Finding the Future: The Role of Economic Conversion in Shaping the Twenty-first Century

By Lloyd J. Dumas
Pages 3-21
"The Socio-Economics of Conversion from War to Peace"(pdf)
Edited by Lloyd Dumas, M.E. Sharpe: Armonk, New York. 1995.

Expenditure, Investment, and Military Spending

After more than a decade of rapidly increasing federal budget deficits under administrations claiming to be fiscally conservative, it is no wonder that by the mid-1990s, the general public had become suspicious of deficit-reduction proposals. To avoid further antagonizing the public in this environment of skepticism and mistrust, Democrats and Republicans outdid themselves (and each other) in proposing budget cuts intended to show their determination to limit tax increases. Having more than quadrupled the national debt between 1980 and 1992, the United States clearly could not indefinitely continue to run up the national MasterCard bill. So there was tremendous pressure from all sides to narrow the gap between federal revenues and outlays, and at least to slow the rate of increase in the national burden of debt.

In all of this, two critical matters seem to have been lost: (1) the key economic difference between expenditure and investment; and (2) the enormous excess in the military budget.

In general, there is little or no distinction in government budgeting between expenditures and investments. A dollar of outlay is a dollar of outlay. Yet, from an economic point of view, expenditures and investments are entirely different. Expenditures are outlays that exchange money (or other resources) for goods and services that accomplish a particular present goal. After the money has been paid out and the goods and services received, the transaction is over. Investments, however, are outlays of current resources made in the hope and expectation of generating a future return. That is, investments are undertaken not to achieve an immediate goal, but to increase the resources available to the investor in the future.

This distinction is an important part of the difference between an economist's or enlightened businessperson's approach to dealing with red ink, and that of an accountant. To an accountant, overcoming deficits - whether in budgets, trade, or balance of payments - calls for reducing outflows and increasing inflows. It does not really matter which outflows are reduced or which inflows are increased. A businessperson or an economist, on the other hand, might recommend increasing outflows in the form of investments in order to generate much larger future inflows that will turn the deficit into surplus. For example, a retail business that is losing money might be best advised to increase its outlays on advertising in order to build its customer base, rather than simply cutting staff. As the saying goes, "You have to spend money to make money" - that is, as long as the "spending" is in the form of investment.

During the long Cold War, the military budget was the largest single category of federal expenditure on goods and services. For nearly half a century, with the armed might of a rival military superpower as a foil, the budget supported a large military establishment, serviced by an unparalleled system of laboratories and industrial facilities. The military budget is an expenditure, not an investment. As such, it had a particular though vaguely defined goal, to provide for the nation's security. Now the Cold War is over, the Soviet Union is no more, and the United States is the only global military superpower.

Although much has been made of the threats of international terrorism and Third World conflict by those who seek to maintain as large a military as possible, these threats, such as they are, were no less serious before the demise of the Soviet Union. The "Soviet threat" was indisputably the main driver and rationale for those huge Cold War budgets, and it no longer exists. Thus, apart from the issue of whether there was ever any justification for the huge military budgets that characterized the Cold War, it is inconceivable that the continuation of military spending at anywhere near that level is justifiable today. Furthermore, many large and expensive military systems, from the MX missile to the B1 (and B2) bomber to the Trident submarine, have absolutely no relevance to dealing with Third World conflict or international terrorism.

Arguments for an even-handed approach to budget reduction, balanced between military spending and domestic programs, are simplistic and make no sense. They are appealing because they have the appearance of fairness. But fairness is not the issue. Fairness may be an appropriate criterion for judging what levels of support make sense for programs of income transfer that benefit one or another segment of the population, but it is wholly inappropriate in the case of mission-oriented programs such as education, roadbuilding, or the military. Within the bounds of affordability, levels of support for the military should be based on what is needed to achieve the mission of securing the nation against real and significant external military threats. According to such a criterion, disproportionately large cuts in the military budget are entirely sensible and justifiable. That is not a matter of ideology, it is a matter of common sense.

