Military Conversion Policies in the USA: 1940s and 1990s Author(s): J.

Davidson Alexander Source: Journal of Peace Research, Vol. 31, No. 1 (Feb., 1994), pp. 19-33 Published by: Sage Publications, Ltd. Stable URL: http://www.jstor.org/stable/425580 . Accessed: 27/10/2013 10:04
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? Journal of Peace Research, vol. 31, no. 1, 1994, pp. 19-33

Military Conversion Policies in the USA: 1940s and 1990s*

J. DAVIDSON ALEXANDER Department of Economics, College of Wooster
Conventional theory of converting military to civilian economies holds that macro-economic policies which stimulate aggregate demand and labor policies which enable unemployed defense industry workers to move to new employment are sufficient to effect optimal transition from military to civilian production, without further need to interfere with market processes. The experience of the USA following World War II is often cited as evidence for this and recommended as a model for a much smaller 199()sconversion. This article briefly compares the four major conversions of the 2()th century, 1918-21, 1944-47, 1953-55, 1968-74, but focuses on the conversion after World War II. It argues that both very favorable circumstances and considerable advance government and business planning also contributed to the relative success of the 194()s US conversion. Nevertheless, that success was sharply limited. For example, socially weak groups involuntarily left the labor force, and many facilities were lost to productive use. These failures resulted from conflicts over income distribution and a piecemeal and contrary planning vision. Under the unfavorable macro-economic circumstances of the 1990()s interests of the military-industrial complex, optimal conversion requires an alternative policy approach to re-employ up to 2 million defense workers, and comprehensive decentralized planning for alternative use of production facilities.

lar demobilizations following World War I, 1. Introduction Recent estimates of further reductions in the Korean War, and the Vietnam War. US defense spending after 1992, barring a They also often depict war industry adjustnew military crisis, would leave the defense ment to changing markets as relatively budget at least 20% smaller by the end of effortless, despite the vast scale of the 1944the decade, and military industry jobs down 47 conversion and its potential for disloby 1 to 2 million or more (e.g. CBO, 1992; cation (Ballard, 1983; Boulding, 1961, 1970; Myers, 1993; Ricks, 1992). As the USA Mosley, 1985). In the face of sharp decline edges toward significant arms reduction, in military demand, supply disruptions and policy-makers need to anticipate economic relaxation of wartime production and price problems in the demobilization process and controls, they assert, unemployment reto formulate policies to address those prob- mained relatively low and inflation was held lems, not just to cushion the US economy in check relatively well, compared to the but also to reduce political opposition from aftermath of World War I and even the sectors that would be harmed. To identify post-Vietnam stagflation. We shall see that potential economic dislocations and fruitful data do not completely support this view. Assessments of World War II reconverpolicy responses during a sizeable industrial conversion process, this study focuses on the sion success in the USA have also been posihistorical case of economic reconversion in tively colored by comparison with economic the USA following World War II. performance during the Depression. A Analysts often compare World War II popular analysis holds that the end of hosconversion of military industry to civilian tilities in 1945 unleashed an enormous production in the USA favorably with simi- deferred demand, based on savings and incomes restored by the war economy, * An earlier version of this article was presented at a which facilitated conversion of resources session in honor of Kenneth Boulding co-sponsored by from military to civilian use. On this basis, Economists Against the Arms Race and Peace Science some generalize about conversion econSociety (International), at the Allied Social Science Asomics: strong macro-economic expansion sociation meetings, Atlanta, Georgia, 29 December, provides smooth conversion to civilian pro1989.

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Table I. Size of Major US Demobilizations in the 20th Century Troops Demobilized Decrease as of Civilian %o Employment End of Period 6.9'% 17.0 0.8 1.5 Military Expenditures as Percentage of GNP

Period 1918-21 1945-47 1953-55 1968-74 1986-97

In Thousands End Beginning 2,90()4 11,43(0 3,4()3 3,4()08 2,2(00) 362 1,59() 288 2,14() 1,6()()00

Beginning NA 39.9% 14.4 9.6 6.5

End NA 5.7% 11.1 5.6 3.6

Sources: Troop demobilization from US Bureau of the Census (1975, p. 126) and US Bureau of Economic Analysis (1986b, Table 577). Civilian employment from US Bureau of the Census (1975, Series D-3 and D-5) and US President (1985, Table B-29). Military Expenditures as percentage of GNP from OMB (1989, Table 6.2). All figures from DCC (1992. p. 11, 52). 198X6-1997

