Planning for Economic Conversion

University Essays, Lesson 6, Reading 4

By Seymour Melman and Lloyd J. Dumas

It’s time to start planning the conversion of America’s defense economy to civilian work. By conversion we mean political, economic and technical measures for ensuring the orderly transformation of labor, machinery and other economic resources now being used for military purposes to alternative civilian uses. The political impetus for conversion is gaining momentum as a result oi the relaxation of cold war tensions. Another stimulus to action is America’s deteriorating competitive position in the world economy.

A major factor in America’s decline to the status of a second-class industrial power has been the voracious appetite of the military-industrial complex, which employs 6.5 million civilian and military personnel in more than 135,000 factories, laboratories and bases. From 1947 to 1989 this country diverted to military purposes resources whose value exceeded the fixed reproducible, tangible wealth of the entire civilian economy. Tens of thousands of factories became virtual wards of the Pentagon; sheltered from the discipline of the marketplace, they adopted inefficient and costly methods. An indirect consequence of the larger share of tax dollars funneled into the military establishment was a diminution of public investment in the infrastructure and its resulting decay. The debilitating effect of all those developments on American industrial strength is readily apparent.

Labor productivity, a key indicator of long-term efficiency, has significantly declined. Between 1968 and 1988 labor productivity (measured by the dollar value of output per hour of workers in the nonagricultural business sector) rose by 24 percent, approximately one-third of the gain between 1948 and 1968.

In every year between 1894 and 1970 the United States ran a trade surplus—exporting more goods than it imported. In 1971 these surpluses turned into deficits. By 1987 the foreign trade deficit had hit a peak of $170 billion, more than 160 percent above the record level set only four years earlier. “Made in the U.S.A.” once meant well-made, high-quality, reasonably priced goods produced by industrial workers earning the highest wages in the world. Now U.S. trade deficits reflect in part a decline in quality and productive efficiency.

In 1982 the American economy plunged into its worst economic downturn since the Great Depression. By the end of the 1980s, however, the unemployment rates fell to more tolerable levels. Inflation remained well below the double-digit rates of the late 1970s. And the real gross national product grew more than 25 percent between 1982 and the third quarter of 1988, when it passed the $4 trillion mark. Supposedly, the country is in the midst of the strongest economic recovery since World War II.

But that is an illusion. We have merely pumped up the economy with a huge infusion of public and private debt. This façade of prosperity is not based on the efficient production that drove the economy’s remarkable growth throughout much of America’s industrial history-an expansion whose benefits were spread among the population rather than going to one small segment of it at the expense of all the rest.

Between fiscal 1980 and fiscal 1989 the national debt more than tripled, from $914 billion to $2.8 trillion. In less than three years after 1985, the federal government added nearly $780 billion in debt, an amount equal to more than 85 percent of the total national debt as of 1980. State and local government debt, and the private debt of households and nonfinancial institutions, soared from nearly $3 trillion in 1980 to more than $6 trillion by September 1988. Between 1980 and 1987 the United States went from being the world’s largest creditor nation, to whom $106 billion was owed, to being the world’s largest debtor nation, with a net international debt approaching $400 billion.

All that borrowing served temporarily to paper over deep-seated economic problems, giving us a fleeting reprieve. But it has also created a “bubble of debt” on top of a steadily eroding economic base, adding the possibility of a sudden collapse to the continuing long-term deterioration in American economic performance.

Conversion to What?

What could the 6.5 million employees of the military-serving institutions do for a living beyond their work for the Pentagon? There are three major areas of work that could be done by these people. The first is repairing the American infrastructure. This includes building and repairing roads, railroads and bridges; constructing waste disposal plants; cleaning up toxic and nuclear wastes; erecting new housing to make up for the enormous shortfall in construction and repair during the past decades; refurbishing libraries, public school buildings, university facilities and so on. In New York City alone, there are 1,000 public school buildings, of which 83 percent require major repairs. Bridges and highways have been crumbling for want of proper maintenance, and the country’s rail’ roads are more like the Toonerville Trolley of cartoon fame than modern high-speed facilities. The cost of repairing the infrastructure could amount to more than 55 trillion. The work to be done would surely extend over several decades.