This situation does not call for 5 or 10 percent cuts in military spending. A military budget no larger than half, and probably more like a quarter to a third of the Cold War average, properly spent, will give us a military force strong enough to provide as much security as military forces are capable of providing in the present and foreseeable future. In any case, by some estimates more than half the United States' Cold War military budget was designed to defend other nations with standards of living comparable to our own, against a threat that no longer exists. Why then, even with all the pressures to cut the federal budget deficit, are we so reluctant to recognize the enormity of excess in present military expenditures and to do what so obviously needs doing?

This is a classic case of a set of vested interests resisting every attempt to move decisively into the future. These interests have become so intertwined with the existing political and socioeconomic structure that it is extremely difficult to disentangle them. Like a tumor that has attached itself to the body's vital organs, it cannot be safely removed by simply chopping it away. It must be detached with the care and precision of a skilled surgeon's knife. Rough across-the-board policies will not work. Generalized macroeconomic stimulation is not the answer. Achieving the real benefits of the long-promised peace dividend is not merely a matter of changing some programs or shifting piles of money around, it is a matter of fundamental structural change. It requires a well-thought-out, careful structural approach.

Economic conversion is just such a careful structural approach. Conversion reaches into the economy and redirects human and capital resources from military to civilian-oriented activity. It involves the retraining and reorientation of work forces and the restructuring of organizations and facilities that have been serving the military sector so that they can efficiently produce civilian goods and services. It is a way of reassuring the individuals, companies, and communities whose income, profits, and economic base are currently locked into the military system that the realization of the dream of peacefully ending the Cold War need not be the beginning of an economic nightmare for them. It is a way of removing obstacles to change, of helping them let go.

But it can be much more than that. Economic conversion can play a critical role in directing key economic resources to the kinds of investment that are so important to rebuilding the competitiveness of U.S. industry and generating real economic growth that can help put an end to our trade and budget deficits. To fully understand why conversion is at the fulcrum of this important change of direction, it is first necessary to understand why the military budgets of the Cold War were so peculiarly damaging to our economic well-being.

Military Spending and Economic Decay

The predominant view among economists is that money value is the arbiter of economic value. As a reflection of this, the most commonly used measure of the total economic output of a society, the gross national product (GNP) (or its close relative, the gross domestic product - GDP), includes only goods and services for which money has been paid. That goods and services produced without money exchange (for example, within the household) can be useful is not denied. But they are clearly not considered part of the "economy," and are therefore not counted as part of economic output. On the other hand, all goods and services (that are legal) for which money has been paid are part of economic output, whatever their function or purpose. If the economy is defined as the system of production and exchange of goods and services for money, then money value is the appropriate arbiter of economic value. This is not, however, the most useful or insightful way to define economic activity.

It is more productive to define the economy as that part of the society whose central function is to provide material well-being. It generates and distributes both the goods and services that directly satisfy material needs (i.e., consumer goods, such as televisions and furniture) and the means required to supply them (i.e., producer goods, such as metal-cutting machines and industrial furnaces). This definition of the economy means that money value is no longer the same as economic value. The proper criterion of economic value becomes the extent to which a good or service contributes to material well-being. A bookcase made at home is just as much a part of economic output as a comparable bookcase bought from a furniture store. Whether or not it has money value, any activity that results in such a good or service contributes to the economy's goal of improving material wellbeing. Therefore, it makes sense to call that activity economically "contributive."

On the other hand, not all goods and services with money value add to the material standard of living. Some goods and services are created to satisfy other human wants and needs. Churches are not constructed and bibles printed to provide material well-being, but to help fulfill the need for spiritual guidance; courthouses and law books are not aimed at increasing the material wealth of society, but at providing political order and control; battle tanks and missiles do not themselves add to the material standard of living, they are produced to enhance physical security. Though these goods may carry a very hefty money price, and may be very useful for the purposes they serve, they do not directly contribute to the central purpose of the economy and so do not have any economic value. It is logical, then, to classify activities that result in goods or services that do not have economic value as economically "noncontributive."[1]

Although noncontributive activities are without economic value, to the extent that they use productive resources they do have economic cost, in terms of opportunities foregone. In other words, the economic cost of a noncontributive activity is measured by the economic value that could have been created by using the same labor, machinery, and equipment to produce goods and services that have economic value.