duction, while weaker macro-economic performance brings less successful conversion, as in the early 1970s (National Research Council, 1986; Ricks, 1992). This view largely reduces conversion policy to one of maintaining aggregate demand and letting labor and capital move unimpeded to their most productive uses, sometimes with auxiliary or enabling policies such as retraining and retooling support, especially since military cuts in the 199()s will be smaller than those of the 1940s (ACDA, 1962; CED, 1991; Weidenbaum, 1989). A closer look at the reconversion of 1944-47 shows that (1) macro-economic expansion does not guarantee successful micro-economic adjustment, and (2) political conflict during transitions makes optimal conversion policy difficult to realize. This suggests that successful conversion in the 1990)swill require local and comprehensive planning. Section 2 below summarizes the dislocations generated by major US demobilizations in this century. Section 3 sketches the
extent to which US reconversion during

these to the failure of the New Deal coalition to formulate comprehensive postwar policy. It also suggests that the shape of conversion policy was determined as much by conflict over income distribution and industrial policy as by conversion theory. Section 5 examines the current context for a sizeable conversion in light of World War II reconversion difficulties.

1944-47 was a planned rather than purely market response to disarmament, concluding that the policy recommendation of pure market response to military cuts lacks the historical justification to which proponents often appeal. Section 4 identifies microeconomic and macro-economic weaknesses of 1944-47 conversion policy, and traces

2. Twentieth-centuryDemobilizations Major postwar industrial demobilizations of this century in the USA followed World Wars I and II, the Korean War, and the Vietnam War. Opponents of conversion planning argue that the largest, the reconversion of 1944-47, was the most successful, and infer that the US economy can easily absorb any conversion shock in the 1990s. Table I summarily compares the four previous conversions. Below, we sketch these experiences by examining measures of their macro-economic and micro-economic performance. Comparable data are not always available for the respective periods. 2.1 The 1918-21 Reconversion The end of World War I generated serious instability in the US economy. By one count, in one year four million military personnel were demobilized. Contracts employing nine million workers were can-

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Military Conversion Policies in the USA

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celed. Federal, state, and local governments to 13.3%, and then dropped to 11.2% and made no plans to counter this job loss 9.6% shares of GNP in the next two years. From 1953 to 1954 real federal government (Samuelson & Hagen, 1943). National Bureau of Economic Research purchases fell some 16.9%/ and inventories data indicate that for at least 32 months declined 2.2%. Although real local and after November 1918, US economic output state government expenditures did jump declined, except for a brief ten-month re- 7.8% and real fixed investment rose 1.8%, covery beginning in the spring of 1919. constant dollar GNP fell 1.3% in 1954 (US During this period, manufacturing output President, 1980, Table B-2). Thus military fell by about 40%, and in 1921 aggregate spending cuts probably induced the 1954 output reached its lowest level since 1911 recession (cf. Harris, 1957, p. 217). During the Korean War, unemployment (Hansen, 1964, pp. 24, 32, 37). Reliable unemployment data are not fell to record post-1946 lows for men available for the period, but by one estimate and women, African Americans as well as the unemployment rate rose from 1.4% in whites, e.g. a 2.9% rate for white males. With the exception of African males, how1919 to 5.2%, 11.70%, and 6.7% over the next three years (US Bureau of the Census, ever, at the end of the war these rates rose 1975, p. 126). By another measure unem- above their 1950 levels. The total number of ployment rose by twice that amount, three unemployed rose 95% for men and 88%/for million in the first year (Samuelson & women from 1953 to 1954. Finally, while wholesale prices rose sharply from 195() to Hagen, 1943, pp. 11, 14). At the same time prices gyrated. From 1951 and moderately thereafter, aggregate 1919 to 1920 wholesale prices rose about data do not reveal any overall surge or insta12% and then fell about 37% in the next bility to prices during the demobilization year (US Bureau of the Census, 1975, p. (US Bureau of the Census, 1975, p. 199). Comparing the Korean War demobiliz199). The memory of this dislocation was painful and long enough that during World ation with 1945-47, Boulding (1961, p. 156) War II advisors such as the older Bernard concludes that the unemployment jump Baruch and the young Paul Samuelson made 1953-54 less successful. Weidenwarned that repetition of this prior experi- baum's studies of defense contractors found ence warranted planning for demobiliz- that firms attempted to diversify production but, apart from marketing civilian aircraft, ation. military contractors generally failed in nonmilitary markets and succeeded best diversi2.2 Demobilization in 1944-47 We examine the failures and successes of fying in military markets (1973, p. 261; this 'Great Disarmament' in detail in section 1963, p. 82). 4, but for brief contrast consider some superficial measures of its success here. In 2.4 Vietnam War Demobilization the largest US demobilization of the cen- The Vietnam War raised the official military tury, about 14 million troops returned to expenditure share of GNP from 7.1 % in civilian life. While wholesale prices did 1965 to 9.10% in 1968. Demobilization increase about 20% from 1945 to 1947, reduced this share to 5.3% in 1974 (US unemployment rose only about two percent- Bureau of Economic Analysis, 1986a, Table age points (from 1.9 to 3.9%). A nation 565, p. 104). Real military spending (defearing a return to depression found the flated by the GNP deflator for nonresidential fixed investment) fell 28% from a results remarkably salutory. 1968 high to 1974 (US President, 1985, 2.3 Korean War Demobilization, 1953-54 Tables B-2, B-3). From 1950 to 1953, according to official Direct military employment (military perfigures which tend to understate military sonnel, civilian Department of Defense expenditures (e.g. DeGrasse, 1983; Mosley, employees, and military industry employees) 1985), this spending rose from 4.9% of GNP fell from 6.5 million to 4.3 million between

