President Reagan's Council of Economic Advisers says the sharp increase he has proposed in defense spending over the next six years will create "adverse economic effects" as the Pentagon competes with reviving civilian demand for durable goods.
Weapons-buying would rise even faster under the Reagan plan than during the peak of the Vietnam buildup. Between 1981 and 1987, the CEA says in its annual report, released last week, procurement of major weapons systems and outlays for military research and development would soar at an after-inflation annual rate of 16 percent.
This would come at the precise time that the private economy's demand for durable goods also should be expanding.
In the three peak years of the Vietnam war buildup Pentagon outlays for the same type of goods expanded at a 14 percent annual rate.
In a section of the report that has received little attention, the CEA said that although concerns over the impact of defense spending on the economy as a whole "has probably been overstated" the military drain will be significant as the economy emerges from recession.
"The U.S. economy as a whole should be able to accommodate the projected expansion in defense spending without experiencing an increase in the general inflation rate," the CEA report says.
But it goes on to concede that "unusual growth in any spending category, military or civilian, makes the goal of overall restraint that much more difficult to achieve," even though the Defense Department will attempt "to minimize the potential adverse effects of the defense buildup" through careful planning, better management of defense contracts and more accurate cost estimates.
The CEA report cites not only higher prices that will have to be paid for defense goods and for civilian products competing for the same manufacturing capacity, but "some temporary crowding-out of private investment."
Moreover, since private industry and the Pentagon must draw on the same manpower pool, the CEA suggested that the military may find it increasingly difficult to attract personnel, especially skilled people.
Outside analysts have been saying similar things for a year about the proposed Reagan military buildup, in which total budget authority of $1.6 trillion is projected from fiscal 1983 through 1987. But the administration has never recognized such questions as valid until now.
Coincidentally, a staff study released yesterday by a Joint Economic subcommittee in Congress said that the defense buildup "is so rapid it will undermine both our economic and military goals if it is not slowed down."
In cautious language, the CEA document suggests that the Defense Department might be able to minimize "the adverse consequences of the buildup," but could not completely eliminate the problem.
The CEA cites three specific likely "adverse effects." First, it says that the increased billions in defense buying will cause a "substantial transfer of resources in the durables sector to defense production," which in turn "may increase relative prices" for both defense and civilian goods.
Second, the buildup "may produce delays in the delivery of military goods. Delivery timetables that seem realistic today may in some cases become obsolete as producers try to accommodate the defense buildup and vigorous expansion in civilian investment at the same time."
The third effect "may be some temporary crowding out of private investment. Defense procurement and associated production equipment use many of the same physical resources needed for private investment in civilian producer durables. Some private firms may turn to foreign sources for materials, while others may cancel or postpone plans for expansion."
The manpower shortage occasioned by the Pentagon's plan to boost active-duty forces 9 to 10 percent over the next five years might be met by costly bonus payments to encouragement enlistments for personnel with special skills, or a return to a peacetime draft, the CEA said. Either course will involve added "real costs to the economy."