peace might generate its own momentum. But most important, what Thomas Schelling calls the “reciprocal fear of a surprise attack” would necessitate a crash program on both sides to prevent the old escalation from starting up again. All this means that planning must be done now, careful planning, both macro- and micro-economic in character.
Apart from everything else, forethought would ease the anxiety voiced by many who still remember the chaos of 1918 and who know that we were only saved from a similar chaos in 1945 by an extraordinary pent-up consumer demand and a population explosion of rare dimensions. The anticipated deflationary impact of reduced federal budgets was obliterated after World War II in an orgy of spending, the likes of which had seldom been witnessed before in human history. Today, however, there is no storage bin of unsatisfied demand; consumer debt, at $61.4 billion, is almost six times what it was in 1947; unemployment is running at the rate of 6 per cent of the civilian labor force; and one-sixth of those working are on part-time hours. And to make matters worse, today’s defense industries, utilizing exotic material and esoteric production systems, are virtually inconvertible coin. When disarmament comes they may simply have to be junked. This is the key problem: today’s defense industries do not manifest the sort of relationship to the rest of the economy that was characteristic of earlier defense and war efforts.
It appears, therefore, that nuclear disarmament involves a new and strange structural situation: conversion will not be a matter of searching for fresh consumer markets. The old task of discovering new work for facilities temporarily diverted is no longer the core of disarmanent adjustments, for time and technology have made the present defense industries less and less transferable to alternative uses. There is one consolation which could ease the reconversion process: our putative affluence might be sufficient to carry the burden, so accustomed have we become to sudden obsolescence. But the people, several millions of them—where would they go? How much human obsolescence can our society bear before it cracks under the strain?
But our story is moving ahead too quickly. The economics of disarmament is divided into three parts: conversion; stabilization; and expansion. The problem of human obsolescence belongs to part three—where growth in the industries comprising the civilian economy would presumably take care of it. First, however, we have to worry about conversion, which means rearranging the commodity mix to satisfy a new kind of public and governmental demand, and next we have to concern ourselves with stabilization, i.e., the prevention of unemployment and deflation. Then, and only then, do we start worrying about expansion and growth.
One way of making a comprehensive study of how resources might be shifted about in the event of disarmament is to construct an input-output table, a device that determines how much of the output of all other industries is needed by every single industry to produce a unit of its own. Such a table can yield a complex statistical matrix showing how men and resources may be moved about in response to a given level of final demand. What would a matrix of this kind reveal about disarmament? The answer, as it happens, has already been given by Wassily Leontief, the originator of input-output analysis, and Marvin Hoffenberg, in the April 1961 issue of Scientific American. Leontief and Hoffenberg argue that the 2,000 workers and 6,000 servicemen who would be released for each $100 million reduction in arms spending could not be totally absorbed by the private business sector. For one thing, reconversion would create its own bottlenecks: if a heavy road-building program were undertaken, for example, cement shortages might delay the effort, while industries once committed to defense (such as electronics) would wither on the vine for lack of sales. In other words, a proper reallocation of resources is a long-run affair, and in the absence of planning, economic deficiencies would plague the body politic. Yet the matrix also revealed that a 20 per cent reduction in military outlays during the first stages of disarmament could increase employment, provided the savings were applied to pressing civilian needs.
However, observations such as these are based on large calculations that can be completely upset by the actions of individual business firms. A few years ago, Seymour Melman asked a number of companies how they were preparing for disarmament. One concern replied that the abolition of defense work would be catastrophic—it obviously had never dreamed that its subsidized sales might one day peter out. An engineering research firm with 25 per cent of its contracts in defense was candid enough to say that it would simply fire 25 per cent of its employees. An electronics manufacturer with half his production geared to the military refused even to weigh the question. And so it went. William Royce, the SRI disarmament expert, has in effect complained that industry can plan only if it knows the direction in which the federal government intends to move—if, that is, it knows something about the proposed curtailment of weapons systems and the programs for space exploration, and knows whether Washington will grant patent protection to new industries stemming from defense work. In short, will the Great Under-writer—as David T. Bazelon calls the federal government—guarantee civilian markets as it has guaranteed military markets? Will there, perhaps, even be lucrative contracts for disarmament itself?