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1968 and 1975 (US Bureau of Economic Analysis, 1986a, Tables 570, 577, 588). Indirect military industry employment may have dropped another 1.2 million (Benoit, 1973, p. 76). In just over five years after the peak of military spending, the US economy experienced two contractions totaling twoand-one-quarter years. Average unemployment rates jumped from a 1969 low of 3.5% to 8.5?%in 1975. Earlier we saw one interpretation of the economic failures of the Vietnam War demobilization - that tight fiscal policy impeded the private re-employment of military industry capital and labor. Data do not necessarily confirm this view. Total federal, state, and local expenditure, perhaps driven by the memory of the Korean demobilization, did compensate for most of the steep decline in military spending. Total government spending fell only 1% from 1968 to

by a fear of renewed depression (Ballard, 1983, pp. 30-31; Somers, 1950, p. 176). On the federal level, even before Pearl Harbor, President Roosevelt instructed the National Resources Planning Board (NRPB) to plan for a post-hostility economy. The NRPB plans included generating demand by financing public works, rehabilitating blighted areas, and producing new housing (Ballard, 1983, pp. 32-33). This approach clearly combined a New Deal social vision with postwar reconversion in the minds of prominent New Deal policymakers. Another example of integrated conversion and social policy proposals appears in policy suggestions to sell surplus war plants to returning veterans, or to have government run them, as part of an antimonopoly policy (White, 1980, p. 91). Planning continued after Pearl Harbor into 1942 and 1943. In mid-1943 a Confer1969, and 3.8%0/ from 1968 to its low point in ence on Postwar Readjustment submitted 1972 (US President, 1985, Tables B-2, B-3). 96 points to the President, and in a matter of Although it is always difficult to untangle weeks Roosevelt addressed the issue of causality, this growing unemployment when reconversion in a national radio talk. By the governments mostly matched large military end of 1943, it was becoming clear that spending cuts with new civilian spending many industries could supply even more raises the question of whether macro- than the huge war effort demanded, and economic stimulus is sufficient in the USA reconversion planning became more earnest to effect a successful conversion of labor and (Cook, 1962, pp. 57-59; Nelson, 1946). By February 1944 the Army began canceling capital. prime contracts. In the first quarter of 1944 the widely publicized Baruch-Hancock 3. Planning the Reconversion, 1941-45 report, the Truman Committee report, and The record of demobilization following the the Senate Special Committee reports all Vietnam War is not the only evidence chal- addressed demobilization and reconversion lenging the conventional generalization that (Ballard, 1983, pp. 32-44; Somers, 1950, fiscal expansion of itself induces smooth pp. 175-176; White, 1980, pp. 90-93). In transfer of military industry capital and late 1943 and 1944, enabling legislation and labor resources to full employment civilian executive order established the GI Bill, production. While the 'Great Disarmament' most of the means for federal troop demobof 1945-47 did not bring extreme problems ilization, contract termination, sale of of unemployment and/or inflation that fol- government surplus and war plants, and lowed World War I, the Korean War, and permitted firms to develop prototypes for Vietnam War, nevertheless, that conversion postwar civilian products.' As Ballard (1983, ch. 4) notes, several was not the effortless product of freely adjusting markets in the context of fiscal things shaped and sharply diminished poststimulus. Extraordinary public and private conversion planning, however. Fear of planning effort went into reconversion in undercutting the war effort, President the 1940s. Governments and business re- Roosevelt's distaste for comprehensive sponded to widespread popular interest in planning, and Congressional attacks on postwar planning, an interest largely fueled and eventual abolition of the National