House Resolution 101 includes a provision for a Cabinet-level council that would be charged with encouraging state, city and county governments to prepare capital budgets for renovating the public works and services under their jurisdiction. If carried out, this would set in motion a thoroughly decentralized set of nationwide planning operations for projects that would have employment needs beyond the size and capabilities of the existing work force.

The second area of new work for the converted military labor force would involve producing in the United States many of the products that are now imported. There is no law of nature or economics that prevents factories in the United States from once again becoming competent producers of shoes, for example; we now import 80 percent of our supply. An infusion of fresh investment and talent into the machine-tool industry could restore our former ability to produce high-quality machinery. The United States now buys 50 percent of its new machine tools from Japan, Germany and South Korea.

The third area is new ideas, a sphere in which American engineers and technicians once excelled.

A uniquely large proportion of engineers and administrators are employed in the military-serving industries. For those occupations some special conversion prospects will surely be in order. Teachers of mathematics and the sciences are in notoriously short supply in American high schools and junior colleges. The major teachers colleges could design appropriate programs for training some of these men and women to teach the young, an activity that would have long-range benefits for society. Many engineers could be retrained as civil engineers to work in American communities. The addition of an engineer to a city’s or a town’s staff would mean a substantial improvement in the ability of local governments to cope with the array of public works that are their responsibility.

The Process of Economic Conversion

The ideology of the free-market economy argues that the labor and facilities no longer needed in the military-serving sector will flow smoothly and efficiently toward an expanding civilian sector once military spending is cut. The market will take care of the transition. There is no need for special attention and certainly no need for advance preparation.

But this isn’t true. The world of military industry is very different from the world of commercial industry. For one thing, military-serving firms do not operate in anything like a free-market environment. In the military production system, the nature, quantity and price of output are not determined by impersonal market forces. They are set by the interaction of the Pentagon’s central planners and the managers of the military-industrial firms. Military industry, unlike any civilian industry, has only one customer-the Defense Department. Even when military firms sell to other nations, they typically sell products initially designed and produced to satisfy the needs of the Defense Department and can sell abroad only with its permission. Furthermore, the vast majority of defense contracts are negotiated rather than awarded through true price-competitive bidding.

More important, competition in the civilian commercial marketplace provides a crucial element of cost discipline that is largely absent in military industry. In practice, most major military contractors operate on a cost-plus basis, being reimbursed for whatever they have spent plus a guaranteed profit. In such an environment, there are no real penalties for inefficient production. In fact, company revenues can be increased by jacking up costs. Such cost escalation would spell bankruptcy for firms operating in a free market.

The sales function of a typical civilian company involves dealing with large numbers of potential customers, ranging from perhaps a few dozen for firms purveying industrial products to millions for consumer goods producers. For military firms the sales function means knowing tire Armed Services Procurement Regulations, developing contacts within the Defense Department and being adept at lobbying. The most crucial job of managers in civilian industries is keeping costs down while producing good quality products. Managers in defense firms need pay relatively little attention to cost, but they must try to manufacture products capable of operating under extreme conditions while delivering every possible increment of performance.

It is not a question of one kind of management being easier or harder than the other. The point is that they are very different. It is simply not reasonable to expect a manager used to operating in one of these worlds to perform efficiently in die other without undergoing substantial retraining and reorientation. This takes time and will not happen automatically. Civilian firms may well prefer to hire inexperienced civilian managers instead of facing the costs involved in retraining an experienced military manager for civilian work. The same consideration holds for engineers and scientists-the other main component of the military-serving labor force-who would require substantial retraining and reorientation.

The products of military industry are notorious for their poor reliability, despite requirements that only components meeting stringent military specifications be used. These components are not only remarkably costly but also certified to withstand extraordinary extremes of shock, temperature and so on. Poor reliability is an unavoidable consequence of die increasing complexity of military weaponry. Thus sophisticated military aircraft have been in repair a third or more of the time. That’s bearable when the cost of maintenance is not a limiting factor. But city transportation systems cannot accept vehicles that are “not mission capable” a third of die time. Hence the retraining of military-experienced engineers and managers is an essential aspect of economic conversion. Of course, the physical facilities and equipment of military industry will require modification as well.