Economically productive resources that are used for noncontributive activity can be said to be "diverted" to other than economic purposes. An economy in which significant amounts of critical economic resources have been persistently diverted to noncontributive activities will tend to experience a long-term decline in its productive competence - that is, in its ability to produce efficiently.[2] And declining productive competence will lead to a deteriorating standard of living in the long run.

There is no question that the production of military goods and services is noncontributive activity. Whatever else may be said for such products, they do not add to the present standard of living as consumer goods do, or to the economy's capacity to produce standard-of-living goods and services in the future, as producer goods do. Military-oriented activity may be only one of many forms of noncontributive activity, but it is one of the largest and most important in the world today. And the voracious appetite of modern military sectors for both capital and engineers and scientists creates a particularly damaging kind of resource diversion. Why is the diversion of technologists and capital so damaging?

The majority of the population earns the largest part of its money income in the form of wages and salaries. Ongoing increases in wages and salaries that outrun inflation are thus key to producing sustained, broad-based improvement in the standard of living. But, since wages and salaries are the largest part of cost for most producers, increases in labor costs will squeeze profits, creating strong cost-push pressure for price increases. Unless some way is found to offset this pressure, widespread increases in product prices will be reflected in a rising rate of inflation. This will wear away the purchasing power of higher wages, undermining the rise in living standards. Furthermore, over time rising prices will make domestic producers less competitive with foreign producers who are still able to offset costs. As a result, markets will be lost, forcing layoffs and causing rising unemployment. Not, on the whole, a very upbeat picture.

The ability to offset cost-push pressures depends crucially on the rise of productivity. Although many things affect the rate of productivity increase, more than anything else, rising productivity depends on improving the techniques of production and the quantity and quality of capital available to workers. Improvements in the techniques of production come primarily from research and development (R&D) aimed at discovering and applying new civilian-oriented technology. Regardless of the amount of money spent, without a great enough quantity and quality of engineers and scientists available to perform the work, such R&D will not be successful. Money does not create technological progress, engineers and scientists do. However, if enough capital is not available, it may be difficult to provide the required research facilities, or to widely deploy the results of successful R&D to the factory floor throughout industry.

A persistent, large-scale diversion of engineers and scientists and/or capital to economically noncontributive military activity will unavoidably reduce their availability to contributive civilian activity. The stream of civilian-oriented, productivity-enhancing technological innovation will slow down, causing the rate of productivity growth to drop. Reduced productivity growth will, in turn, undermine the ability of domestic producers to offset the rising cost of labor, or for that matter, of any other input to production and supply. If wages and salaries continue to rise, the result will be cost-push inflation that will wear away the purchasing power of the nominally higher pay. If higher prices cannot be sustained in the face of foreign competition, there will be direct downward pressure on wages and salaries. If protectionist measures dull the edge of foreign competition, higher prices will penalize domestic consumers. In all three cases, the standard of living will decline; only the distribution of the loss and the mechanism by which the decline is transmitted will differ.

How large has the diversion of technological and capital resources been in the service of the arms race? For decades now, about 30 percent of the nation's engineers and scientists (full-time equivalent) have been engaged in military R&D. Because pay has been higher and access to state-of-the-art facilities and equipment better in that arena, the military has tended to attract a disproportionate number of the "best and the brightest" technologists. Thus, although the quantitative diversion of engineers and scientists is large enough, adjusted for quality, the "brain drain" is even larger.[3] Concerning capital diversion, as of 1990 the total book value of physical capital directly owned by the Department of Defense (DoD) (including plant equipment, structures, weapons, and related equipment and supplies) was more than 80 percent of the total book value of capital equipment and structures in all U.S. manufacturing facilities combined![4]

The standard of living in the United States has been declining since the mid-1970s. The failure of American industrial competitiveness has been highlighted by the replacement of more than three-quarters of a century of continuous trade surpluses (1894-1970) by decades of trade deficits. Hundreds of thousands of high-paying manufacturing jobs have been lost, while job creation has focused on "MacJobs" - low-paying, no-future jobs in the downscale part of the service sector. And all this alongside a national orgy of borrowing that quadrupled the national debt and transformed the United States from the world's largest net creditor internationally to the world's largest net debtor. Had the huge amount of capital borrowed just since 1980 been used for contributive investment and combined with the talents of otherwise diverted engineers and scientists, the United States would have undergone an industrial renaissance. Instead, such resources were lavished on largely noncontributive activity, and all we have to show for all that debt is protracted economic decline.

