Defense Conversion

Key Problems

  • The Clinton administration has promised that by 1998 it will have increased to 50% the civilian-oriented share of federally funded research and development.
  • The lion’s share of the peace dividend—80% of the $81 billion from defense savings—has gone to reduce the federal deficit.
  • By the end of Clinton’s first term, total government funding for all conversion programs was winding down.

What happened to the peace dividend that was widely expected to accrue from reduced defense spending after the end of the cold war? After the collapse of the Soviet Union, many in the U.S. began debating whether projected defense cuts should go to reduce the federal deficit, cut taxes, or address pressing domestic concerns.

When President Clinton unveiled his economic conversion plan in March 1993, he pledged to invest in the work force and civilian programs. His administration, Clinton said, would “continue to reduce defense…[while] we’re trying to plan for the future of those people and those incredible resources” being released from the defense sector. Based on congressional initiatives, the president’s conversion program authorized funds for defense-dependent workers and communities as well as for promoting “dual-use” technologies (those with both military and civilian applications). Clinton promised to enhance competitiveness and economic growth by reinvesting defense savings in infrastructure, job training, and civilian research and development (R&D). The government promised that by 1998 it would increase to 50% the civilian-oriented share of federally funded R&D, thereby partially replacing the role defense investments have played in stimulating science and technology.

But promises aside, between 1993 and 1997 the lion’s share of the peace dividend—80% of the $81 billion from defense savings—has gone to reduce the federal deficit. The balance—$16.5 billion—has been invested in broadly construed “conversion” programs. These include: $6.8 billion for defense technology initiatives (of which only 12% involve any real conversion benefit), $3.4 billion for separation benefits for members of the military, about $4.8 billion to stimulate new high-tech industries, and nearly $1.4 billion to assist defense workers and communities.

The largest portion of community transition assistance has gone to ease the economic shock of base closures. In the four rounds of base closures since 1988, over 146 major bases and numerous minor installations in the U.S. were selected for closure. Transition assistance has included money for alternative economic development, worker retraining, and environmental cleanup.

Major military contractors have responded to defense cutbacks with a variety of sometimes-conflicting strategies. These include mergers and acquisitions within the defense industry; sell-offs of defense divisions or exiting the industry completely; and diversification by commercializing defense technologies, developing new civilian products, and acquiring commercial businesses. Of the top defense contractors, Los Angeles-based Hughes Electronics has been among the most successful, aggressively developing new commercial products such as home satellite dishes. Hughes has reduced its defense dependency from 75% in 1990 to 40% in 1995 and has achieved real revenue growth. Hughes did so, however, by laying off over 14,000 workers.

Indeed, defense workers have fared badly from defense firms’ adjustment strategies. Corporate layoffs account for half of the 1.5 million defense jobs lost since 1989. By contrast, small- to medium-sized defense contractors and subcontractors, like Lau Technologies in Massachusetts and Chandler Evans in Connecticut, have put greater emphases on commercialization and retaining key employees.

The Departments of Defense (DOD), Labor, and Energy have sponsored programs to either retire, retrain, or re-educate laid-off defense industry workers and uniformed military personnel. The DOD has provided over $3.4 billion for military personnel. In a more modest program between 1991 and 1994, the DOD funneled some $64 million annually through Labor to retrain defense industry workers. After the DOD funds were exhausted, the Labor Department was able to provide only $20 million in 1995-96. No new money was appropriated for these programs in the 1997 budget. By the end of Clinton’s first term, funding for all conversion programs was winding down, falling by 43% in 1997 from the $4.260 billion peak in 1995.

Problems with Current U.S. Policy

Key Problems

  • The U.S. government has reinvested only 20% of defense savings in domestic programs that address important social needs and stimulate new business and job creation.
  • Although the Clinton administration’s conversion program was an immense improvement over the meager initiatives of the Bush administration, actual spending has fallen short of the original plan.
  • Federal subsidies for corporate merger and acquisition costs have helped lock certain defense companies into military production and retarded their conversion efforts.

The Clinton administration failed to fully deliver the peace dividend promised with the end of the cold war. It reinvested only 20% of defense savings in domestic programs that address important social needs and stimulate new business and job creation. While this conversion funding has assisted businesses and, to a lesser extent, workers to move into civilian work, the timing, focus, and funding levels have been inadequate to offset the huge impact of defense budget reductions.

Compared to the cold war peak in the 1980s, the overall defense budget for 1996 was cut by one-third. As a result, over 2.6 million defense-related jobs are estimated to have been lost during the 1987-97 period. The Clinton administration’s conversion program, which dispensed $16.5 billion between 1993-97, was an immense improvement over the meager initiatives of the Bush administration. Actual spending by the Clinton administration has, however, fallen short of the original plan of nearly $20 billion; and since 1995, the congressional push for deficit reduction and increased defense spending, as well as harsh partisan criticism of conversion, has eroded program funding.

Government policies and programs have had contradictory effects on corporate conversion strategies. On the positive side, increased government investment in nondefense fields has lured defense contractors into such work as modernization of air traffic controls, environmental remediation, information systems and services, and alternative and mass transportation technologies. Smaller firms have used manufacturing extension services, technology centers, and conversion loans to assist in commercialization.