Planning for Conversion

Advanced contingency plans for moving into alternative civilian-oriented activity could help carry the nation smoothly through the transition to a demilitarized economy and protect militarily-dependent communities against the considerable economic disruption they will otherwise experience. The transformation of a facility and its work force to civilian production must be planned locally, by those who know them best-not by distant “experts.” Even at its best such a planning process will be lengthy. A great many details must be worked through to ensure that the transition is smooth and that the resulting facility and work force are properly restructured to be an efficient civilian producer, able to operate profitably without continuing subsidies. It is long past time to get this process underway.

A bill now before Congress, House Resolution 101, would institutionalize a nationwide system of highly decentralized contingency planning for economic conversion at every military facility in the United States. The resolution, called the Defense Economic Adjustment Act, sponsored by Representative Ted Weiss, would require the establishment of labor-management Alternative Use Committees at every military facility with 100 or more people. These local committees would be empowered to draw up detailed technical and economic plans for shifting to viable alternative civilian activity. Funds would be provided for services such as income support, continued health insurance and pension benefits during any actual transition resulting from military cutbacks.

There are two reasons why military-industry workers should be especially protected, even though workers in other industries are not. First, such protection is vital to breaking the hold of the politically powerful “jobs” argument, which raises the specter of lost jobs to the constituents and thus damage to the political careers of representatives who vote against any military programs. The second is that the special obstacles to conversion of military industry must be overcome to allow the infusion of resources into civilian activity that will ultimately revitalize the whole of U.S. industry, and not just the prospects of converted defense workers and firms.

By moving military-sector resources into profitable civilian activity through a carefully planned process of economic conversion, the nation can break its decades-long addiction to military spending and build a stronger and more secure economic base. Without such a revitalization of civilian production, it is difficult to see how America can climb out of the deep hole of production incompetence, deficit and debt it dug for itself in the 1980s and reverse the deterioration of its economic performance and competitive position in the global marketplace.

Perestroika and Glasnost

The remarkable changes in the Soviet Union and Eastern Europe offer great promise of substantial arms reduction. We have seen only a beginning, but it is a hopeful one. The prospect of a 50 percent reduction in strategic nuclear arsenals-even talk of the total elimination of nuclear weapons within a decade or two-has moved from the realm of an impossible dream to the real world of negotiations. Progress toward reduction of conventional forces has begun.

Each of the three forces we have been discussing has its counterpart in the Soviet Union, which has finally admitted that it too is plagued by out-of-control budget deficits. The military’s diversion of critical resources from the country’s civilian industrial base has played no small part in rendering those industries hopelessly inefficient. At the same time, die attention of the nations of Western Europe has turned increasingly to economic integration rather than military adventurism. As far as the Soviet Union is concerned, this surely diminishes the threat to their security.

Obstacles to Conversion

Nevertheless, there are strong institutional and ideological barriers to implementation of economic conversion. The most prominent of these are the managements in central government offices and the private firms that are dependent on the military economy. Government departments are ordinarily viewed as “bureaucracies”; however, the central management in the Defense Department that controls the operations of 35,000 prime contracting establishments is, functionally, a central administrative office. This central administrative office is probably the largest such entity in the world and performs the same functions as similar offices in large corporations.

Furthermore, the management of the Pentagon’s central office controls die largest block of finance capital in the hands of any single American management. Every year since 1951 the new capital made available to the Defense Department has exceeded the combined net profits of all U.S. corporations. The top managers in the Pentagon and their subordinates are endowed with the usual managerial imperative to maintain and enlarge their decision-making power. Accordingly, they have consistently opposed all proposals for economic conversion planning in the United States.

This managerial opposition to conversion planning is not specific to any particular social structure, political ideology or management technique. Thus the managers of the U.S. military economy perform their command function via allocation of money resources, while those of the Soviet Union perform the command function by direct physical resource pre-emption and allocation. The results in each case are similar: preemption of major resources from civilian production and powerful pressures for operating in an unproductive, cost-maximizing way.

