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Don’t Just Cut the Defense Budget With Laissez-Faire Economic Policy

The Pentagon and the Fiscal Cliff

by JONATHAN M. FELDMAN

Progressive and left leading economists have proposed military budget cutbacks,  increased taxes and closing loop holes as ways to reduce the deficit.  The problem with the first proposal is that it often is not accompanied by proposals to create civilian alternatives for defense firms.  Does the left seriously think that the defense firms will “say uncle” and allow their budgets to be cut without a serious fight?  And if they are forced to “say uncle,” does the left believe that laissez-faire solutions will work and that defense firms can manage the transition as easily on their own as they could without some kind of planning effort involving the government?

Defense firms are part of an alliance with the Congress, parts of the government, and their suppliers, i.e. the military-industrial complex, that also involves universities, members of Congress, and other key actors, like “defense intellectuals” in various think tanks.  This large scale constituency is well positioned to fight cutbacks. Moreover, there are many defense-dependent regions and local communities which would be hurt by military budget cuts in the absence of civilian alternatives to lost jobs and economic activity.

Why Cutting the Military Budget Without Civilian Planning is Insufficient

Consider a few problems.  First, many companies are highly defense dependent and require assistance or prodding to go into civilian markets.  For example, companies like Lockheed-Martin and Nortrop-Grumman are about 80 percent or more defense dependent.  These companies have engineers and managers who are usually oriented to serving the military markets and military designs rather than meeting civilian requirements.

Second, defense firms and communities are now mobilizing politically to oppose cuts, i.e. there is the threat of a political backlash.  This backlash was part of Romney’s political campaign (corresponding to real interests in fighting military cuts).  Although Romney was not successful in convincing the majority of Virginia’s voters, despite using the argument about military cutbacks hitting that state.  Consider this report from a few months ago: “Lockheed Martin’s vice president for legislative affairs, Greg Walters,recently announced that if the $500 billion in automatic cuts to defense spending mandated by last year’s ‘supercommittee’ budget deal go through as planned, it may have to issue layoff notices to the ‘vast majority’ of its 123,000 employees.”  Perhaps that is just corporate propaganda, but it certainly contains more than a grain of truth. It’s not a secret that the U.S. spends hundreds of billions of dollars on the military and that this creates thousands of jobs.

Third, if cutbacks are made without civilian alternatives for firms and military-dependent communities, hundreds of thousands of jobs could be lost.  For example, one claim (which might be exaggerated) is that Florida could lose as many as 80,000 jobs.  Some news reports addressed the possibility that thousands of the Pentagon’s civilian employees could lose their jobs.  One report in September cited an estimate that claimed that defense cuts in Tennessee could lead to a “$809 million cut in the state’s gross domestic product.”  Let’s assume that civilian investment creates more jobs than a defense investment.  What if the civilian investment projected does not materialize to match the defense investment?  We need to consider the opportunity cost represented by lost capacity at closed plants, i.e. the failure to make useful things like wind mills, mass transit, and other new technologies at defense firms that simply junk, mothball or sell off industrial and engineering capacities.

As a result of these considerations, we need to develop civilian alternatives for defense-serving firms and communities.  This can occur by providing civilian budget investments and R&D contracts for defense firms to bid on so that they have the possibility of making new products and services.  Conversion involves advance notification, teaming with civilian counterparts, lowering overheads, relocation assistance, income subsidies for key workers, green procurement budgets, and training in diversification processes, as well as some supplemental teaming with civilian capacities.

What are the Benefits of Military-to-Civilian Conversion?

There are several benefits of a plan to support conversion and diversification of defense firms (the two concepts are similar, but not identical).

First, peace groups, environmentalists and lobbyists for defense cuts can win allies in trade unions and some companies (probably lower-tier firms because the big ones want to argue at this point that conversion is not even possible).

Second, defense firms can be turned into wealth generators rather than tax absorbers.  By making useful products they can generate incomes and profits that can be taxed, rather than absorb tax revenue by making weapons. These tax revenues could better fight the budget deficit than mothballed and closed down plants. Want evidence?  Just look at Detroit’s fiscal difficulties created by deindustrialization.  Consider the jobs that would have been lost if an industrial policy did not save GM and Chrysler.  Could this industrial policy have been more ecologically-minded and fought for a greener alternative to what was produced? Yes!  But no one took up that fight in any serious way.  A forthcoming report considers a plan to support a more ecological industrial policy for Michigan.  The US imports a lot of its mass transit products.  Here is a place where defense firms (properly teamed with civilian firms expert in mass transit) could convert to more useful activity.

Third, defense firms have a large share of the domestically-anchored manufacturing and advanced engineering capacity that still exists in the United States. Losing this capacity is a huge opportunity cost.  Converting the capacity is a net gain for producing green products and services.  Even states like Michigan known for civilian manufacturing have a significant share of defense production. That defense capacity helps stabilize the state’s industrial base whether we like it or not. If you don’t like it, then support conversion of defense firms not laissez-faire economic ideas.

