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Using the Dividend

A PEACE dividend is on the way. The complete collapse of the Soviet Union has seen to that. Debate will churn in Washington over just how large the dividend should be - which weapons systems to cut or bases to close. Realistic views of the need for sustained military readiness should govern that discussion.

But another discussion - how best to use any savings from defense cutbacks - is just as central, and realistic views of economic benefit should govern that.

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A top priority should be the set of human-resource concerns that present the greatest long-term economic and social danger to American society. Prominent among these are educational decline, growing poverty (particularly among minorities), and drug abuse. These problems contribute to ills ranging from chronic joblessness to prison overcrowding.

The best way to deal with these problems is not through massive new federal programs. A fiscal blowout in the name of social betterment is not the answer - and the likely peace dividend, which could net as little as $9 billion in the years just ahead, wouldn't support it in any case.

What would make sense is some reopening of federal aid to state and local governments that have the primary responsibility in such areas as education and antidrug campaigns. Those levels of governments are experiencing severe budgetary contraction. Targeted grants would be in order, as would be a revival of revenue sharing that allows state and local authorities to set their own priorities.

Public investments that will help a larger number of Americans enter the competitive mainstream through better education and training are critical.

A second priority is the obvious: reducing the still-bulging federal deficit. The deficit soaks up savings in the United States, undercutting capital investments that could set the stage for long-term economic recovery. Dedicating a portion of any savings from defense to reducing the overall size of the federal budget would send the message that US will not continue to bloat itself on borrowing. That's a reassuring message both to the financial markets and to individual Americans. And more money will be freed up for private business investments.

What about the most politically popular use for a peace dividend - tax relief for the middle class? The short-term economic benefits would probably be minimal, and the long-term damage from widening the deficit and pushing interest rates back up could be great.

The American middle class will benefit most from farsighted policies that encourage its expansion in the years ahead.

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