One clear implication of this analysis is that not all parts of the military budget have equal economic meaning. Roughly half the military budget has traditionally been operations and maintenance expense, including the salaries and benefits of those in the armed services. Although these outlays involve a great deal of money, they have relatively little economic impact. The main economic action lies in procurement and R&D expenditures, because those are the outlays that draw engineers and .scientists, industrial capital, und other productive economic resources into the military sector. Compared with cutbacks in military procurement and R&D, troop reductions and base closings thus do very little to release the economic resources critical to industrial renewal. Yet the military spending cuts to date have been concentrated mainly on operations and maintenance.

Conversion and Reconversion

Economic conversion is key to economic renewal for two related reasons. First, it provides a means for efficiently reconnecting labor and capital resources released from the noncontributive military sector to contributive work in the civilian economy. It is, after all, not what diverted resources are doing (noncontributive activity), but what they are not doing (contributive activity) that causes economic decay. Shrinking the military sector will do nothing to repair the economic damage of the arms race unless the released resources are reconnected to contributive civilian activity. In economic terms, nothing will have been accomplished if those people and facilities are released from the military sector and become unemployed. Second, conversion can help reduce the natural resistance of entrenched vested interests to this restructuring by reassuring them that in fact reconnection, rather than unemployment, lies at the end of the road.

At the end of the World War II, the United States faced a great challenge. A large fraction of the nation's output had to be moved from military to civilian production. With a combination of private sector and federal, state, and local government planning, the challenge was met with flying colors. Some 30 percent of U.S. output was transferred in one year without the unemployment rate ever rising above 3 percent.[5] This experience made it clear that it is possible to redirect enormous amounts of productive resources from military to civilian activity without intolerable economic disruption. But it is an experience that must be interpreted with care.

First of all, rationing during the war combined with high incomes to create considerable pent-up demand for all manner of consumer products. When rationing ended with the war, there was a ready-made, unsatisfied market for a wide variety of goods to which war producers could turn. There was little foreign competition to challenge American producers, since every major industrial nation except the United States had been severely damaged by the war. Even more important, the companies that supplied the military during the war were basically civilian companies that shifted to military production for a few years from their normal business of making civilian products. All of their workers, including managers, engineers, and scientists, knew how to operate in a civilian commercial market environment. That is what they had spent most of their working lives doing. Though modifications had been made during the war, most production facilities and equipment had originally been designed and configured for efficient civilian production most these firms and their work-forces, this was a "reconversion" - that is, they were going back to business as usual.

The situation today is quite different. There is no deep well of unsatisfied pent-up demand, and there is fierce foreign competition. Decades, rather than a few years, of high military expenditures have drained the U.S. economy and put many domestic producers far behind their overseas rivals. It is no coincidence that the two most successful industrial economies in competition with the United States have been the two industrialized nations prevented by the World War II terms of surrender from building massive military forces - Germany and Japan.

Today there are generations of managers, engineers, scientists, and production and maintenance workers whose employment experience includes little or nothing but military-oriented work. Many present-day military-industrial firms have never operated in civilian commercial markets. Even those that are large-scale manufacturers of both military and civilian products (e.g., Boeing and Rockwell International) typically have operationally insulated military and civilian divisions functioning as separate, wholly owned subsidiaries reporting to the same overall top management.

Furthermore, during World War II, both the means of production and the technologies used in designing and manufacturing military goods were still fairly similar to those in the civilian economy. Over the past half century, the physical plant, machinery, and technologies involved in military and civilian manufacturing have sharply diverged. The technologies embodied in the designs of the products themselves are even more different. For the major military producers, moving into civilian commercial markets is most assuredly not returning to "business as usual." It is movement into new and unexplored territory. It is conversion, not reconversion.