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Resources Planning Board all pushed recon- siderable planning effort. Government at all version planning into distinct agencies with levels engaged in fiscal planning by preparpiecemeal missions, e.g. the Office of War ing public works proposals and plans for Mobilization, the Defense Plant Corpor- troop demobilization. Governments also ation, and the Navy Department. Only as planned for some training and retraining of the war was ending was some degree of returning veterans, but not civilian defense coordination re-established in the Office of workers. The micro-economic planning of War Mobilization and Reconversion, with a labor transfers, retooling, product design, and market research, however, was left to much weakened social vision. State governments and many cities as well firms, and, as we shall see, met with conset up agencies to plan postwar public works siderable failure from a social point of view. projects, aid business, and provide vocational training. Particularly in the West, state and regional planning centered on how 4. The Reconversion Record, 1944-47 to maintain wartime prosperity and the new Converting military economies faces three industrial capacity that the war effort had problems: (1) the physical and managerial placed in many parts of the West (Nash, problem of transferring resources to civilian production ('conversion' in the narrowest 1985, ch. 11). Business and its organizations extensively sense); (2) the aggregate problem of stabilplanned for reconversion. The US Chamber izing output, employment, and the price of Commerce and the National Association level after military expenditure declines; of Manufacturers published conversion and (3) the problem of providing sufficient planning reports and guidelines as early as institutional and policy conditions for re1943 (Ballard, 1983, pp. 30-31; White, establishing long-run economic growth and 1980, p. 91). The Committee for Economic resolving conflicts over income distribution Development (CED) claimed in 1944 to (Boulding, 1961; Means, 1944). While in have fieldwork in every state and in 1800 practice it is difficult to separate the three communities.2 In 1944 it had '40,000 busi- theoretical parts of the problem (or their nessmen' on economic development com- policy solutions) completely, this section mittees nationwide to assist business in follows the first two problems to analyze the planning their postwar production and 1940s conversion in the USA. It addresses employment schedules early. It had special- the third problem of growth, or industrial ists producing materials on management, policy and income distribution, only in passproduct design, advertising, and selling, ing. including a postwar market analysis of 500 goods (Kaplan, 1944b, pp. 123-128). In ad- 4.1 Converting Capital and Labor dition to individual business reconversion Resources planning, the CED called for more govern- Once production controls were relaxed at ment planning, especially in the area of the end of World War II, the first convertraining, public works, and income support sion problem - transferring resources to civilian production - was posed as a problem of (Means, 1944, p. 105). A 1944 survey by the Defense Plant Cor- enabling market forces to transfer capital poration of its leasees gives some indication and labor to civilian production (rather than of the extent of the private reconversion a problem of fundamental social redirection planning. Asked whether they were of resources through structural change in interested in buying their leased plant and labor markets or direct production deequipment, three quarters of the firms re- cisions). sponded (most, negatively).3 Undoubtedly, respondents were planning their postwar 4.1.1 Converting Capital condition as early as 1944. The writings of policy-makers and private The reconversion of 1944-47, then, fol- analysts associated the problems of transferlowed and presumably took shape from con- ring physical capital to civilian production

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following World War II with renewed unemployment (Ballard, 1983; Baruch & Hancock, 1944; Kaplan, 1944a; Means, 1944; Nelson, 1946). For the most part, the policy problem was framed conventionally as one of enabling capital to move to productive use. Prewar capital equipment had been mothballed, and estimates suggested that within six months production of certain controlled industries would return to prewar levels. For example, auto manufacturers could start producing prewar models within two or three months of receiving permission to return to production (Ballard, 1983, p. 137; Means, 1944). In some industries, production had already expanded during the war. For the longer run there were sufficient resources for industrial retooling, because capacity in the machine tool industry had grown seven-fold since 1939 (Ballard, 1983, p. 137). As the war went on, moreover, it became clear that firms had ample funds, and, with record deposits, banks were anxious to lend.4 By 1944 policy-makers generally concluded that for most industries the two major obstacles to industrial conversion were lingering defense contracts and manufacturing plants crowded with governmentowned machine tools and inventories. For example, the widely-acclaimed Baruch & Hancock report (1944) on problems of reconversion to the Office of War Mobilization called for canceling unnecessary government contracts, prompt 60-day clearance of government equipment and inventories from war plants, and acceptance of bids on this surplus from the manufacturers housing it. Baruch & Hancock argued that this would restore civilian supply and employment, reduce inflationary pressures, and save the government money (1944, pp. 7, 13, 52, 80). New procedures for quick settlement of contracts were enacted in 1944 and by November 1945 prime contracts worth USD 64 billion were canceled, at about 10% of value. Although this compared favorably with the 14% settlement cost following World War I, it was accomplished directly by negotiating teams within procurement agencies without final accounting (Ballard, 1983, pp. 132-136). While this

