After the Cold War: Living With Lower Defense Spending February 1992 OTA-ITE-524 NTIS order #PB92-152537 ... -——. .— Recommended Citation: U.S. Congress, Office of Technology Assessment, After the Cold War: Living With Lower Defense Spending, OTA-ITE-524 (Washington, DC: U.S. Government Printing Office, February 1992). I.(m .;IIc b! lhc ( I S (io\crnIIIt,I)l PIIIIIIIIg OI]ILL. sLl[>cllll[c.llclL.111 (It IX)clllm$l)l., AI(l II Mop SSOP, W’<iwl[lgloll. [)(’ 2040?” () {?s ISBN 0-16 -036108-7 Foreword The great events of 1991 ended the Cold War, banished the threat of global nuclear conflict, and freed us to redefine national security. While future U.S. defense needs are still unclear, they will surely require less money and fewer people, as well as shifting in kind. It is now safe to contemplate very substantial reductions in defense spending-perhaps to the lowest level in 40 years—and to turn our attention to other pressing national needs. Welcome as these changes are, adjustment to lower defense spending is not painless. Many of the workers and communities that depend for their livelihood on the military will have to find new jobs and new sources of economic strength. Defense companies will have to adapt to commercial demands, or shrink, or possibly go under. On the bright side, the size of the adjustment is modest, compared to defense build-downs of the past and to the present size of the U.S. economy. From 1991 to 2001, perhaps as many as 2.5 million defense-related jobs will disappear. That averages to 250,000 a year, or two-tenths of 1 percent of the employed work force in 1991. Averages, however, can be misleading. The decline could be uneven, with steep drops in short time periods, making adjustment more difficult. And hardships will be much greater than average in some communities where defense spending and jobs are concentrated. Another caveat: the U.S. economy is not as sturdy as it was during earlier defense cutbacks. American industry faces tough challenges by foreign competitors, especially the Japanese; well-paid jobs to take the place of defense manufacturing jobs are scarce; and the 1990-91 recession shows few signs of lifting in early 1992. Government programs can help defense industry workers, veterans of the armed forces, and communities make the transition, and can lend assistance to defense firms that want to get into more commercial production. But their prospects will depend most fundamentally on growth in the national economy. This is the first report of OTA’s assessment of Technology and Defense Conversion, requested by several congressional committees and members of the Technology Assessment Board to examine effects of the defense build-down on the civilian side of the economy. This report focuses on ways to handle the dislocation of workers and communities that is, to some degree, inevitable in the defense cutback. It opens a discussion of how defense technologies might be converted to commercial applications. The second and final report of the assessment will continue that discussion and will concentrate on opportunities to channel human and technological resources into building a stronger civilian economy. U JOHN H. GIBBONS Director iii Advisory Panel—Technology and Defense Conversion McGeorge Bundy, Chairman Professor Emeritus of History New York University Michael Borrus Arthur Flathers Deputy Director, Berkeley Roundtable on Director of Independent Research and Development International Economics GE Aerospace Division University of California Douglas Fraser I-I. Kent Bowen Professor of Labor Studies Co-Director, Leaders for Manufacturing Wayne State University Massachusetts Institute of Technology Gregory S. Frisby Charles Bradford Chief Executive Officer Director, Apprenticeship, Employment Training, Frisby Airborne Hydraulics and Rehabilitation Programs Donald A. Hicks International Association of Machinists and Professor of Political Economy Aerospace Workers University of Texas at Dallas Anne Buck Frank J. Lewis Manager, Economic Adjustment Unit Senior Vice President California Department of Commerce Harris Corp. Philip W. Cheney Ira Magaziner Vice President of Engineering President Raytheon Co. SJS Inc. Robert W. Carlton Ann Markusen Vice President, Community and Business Services Director, Project on Regional and Industrial Jackson Community College Economics Robert S. Cooper Rutgers University President John P. McTague Atlantic Aerospace Electronics Corp. Vice President for Technical Affairs Jerry R. Crowley Ford Motor Co. Entrepreneur Basil Papadales Christopher Demisch Business Development Manager Partner W.J. Schaefer Associates McFadden Brothers Suzanne Teegarden R.C. Dynes Executive