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The Secret to Absorbing Defense Cuts: Economic Growth

BRAVO for Congress. Last month's strong vote in the House to approve the military base closing proposal is a sound display of political will and a correct stand against those who would maintain military spending for alleged economic reasons. A strong United States military is necessary for world peace, but retaining unneeded defense capacity as a jobs program is bad economic policy. Those who would do so underestimate the flexibility of the US economy and ignore the economic benefits that will result from investing the resources no longer needed for defense in new productive capital. As a trustee of the Committee for Economic Development (CED), I recently chaired a study group which wrote "The Economy and National Defense: Adjusting to Military Cutbacks in the Post-Cold-War Era." The statement was unanimously approved by this group of top business leaders, many of whose firms will be adversely affected by defense reductions. These business leaders concluded that cuts in defense spending do not threaten economic prosperity and that reallocation of resources from defense to more produc tive uses need not be feared. Indeed, it presents an opportunity that should not be wasted. The only yardstick for defense should be national security, not jobs. Our economic system is threatened, however, by our low rate of national saving, largely caused by federal deficits. The adverse effects of these mammoth deficits are so well-documented they scarcely need to be repeated: Sluggish growth in productive investment, high percentage rates for the dollar, and increased reliance on foreign capital undermine US long-term economic growth and competitiveness. In order to build the capital for future economic strength, the saving resulting from cutbacks in defense s pending should be devoted to federal deficit reduction. The 1990 budget agreement takes this approach. It requires that savings from defense cuts be devoted to deficit reduction through fiscal year 1993 by placing separate caps on discretionary spending for defense, international affairs, and domestic programs. From an economic perspective, this is the correct procedure. The budget agreement generally is an excellent first step toward fiscal discipline, and I urge Congress to stay the course until the deficit problem is completely under control. THIS view does not imply that no other spending programs are important enough to warrant increased resources. The economy and society need increased spending in such areas as education, especially for disadvantaged children - as well as for certain infrastructure and basic scientific research programs. How, then, is it consistent to advocate both deficit reduction and selected increased spending as top priorities? The answer in two simple words is economic growth. In the long run, the reduction of the deficit will boost economic growth by trading today's overconsumption for tomorrow's production. This future production will create a steady stream of new federal revenues to finance domestic needs without taking away from other priorities. Most issues on the domestic agenda do not lend themselves to quick-fix solutions, and a one-time expenditure of the peace dividend without regard to the deficit is an effective denial of a long-term commitment to these serious needs. If we consume rather than invest the peace dividend, we will find ourselves starved for resources in the future. Trading guns for butter is not a wise choice if you have the option of trading for a dairy farm. Admittedly, there is a lag between deficit reduction and the growth it brings. However, starvation of high-priority domestic programs in the short term is not required. First, entitlements may be somewhat constrained by a pay-as-you-go rule but they are not subject to direct spending caps. With respect to domestic discretionary programs, the 1993 spending cap allows for annual growth of about 6 percent above the 1990 level in place when the budget agreement was negotiated. This is about two points above projected inflation. This allows room in the budget for the most urgent domestic needs. Yes, this means some programs must be cut, but setting priorities is the business of Congress. As the base closing process proceeds, there will be painful changes in some communities. Existing economic adjustment programs should be used and strengthened to ease the transition. However, we should remember that flexibility and adaptability in the face of change have been the foundation of our economic strength. Ultimately, jobs come from economic growth, not the Department of Defense.