made room for significant fraud, apparently 94%?of government tools and inventories were successfully cleared within 60 days of contract cancellation (Ballard, 1983, pp. 136-137; Kaplan, 1944b, chs 2, 3, 5). The conventional approach to converting physical capital, however, did not address other problems of excess capacity and specialized capital, which are particularly relevant to conversion in the 1990s. Much of the excess industrial capacity threatened by demobilization had been created in newly industrialized regions, particularly in the West and Southwest. Conversion raised concerns about the survival of some regional industrial bases. New wartime capacity, moreover, was concentrated in several industries, such as primary metals, machine tools, and aircraft and shipbuilding, and analysts estimated that as much as 90%/ of capacity in some industries would disappear after the war.5 Finally, about one-third of government-owned plant and equipment was specifically designed to produce munitions and naval ships, and consequently had little civilian use (Baruch & Hancock, 1944). Overall, observers estimated that twenty percent of total industrial capacity would require retooling and twenty percent of workers would need retraining (Baruch & Hancock, 1944). The federal government was certainly aware of the extent of excess capacity it had generated. As we have seen, when threefourths of the private leasees polled by Defense Plant Corporation in 1944 responded, they expressed an interest in purchasing only 10% of the DPC's plant and equipment (White, 1980, p. 98). In the end, much of the excess capacity was either scrapped, mothballed, or sold cheaply to civilian firms, especially in iron and steel, non-ferrous metals, chemicals, electrical equipment, and synthetic rubber. Despite federal subsidy of research on new uses of magnesium, most of the new capacity in magnesium processing was scrapped or mothballed. In one of the few successes, following anti-trust action against Alcoa for its aluminum monopoly, sale of surplus aluminum capacity helped establish Reynolds, Kaiser, and Anaconda in the expanding alu-

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minum industry (White, 1980, pp. 100110).

Thus, while making a major effort to plan for reconversion by settling contracts, clearing plants, and selling surplus, the federal government made little effort to help firms find new products and markets for excess capacity or find other ways to save particular workplaces and jobs. Part of the reason for this is that by the end of the war federal policy had begun to retreat from several areas of New Deal economic planning. Wartime production had restored the manufacturing sector to a pre-Depression level, expanding its profits and quieting some critics, and corporations enjoyed a presence on wartime planning boards (Cook, 1962, pp. 50-67; Pursell, 1972, sect. III). The reconversion experience after World War II suggests that without distinct federal policies to target retooling of these workplaces, there will be little successful conversion in the 1990s. After World War II, some private retooling occurred - for example, private buyers retooled some aircraft plants for production of automobiles, refrigerators, freezers, and coolers; and petroleum pipelines, rendered unnecessary by the return of coastal shipping, became natural gas pipelines (Ballard, 1983, p. 160; White, 1980, pp. 100-101, 109). Nevertheless, such conversion successes appear to have been the exception rather than the rule. By mid-1947, less than one-third of government-built plants had been put up for
sale, and, of this,
40-50o/o

firms. He found these adjustment efforts largely unsuccessful and eventually abandoned. Firms were more successful at diversifying within military industry, and even firms that had both civilian and military divisions transferred few resources to civilian use with any success. A Department of Defense study of subsequent diversification attempts found similar results (President's Economic Adjustment Committee, 1985, Appendix M). These findings leave policymakers with a dilemma: either leave conversion to markets and face dislocations in major military industries or induce firms to generate reasonable plans to convert their facilities to civilian production. 4.1.2 Converting Labor World War II reconversion policy faced and met some extraordinary problems of labor conversion. Fourteen million uniformed personnel needed to be discharged in an orderly fashion and provided means for returning to prewar jobs (which were reserved for them by law). Workers in uniform who would be new to the labor force needed federal and state employment counseling and training support. Millions of defense workers would need non-defense jobs. While results might have been worse, they were not good. Non-agricultural nonsupervisory employment fell from a peak of 15.6 million in October 1943 to 14.6 million a year later, and to 11.2 million in October 1945, a two-year decline of 28% (US Bureau of Labor Statistics, 1979). By contrast, the loss of defense-related industry jobs after the Vietnam War peaked was about 1.3 million (Benoit, 1973). Prima facie, there are good reasons for questioning whether conventional mobility-enabling policy succeeded. First, it appears that many workers left the labor force involuntarily. In the 1945 conversion many returning veterans found jobs because 2.2 million women defense workers (of 3 million new wartime women workers) and 8 million young and older workers left the labor force. Studies suggest that many would have preferred to remain in the labor force, despite official assump-

of capacity

remained unsold and unleased. The proportion of capital equipment that was sold was somewhat higher, but since much of it was probably transferred to new locales and new operators, many wartime defense workers were probably also hurt by federal capital liquidation policy (Ballard, 1983, pp. 159-160). Haphazard liquidation, then, rather than deliberate conservation of defense manufacturing jobs, capital and work sites, was the hallmark of the federal reconversion policy after World War II. Weidenbaum (1963, 1964) studied military industry firms' attempts to convert after World War II and the Korean War by diversifying product lines and acquiring other