This last possibility is not far-fetched. The capital outlay of a test-ban inspection system has been estimated by Melman at approximately $1.7 billion. An international radar network for disarmament inspection with machines installed on land and ships would cost initially about $10 billion, while annual operating expenditures have been calculated at $600 million. Aerial reconnaissance would require another $420 million. All told, these expenditures might reach well over $12 billion, with $1.5 billion needed each year for maintenance and operation. There is not much here as compared with the arms race, but it is something on which to fall back.
And, indeed, the scent of these dollars has already begun to waft toward the defense companies. Recently Business Week reported that Bendix, Raytheon, and General Telephone and Telegraph were very much interested in the “potentiality of arms-control hardware contracts.” Bendix even went so far in late 1962 as to stage a conference on the subject, and the odd mixture of tough thinkers from RAND, Pentagon officials, academicians, electronics manufacturers, and the first secretary of the Soviet Embassy, led one observer to describe the session as resembling a meeting of Temperance ladies held in a bar.
No doubt contracts for “disarmament hardware” would ease the burden of adjustment, for to judge by one analysis, existing defense industries would have a devil of a time penetrating ordinary civilian markets. James McDonagh and Steven Zimmerman, two young engineers, discovered that in the airframe industry only once in the years between 1950 and 1955 did a major company sell as much as 30 per cent of its product to civilian customers. That, as McDonagh and Zimmerman put it, “the sales and marketing experience of the industry” should “in some respects” be “quite limited,” is not surprising, for defense firms (most of whose industrial capacity stems from government subvention anyway) know how to politic and bargain with one big customer only. And this is not quite the same thing as knowing how to carve out a slice of domestic sales.
Where could the airframe industry—to take it as a representative example—go for non-defense business after disarmament? Commercial aircraft? That would bring in a mere $168 million a year, hardly enough to pay expenses. Prefabricated homes? With a potential of one and a half million units annually, the industry might secure $850 million a year. If there were bridges to build or if rapid transit were revived (a genuine need today), perhaps another $400 million or so a year could be recaptured. Yet even with all of this, only 58 per cent of the airframe industry’s present sales capacity would have been replaced. Thus, assuming a constant relationship between sales and employment, over 200,000 employees would have to be dismissed.
While after World War II many aircraft manufacturers shifted half-heartedly to canoes and power boats and stainless steel caskets and subcontracted for musical instrument manufacturers,4 today firms like General Dynamics, skilled only in high-cost, high-specification operations, would have great difficulty in adapting successfully to big-volume, low-cost, low-quality production. There is little opportunity to apply modern techniques of military production—techniques that require parts to be assembled in dust-free, vibrationless plants with devices constantly tested, temperature and humidity carefully controlled, and precision machinery of the kind achieved only by computer calculations—to normal factory methods. For such concerns today, abolition of the cold war means bitter obsolescence—unless a vast space program, or something like it, were to come to the rescue.
Of course, from a purely economic standpoint, the disappearance of these industries would not be a great calamity. There technology is so special and esoteric that the income they create in other sectors of the economy—the Keynesian multiplier—is considerably less than the amount that stems from the old-line industries. Leontief has estimated that about $42 billion of direct military purchases in 1958 generated another $44 billion of indirect demand—a multiplier of 2. But meanwhile, the arms mix undergoes rapid change, and with virtually every alteration in defense strategy (from surface weapons to missiles, from airframes to electronics, from simple logistics to complex “subsystems”), the capital share in military spending goes down; it has indeed moved from about 75 per cent in 1951 to 47 per cent today. In consequence, the defense industry multiplier is probably a good deal less than 2 by now.