Fourth, if defense firms are successful in converting, they could create domestically-anchored high quality jobs, contribute to the U.S. export machine, and thereby support higher living standards and lower the trade deficit.  The alternative, low growth and depression, eventually will promote a right-wing backlash or a steady state consensus which does not make the proactive investments in a green infrastructure and technology necessary to stave off ecocide.

Why are the Counter-Arguments Weak?

There are  many objections that can be raised to economic conversion planning to support civilian activity in defense firms backed by civilian government investments.

First, won’t money invested in defense firms for conversion contribute to the deficit?  Yes, they might in the short-run, but if the U.S. loses further its advanced engineering and manufacturing capacity, then it will soon head the way of Greece, a country largely unable to quickly generate domestically-anchored wealth.

Second, won’t defense firms fail in conversion and diversification.  Yes, if they do it the wrong way.  No, if they do it the right way (then they will have a fighting chance to succeed).  The research on how to do it the right way is extensive.  The problem is that many scholars and policy makers refuse to read the documentation (see this link and Appendix 1 below for citations).  This research shows that some firms succeed and others fail at conversion, but we know the reasons for success and failure.  Yet, we have not adopted and fought for the success formula.

Third, can’t defense firms simply export more weapons rather than convert?  Well the global recession limits the customer base found in many countries.  Japan and China might militarize further, but won’t they do it with more domestic (as opposed to U.S.) components?   Besides furthering weapons sales contributes to the cycle of violence, limited trade, and is ethically problematic.  We have to fight for conversion to limit global arms exports.  If the U.S. arms nations, contributes to their military waste, then this could crowd out civilian sales coming from  defense firms converting to civilian markets and based in the U.S.

Finally, why should this one sector be helped over and above other sectors?  The answer is simple. Defense firms are strategic assets and different from other firms and warrant special treatment because of their manufacturing capacity, engineering capacity and presence as often domestic anchors at the regional and national scales.  The high degree of specialization and often inflexibility of these firms is yet another reason why these are strategic industries.

Support the economic conversion of defense firms by writing your Congressperson, mayor, local elected official and newspaper.  Send them this link.  Get them informed!  Don’t reward laissez-faire, do-nothing solutions that will further weaken the U.S. economy and the suffering of depressed living standards and the loss of production capacity to produce needed green products and services!  Make this part of your NGO or social movement’s agenda.

Appendix 1: Defense Firms Can Diversify if They Do It Right

Recent claims made in Forbes that defense firms won’t diversity are misleading. The right question is: What does the United States need to do to enhance its economic and strategic security? More soft power, more alternative energy and mass transportation, more wealth producing activities that relate to these through green manufacturing, etc. Less hard power and military hardware and less cycle of violence military campaigns in the Middle East.  What did the Forbes article fail to consider?

First, ironically Defense News showed on April 14, 2012 the empirical data that debunks the premise in “Companies Turn Toward Diversification,” mentioned General Dynamics and their acquisition of Vangent.

Second, the long term political horizon does not look good for defense budgets in the sense that both the T-Party and the Occupy Wall Street movements have argued for military budget cuts. Of course, a new crisis is possible that would trigger more defense spending, but the U.S. military budget seems to be increasingly paid by unsustainable Japanese and Chinese debt. How long can debt-driven defense spending go on without a major economic crisis triggering military budget cuts?

Third, it is partly irrelevant that “skills are fungible, behaviors aren’t.” When defense firms or military-serving divisions have been forced to change behavior with the correct managerial group, then they have sometimes done so. The idea that diversification was “unblemished by success” is totally wrong, factual incorrect and the counterexamples have simply been ignored, see for example my write up about how Boeing Vertol learned to make subway cars (cited below). Of course, the incentives for making helicopters was greater than subways, but that is not a behavior issue, that is a question of market signals. For why those might change, see above.

Fourth, not all defense investors hate diversification, as the Defense News article points out. Most firms would choose survival over suicide. Some diversifications have been very successful, whether or not defense analysts want to be honest about it. For example, McDonnell Douglas had a very successful spin-off that I documented (see article discussing Vitek, cited below).

Why are the successes few? The post-Cold War propaganda campaign against diversification was largely successful. It continues today.  The political question of “what to produce” is a taboo for the right, ignored by postmodern abstractions. The government failed to develop a comprehensive civilian industrial policy. Yet, when even marginal interventions were made, under the right formula, diversification succeeded. It really is the reader’s responsibility to identify the formula (and the shareholders for that matter).

References:

Feldman J M, 1999, “Civilian diversification, learning, and institutional change: growth through knowledge and power,” Environment and Planning A 31(10), pp. 1805 – 1824. (On McDonnell Douglas).

Jonathan M. Feldman (author), Gerald I. Susman and Sean O’Keefe, eds. Chapter 18,The Defense Industry in the Post-Cold War Era: Corporate Strategy and Public Policy Perspectives, “The Conversion of Defense Engineers’ Skills: Explaining Success and Failure Through Customer-Based Learning, Teaming and Managerial Integration,” pp. 281-318. Oxford: Elsevier Science, 1998. (on Boeing Vertol).

Jonathan M. Feldman is a SMART Fellow at the University of Michigan and 
Associate Professor in the Department of Economic History at Stockholm University. He is a principal convenor of the Global Teach-In: www.globalteachin.com.