There is a potential Republican nightmare for 1984 buried in the Reagan administration's "Program for Economic Recovery." It can be found under "D" -- for defense.
If Congress enacts the enormous Reagan defense program, as it now seems eager to do, and if the national economy fails to perform as well as the administration predicts it will, that nightmare could become reality. If a tax cut is passed and the promised Reagan boom fails to materialize, what is supposed to be a balanced budget in 1984 could have a $50 billion to $100 billion deficit.
Every major economic forecasting firm and the Congressional Budget Office say that the boom won't materialize.
The significance of the administration's proposals can be stated in simple numbers. This year the Pentagon will spend about $163 billion. By 1084, according to the administration's optimistic calculation, that figure will rise to $256 billion. By the Congressional Budget Office's reckoning (the CBO is more pessimistic than the administration's Office of Management and Budget about the prospects for reducing inflation), the 1984 figure actually will be $267 billion, or a 64 percent increase in just three years.
Stated another way, the Reagan administration proposed to increase defense spending in the next three years by an amount greater than the entire defense budget of 1978. In constant dollars, this buildup would be three times larger than the Vietnam war buildup; as a percentage of gross national product the Reagan increase would equal the Vietnam experience. It was that late-1960s strain on the economy, numerous economists say, that provoked America's current economic problems.
Conditions have changed since the late '60s, and there are economists who believe that the economy and the federal budget can absorb the huge defense increases that President Reagan favors (in real terms, an 11.5 percent increase in budget authority this year, a 14.8 percent increase next year). Several administration economists pointed out that even if the Reagan buildup is fully approved by Congress, defense spending will represent a smaller portion of GNP than it did in the late '60s -- about 7 percent compared to 10 percent then. But the proposed increases are unprecedented in size and there is great political momentum now behind them, a combination that makes this potential nightmare at least worth considering.
Few politicians in Washington seem to be considering it just yet. Congress is rushing into the new defense program with enthusiasm and, thus far, very little scrutiny.
Theoretically, nothing would prevent the administration from cutting back on defense spending if it saw the economy falling behind its optimistic predictions. Lawrence Kudlow, chief economist at the Office of Management and Budget, made this point in an interview, saying: "If any overall budgetary adjustments are necessary [in the future], then they'll be made. . . . Defense expenditures are always considered as part of the overall budget picture."
But defense spending is not so easy to alter, particularly in the midst of a multiyear buildup like the one now beginning. For example, if the Reagan administration were to decide in January 1983 that excessive defense spending jeopardized any chance at a balanced budget in 1984, it would find that it had already lost control of all but 16 percent of the procurement outlays scheduled for the 1984 defense budget.
This is because money appropriated for defense programs in one year actually is spent over the next several years. According to figures compiled by the CBO, $72 billion will be spent on procurement of weapons and equipment in 1984 under the Reagan budget. But in January 1983, $61 billion of that amount already would be appropriated (most of it in the '82 and '83 budgets), so it would be locked in and beyond the reach of any sudden effort to cut defense spending. Only about $11 billion of the '84 outlays would remain to be appropriated after January 1983.
The nonprocurement sections of the budget would be equally hard to reduce suddenly, because they represent money spent to support and maintain forces in being.
Moreover, defense spending is more than just another item in the Reagan budget. The new administration has made a stronger national defense its top spending priority, and has treated funds for the Pentagon as a unique budget category. While the Office of Management has been slicing away at almost every department in the government, the Reagan White House actually gave the Pentagon more than it asked for in its 1982 budget.
According to sources inside OMB, the usual staff work was dispensed with this winter as the new administration rushed to pump more dollars into defense. t
The administration has further committed itself to huge defense outlays by promising to stick to the program it has outlined, even if its price goes up. Defense Secretary Caspar W. Weinberger has testified at least twice that if inflation pushes up costs, he'll return to Congress to ask for more money.
That prospect raises fears among some economists of a repetition of the Vietnam experience Lyndon B. Johnson refused to raise taxes to pay for his Vietnam buildup, insisting that the Great Society could have both guns and butter. Instead, he set off the inflation that still plagues the United States.
Now President Reagan proposes a much bigger buildup in abosolute terms.
Not all economists agree that the defense buildup Reagan proposes is inherently dangerous. Some economists believe the economy now has enough slack to cope with this buildup relatively easily, perhaps at the cost of about an additional one percent added to the inflation rate. That was the consensus among several of the nation's best-known economic forecasters at a Pentagon-sponsored seminar last fall.
But those economists all assumed that a big military buildup would be financed either by a tax increase or by cuts in other forms of government spending. The Reagan budget proposes to balance increased defense spending with a new boom in the domestic economy.
As calculated by Prof. Lester C. Thurow of the Massachusetts Institute of Technology (an adviser to Democratic politicians who is unabashedly critical of the Reagan program), Reagan proposes to offset a $196 billion tax cut and a $181 billion increase in defense spending with $138 billion in civilian spending cuts. Then new revenue generated by vigorous economic growth hypothetically would balance the Reagan budget by 1984.
Thurow is one of the economists who has argued that the Reagan defense program could create serious new economic difficulties. Another is Wassily Leontief, Nobel Prize-winning economists now at New York University, who said in a recent interview: "If handled improperly, these huge jumps in military spending will mean higher inflation, a worsening balance-of-payments gap, a drain on productive investment, soaring interest rates, increasing taxes, a debased currency and, in the longer term, more unemployment."
Leontief disputes the administration's optimism.
"Reagan hopes our gross national product will expand so much that we will be able to pay for higher defense spending without raising taxes," he told U.S. News and World Report. "This is not likely to happen. In fact, I personally guarantee that it will not happen."
