Do arms dollars hurt economy?

Early in his presidency, when Ronald Reagan revived plans to purchase 100 B-1 B bombers from Rockwell International, the prospects for the ambitious desert town of Palmdale, Calif., caught an almost immediate updraft.

To a town of 12,000, assembling the B-1 has meant 4,000 new jobs, which will last most of this decade.

But while Palmdale and much of the state of California prospers under the fast-growing defense budgets of the Reagan administration, some analysts assert that defense spending weakens the larger national economy in subtle but far-reaching ways.

The point of defense programs, of course, is not to provide jobs or lead the economy, but to ensure national security. Yet individual defense contracts often win support in Congress because of their economic impact on a congressman's home district. Southern California Rep. George Brown (D), for example, makes no secret of his disdain for the B-1 as an obsolete strategic weapon. But he supported the B-1 program, since it meant jobs in his district.

Critics of defense spending point out that it is a very inefficient way of providing jobs, and they say that its costs are much greater than commonly understood.

Dollar for dollar, these critics say, defense contractors provide fewer jobs than most other industries, because more money is spent on expensive equipment than on labor. And the jobs that defense contracts do provide are often well-paid engineering jobs, so salaries are spread thickly over fewer people.

''Aside from one or two extremely capital-intensive activities, defense spending generates fewer jobs than almost any other industry where similar amounts of money are spent,'' notes John E. Ullmann, professor of management at Hofstra University.

A more significant problem with Pentagon programs is their contribution to massive government budget deficits. Military spending tends to crowd out other businesses when the government borrows money needed for commercial investment, driving up interest rates.

This crowding effect is probably not significant when there is slack in the economy, that is, when the nation's factories have capacity they are not using, says Arthur Anderson, an economist with the Rand Corporation.

And as the United States emerges from recession, it is just now approaching the point where the slack is gone, Dr. Anderson explains, and military appropriations nearing $300 billion will start to drain resources from other parts of the economy.

In the view of critics - such as Dr. Ullmann of Hofstra, Seymour Melman of Columbia University, and Lloyd Dumas of the University of Texas at Dallas - the most serious long-term damage that heavy military spending does to the economy is to the nation's competitive standing in commercial innovation.

The crowding also occurs in the market for engineering and scientific talent. Dr. Dumas, a professor of economics and political economy, estimates that 30 to 50 percent of American engineers and scientists are working in defense-related fields. The effect of this siphoning of talent on the rest of industry, he asserts, ''has been very dramatic.''

Since World War II, says Dumas, the defense drain on engineering talent has slowly eroded US leadership in productivity and handed it to countries like Japan and West Germany that spend little on defense technology.

This was a major concern four years ago as the defense buildup began, says Rand's Dr. Anderson. But in the meantime the number of young engineering graduates has caught up with demand.

On the other side of this issue, military research has led to some major technological advances. California's lead in high technology, the basis of the modern computer, can be traced to Pentagon-backed programs.

Yet, Anderson notes, in most cases private enterprise would have done the research on its own, perhaps more efficiently, a few years later.

But Anderson and others add that while defense spending may indeed weaken the US economy, that is only a secondary line of argument in the debate over Pentagon budgets.

To the critics of defense programs, says Larry J. Kimbell, professor of economics at the University of California at Los Angeles and a business forecaster: ''You have to convince me that the Russians aren't a threat. Once you've done that, I'll support defense spending cuts, and I don't care how many people it throws out of work in California.''

The first article appeared Sept. 10.

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