Defense Cutbacks Squeeze Economy

THE defense-industry crunch has arrived.

Many of the massive purchases of weapons made during the Reagan presidency are petering out. "Order books are going down, down, down," says Richard Bitzinger, an analyst with the Defense Budget Project in Washington. "A lot of major procurement programs are ending now."

Other weapons programs have been canceled, terminated, or shortened. The list includes the Army's M-1 tank, M-2 Bradley infantry fighting vehicle, AH-64 Apache helicopter, and RAH-66 Comanche light helicopter; the Navy's F-14D fighter, SSN-21 submarine, P-7A antisubmarine patrol plane, and A-12 advanced fighter/bomber; and the Air Force's F-15E fighter, F-16 fighter, and B-2 bomber program.

Defense companies are announcing more layoffs. The impact on the total economy has already been felt. One reason for the weakness in output in the first quarter was a drop in defense spending of $19 billion, more than many economists anticipated.

Military spending will pick up as the year moves on, figures David Wyss, an economist with DRI/McGraw-Hill, a consulting firm in Lexington, Mass. "Military underruns have never been a problem," he comments sarcastically. The Clinton budget puts military outlays at $306 billion in fiscal 1993.

Nonetheless, the more-rapid reductions in defense spending will cost jobs and slow the recovery. "The idea that you can do it smoothly is phoney," says Mr. Wyss. "It is a drag on GDP," the gross domestic product.

Under the Clinton plan, military spending will shrink 5 to 6 percent a year for the next few years after inflation, or about 2 to 3 percent in nominal dollars.

If the US and Western Europe were to intervene in Bosnia, the Clinton administration would go to Congress for a supplemental appropriation - size unknown. "It doesn't look like we are going to do anything," says Mr. Bitzinger.

Bitzinger and another Defense Budget Project analyst, Steven Kosiak, in a new study predict these changes:

* As a share of GDP, defense outlays will fall by half from 6.5 percent in fiscal 1986 to 5 percent in fiscal 1992 and 3.2 percent in fiscal 1998. This 12-year reduction is much smaller than those after World War II or the Korean and Vietnam wars.

* The reductions will affect less than 1 percent of all US workers over the next five years. In only three states - Hawaii, Virginia, Alaska - and the District of Columbia will job losses amount to more than 2 percent of total 1992 employment. In D.C., the most severely affected, the loss will be 3.4 percent.

* Between fiscal years 1992 and 1998, the Clinton plan could result in the loss of 1.24 million defense-related jobs. By comparison, the more modest cuts proposed by President Bush would have led to the loss of 882,000 jobs.

* Some 500,000 job losses within the Clinton plan were already set in force by decisions made by the Bush administration and Congress in the past several years.

A "significant portion" of these job losses will occur through early retirement, voluntary separation, and normal attrition, combined with lower hiring, the two analysts note.

The slow economic recovery is not making adjustments easy "We need growth elsewhere - housing, investment," says Wyss.

Defense firms are adjusting in different ways. Generalizing, large diversified companies with defense divisions, such as General Electric, Ford, General Motors, and United Technologies, are moving out of the defense business, says Bitzinger. For example, Ford Motor Company sold off its missiles unit to the Loral Corporation. GE sold its aerospace division to Martin Marietta.

By contrast, many large companies highly dependent on the defense business are preparing to fight for whatever defense purchases are left. These include Lockheed, Northrop, and Martin Marietta. General Dynamics is radically consolidating.

Some defense companies are cautiously trying to diversify into civilian activities. Others are selling weapons abroad. US overseas military sales have risen from $12 billion in 1991 to more than $28 billion in 1992. But this is a volatile and controversial area for business, notes Bitzinger.

In the long run, of course, defense cuts provide more resources for civilian purposes.