Peace dividend shows up in U.S.' corporate profits

The Economy

January 23, 2000|By William Patalon III

WHEN THE Berlin Wall fell in November 1989 -- symbolizing the end of the Cold War -- economists almost immediately began speaking of a "peace dividend" accompanying any scaling down of the U.S. military.

The hope for a big peace payoff seemed to make sense. The United States wouldn't have to spend the billions it takes to design, develop and deploy every new weapons system conceived: jet fighters and bombers, hunter-killer submarines or new tanks. Nor would the U.S. have to keep all its military bases; some could close, others could downsize.

Trouble is, the peace dividend forgot to show up. Saddam Hussein invaded Kuwait in 1990, helping to bump the U.S. economy into a recession and to send corporate America into a slash-and-burn layoff frenzy that was hidden behind such sterile terms as "downsizing," "rightsizing," or "hollowing out."

A lot of the private-sector workers who lost their jobs were civilian defense and aerospace workers -- many of them in California, but a large number here in Maryland, too.

By the middle part of the decade, peace-dividend proponents were grumbling that there was no visible payoff from peace.

The question remains: Where is the peace dividend?

The answer: Just take a look around you.

At the close of January, without evidence to the contrary, the U.S. economy will set a record for the longest, uninterrupted expansion in history. While the catalysts for this prosperity are legion, one is clearly the Cold War peace dividend, economists say.

"From an economic standpoint, there probably has been a salutary effect on the economy to the extent that the private sector does a better job using resources in terms of earning higher rates of return" than government, says Aldona Robbins, a former Treasury Department economist who is now vice president of a consulting firm she and her husband founded: Fiscal Associates Inc. of Arlington, Va.

Private efficiency

What Robbins means is this: Give a buck to the private sector and that dollar will be used more efficiently -- and grow a lot faster -- than if it's put it into the hands of the government.

That's because business deregulation, the use of productivity-enhancing technology and the leanness brought about by the 1990s downsizings have made corporate America trim, efficient and competitive. The government, by contrast, still is more reminiscent of an old-line utility: a wasteful, protected monopoly that's not subject to marketplace competition.

By paring back on Cold War defense spending, the government is effectively taking less money and putting more into the private sector.

Just look at these numbers from a federal report. In 1989, defense spending stood at $300.5 billion. In 1998, the most recent figures available, that number had fallen to $299.9 billion.

That seems like a small decrease. But those numbers aren't adjusted for inflation, meaning the actual chasm is much wider, since a dollar a decade ago had more buying power than the same dollar today. One research organization said that, in inflation-adjusted 1999 dollars, defense spending averaged $310 billion annually from 1946 to 1990 -- but was only $270.5 billion for 1999.

Since the budget increases with inflation, we can also consider defense spending as a percentage of the overall federal budget. In 1989, before the Berlin Wall fell, defense dollars accounted for 26.4 percent of the federal budget. In 1998, according to Robbins, the economist, that figure had declined to 17.6 percent.

Let's look at it one other way: defense spending as a percentage of gross domestic product: In 1989, defense dollars equaled 5.5 percent of GDP; in 1998, only 3.4 percent. "It is significant" how defense spending has declined, Robbins says.

Freer resources

That's freed up capital so more money could go into the private sector for development of such technologies as the Internet. The shrinking defense budget has also freed up workers -- the "intellectual capital" of the economy -- to design and implement these innovations.

The United States has reaped most of the peace dividend, says Pradeep Ganguly, director of the Office of Business & Economic Research for the Maryland Department of Business and Economic Development.

That's probably because countries such as Japan and several in Europe have yet to go through the painful restructuring that the United States endured in the middle 1990s. Laws and culture, in many cases, make it nearly impossible to fire workers and shutter plants in foreign countries, which overseas firms must do to keep pace with their U.S. rivals, Ganguly says.

This inability to restructure is particularly true for foreign defense industries, where many of the companies are, at least in part, government owned. In the United States, the military-spending drawdown forced some of these defense firms into one another's arms as merger partners, which, in turn, allowed them to cut workers and make themselves ultra-lean.

In the next few years, it's possible defense spending will have to increase again. A key reason: The cutbacks may have left the United States too lean, relying on weapons systems that are too old.

The labor shortage that's gripping the private sector is also hurting the military: Turnover is high and recruiting tough, with pay, training and chances for advancement at times better outside the armed services than inside. A strong military can be important, even during prosperous periods. The military doesn't just protect human rights, but property rights, too -- two of the nation's founding principles.

Wouldn't it be ironic if the military spending cuts that helped spawn this great boom forced us into military spending increases so that we might protect and prolong it?

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