A further result of the stress on these exotic industries has been the loss of overseas hard-goods markets—machine tools, for example. Moreover, the distorted geographical distribution of defense contracts has influenced the pattern of industrial location in ways that could, in the absence of advance planning, easily result in chaos when cutbacks occur. Many towns in the South rely almost exclusively on military installations—what would happen to Cape Canaveral if disarmament came? In Los Angeles almost 200,000 workers draw pay checks from three aircraft companies. In Wichita, 72 per cent of the work force is employed in making planes and missiles. In the states of Kansas, Washington, California, Connecticut, and Arizona, anywhere from 20 to 30 per cent of manufacturing employment is in ordnance, electronics, aircraft, missiles, and ships—the leading industries in the military-space complex. Disarmament without planning would unquestionably leave many localities in these areas as destitute as a ghost town in a Western movie.
The National Aeronautics and Space Administration has been admonished several times by Congress to spread its share of the business, but most of it still flows to the West Coast. Of the $2.7 billion NASA spent in fiscal ’63, California received 30 per cent, while 28 per cent went to three southern states, and only one per cent to all of New England. The Pentagon explains—and with some justice—that its contracts must be placed where prior investment had been made in research and where the higher skills for the new weaponry can be found. Thus, the increasing need for technical competence and scientific components intensifies the insulation of the defense sector from the rest of the economy. This, perhaps more than any other single factor, has impeded genuine growth.
In a recent Harvard Business Review article,5 Robert Solo of the National Planning Association demonstrated that since 1920 research and development expenditures have increased at a phenomenal rate, rising 400 per cent in relation to national income, while output per man-hour in the economy as a whole has steadily hovered around the old norm of a 2 to 4 per cent gain per annum. Hence, he argued, not only has there been no perceptible relationship between R&D and economic growth, but the latter may have been inhibited by just the sort of research demanded by the military. Missiles and shooting for the moon may heighten our sense of international prestige, but they add little to the ordinary goods and services needed by an expanding population. Even worse, defense and space research is a parasite on the rest of the economy, for it feeds upon some of the best talents of society. The old-fashioned scientist who might have invented a gadget that could increase output per capita is now an engineer on a team project constructing a component for the trigger of a space vehicle.
Military technology, in short, has moved farther and farther away from industrial research, to the point where the possibility of communication between them has all but disappeared. How, asks Solo, can such skills as preparing a research proposal or designing space instruments or planning “component development” be transferred to production for civilian markets? Of course, there have been some cases of successful transfer, as with PERT—a computer system—and Telstar. But these are exceptional. There are few, if any, civilian counterparts for nuclear warheads, supersonic planes, and the rare materials that go into spaceships. The very habits of the scientists and engineers involved are wrong for civilian production. They are concerned only with performance—“tell the front office to worry about cost”—and they are accustomed to producing prototypes of machines while eschewing standardized methods. The inescapable conclusion is that spill-over from defense to civilian life is almost non-existent.
We pay a rather handsome price for this strange non-Keynesian situation. The military budget in fiscal ’63 was $51 billion; for fiscal ’64 it has been set at $54 billion. The research and development share, though only 8 per cent of the total, is essential to the whole complex. The development of weapons systems takes three-fourths of military R&D funds, while research in engineering, physics, biology, and the like absorb the balance. Not surprisingly, the scientific community has become utterly dependent on government largesse; in 1961, over 75 per cent of electronics scientists and engineers were working on projects paid for by the federal government.
What can happen when sudden cutbacks are made without proper planning was brought home vividly when the Skybolt missile was eliminated from our arsenal not long ago. Douglas Aircraft, the prime contractor for this weapon, dismissed about 4,000 workers, and another 5,000 jobs being supplied by subcontractors were placed in jeopardy. Yet all Douglas could think of to do was protest the Defense Department’s decision, arguing that Skybolt should be kept on because it would save billions in taxes by extending the life of the B-32 bomber and Britain’s Vulcan II.6
Few of the companies working on missiles and communications meet contract cancellations with anything more than public hand-wringing and telegrams to their senators. Sometimes they get a Congressional investigation started. Meanwhile, the workers are sent packing to the unemployment insurance offices. In 1957, for example, the Navajo missile was abruptly removed from the Pentagon’s weapons arsenal and two days later some 10,000 persons had to scrounge for other jobs as some $680 million went down the drain. Similarly with Regulus II, a submarine missile; the boron high-energy fuel for supersonic jets; the P6M Seamaster jet seaplane; and the atomic-powered airplane, shelved after a decade’s work. The psychological and economic shock to the communities involved has finally set the Pentagon to thinking about the “potential economic impact of procurement efficiencies,” and unofficial hints are now going out to localities unduly dependent on federal contracts.
