Defense ‘Conversion Plan’ Flawed

During every period of substantial reduction in defense spending, a popular response emerges: The high-powered resources previously devoted to defense are too valuable to lie fallow; they should be utilized to deal with the various shortcomings in our society, generally through the public sector. This is a variation of the related complaint: “If we can put a man on the moon, why can’t we build safer roads to eliminate illiteracy?”

It is not surprising that unemployed defense workers--and those who fear that they soon will be laid off--urge the government to spend money to keep them busy. Nor is it unusual for other citizens to think of periods of defense cutbacks as a good opportunity to use science and engineering in civilian pursuits.

However, much of the support for the current legislative proposals to “convert” defense industries to civilian tasks arises from a different--and essentially non-economic--set of concerns. Many people and organizations whose objectives are mainly to achieve a more peaceful world fear that citizens will resist large defense cuts because they may result in many people losing their jobs. Hence, to defuse the opposition to lower military spending, leaders in the peace movement seek to convince the public that attractive civilian alternatives exist for defense contractors. According to one congressional aide, a major purpose of the defense conversion legislation “is to ease that political pressure.”

The “conversion” approach is widely propagated. It is embodied in proposed legislation requiring defense contractors to establish “conversion planning” activities. These proposals have reached the congressional hearing stage. Despite their surface attractiveness, these proposals contain serious shortcomings. One clear fallacy of this line of thinking is the simple-minded assumption that those who object to large defense cuts do so solely out of economic self-interest. That may be the case for quite a few who are directly involved in defense work, but it ignores several more basic factors.

First, many people whose incomes and jobs are not at all affected support high levels of defense because they view the world differently from the advocates of conversion. That is, they believe that the United States exists in a dangerous international environment. Thus, they sincerely believe, a high level of defense (although not necessarily the current amount) is needed for the nation’s welfare.

The second shortcoming of the conversion position is the adverse experience of the past. Previous efforts--public and private--to force-feed the transition from military to civilian pursuits have generated a disproportionately large number of failures. The most comprehensive studies of past attempts by large defense contractors to use their capabilities beyond the aerospace market have been unable to find any important examples of successes. The failed diversification efforts cover the entire period since the end of World War II. The unsuccessful efforts include product lines ranging from canoes to computers to coffins.

My own research has uncovered numerous reasons for this situation. Given the nature of the military’s needs, defense companies are geared to low-volume production of expensive, specialized equipment, which rarely incorporate the tradeoffs between quality and price so common in commercial markets. These firms produce under detailed government supervision, which generates large overhead costs. Moreover, the major defense contractors lack the marketing and distribution systems required in the consumer-oriented economy.

A third point is ignored by conversion advocates: the need to maintain an adequate defense research, development and production base should the current optimistic view of the international climate undergo another shift. Sadly, history provides numerous examples of the cyclical nature of superpower relations and of the abrupt shift from belligerency to glasnost --or detente --and back again. Surely, China, the Middle East and Central America provide examples of unstable situations that could generate threats to our national security.

The fourth shortcoming of a conversion strategy is that it focuses on keeping existing jobs in place. If that approach were followed, it would be a recipe for stagnation and a barrier to change. The adjustments required by defense cuts are not basically different from the responses that regularly occur from shifts in consumer demand, in patterns of foreign trade or from the introduction of products that render existing products obsolete.

The fifth shortcoming of the conversion approach may be the most compelling. Peace is not about to break out, and the reductions in the military budget are not likely to be overwhelming. Compared to the 2% annual reductions in real military spending, we might experience perhaps an acceleration to a 4% annual cut. The resultant “savings” would not be enough to bring the budget deficit below $100 billion a year.

In any event, it seems clear that the limited ability to transfer defense technology to civilian uses has not been because of a lack of trying. If the companies on their own want to continue trying, we should wish them well. But conversion does not seem to be an attractive use of taxpayer money.

The conversion advocates, of course, say they oppose any use of the tax system for this purpose. So how do they propose to finance the compulsory conversion planning efforts that they would impose on defense contractors and on defense bases? They have come up with two alternatives (it would be more accurate to label them subterfuges). One is to impose a tax of 1% to 2% on the contracts that companies receive from the Defense Department. The other is to use a portion of the savings from cuts in defense spending. One member of Congress has the temerity to say that under the latter approach “there would not be any cost.”

In a period of budget stringency, there is no compelling case for devoting public resources to force-feeding such conversion efforts. Nor is it obvious why public policy should interfere with the voluntary shift of resources to other economic sectors. Indeed, a large reduction in defense spending--and a concomitant reduction in federal deficit financing--would be a welcome opportunity for increasing the extent to which consumers, producers and investors decide the use of their income and wealth.

Viewed on a national rather than local scale, the defense program is a relatively minor player in the American economy, accounting for 1/15 of the gross national product and an even smaller proportion of the nation’s work force. Contrary to the melodramatic tone of the conversion debate, economic activity in the United States marches essentially to the beat of civilian drummers.