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America’s Peace Dividend, by Ann Markusen (ed.)
Comments on Michael Oden, Laura Wolf-Powers, and Ann
Markusen's
"Post-Cold War Conversion: Gains, Losses, and Hidden
Changes in the U. S. Economy"
David J. Berteau
The end of the Cold War presented the U. S. with an opportunity to downsize the economy’s military industrial establishment with an eye toward improving overall economic performance. The authors of this paper investigate the actions taken in pursuit of that opportunity and attempt to address four key questions:
By answering these questions, the authors also attempt to ascertain whether an alternative set of government policies and programs would have lead to a different, perhaps better set of outcomes.
The comments that follow are from a perspective that is not of an academic, but rather of a practitioner and an implementer. As a result, the comments draw not only from the research results presented in the paper but also from other research and anecdotal evidence. In many cases, anecdotes are the only evidence available. Inadequate information was gathered on economic performance, baseline data were rarely recorded, and key questions were not asked when they should have been. Perhaps the most unarguable conclusion one can reach about post-Cold War defense restructuring is that the opportunity to evaluate the impact of restructuring policies and programs was largely missed. We basically failed to gather the data.
Advocates have argued for decades that defense conversion should be an active set of such policies and approaches, and that government programs would produce outcomes that were in some way better than the economy would yield on its own. The end of the Cold War offered the U. S. an unprecedented opportunity to conduct experiments in defense conversion, and that is exactly what the federal and state governments did. The authors in this paper document the conduct, conditions, and results of those experiments.
Unfortunately, the experimenters neglected to follow some of the basic rules of the scientific method. They not only failed to stabilize external factors, they seemed to take opportunities to vary them. Rather than measure outcomes against benchmarks, they continually redefined success. When faced with promises of potential success, they often reversed direction in mid-project. Some of these perturbations were the direct result of the 1992 presidential election, which replaced a Republican administration that rejected anything they called "industrial policy" with a Democratic that advocated government assistance to defense companies, workers, and communities. After the Clinton administration took office, however, there were frequent and sometimes radical shifts in policies, especially after the Republicans took control of Congress in the 1994 mid-term elections.
Still, the authors reach the somewhat tautological conclusion that a better set of policies would have produced better results. From a pragmatic point of view, perhaps a more relevant question would be to ask whether any set of policies would have led to dramatically different results.
Most observers agree that the basic growth in the underlying economy throughout most of the 1990’s has been a major contributing factor in the successful redeployment of defense resources and workers. The authors dismiss this impact at the outset, based on the view that economic growth "obscures" some conversion effects. They do not, however, dispute the value of 7 years of high real growth in the economy. No set of affordable conversion policies could have offset the negative impact of the economy on defense restructuring had it performed substantially worse over the past decade. The paper offers nothing on this point nor does it seem to dispute it.
Nonetheless, policies are important and programs do produce effects. The paper examines both explicit and implicit policies and their actual outcomes, to the extent that data are available to support analysis.
With respect to industry itself, the authors argue that Wall Street impacted defense mergers and consolidations by undermining companies intent on diversification and rewarding those focused solely on defense. Short-term stock price gains led in the long-term to reductions in defense competition and research investment and a failure to reapply technology and workforce talent in productive ways. The explicit approval of the Secretary of Defense for these mergers offset the impact of any other set of policies. It basically undermined conversion by any name and rewarded those companies that refused to convert.
It may be that the influence of Wall Street and even of the Secretary of Defense were only secondary, though. The leaders of the consolidating defense "giants" focused on cornering market share, especially in the face of declining defense procurement budgets. Unpublished interviews conducted by the Defense Conversion Commission in 1992 and 1993 confirmed this motivation. Norm Augustine of Martin Marrieta, Bill Anders of General Dynamics, and Kent Kresa of Northrop all stated that they were not interested in programs to promote diversification. They were interested in solidifying a monopolistic position.
Even after the Pentagon curtailed its support for mergers in 1997, concerns about programs that create competition still drove defense "giants" to react. The Pentagon’s opposition to the privatization of the Aerospace Corporation, a federally controlled R&D center, was driven by opposition from those same giants, led by Lockheed-Martin and Boeing. Similar motives now support the Pentagon’s migration toward dependence on original equipment manufacturers for life-cycle logistics support for weapons, a move that will create monopolies that will last long past the end of production. These programs, known by many names but embodied in the Air Force’s TSPR program (Total System Performance Responsibility), can eliminate competition for decades.