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tions that women, at least, sought to leave.6 American Economic Association members Low seniority and discrimination, more- who responded to a National Association of over, left a large number of Black and Manufacturers' survey predicted a return to Hispanic workers unemployed (Ballard, depression following hostilities (Ballard, 1983). Some pessimistic expectations per1983). There were other serious failures of labor sisted throughout the war, and were widely conversion. While some retraining of circulated in various studies and in the returning veterans occurred, it is not clear press.7 Consequently, public works projects how much retraining was made available for were outlined for every level of government civilian defense workers, or how it was dis- (Ballard, 1983). Pessimism decreased as the war protributed by sex and race. At least one union economist asserted that rapid technological gressed, however. Economists gradually change during the war had rendered even became aware that large household and many skilled workers redundant and called business savings represented significant for massive retraining of civilian defense pent-up demand that would be released workers (Shiskin, 1944), a task the federal once production controls receded. They also government certainly did not take up. Late anticipated large foreign demand. As in 1944 President Roosevelt apparently attention turned to the likelihood that civbelieved that a full employment macro- ilian output would fall short of a bursting economic policy would suffice to assist civ- demand, then, inflation became the immediilian defense workers in obtaining new jobs ate fear for the postwar period (an unlikely (Ballard, 1983). Despite the adjustment outcome of 1990s' conversion). In 1944 and 1945, inflationary fears problems, federal conversion policy folfocused on enabling policies built upon lowed Roosevelt's lead. Probably, then, official unemployment World War I experience: clearing factories missed some significant disguised unemploy- of government-owned inventories and ment in 1945-47. Thus, if we consider not equipment, and discharging uniformed only macro-economic measures of efficiency workers to stimulate supply. Some hoped but also other criteria, such as micro- that prompt sales of government surplus economic efficiency and equity (or stronger goods would meet part of the new concriteria such as participation in decisions sumer, investment, and export demand. affecting one's life), the performance of Others, however, apparently feared either post-World War II labor conversion policy that an abundance of government surplus was less than satisfactory. Because conver- consumer goods would dampen manufactursion policy during 1945-46 was formulated ing zeal or that speculation in surplus goods as one of making labor more mobile among would destabilize prices. To make surplus autonomous labor markets, groups tra- capital goods available to producers quickly, ditionally marginal to labor markets and government accounting policy shifted educational opportunities found their pos- sharply in favor of buyers, and in 1947 surplus capital accounted for 20% of ition in the labor force eroded. capital investment (Ballard, 1983; White, 1980). 4.2 Stabilizing Output, Employment and Inflationary fears also generated policy Prices The second conversion problem - macro- controversies over the removal of produceconomic stabilization to offset shocks of tion controls and removing price controls. troop demobilization and declining military While such controls do not exist today, the spending - preoccupied the makers of controversies and their outcomes are World War II reconversion policy. Quite instructive for the 1990s. The outcomes naturally the deflationary experience of strongly suggest that US policy sacrificed the Great Depression dominated their stable and complete conversion to other concerns. Even during the rising prosperity aims. For its proponents, a policy of early of rearmament before Pearl Harbor, 80% of