That makes the process more difficult. But with some care and advanced planning, there is little question that it can be successful.

The Nature of the Conversion Problem

The United States' military sector does not operate by market principles. It is the closest thing to centrally planned socialism in the United States. The nature, quantity, and price of output are not determined by impersonal market forces. They are set by the interaction of the Pentagon's central planners and the managers of military industry. The vast majority of Department of Defense business is negotiated rather than awarded through a serious and enforced competitive bidding process. In practice, virtually all major military contracts operate as if they were "cost-plus" - with producers reimbursed for whatever they have spent, "plus" a guaranteed profit. Under such a contract, the manufacturer bears virtually no risk and can increase revenues without hurting profits by high-cost, inefficient operation. In a competitive commercial marketplace, this kind of inefficient operation would cause serious, if not fatal, problems for the company. In the sheltered and subsidized world of the centrally planned military sector, it is a recipe for growth and success.[6]

Much of the capital of the military sector is owned by the government. Some military-oriented production and maintenance facilities are wholly government-owned and completely government-operated (GOGO). Many more are government-owned but operated by private military contractors (GOCO). As of the mid-1980s, there were more than fifty GOGO and more than sixty GOCO military-serving manufacturing and maintenance facilities entirely owned by the federal government.[7] In addition, a great deal of government-owned industrial equipment is used in privately owned and operated plants by military contractors.

Military industrial firms serve a well-funded customer willing to cover whatever costs they might incur. They therefore have a tremendous advantage over market-oriented firms in bidding for resources. Civilian commercial firms must be concerned with the cost of everything they buy. They are not guaranteed reimbursement of costs plus a profit in advance by their customers. Backed by an essentially cost-plus procurement system, military firms can pay as much as they need to pay to make sure they get the inputs they want, whether those are exotic metals or engineers. As a result, the military sector is able to divert resources from the civilian economy almost as easily as if they were diverted by government decree (which is how the same thing was accomplished in planned economies, like that of the former Soviet Union).

While the military sector is relatively insensitive to cost, it is very much driven by performance. Military firms are contracted to design and deliver products that are capable of high levels of performance under extraordinarily hostile operating conditions. Although they do not always succeed, they are pressed hard to squeeze every ounce of performance out of products that can operate under varied and extreme conditions of vibration, shock, temperature, humidity, dirt, and so on. The cost-insensitive, performance-driven world of the military sector affects both the capital and the labor it uses. Some capital is so specialized to military-serving use that it has no sensible civilian alternative use; other capital may technically be usable for civilian purposes, but has a cost-capability tradeoff that makes it inappropriate for a market-oriented firm.

More important, long years of training and experience in the peculiar world of the military sector can create a labor force with a trained incapacity to function effectively in a civilian commercial environment. Except possibly for wage expectations, this is not that much of a problem for most factory-floor workers or lower-level administrative and clerical personnel. But managers, engineers, and scientists are generally so greatly affected that they are not readily reemployable in the civilian, market-oriented sector without significant reshaping. They need to be taught some new skills (retraining) and just as important, taught to look at what they do from the entirely different perspective of a cost-sensitive operating environment (reorientation).

Managers, for example, are used to operating in a one-customer world of guaranteed profit, where the critical skills are maintaining capability with little regard to cost, meeting the bureaucratic requirements of the armed forces procurement regulations, and lobbying effectively for contracts. This has little in common with the critical civilian commercial sector skills of minimizing cost, serving many and varied customers, and navigating in the constantly changing commercial marketplace where nothing is guaranteed. Military sector engineers are able to use the most exotic materials and must specify the most exacting tolerances to meet stringent military performance requirements. For the most part, these engineers will not even be aware of just how dramatically tight tolerances and exotic materials can increase the cost of manufacturing and maintenance. They do not know because they have not had to know. But unless they come to understand the cost implications of their work and learn to take them seriously, they will be of very little use to any civilian firm that might hire them.

