Defense Cuts Could Wound The Economy For A Decade

Experts studying the implications of the defense "build-down" in the wake of the cold war have generally been optimistic regarding its long-run economic effects. While acknowledging that some regions and industries face a wrenching readjustment, the consensus view has been that the huge U.S. economy ultimately should be able to take these painful changes in stride.

Nestor E. Terleckyj of the National Planning Assn. disagrees. Writing in the current issue of the npa's quarterly, Looking Ahead, he warns that defense cuts not only may be short-circuiting the current recovery but also could hamper economic growth through the 1990s.

The NPA economist concedes that the economy was able to bounce back nicely in the wake of much larger defense cutbacks after the Korean and Vietnam wars. But he points out the drop in defense outlays during these two earlier periods was offset by healthy growth in the two most dynamic sectors of the economy: consumer durables and fixed investment. By contrast, real outlays in these sectors since 1989 have declined twice as much as defense spending.

That's not all. Terleckyj points out that the largest reductions in both military manpower and defense purchases from the private sector are occurring right now. All told, over 1.2 million defense-related jobs are scheduled to be axed from 1992 through 1994 -- nearly half the cuts projected for the decade.

"The evidence," says Terleckyj, "suggests that defense cutbacks, in the absence of offsetting momentum elsewhere in the economy, are undermining the recovery." Since April of last year, he notes, the jobless rate in the 12 states with the highest dependency on defense-related spending has jumped by 0.6%, compared with a minuscule 0.1% rise in the 18 least defense-dependent states.

Terleckyj says that defense-related jobs have a multiplier of 3.5 (that is, each job indirectly sustains 2.5 non-defense-related jobs). Thus, in a worst-case scenario, he calculates that defense-related layoffs next year alone could eventually cost the economy 1.6 million jobs if employment growth lags in other sectors. Such a dire prospect, though unlikely, says Terleckyj, suggests that policymakers consider adopting more expansionary fiscal policies now to offset coming defense cuts.

"In view of the economy's continued weakness and the accelerated pace of defense reductions," says Terleckyj, "time is of the essence."

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