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removal of production controls would have policy took. In general, this will be true for relieved inflationary pressures and increased any period of conversion to civilian producdemand for industrial labor. This would tion. Economic conversion policy, like all have allowed firms with canceled contracts national industrial policy, is strongly tied to and slack military demand to return to civ- implicit or explicit income distribution ilian production as early as 1944. But pros- policy. Strong groups in the distributive pects of relaxing production controls preci- struggle will fare well in the conversion pitated a major struggle whose participants period even if this means sacrifice of some included the Army, the War Production production facilities and labor. Although the evidence is not decisive, the Board (WPB), and the President. The WPB was divided between representatives of the record shows a strong contrast that can be industrial oligopolies and anti-monopoly explained only as a victory over convenNew Deal reformers who believed that oli- tional conversion policy that freed military gopoly helped cause the Great Depression. contractors from obligations to regions and Led by the President of General Electric, workers. Postwar macro-economic policy oligopoly interests in the WPB apparently slowed relaxation of production controls to feared that early decontrol of production protect oligopolists' market shares in 1944would help small firms retool faster than 45, but after a stormy and shifting debate, larger companies (which had continuing an accelerated removal of price controls military commitments), enter new markets, during 1945-46 protected newly restored and gain market share. In the end, oligopoly profit margins. This return to "business as interests were able to block release of usual" undercut the macro-economic needs decontrol procedures for six months or of stable conversion. We have also seen that more (see Cook, 1962; Nelson, 1946; policy left conversion of labor and capital resources - rapid retooling and retraining Somers, 1950). When it came to removing price controls to managerial prerogative in military firms. powerful business interests reversed them- Policy-makers' sole reliance on market selves, calling for early decontrol of prices. forces ignored the effects that social and This went against the advice of both Ber- market power would have on the demobiliznard Baruch, expert on World War I ation process. As we have seen, the conseinflation, and Chester Bowles, Head of the quences of this included the exclusion of Office of Price Administration, who pro- socially weak groups from the labor force, posed cooperative incomes policy rather abandonment of much physical capital and than decontrol (Ballard, 1983; Bowles, production sites, and renewed oligopoly. 1971; Craf, 1947), and against the need for That the demobilization avoided greater stable prices during reconversion. It also economic trauma surely is attributable to intensified a rising distributive struggle be- unusual macro-economic conditions - high tween labor and capital, as by some demand, large savings, and cheap physical accounts slowing war production reduced capital - and advance business and governworkers' incomes perhaps by 25% (Bowles, ment planning (however piecemeal). 1971; Williams, 1946). Strong business pressure forced President Truman to allow price increases for industries which could 5. Conversion Problems in the 1990s demonstrate they were squeezed by rising US military expenditures will fall at least wage costs, and in 1946 Congress killed 25% in this decade to release resources for price controls (Ballard, 1983). civilian use (CBO, 1992). We have little From this brief review of conflicts over ground for optimism that market forces are production and price controls, we formulate succeeding better than in 1944-47 in solving the following hypothesis about the derived the first conversion problem of transferring status of conversion policy: in 1945-47 the labor and capital to civilian production. Nor shape of the distributive struggle and its out- are current macro-economic conditions and come determined the form that conversion policies likely to promote smooth industrial

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conversion. Finally, while there is an alternative policy vision available, the Department of Defense continues to promote a narrow, unplanned vision of adjustment. 5.1 Converting Capital in the 1990s Compared to 1944-47, defense industries now face substantial new obstacles to conversion of physical capital. In the 1990s, prime military contractors will not have equipment designed for civilian production available in storage. They will have no civilian products to market in place of military goods; nor will they have returning to work production labor, technical and research personnel experienced with civilian production, or marketing experience in civilian markets (see Melman, 1983, 1985; Weidenbaum, 1963, 1964). These obstacles make the current state of military industry relatively close to the situation in the two most endangered and least converted classes of industry at the end of World War II: those industries in which the war had generated excess capacity and those industries built on highly specialized facilities. Here we focus on manufacturing and ignore important cases of government offices, arsenals, shipyards, and bases. Major arms reductions will leave many manufacturing industries with excess capacity. In 1985, 45 manufacturing industries had a defense share of output greater than 10% and 25 industries had a defense share above 20% (Henry & Oliver, 1987). In the early 1990s these large defense shares were still 99% for ship-building (up from 93% in for aircraft (down from 66%), 1985), 40%/o 42% for communications equipment, and 18% for engineering and scientific equipment (down from 55%) (CBO, 1992; Henry & Oliver, 1987). Of course, given sufficient new civilian demand, some manufacturing industries would require little retooling to maintain employment. Others, however, would need major retooling of specialized military facilities. Defense employment in just five such specialized industries - ordinance, missiles and space vehicles, communicating equipment, aircraft, and shipbuilding - was over one million in 1985.

Obviously a 25% reduction in military pur-

chases, without a planned compensating demand, would bring a concentrated regional and industrial shock. 5.2 Converting Labor in the 1990s Conversion in the 1990s will face problems of labor mobility similar to those of 194447. First, troop demobilization and Pentagon civilian employment reductions will be smaller, but still more than one-half million (CBO, 1992). While most reductions will take place through normal attrition, very few returning service men and women will have jobs waiting, and none will have guaranteed jobs. Thus the need for some sort of GI bill remains. With smaller proportions of white men in the armed forces now, moreover, other groups will claim a more proportional share of any demobilization assistance resources. Defense-related private employment was 3.2 million in 1985 (Henry & Oliver, 1987). Military-related employment represented
9.40/

of all manufacturing employment

for

that year (US President, 1989). Based typically on a 25% military cut, estimates of job loss for military industry range from one to two million workers.9 Labor policy based upon conventional adjustment theory like that employed in 1944-47 would rely on rapid market adjustment, severance awards, and employment services for displaced defense workers. Policy-makers should exercise some caution before relying on such a policy to protect any defense worker, especially those more vulnerable in labor markets. On the other hand, arms reductions in the 1990s will not so much mean that white men will return from military service to claim jobs from white women, Blacks, and Hispanics. We have seen how the enabling reconversion of 1944-47 forced many women and minorities from the labor force. Because it is highly skilled and more technical, the defense industry workforce may well be more white and male than during World War II (Blank & Rothschild, 1985; Wartzman, 1990). Consequently, devoting conversion resources exclusively to the defense industry workforce may not only be less