Policies for Successful Conversion

Given a thorough understanding of the endpoints of conversion - the very different operating environments of the military and of the civilian sectors - policies can be designed to carry workers and facilities successfully through this difficult transition. For technical reasons, some things must be done regardless of the particular shape the conversion process takes. It is abundantly clear, for example, that any sensible conversion process must take seriously the need both to retrain and to reorient -managers, engineers, and scientists. But other things are greatly affected by whether conversion is internal or external to the firm.

"Internal" conversion involves the transition of work force, facilities, and equipment within a formerly military-oriented firm that is shifting to servicing a civilian market. "External" conversion involves the transition of workers, facilities, and equipment that are released by a military-oriented firm and so must find reemployment elsewhere. Internal conversion has much to recommend it. It minimizes disruption of the lives of workers and their families, since it aims at keeping as much of the work force intact as is economically sensible. It minimizes disruption of the surrounding community as well by maintaining the tax base and the geographic patterns of living, spending, and commuting. And working within the familiar context of an existing firm and workplace means that less on-the-job adjustment is required on the part of the affected work force. On the other hand, some external conversion is unavoidable.

Even if all military contractors were committed to planning for internal conversion, some part of their work force would have to be externally converted. The engineering intensity and management staff size common in military industry are simply unsupportable in any economically viable, unsubsidized civilian firm. One of the most striking anecdotal illustrations is the B1 bomber plant in El Segundo, California, which at the height of its operation had 14,000 workers, including 5,000 production workers, 5,000 engineers, and 4,000 managers. What civilian manufacturer, low tech or high tech, would need or could support one engineer and almost one manager per production worker? Efficiency inevitably requires some paring of the work force. External conversion is therefore needed both to reshape the engineers and managers laid off from converting military enterprises and to reconnect them to other civilian firms.

Furthermore, no matter how carefully internal conversion is planned, some of the plans will not work well. There are many reasons, some of which have more to do with the uncertainties of life in the world of business than with the quality of planning. External conversion will be required to find new civilian opportunities for the workers (and perhaps the facilities as well) associated with the plans that failed. But the plain fact is, the main reason external conversion will be required is that many military contractors, especially major contractors, are extremely resistant to any form of internal conversion planning. They intend to fight for every bit of military business that remains and to "downsize" (a euphemism for laying off workers and shrinking the company) when they lose military contracts. For many years, these firms successfully used ''job blackmail" (threats to lay off large numbers of workers) to coerce the Congress into funding military programs that, in some cases, even the Pentagon did not want. And old habits die hard.

Some argue that external conversion is preferable because it is easier to get off on the right foot in a new enterprise than it is to completely reshape patterns within an existing company. There is something to be said for this point of view. It is more difficult to change patterns of behavior when much of the surrounding physical and sociological environment remains the same. Yet business enterprises that are healthy and vital must retain the flexibility to reshape themselves when business conditions change. There are few ways to get deeper into trouble in business, especially in the long term, than to get caught in a changing game without recognizing that the game is changing. For military industrial firms, like it or not, the game is most assuredly changing. For the firms as well as their employees and the surrounding community, then, there is much to recommend internal conversion.

One of the great technical advantages of internal conversion has to do with reshaping the labor force. Job retraining programs are far more effective if they are targeted to specific job opportunities. With internal conversion, the nature of the job any given worker will be doing after conversion is known nearly as well as the nature of his or her present job. Whether we are dealing with scientists, engineers, production workers, clerical/administrative workers, or managers, it is much easier to develop a successful program for whatever retraining and/or reorientation might be required with this knowledge in hand. Knowing what position the trainee will be filling is such an advantage that it must also be taken seriously in external conversion. Mechanisms need to be developed for connecting workers to future employment before retraining begins, if at all possible. For example, the government might sign retraining contracts with potential civilian employers. The government would agree to pay for or heavily subsidize a program of retraining that is tailored to the needs of the employer, provided the employer agrees to hire (and retain for a specified minimum period) the trainee upon successful completion of the program.