Has this centralization achieved the results that the Big Three defense firms sought? How long will their market advantage last? The decade that saw them consolidate their market share also saw a precipitous decline in their relative market position. In today’s economy, companies like Cisco have market caps that are 100 or more times larger than the defense "giants" like Lockheed Martin or Northrop Grumman. Even defense information technology companies like CSC or SAIC have market caps that surpass these "giants." The end result leaves the large frogs in ever–shrinking ponds. Migration toward unmanned vehicles and a lighter, more mobile force, accompanied by greater reliance on information in warfare, will reduce their influence even further. In the end, technology developments in the non-defense sectors will produce changes that are farther reaching than those of any government policy or program.
The paper’s second focus is on the defense workers who began the decade in fear of losing their jobs as a result of defense downsizing. These workers found little in the merger years to assuage their fears. The authors note that the private sector workforce was reduced by 40% between 1987 and 1996, an annual rate that is barely 0.1% of the entire U. S. workforce. Attempts to redefine the impact of this workforce reduction by narrowing the realm of comparison (it is 0.5% of the manufacturing workforce, for example) fall short. At the national level, the disruptions caused by defense downsizing were and remain small. In addition, much of this downsizing may have occurred even if defense spending declines had been avoided, because in general, defense firms were late in adopting the restructuring changes that the rest of the global manufacturing industry faced in the 1970s and 1980s. Streamlining, outsourcing, and technology productivity enhancements may have led to workforce changes that were nearly as significant as those driven by defense spending reductions.
Of more interest is the paper’s description of regional efforts to retrain and redirect portions of this workforce. 'Regional' in most cases implies a single urban area, though it can describe an area as large as a state (in the case of Connecticut). There is considerable evidence that programs aimed at retraining defense workers produced positive results. But how many workers wanted service that they did not get? No data is available concerning whether demand far exceeded the capacity of those programs to provide services. Equally important, the alternative programs presented in the paper focus on long-term training, complete with coverage of living expenses for a year or more. There is no evidence of benefits that would justify such costs. Furthermore, it is difficult to envision the federal government possessing the delicacy needed to coordinate national industrial policies with regional or local workforce support and retraining programs.
Another issue of defense downsizing demanding further investigation is whether efforts concerning the workforce should be aimed at redirecting the career paths of the future workforce, rather than at retraining the defense workers of 1990. Engineering graduates today are not choosing to pursue work in defense firms. Competitive salaries and career growth potential are in other industries, particularly information and other technical services. These are the same companies that have dwarfed the defense giants in market capitalization.
Finally, the paper does not address the legislative climate in which these alternative programs would have had to operate. Even when the Democrats held a majority in both houses of Congress, there was little support for expensive defense conversion programs. The 1994 election, which pushed Republicans into control of the Congress, reduced this support even further. One plausible argument supporting the Pentagon’s encouragement of defense mergers offers that there was no legislative support for any other approach. This argument, however, appears to lack supporting evidence in any corner other than Newt Gingrich’s.
Nonetheless, even if the paper’s basic conclusion is correct and some set of defense conversion programs could have produced a more diversified and better integrated defense industry, there is little likelihood that Congress would have provided any funding. On the simple basis of the rise in defense spending, the need for conversion programs would have been obviated. On the more fundamental level, no majority of votes could have been mustered in favor of any large retraining program or subsidy for firms’ conversion or diversification efforts.
Moreover, the failure to create or sustain a more comprehensive set of conversion programs calls into question the very basis for such efforts. Governments have accepted roles in mitigating the negative consequences of their actions, and the impact of defense downsizing arguably merits such mitigation. Defense conversion efforts have long held loftier goals, however, not least among them (and one that has been consistently upheld by this commentator) is the support for better military-civil integration in the defense industry. In fact, the report of the Defense Conversion Commission in 1993 argued that such integration was the most important single reason for government support of conversion programs. The fundamental premise of these arguments is that the drive toward military-civil integration could come from inside the defense establishment. The premise's flaws: Could it be that such integration will only occur when technological advances in the commercial sector far surpass those in defense? The evidence of the 1990s is inconclusive on this point, but it seems clear that investment is no longer oriented toward progress that will primarily benefit defense. Projected increases in defense spending offer little more than a palliative, because increases of $2-3 billion per year in defense research and development are insignificant in comparison to those in commercial high-tech areas.
True conversion may in the end occur when defense firms are no longer relevant to the economy at all, and no set of government policies could have produced that outcome. While it may be that, as the authors argue, a different set of policies and approaches would have resulted in improved technology development in the defense-related firms, there is no evidence that the overall economy would have benefited in the long run.
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