The Reagan administration has begun a major new buildup of the nation's defense forces that could have profound implications for the overall economy. If the president has his way, over the next five years military outlays will more than double to $336 billion, from $158.6 billion this year.
Administration figures show that between fiscal 1982 and 1986, the defense budget will surge an average 11.1 percent a year after adjustment for inflation, outpacing both the 6 percent growth that former President Carter envisioned and the 10 percent annual rate achieved during the Vietnam war buildup.
The increase will begin slowly but will speed up significantly in later years. Over the full five-year period, defense outlays would grow by $177.4 billion under Reagan's proposed budget, compared with $135.7 billion under Carter's plan. And the new president seems likely to get what he's asking.
Can the defense industry -- and the economy -- seriously cope with this kind of outpouring? Or will the increase, as some analysts argue, overwhelm the industry's production capacity, exacerbate shortages in labor and materials and send inflation soaring even farther?
The industry's current readiness has set of warning cries from some critics. A House Armed Services Committee report last December asserted the U.S. industrial base has deteriorated sharply and questioned whether the Pentagon will be able to spend the money it's seeking in an "economic manner."
Thomas S. Hahn, former counsel to the armed services panel, points to a steady decline in the number of defense contractors over the past few years, aging facilities and shortages of skilled labor and critical materials. He also warns that the increasing complexity of new weapons has lengthened production time.
The issue is important because of the potential impact of this size increase on the overall economy. In the Vietnam war buildup, for example, the spurt in defense spending overheated the economy, created bottlenecks in key industries and sent prices skyrocketing. It was the beginning of the current inflation spiral.
But how serious is the prospect of a repeat performance this time around? How critical are the shortages and bottlenecks likely to be? And how effectively will the defense industry be able to gear itself up to meet the military's new needs?
Ralph Doggett, defense specialist for Data Resources Inc., the Cambridge, Mass.-based research firm, joins a sizable group of analysts who concede that the short answer is that "nobody can really tell for sure" yet. "There's been very little hard analysis," Doggett admits.
Although experts on both sides can argue heatedly over whether the industry can cope with the new outpouring, the government has only just begun a detailed survey of the defense industry's current capacity and ability to expand. And private analysts seem no better grounded.
While defense analysts concede some bottlenecks will occur now matter what, the impact is likely to depend largely on how quickly the new budget decisions will be translated into actual spending and how rapidly the overall economy will perform over the next several years.
Unlike the case in the Vietnam era, the defense outlays being pondered now would not go primarily for ordnance, where dollars are dumped quickly into the pipeline, but for new long-term weapons systems, which often require years before production contracts actually are let.
Economists say if the Pentagon and Congress can manage the defense pot effectively, the industry may be able to squeak by with a minimum of bottlenecks in a few, albeit important, sectors. But if the money simply is "dumped" into the economy, serious strains could result.
A rundown by several knowledgeable defense analysts produces this sketch of the industry's current state:
The major prime contractors, particularly in aerospace and communications, are in relatively good shape and should have no trouble meeting the new push. Unlike the situation during the Vietnam war, the commercial aircraft market is on the decline, making it easy for companies to switch to military production.
Edward E. Hood Jr., vice chairman of General Electric Co., one of the nation's largest defense contractors, says the impact is "hard to assess until we see" how the defense budget actually breaks down.But private consultant Hahn notes that "as far as floor space is concerned, we've got a lot of it."
The picture for subcontractors isn't nearly as bright. After years of on-and-off budget cuts before Reagan's newly announced buildup, many subs and suppliers have gone out of business or switched to more lucrative civilian work. To attract them back would require costly and long-term guarantees.
There's a serious problem in the nation's foundry capacity, where shrinking markets and increasing stiff environmental regulations have forced some 240 shutdowns in recent years, virtually wiping out the industry's ability to handle any major new increase in production demands.
The United States currently has only two major foundries large enough to be able to make the huge forgings needed for aircraft and other weapons. There's also a shortage of bearings for jet engines. And supplies of semiconductors, which are crucial to military electronics systems, are becoming increasingly scarce.
More ominously, many of these items, particularly forgings, require lead times of two years or more just for normal production. As a result, in many cases manufactures couldn't boost their output rapidly no matter how much the government was willing to pay.
The shipbuilding industry is in a mess, partly because of its own bad management practices, and some experts are expecting more closings within the next few months. The quality of U.S. yards has been so low, the Navy has considered buying warships from British producers. Can the remaining yards cope?
There are critical labor and materials shortages to take into account. The aerospace and electronics industries already are unable to find the engineers and technicians they need, and many categories of skilled workers also are in short supply. As a result, wage pressure easily could mount.
There's also a potential for serious shortages in strategic metals, such as titanium, cobalt and chromium, that are needed for the production of aircraft and jet engines. Many already are in short supply and despite new government efforts to rebuild stockpiles, inventory levels remain low.
Admittedly, at least some of these hitches are offset by economic factors. Compared to historical levels, defense spending right now is relatively low.
Government figures show the nation now is spending only 5.6 percent of its gross national product on defense. Regan's budget would push this to slightly more than 7 percent by 1986, still well below the 8-to-9 percent that prevailed before Vietnam.
Besides the aerospace industry, the segments apt to feel the strains the most are shipbuilding, missile construction, the forgings and castings industries, tank production and general armaments manufacturing. No doubt there also will be some spillover into related areas.
What can the government do to prevent the defense time bomb from exploding?
Experts offer these steps:
First: Improved management of the entire military procurement process to make sure all purchases are coordinated to avoid undue strain on individual industries. Experts argue that some orders ought to be delayed, if necessary, to avoid overloading the industry's capacity.
Second: A switch to multiyear contracting on defense procurement to guarantee subs and suppliers a long-term market and to make it attractive for them to stay in defense production. Also possible: Increased incentives, such as loan guarantees and price floors.
Defense consultant Hahn reflects a widely held view in the industry: "Under current procdures, our defense industry doesn't know how to plan. How many people were all lined up to build the B1 bomber when Jimmy Carter backed away?"
Third: A step-up in stockpiling of strategic materials so reserves can be rebuilt now while supplies are still moderately good. Until recently, the United States has regularly sold off its stockpiles as a price-dampening measure. Defense considerations have been put aside.
Finally, a good many analysts are urging the military to settle for less complexity on new weapons and stick with proven systems that cost less and provide more bang for the buck. "More money alone just isn't the solution," says a former congressional defense expert. "There must be some reforms."
The difficulty is, how to manage all these components without setting off a new price spiral that could spread throughout the economy. To some analysts, that means not only skillful manipulation of the defense side, but a firm hold on nondefense spending as well.
Albert M. Wojnilower, economist for First Boston Corp., notes that, because sharp boosts in defense programs require such large capital spending increases, hte current push could prove a bigger spur to the economy than most analysts are predicting, particularly on top of the Reagan tax cuts.
"When the military is spending more it makes everyone else spend more . . . without making anybody else spend less," Wojnilower says. "So its multiplier effect, to use that jargon, is far greater than that of either the spending cuts or the tax cuts." The prospect clearly worries Wall Street.
For the moment, policymakers may have some respite. Given the usual lags between the time a president proposes and spending increase and the time it's acutally pumped into the economy, the first serious pressures shouldn't begin to show up until 1983 or 1984.
In the meantime, the defense boost, which actually began in earnest during the final year of the Carter administration, already is under way and threatens to loom even larger as Congress continues to out-Reagan the president on defense. How well the nation can swallow that increase remains to be seen.