The burden of planning the changeover, then, goes by default as well as necessity to the federal government. Nevertheless, there are business diehards who still insist on laissez-faire. Richard Raymond, a General Electric spokesman, urges reliance on the free market with “bold risk decisions to take advantage of conversion opportunities as they arise,” without grasping the rather elementary notion that government may have to create such opportunities. The Magazine of Wall Street proposes a National Reconversion Committee comprised of leading business and retired executives to arrest the onslaught of government zealots. About the millions of Americans who live in abject poverty, and who can only be helped by massive outlays of monies for public needs, such ideologues have nothing to say. Yet the two documents mentioned above that were prepared under the aegis of the Arms Control and Disarmament Agency, by revealing the usual backlog of starved public services, indicate what might be substituted for arms. Housing could absorb $33 billion over a period of years; mass transit might account for $9 billion over the next decade; and resource development $8 billion a year. At least $10 billion a year could be used to improve the educational system. Additional expenditures for health services, better social security schemes, retraining and relocation, area redevelopment, and adequate foreign aid would take care of the rest (and without rushing into space); in fact, the total could easily pass what is now spent by the Pentagon, NASA, and the AEC.
But how does one venture upon these programs? What are the specifics? At what points in the economy do we mark off the starting lines? Difficult as it seems, the problem is not intractable, for there are institutions and organizations in our society which could be utilized to initiate the new peace. Public corporations such as TVA, local housing authorities, state road commissions, and urban renewal agencies—all could be put to work the moment a disarmament agreement were signed. Despite the acknowledged deficiencies of some of these bodies, their accomplishments might be surprising enough to make us ashamed of the neglect they have had to bear while we have been wrangling our way to the edge of extinction.
All this, to be sure, could only take place in what economists call a proper fiscal environment, which means an environment created by tax cuts and budget deficits. But these would have to be of sizable proportions—much larger than the piddling sums of the present tax and budget program—to correct the combined effects of defense cutbacks and a stumbling economy. The tax cut alone ought at the very least to be $10 billion in the first year of disarmament; with the dual multiplier-accelerator evaluated at 3.7, this would probably yield $37 billion in GNP, enough to initiate the readjustment process with ease.7 However, since in a lagging private sector accumulated idle capacity tends to impose restraints on any exuberance stemming from fiscal maneuvers, the tax cut might have to be substantially larger than $10 billion to do an adequate job.
Disarmament, then, need not result in economic catastrophe: the necessary economic knowledge is at hand for dealing with the problems that would arise. What remains to be created is a sense of urgency in high places over the need to prepare now, and an awareness throughout our society that with proper planning and forethought, disarmament would be an economic contingency to be welcomed, not a disaster to be feared.
1 In addition, the ACDA has published the American reply to a UN inquiry on the effects of disarmament, a rather detailed memorandum which was included in the UN disarmament experts’ report of February, 1962.
2 Emile Benoit and Kenneth F. Boulding, editors, Disarmament and the Economy, published this month by Harper & Row.
3 Economist Intelligence Unit, The Economic Effects of Disarmament, 208 pp., $5.00. Available from the University of Toronto Press.
4 Some companies were helped by relying on such gimmicks as loss carrybacks to offset past taxes, which enabled them to latch on to more profitable firms—once again the government became an underwriter.
5 November-December 1962.
6 The idea of trying short-range commercial jets did occur to Douglas as well, but typically it was a year behind the British Aircraft Corporation which already had been selling them to American airlines.
7 The multiplier indicates how much new GNP will stem from a given amount of investment; the accelerator measures the response of investment to additional consumer spending. These processes are, of course, interrelated; the Joint Economic Committee recently estimated the multiplier at 2.5 and the accelerator at 1.2.