Defense reductions and U.S. manufacturing

Business Economics, Jan, 1992 by Daniel J. Meckstroth

The manufacturing sector should

experience a 125,000 increase in nondefense

employment between 1990 and 1994. However,

these gains should be more than offset by a

decline of 405,000 defense-related

manufacturing jobs. All the growth in U.S.

employment over the next four years is

expected to occur outside the manufacturing

sector. When compared to prior

demobilizations, the magnitude of today's defense-related

reductions will be modest. Normal

labor market adjustments, aided by existing

federal job assistance and training

programs, should facilitate the transition.

HOW MUCH military spending is enough? This question is one the United States has been wrestling with since the end of World War II. With limited resources available, the government must decide how much of the federal budget should be allocated to defense spending in order to ensure the security of the American people, protect our allies, influence world events, and at the same time encourage the social and economic development of this country. In a sense defense spending is much like an insurance policy; the amount of coverage or protection is dictated by how prosperous the economy is at the moment and the perceived risk of a military conflict in the future.

This report examines the proposed defense cuts and puts them in perspective. The Bush Administration's defense budget is analyzed with particular attention given to the Department of Defense (DOD) procurement plans and personnel cuts. Furthermore, estimates are made for the reduction in output and jobs lost in the private sector and selected manufacturing industries because of the defense cuts.

DEFENSE BUDGET REDUCTIONS FOR FY 1992-96

The defense budget for fiscal years (FYs) 1992-96 calls for military planning that takes into consideration the new realities of a reduced threat to the nation's national security and the necessity for cutting the huge federal budget deficit. Over the next five years, inflation-adjusted defense outlays are budgeted to decline 19 percent. Figure 1 shows inflation-adjusted national defense outlays since FY 1962 and the Bush Administration's budget projections through FY 1996.

When the total defense budget is slashed by nearly one-fifth, the cuts affect virtually every budget item, thousands of programs and weapons systems. To simplify the analysis, the defense budget is divided into six major categories: construction and housing, research, operations and maintenance, procurement, personnel, and an "all other" category. Figure 2 shows the dollar amount of each major defense category and its share of total defense outlays for FY 1991. The projected average annual growth rate for major defense categories through FY 1996 are illustrated in Figure 3. These two charts show:

1. The cost of operating and maintaining the facilities

and equipment of the armed services will comprise

29 percent of the defense budget this fiscal year

and is projected to decline 4.5 percent

annually -- after allowing for inflation -- over the next five

years. What has grabbed the headlines, though, is

DOD's announcement recommending the closing

of thirty-one major U.S. military bases, twelve

small facilities, and reducing operations at twenty-eight

other bases.(1)

2. Personnel outlays make up 26 percent of the FY

1991 defense budget. The demobilization plan calls

for reducing active duty personnel by 321,000 and

reserves by about 270,000 from FY 1991 through

FY 1995. As a result of these cuts, personnel

spending is projected to decline 3.8 percent annually.

3. Procurement spending also takes 26 percent of the

defense budget. However, unlike many other

categories, procurement is highly cyclical. There are

rapid buildups during wars (both shooting wars and

the Cold War) and significant spending cuts

afterwards. The FY 1992 defense budget reflects the

downside to the procurement cycle. Secretary

Cheney said the 1990s will "be a decade of

development, more than of production."(2) Real

procurement outlays are budgeted to decline at about a 7

percent annual rate over the next five years.

4. The Defense Department will spend $35.5 billion on

research, development, testing and evaluation

(RDT&E) this fiscal year, 12 percent of all defense

outlays. The RDT&E budget emphasis is on strategic

programs, intelligence, communications, and

developing the next generation of weapon systems.

Inflation-adjusted research spending is expected to

decline at a 3.3 percent annual rate for FYs 1991-96.

5. Also worth noticing are the changes to "other"

defense spending. The "other" category is primarily

for the nuclear energy program run for the military

by the Department of Energy (DOE). The whole

nuclear weapons complex is to be restructured in

response to reduced demand for nuclear defense

materials.

PROCUREMENT REDUCTIONS AND FUTURE OUTLAYS

The procurement budget is the most important defense account for manufacturers. The design and manufacture of military hardware is a significant proportion of sales for many companies. In 1990, the top 100 defense contractors received $86.7 billion in prime contract awards, about two-thirds of the $130.8 billion of large, prime contract awards that year.(3) Many thousand more firms act as suppliers and subcontractors for the defense prime contractors. Table 1 details procurement outlays by major group through FY 1993.