Administration economists argue otherwise. Kudlow of OMB contends that the administration's budgetary and monetary policies will bring down the inflation rate, thus in effect holding down the real cost of defense spending. He disputed any suggestion that high defense spending might itself aggravate inflation.
"We've done a study on that," Kudlow said. It concluded that when defense spending was high in the 1960s, inflation was low, he said, but when defense spending fell dramatically as a percentage of GNP in the '70s, inflation rates soared.
There are numerous unasnwered questions about the potential economic impact of the Reagan defense budget, but few of them have yet been raised in any congressional committee or other official forum.
First of all, the simple budgetary facts have been obscured, largely by rhetoric about the president's "budget-cutting" crusade. In fact, Reagan is not proposing to cut the federal budget. He is proposing to slow the rate at which it will grow. Instead of reducing the budget, the administration wants to transfer billions previously earmarked for social programs into defense.
If the Reagan budget were adopted by Congress, and OMB's optimistic forecasts for the economy came true, this is what would happen to the federal budget and the national economy:
Gross national product would grow 41 percent, from $2.9 trillion in 1981 to $4.1 trillion in 1984. Civilian expenditures in the federal budget would grow from $493.1 billion to $614.6 billion, a 25 percent increase. And outlays for defense would rise 60 percent from $162 billion to to $260 billion in 1984 -- and continue growing to $343 billion in 1986. (All of these figures are in current dollars, unadjusted for inflation.)
Using the CBO's less optimistic economic assumptions, the 1984 defense budget might be 10 percent higher than Reagan predicts. But the CBO also believes that the administration underestimates the rate at which the prices of defense-related goods are rising. To complete the programs in the Reagan budget could cost $50 billion more by 1984 than the administration expects, CBO has estimated.
Defense-sector inflation is another area that has received almost no public attention in the discussion so far over Reagan's defense proposals.In fact, prices for military goods are rising 50 percent faster than the underlying rate of inflation.
Some weapons systems have more than doubled in cost just in the last two years. The unit cost of the Army's new, advanced armored personnel carrier, for example, rose 94.8 percent in 1979 and another 65 percent in 1980. A modified version of the C130 air transport equipped with advanced electronics went up in price 75.9 percent in 1979 and another 26 percent last year. The price of an F18 jet fighter, in which the Reagan administration plans to invest heavily, went up 25 percent in 1979 and 44 percent in 1980.
Overall, the costs of the 47 major weapons systems now being purchased by the Pentagon rose more than 20 percent in 1980. According to a CBO calculation, while the underlying rate of inflation in the economy as a whole last year was 9.3 percent, costs of defense purchases went up 14.9 percent. For four years up to 1980, the same index shows, defense-sector inflation was less than a point higher than inflation generally; the sudden jump last year hints at a new explosion in defense costs.
This is another area that has received relatively little public attention, although a number of gloomy (and prolix) official reports have been written on the subject. During the 1970s, when defense spending fell to the lowest levels (as a percentage of GNP) of the postwar era, what has been called the military-industrial complex changed radically. Thousands of small firms that were subcontractors to the giant defense firms in the 1960s -- providing 50 to 60 percent of the components of most major weapons systems -- went out of business, or out of the defense business.
In many critical areas, there are only one or two firms in the United States that can provide key parts. According to the Pentagon's Defense Science Board, only two companies make the titanium wing skins crucial to advanced aircraft; only three firms make aircraft landing gear; just one manufactures special ball bearings for air frames. Only two shipyards in the country -- both of them already working at full capacity -- can build many of the ships in the new Navy budget.
As a result of real or potential bottlenecks such as these, the waiting times for the Pentagon to take delivery on major weapons systems after they are ordered have stretched into years. According to the Defense Science Board, the waiting time for an F15 jet fighter is 41 months; for an A10, 49 months. Numerous experts have testified that the U.S. defense industry does not have the capacity to sustain a surge in production to meet the needs, for example, of an unexpected military conflict, and the surge called for in the Reagan budget will be difficult to satisfy.
Bottlenecks in domestic defense industries and a sudden intensification of defense orders contribute to another little-discussed repercussion from a new defense buildup: the stimulation of an increase in imports. Last fall, the major economic forecasters met in a seminar sponsored by the Pentagon to discuss the possible impact of a surge in defense spending. Although they all differed in their predictions, all agreed that increased imports would be one consequence.
Thurow or MIT argues that a defense buildup could prove more profitable to West Germany and Japan than to the United States, partly because of the new sales it will mean for firms in that country, partly because American defense industries draw off the best engineers and skilled labor.
"Would you rather work on designing a new missile with a laser guidance system, or on designing a new toaster?" Thurow has written. "To ask the question is to answer it. Military research and development is more exciting. . . . The military is willing to pay almost any premium to have a better product. The civilian economy is not. As a result, the very best brains move into defense."
"If the skilled personnel and funds that are used for defense here are used for civilian production abroad," Thurow added, "it should not come as a great surprise when we are driven out of civilian markets. What happens to us if we are driven out of semiconductors, microprocessors and computers while we are busy rearming ourselves?"
None of these questions about the potential impact of the Reagan defense program have been raised very loudly in Congress. Critics can be found, particularly on the liberal end of the political spectrum, but few of them volunteer their views before they are solicited.
"You're going to spend more, get less, and ultimately put yourself in a far more dangerous position," according to Rep. Thomas J. Downey (D-N.Y.). Downey, a member of the House Budget Committee, then was asked if he would try to delete any of the defense program from the budget resolution. No, he said. "It's no use."