The workforce and surrounding communities of factories, bases and laboratories that serve the military are another institutional barrier to economic conversion. In the United States 3.5 million men and women work in the military industry. An additional 1 million are employees of the Pentagon, including civilian workers on bases, and there are 2 million in the armed forces. For these 6.5 million people and their families and surrounding communities, the military-serving facilities have been the principal sources of jobs for most of their lives. The skills they have developed and the relationships with which they are familiar are powerful incentives to continue working for the military. The people in such enterprises know that even the appearance of an interest in the idea of economic conversion would bring the disfavor of the Pentagon’s top managers.

The nation’s organized engineering societies include large numbers of engineers beholden to the military economy. This has a significant effect on the contents of society meetings, the subject matter of journals and learned papers, and the network of contacts available for employment opportunity. At this writing no single engineering society has ventured to propose contingent conversion planning for its members as a way o{ coping with the possible reversal of military budget growth. In its November 1989 issue, Spectrum, a journal of the Institute of Electrical and Electronics Engineers, published a special report titled “Preparing for Peace,” a serious, courageous attempt to survey the military engineers’ prospects during a subsiding cold war.

Finally, there are the universities, particularly the larger ones, which have grown accustomed to receiving major R&D grants from the Defense Department and to administering major research institutions, like the Lawrence Livermore and Los Alamos nuclear weapons laboratories, for the Pentagon. At the same time the departments of universities that might be expected to have some connection with civilian production, the engineering and business schools, have become less production-oriented during the long cold war period. Some schools are beginning to make an effort to re-establish the importance of civilian production in their curriculums, but the emphasis is small compared with the military-oriented research activities. The universities also contain large departments and schools—such as political science and international relations-whose faculties and curriculums have focused on training cold war technicians, researchers and administrators.

Alongside these direct economic ties to the military at the universities there are a number of ideological commitments that play an important part in sustaining support for military institutions. Among economists, for example, it is generally accepted that money equals wealth, that the proper measure of economic product is in money terms, that the money value of an economic activity denotes its value independent of the usefulness of the product. Military goods and services are thus counted as additions to real wealth despite the fact that they do not contribute to the central purpose of the economy-to provide the material standard of living. They add neither to the present standard of living (as do ordinary consumer goods) nor to the future standard of living by increasing the economy’s capacity to produce (as do industrial machinery, equipment and the like.)

Since the Great Depression, economists, and indeed the larger society, have defined the central problem of the U.S. economy as the maintenance of proper levels of market demand, and thereby of income and employment. From this perspective, expenditures that generate market demand are critical, regardless of the nature of the product. A consensus formed that military spending is the best way to accomplish this effect. Thus, most economics textbooks do not differentiate between firms producing military goods and civilian enterprises.

Collecting the Peace Dividend

Apart from the planning of economic conversion, its actual execution will be heavily dependent on the timing and the size of the peace dividend that would result from the reduction of military budgets. Savings can be expected from two sources: first, and early on, reduction of certain military activities (such as base closings and elimination of marginal weapons programs) at the initiative of the federal government; second, de-escalation of military spending and the size of the military-serving institutions as a result of international agreements setting in motion a programmed reduction of the arms race. The first of these approaches could yield possible savings of several billion dollars annually. The New York Times editorialized on March 8 in favor of weapons and force cuts starting with $20 billion per year and reaching $150 billion annually after ten years. That would bring down annual military spending to a level comparable to that in President Carter’s budgets. But a thoroughgoing military de-escalation would require international disarmament agreements.

A program for reversing the arms race was laid out by President Kennedy in April 1962 in a document called “Outline of Basic Provisions of a Treaty on General and Complete Disarmament in a Peaceful World.” This plan called for a ten-year period to accomplish a significant reversal of the arms race among nations and the parallel establishment of international institutions for inspecting the disarmament process, for coping with international conflict by non-military means and for developing an international peacekeeping force. If this blueprint is implemented, a ten-year cumulative peace dividend of $1.5 trillion is within reach. That is the magnitude of resources needed to start serious economic conversion and to rebuild the infrastructure and industry of the country.

This reading is from The Class of Nonviolence, prepared by Colman McCarthy of the Center for Teaching Peace, 4501 Van Ness Street, NW, Washington, D.C. 20016 202.537.1372.

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