Both public and private sectors have key roles to play in converting the economy. There are things they should do, and just as important, there are things they should not do. It is very helpful to have the coordination and assistance that the federal government can provide, but if the conversion process is not highly decentralized, it has very little chance of working well. The search for productive and profitable civilian activities to replace the previous military mission, and the plans for the reshaping of capital and labor they imply, must be tailored to the details of each particular facility and workplace. This is one case where a one-size-fits-all approach virtually guarantees that nothing will fit anyone. It is a mistake for the federal government to try to blueprint facility and work-force conversion. There is no good substitute for a high degree of decentralization in the detailed planning and plan implementation process. Even close oversight of microlevel conversion by the federal government is a poor idea. It is unlikely to improve the effectiveness of conversion plans and highly likely to be inefficient and expensive. Although this is more obviously true of internal conversion, it is important for external conversion as well.

A more appropriate role for the federal government is to use its leverage as customer to pressure military industry to begin planning for internal conversion without further delay. This could easily be accomplished by following the precedent of other federal legislation, such as equal employment opportunity laws, that set requirements for eligibility for federal contracts. One low-cost approach is to require military contractors to set up independently funded labor-management "alternative use committees" (AUCs) as a condition of eligibility for any future federal contract, military or civilian. There is no airtight guarantee that this planning will be taken seriously and done well. But with independent funding and the combination of competing and common interests of labor and management in the conversion process at work, the probability of triggering effective internal conversion is certainly much higher.

It may also be time to resurrect, in updated form, one of the most successful federal investment programs in the nation's history, the World War II vintage GI Bill of Rights. Under the provisions of the GI Bill, millions of individuals who had served in the armed forces received training and educational benefits to help them improve their earning capacity and employment opportunities. According to former Senator Ralph Yarborough, who chaired a committee that evaluated the performance of the program, the GI Bill was an investment with an enormous rate of return. The extra federal taxes collected out of the higher incomes earned because of the training amounted to some thirty times the program's cost to the taxpayer. And this does not even begin to consider the plethora of other benefits to the economy and society that attend a better-trained and better-educated work force and citizenry. A new GI Bill for all workers in the military sector would make a great deal of sense in facilitating conversion today. I see no reason why this approach could not eventually be broadened to cover all displaced workers. However, it is important to recognize that workers undergoing conversion (particularly engineers, scientists, and managers) do have special problems. Even more important, the successful conversion of these workers, especially of engineers and scientists, holds the key to the kind of industrial renewal that can and will brighten the economic prospects of the entire labor force.

With all the differences between the reconversion problem that followed World War II and the conversion problem today, the basic division of responsibility that succeeded then still makes sense. The public sector - federal, state, and local - took care of education and training, and planned public works projects to create productive jobs building the nation's infrastructure. But the private sector did all of the microlevel corporate planning.

Alternatives to Conversion

Conversion is only one of three policy approaches that deal with the economic transition to lower levels of military expenditure. It is the most thoroughgoing approach, reaching into the structure of economy to redirect human and capital resources from military to civilian activity. But it is also the most complex and most difficult.

Diversification is one alternative approach. It seeks to minimize the economic stress of transition by reducing economic dependence on the flow of military dollars. It has for years been the preferred strategy of those military-dependent firms in the United States that have paid attention to the possibility that the volume of their military might someday fall. By operating parallel civilian product contracts divisions within their own firms or acquiring other civilian producers, they can protect the company's financial position against the possible loss of military business. When major military firms have tried to diversify by producing civilian products in their military divisions without the kind of retraining and restructuring that is at the heart of conversion, the results have routinely been disastrous for both the companies and their customers. There are quite a few examples of failures of this particular type of diversification.

The prime contractor on the Bay Area Rapid Transit (BART) system in San Francisco was Rohr, a military aerospace company. BART was years late getting into service and greatly overran its initial cost estimates. Boeing Vertol, the military helicopter division of Boeing Aircraft, took a considerable financial loss producing light rail transit vehicles (streetcars) for the city of Boston because of unreimbursed cost overruns. The vehicles broke down so frequently and sometimes so completely that they could not be repaired on site. They had to be shipped back to the factory. Vought Corporation, the military aerospace division of LTV, manufactured an automated "people mover" called Airtrans for Dallas/Ft. Worth Airport in the 1970s. Twenty years later, the system still did not meet all of its original specifications. Its overruns and project delays led to a flu- of lawsuits between Vought and the airport authority.