On the negative side, federal subsidies for corporate merger and acquisition costs have helped lock certain defense companies into military production and retarded their conversion efforts. The much-touted, dual-use technology programs, totaling $5.4 billion, were originally supposed to “spin-off” defense technologies into commercial fields, “spin-on” commercial technologies to lower costs for new defense technologies, and invest in new technologies with both military and commercial use. They have, however, largely served military objectives: research by the National Commission for Economic Conversion and Disarmament (NCECD) found that a substantial majority of dual-use projects were, in fact, strongly oriented towards military production. Despite this, congressional critics have attacked the conversion program as not defense-oriented enough. As a result, funds for the centerpiece of the DOD’s dual-use effort, the Technology Reinvestment Project (TRP), were slashed in 1995 and 1996, and eliminated altogether in 1997. TRP has been replaced with a much smaller program, the Dual-Use Applications Program, that is single-mindedly focused on leveraging commercial technologies for defense purposes.

Thus what was originally billed as the flagship of the administration’s conversion program has now been stripped of all semblance of a civilian-use focus. Of the $1.4 billion spent on TRP and its successor over the 1993-97 period, only 20% really served conversion objectives.

Conversion programs to civilian use (as opposed to dual-use) are strewn across a number of agencies and have stimulated civilian-oriented research and provided business services to assist firms in becoming more competitive. Total funding for all these programs declined by 19% in 1997 from its peak in 1994 of $1.3 billion.

While troop downsizing has been largely completed, with a reduction from 2.2 million to 1.5 million troops in active duty, base closures and defense industry mergers will lay off an additional half million to three-quarters of a million more defense industry workers. These workers will now have to compete with all displaced workers for the fewer federal dollars being spent on job training and employment.

In contrast, military base conversion, supported by local activism and substantial federal funding, is one of the success stories of post-cold war demobilization. Military bases have been converted to such uses as commercial airfields, industrial parks, hospitals, schools, child care facilities, stores, recreational facilities, and housing. Chanute Air Force Base in Illinois, for instance, has been rapidly converted into a municipal airport.

Debates over environmental cleanup at bases such as Wurtsmith Air Force Base in Michigan and several bases in Northern California have led to innovative solutions. Under what is known as the Keystone Process, environmental and economic interest groups have agreed to a procedure to divide bases into contaminated and uncontaminated parcels so that cleanup and development can proceed simultaneously. Yet the DOD’s environmental cleanup funding requests for the first three rounds of closures were underfunded by an estimated $1 billion, and this funding gap is likely to widen to over $2 billion once the cleanup costs of the fourth round of base closures are included.

Community assistance programs funded by the Departments of Defense, Commerce, and Energy have been quite effective, as well, in planning and implementing conversion strategies for defense industry-dependent communities. Total community assistance funding declined by 18% for 1997 from a peak of $249 million in 1995.

Toward a New Foreign Policy

Key Recommendations

  • Real conversion and new job generation depends on a much more profound redirecting of defense savings into nondefense public investments that serve definable public needs.
  • The government should further reduce defense spending to match reduced post-cold war threats and should invest the savings, dollar-for-dollar, in critical public sectors.
  • Economic conversion is the linchpin of domestic security necessary to reverse infrastructure decline and begin the process of social, environmental, and economic reconstruction.

The nation’s conversion strategy has been focused primarily on base closures, dual-use assistance to defense firms, and adjustment assistance for uniformed military and defense workers and surrounding communities. Yet real conversion and new job generation depend on a much more profound redirecting of defense savings into nondefense public investments that serve definable public needs. These include education, training, environmental protection and restoration, community redevelopment, and public infrastructure needs such as transportation, safe drinking water, and wastewater treatment, as well as increases in nondefense research and development.

Defense companies, like other contractors, are motivated to follow the money. With budgets for civilian public investments shrinking, conversion on a national scale remains stalled.

The government should further reduce defense spending to match reduced post-cold war threats and should invest the savings, dollar-for-dollar, in critical public sectors. Currently, Congress has slated to cut domestic public investment to balance the budget. But deficit reduction does not require sacrificing our nation’s investment in economic security.

Congress could better accomplish fiscal responsibility by cutting defense and corporate subsidies and basing our tax system on the ability to pay. Such a realignment of national priorities would permit the nation to enjoy a real peace dividend.

Any future conversion program should abandon the pretense that dual-use programs serve civilian production. The focus should instead be on providing businesses with real incentives to commercialize and develop new products that build on their core organizational and technological strengths.

Specifically, federal policy should build on the lessons learned from successful company diversification and conversion by encouraging:

  • Commitment to reorienting firms and identifying market opportunities.
  • Cost reduction and quality-control programs to enhance competitiveness in commercial markets.
  • Organizational innovations to promote technology transfer between defense and commercial fields and to encourage the mobility of staff between divisions and companies in order to learn better procedures.
  • Labor and management cooperation focused on job retention and new job creation.
  • Partnerships to enhance marketing capabilities and gain technical capacity in commercial technologies and markets.

Federal domestic programs for supporting conversion should be maintained, particularly small business loans to promote conversion and the manufacturing extension and technology centers programs. At the same time, the government should end all federal subsidies for the consolidation costs of defense mergers and acquisitions, which have already cost taxpayers $1.8 billion.

Adjustment assistance for workers and communities has worked well, overall, even though the actual sums spent have been modest, comprising only 8% of the $16.5 billion multiyear conversion program. Under the government’s proposal to consolidate employment and training systems, however, effective reform will require expanded capacity and performance accountability, including report cards on what training providers have actually done for their enrollees. Realistically, such reforms will require more money.

For forty-five years our nation has pursued an industrial policy designed to make our military second to none. This policy has succeeded, but at a high cost. Behind the display of military might lies the wreckage of our cities, persistent trade deficits, the decay of our infrastructure, the despoiling of our environment, and the decline of educational achievement. Economic conversion is the linchpin of domestic security necessary to reverse this decline and begin the process of social, environmental, and economic reconstruction.

Written by Greg Bischak, an economist and member of the
National Commission for Economic Conversion and Disarmament.