The Peace Dividend: Myth and Reality

By Richard Hornik

When Isaiah prophesied that warriors would "beat their swords into plowshares and their spears into pruning hooks," he did not add that a peace dividend would follow, at least in the sense that Congress is eagerly anticipating. If the Pentagon budget were cut in half, defense spending would fall to about 3% of the gross national product. At that level, military spending would practically cease to have a significant impact on the overall economy, and $150 billion a year would be freed for other uses.

Some latter-day prophets, pointing to the boom that accompanied Ronald Reagan's military buildup, might argue that such cuts are not necessarily a good thing. Socialists have asserted that capitalism thrives by creating a permanent wartime economy. Will the U.S. economy slow down as Rockwell shifts from producing the B-1 bomber to making flight-control systems for commercial airliners?

But a peace-driven boom or bust is not likely: as demobilizations go, the newest one will be relatively puny, even if Congress can persuade the Administration to try something bolder than the 2.6% cut Defense Secretary Cheney proposed last week. In 1945 almost two-fifths (39.1%) of the American economy was devoted to winning World War II. Three years later, U.S. military spending had dropped to just 3.7% of gross national product, leading to a huge infusion of $68 billion into the postwar economy. The savings that followed the Korean War (military spending dropped from 14.4% of GNP in 1953 to 10.4% in 1958) and the Viet Nam War (from 9.6% in 1968 to 4.8% in 1978) also involved a far larger proportion of the U.S. economy than anything contemplated for the post-cold war period.

In fact, the U.S. has been enjoying a minor peace dividend since 1986, when the Reagan buildup topped off at 6.5% of GNP, and even that was a relatively modest level by wartime standards. This year defense's share of the economy is 5.5%. "The military burden, although significant, has been far from overwhelming," says Murray Weidenbaum, director of the Center for the Study of American Business in St. Louis. "The reductions now contemplated would be merely an acceleration of that negativesloping trend line."

The easiest part of a slowdown will be converting soldiers into workers. An economy that has produced 20 million jobs in the past decade could absorb a massive demobilization, even if it meant cutting the armed forces in half by eventually releasing 1 million service members into the work force. Certain firms and regions would certainly feel the hardship of a defense slowdown, like the Boston area, with its concentration of Pentagon suppliers such as Raytheon, manufacturer of the Sidewinder missile; Long Island, with Grumman, builder of the soon-to-be killed F-14 fighter; and Kings Bay in south Georgia, where ballistic-missile submarines are based. But the Government could soften the blow through job retraining and other social and tax programs. Overall, American productivity might benefit if military contractors competed more for civilian customers and less for Government programs with built-in profits.

Special-interest groups are already lined up to grab whatever savings result from defense cuts. Supply-siders will argue for more tax reductions. Others will want to spend more on the homeless, education or the war on drugs. States and local jurisdictions are bidding for repairs in the country's deteriorating infrastructure: roads and bridges, mass transit, pollution-abatement facilities. A good case can be made for increased foreign aid so that America's global position will not shrink along with its military.

The best possible use for any peace dividend is reduction of the federal budget deficit. That might begin to restore the U.S. economy to the good health it will need to compete with Japan, the emerging European dynamo and increasingly vigorous Asian countries like Taiwan and South Korea. America's abysmal private saving rate (about 6% of GNP, vs. 16% for Japan) is not sufficient to provide capital for private-sector investment, particularly if Washington continues borrowing half the savings to finance the federal deficit. Devoting the bulk of future defense savings to erasing the deficit would be fitting, since much of the Government's red ink stems from Reagan's sharp military buildup.

A reduction of the deficit would have a number of subtle but important effects. Roger E. Brinner, chief economist of the forecasting firm DRI/McGraw- Hill, projects that the lower interest rates that would result from a smaller deficit could produce a modest budget surplus by the end of the century, when coupled with reduced defense spending. Economists believe that lower interest rates would encourage productive domestic investment, make U.S. businesses more competitive and thus help reduce the trade deficit. Using only half that dreamed-of $150 billion peace dividend in the year 2000 for deficit reduction would still boost the economy while allowing modest increases in social and infrastructure spending.

Despite America's fiscal recklessness in the 1980s, the sudden end of the cold war has provided the nation at least a modest opportunity to improve its economic health without raising taxes or cutting already anemic social spending. The nation has wasted such opportunities in the past, notably after Viet Nam. It could all too easily squander its savings again. Washington should provide leadership on this issue, not pliancy to every special-interest group. The worst outcome would be for the U.S. to beat its swords into more credit cards.