Ironically, the dismal record of this type of diversification has often been cited as proof that internal conversion does not work. But this is not conversion. In fact, given the striking differences between the operating environments in the military and civilian commercial sectors discussed earlier, it is completely predictable that this type of diversification is doomed from the beginning. These experiences demonstrate the importance of heeding the caveats of internal conversion. It is dishonest to use these cases as examples of the failure of conversion. And to use them as an excuse for not facing the need to take this transition seriously is unconscionable.

Community economic adjustment is another alternative approach. It involves government providing financial and technical assistance to military-dependent cities and towns to help them overcome the problems created by base closings, loss of business by local military contractors, or the need to reintegrate large numbers of discharged military personnel into the local economy. For decades, community economic adjustment has been the Pentagon's policy of choice for quieting the uproar that attends the announcement of military base closings. Typically, the Department of Defense has not provided much financial aid under this program. It has instead offered limited technical assistance and served as a liaison for the communities with other federal agencies.

Properly implemented diversification and well-funded economic adjustment programs can provide some help in mitigating the financial stresses that military-dependent companies and communities face as military budgets are cut back. Unfortunately, neither of these policies does much to help displaced military sector workers modify and redirect their skills for civilian employment. Only conversion seeks to recoup the largest part of the huge investment society has made in the skills of the workers and in the facilities and equipment of the military sector. It takes seriously the possibility of reusing military-serving facilities and equipment, but only where such reuse makes economic sense. And most important, conversion refuses to accept the personal cruelty and social foolishness of writing off a generation of military sector workers because their current skills and orientation need reshaping to fit changing labor needs. Diversification and community economic adjustment programs are much more ready to abandon and move on.

Conversion and the Twenty-First Century

Times of transition are always difficult. They call on us to break old familiar patterns that have come to feel comfortable. Effort is required where habit and routine once carried us through. It takes some courage to face up to the need for change, even when it is clear that the patterns of the past are no longer tenable. It takes some creativity and determination to recast our lives in ways that are not just different, but better.

We are living in an era of profound change. That can be frightening, but it can also be liberating. Where the structures of the past have crumbled, there is the opportunity to create new and better structures for the future. And it is easier to build bridges when walls come down. In the last decades of the twentieth century, structures have crumbled and walls have come down all over the world. That we are passing through a time of profound change is undeniable. What we do - or fail to do - will change the shape of the century to come. The enormous, worldwide preemption of productive resources for military purposes over the past fifty years says a great deal about the world we have created and the priorities we have established. If we have courage, foresight, and determination, we can break with the deadly, fear-driven legacy of this tortured century. We can find a more productive, life-enhancing way to use our talents and capabilities. Conversion, properly understood and implemented, can help us work our way through the myriad of details needed to build a practical path to a world that is both more prosperous and more humane.


[1] See Lloyd J. Dumas, The Overburdened Economy: Uncovering the Causes of Chronic Unemployment, Inflation and National Decline (Berkeley: University of California Press, 1986).

[2] Ibid., pp. 147-83.

[3] Ibid., pp. 209-11 .

[4] The book value of capital owned by the Department of Defense is from Department of Defense, Real and Personal Property (September 30, 1990). The book value of capital in U.S. manufacturing as a whole is from Bureau of Economic Analysis, U.S. Department of Commerce, Survey of Current Business (January 1992) p. 113.

[5] Kenneth E. Boulding, in Foreword to Lloyd J. Dumas (ed.), The Political Economy of Arms Reduction: Reversing Economic Decay (Boulder, CO: The American Association for the Advancement of Science and Westview Press, 1982), p. xiii.

[6] See Lloyd J. Dumas, "Payment functions and the productive efficiency of military industrial firms," Journal of Economic Issues (June 1976): 454-74.

[7] Lloyd J. Dumas, "Commanding resources: The military sector and capital formation," in Dwight R. Lee (ed)., Taxation and the Deficit Economy: Fiscal Policy and Capital Formation in the United States (San Francisco: Pacific Research institute, 1986), table 12-1, p. 336.