Director Department of Physics Industrial Services Program University of California, San Diego State of Massachusetts Craig Fields Charles D. Vollmer President Vice President, Technology Initiatives Microelectronics and Computer Technology Corp. Booz-Allen and Hamilton Inc. NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does nog however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the background paper and the accuracy of its contents. iv After the Cold War: Living With Lower Defense Spending OTA Project Staff Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division Audrey B. Buyrn, Program Manager Industry, Technology, and Employment Program Katherine Gillman, Project Director Robert Atkinson, Senior Analyst Jeffrey Lewis, Research Analyst Terry Mitchell Mark Roberts Jenifer Robison Elizabeth Sheley, Editor Administrative Staff Carol A. Guntow, Office Administrator Diane D. White, Administrative Secretary Publishing Staff Martha Dexter, Acting Manager, Publishing Services Denise Felix Cheryl Davis Dorinda Edmondson Chip Moore Christine Onrubia Bonnie Sparks Susan Zimmerman Contractors Linda Kravitz Takashi Mashiko Letitia L. Oliveira Contents Page 1: summary and Findings . 3 Chapter 2: Policy Issues and Options . 39 Chapter 3: Displaced Defense Workers . 59 Chapter 4: Engineers: A Special Case . 103 Chapter 5: Veterans’ Adjustment . 129 Chapter 6: Adjustment for States and Communities . 153 Chapter 7: Defense Companies . .. 193 Appendix A: Defense Spending and Employment . 229 vi Chapter 1 Summary and Findings Contents Page INTRODUCTION . 3 MACROECONOMIC EFFECTS: A HISTORICAL PERSPECTIVE . 6 After World War II . 6 After the Korean War . .7 After the Vietnam War . 8 Structural Changes in the Civilian Economy . 9 After the Cold War: The 1990s . 10 LOCAL AND SECTORAL EFFECTS . 11 States and Localities . .12 Industries . .\. , . 14 DISPLACED DEFENSE WORKERS . 18 The Dimensions of Displacement . 18 Prospects for Displaced Defense Workers . 18 Adjustment Assistance for Displaced Defense Workers . 19 ENGINEERS: A SPECIAL CASE . .. 23 VETERANS’ ADJUSTMENT . 24 DEFENSE-DEPENDENT COMMUNITIES . 25 DEFENSE COMPANIES . .. 28 The Outlook for Major Defense Companies . .. 28 Small Business and the Defense Industry . 30 POLICY ISSUES AND OPTIONS . 31 Displaced Defense Workers . .33 Defense-Dependent Communities . 34 Defense Companies . .35 Figures Figure Page 1-1. Defense Spending, 1940-91 . .4 1-2. National Defense Spending, 1950-2001 . 4 1-3. Defense Employment Levels, 1944-91 . 5 1-4. Defense Employment Levels, 1950-2001 . 6 1-5. Eight States Totaling One-Half of U.S. Defense Spending, 1991 . 12 1-6. Defense Spending as a Percent of State Purchases, 1991 . 13 1-7. Eight States Totaling One-Half of U.S. Defense-Related Employment, 1991 . 14 1-8. Percent of State Employment in Defense, 1991 . 15 1-9. Direct Defense Spending in California, 1964-90 . 15 1-10. Leading Defense Industries by Value of Defense Output, 1990 . 16 1-11. Leading Defense Industries by Defense Share of Industry Output, 1990 . 16 1-12. Prime Contracts for Hard Goods . 17 Table Table Page 1-1. Projected Defense Spending and Employment Levels . 19 Chapter 1 Summary and Findings INTRODUCTION economy running at $5.5 to $6 trillion a year. Defense-related employment in defense industries, The dissolution of the Soviet Union and the end civilian jobs in the U.S. Department of Defense of the Cold War have profoundly changed U.S. (DoD), and the armed forces might drop from 6.0 defense needs. Just what a prudent U.S. national million in 1991 to as low as 3.5 million a decade defense system will be in the post-Cold War era is later, or an average of 250,000 a year2 (figures 1-3 not yet clear. But it will almost certainly require less and 1-4), a substantial number, but only about 0.2 money and fewer people than it did in the 40 years percent of the 119 million jobs in the U.S. economy when this Nation faced a hostile and obdurate in 1991. military superpower with a huge army poised at the borders of Western Europe. Welcome as these Several cautions should be noted. First, the changes are, they have serious implications for the decline may not be gradual; steep cutbacks could people, companies, and communities that have occur in single years, making adjustment more depended on defense spending for their livelihood. difficult. Moreover, effects in some localities will be The changes also raise some potentially troubling much more troublesome than the aggregate figures questions about adjustment for the Nation as a suggest. Approximately one-half of the defense- whole. related jobs within the United States are in eight States, and within the States certain local areas