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Military Conversion Policies in the USA

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necessary for correcting labor market failures, it might also perpetuate an historically unequal distribution of military-related expenditure. Because of these complexities, and because simple enabling policy brought significant failure in earlier conversions, it makes some sense to formulate 1990s' conversion policy not narrowly as enabling policy, but to integrate it into wider labor policies. The US labor force, already rocked by structural economic change, has ample need for education, training and equal opportunity, and the new Clinton Administration has promised some new resources in these areas. Already 3% of the manufacturing workforce has been directly affected by military reductions since the late 1980s, and eventually S-10% will be, compared with as much as 20% after World War II. Repeating the conventional adjustment policy of haphazard capital liquidation in this decade would just repeat employment dislocations, although on a smaller scale. To avoid this, we need some advance civilian production planning at the level of military production facilities. 5.3 Stabilization for Conversion in the 1990s In the 1990s, the context of macro-economic stabilization is largely different from and faces less favorable circumstances than in 1944-47. With hopes of a booming European economy fading, we can expect little private upswing in demand in the USA to offset deep cuts in military expenditure, and defense firms to have little incentive to undertake the investment needed to convert labor and capital. Foreign competition and financial reorganization, moreover, have reduced manufacturing and R&D capability in many industries, and limit growth of market share for US producers. While production costs in the USA have probably drifted down relatively to commercial rivals' costs, still slower productivity growth in manufacturing gives producers little grounds to anticipate resurgent profits. Finally, high private and public debt will restrict private demand and severely limit fed-

eral flexibility in stabilization during the

period of conversion.

The 1990s continue a recent legacy of US governments in retreat from planning and committed to laissez faire. This contrasts sharply with the wartime government struggling to break free from laissez-faire policy toward active stabilization. Over the past two decades federal policy has not only resisted conversion planning in particular (Melman, 1985; President's Economic Adjustment Committee, 1985), but also rejected civilian industrial policy and funding of civilian research and development on the scale of the Japanese and the Europeans. In the near future, short of facing major economic crises, policy-makers will be hesitant to establish even relatively modest conversion policies similar to those of the post-World War II period, when the problems of aggregate demand, availability of stored equipment, and appropriately skilled labor were relatively less serious than they will be in a 1990s conversion. We have seen, moreover, that conflict over income distribution diverted macroeconomic anti-inflation and production policy from the requirements of stable conversion in 1945-47. With continued distributional conflict anticipated in the 1990s over the federal deficit, the trade deficit, banking crises, and other macro-economic problems, we should expect an analogous state of confusion concerning conversion stabilization. Since 1989 the Bush Administration, the CBO and others have explicitly proposed to turn any 'peace dividend' of military savings into deficit cutting rather than compensatory spending on infrastructure renewal, rebuilding education, or on useful civilian products military firms might produce. Such a policy departs from the fiscal stimulus prescribed by both conventional conversion policy and proponents of advance planning for stabilizing output. 6. Concluding Remarks on Planning
Conversion

We have seen that unusually favorable macro-economic circumstances and a long (if broken and piecemeal) planning horizon

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J. Davidson Alexander

made conversion in 1944-47 as successful as it was, but that incompleteness of planning and social conflict sharply limited that success. In the 1990s there are widespread theoretical objections to conversion planning and practical obstacles. The most common objections to advance conversion planning at the enterprise level in the 1990s are that (1) any government planning is inefficient or dangerous and should be avoided; and (2) that the 1990s conversion will be relatively so much smaller than the earlier one that the economy can absorb the shock more easily. The first objection justifies not so much complete rejection of conversion (or any) planning as caution in planning. Obviously, military industry in the USA was established by Pentagon industrial and regional planning; its reduction could also be planned, by either central or decentralized authority. The second objection employs a non sequitur. Even if the 1990 cuts will affect relatively fewer defense workers, families, and communities, it will be no less painful for these millions of people and their communities. The assumption, moreover, that the US economy can absorb any shock very quickly in the 1990s is far from certain, and is frequently debated by economists. While conversion in the 1990s will require no less planning than in 1945, there is no agent prepared to do that planning. Defense contractors have fewer incentives and resources to plan conversion in the 1990s. As World War II ended, firms were anxious to plan postwar production to reestablish market share quickly. Defense contractors today lack the experience in design and marketing of civilian products. Studies indicate, moreover, that specialized defense contractors do not respond to military cuts until after their contracts end (President's Economic Adjustment Committee, 1985; Weidenbaum 1963, 1964). Without additional incentive for firms, their employees, and their communities to plan civilian production in advance, we predict considerable employment dislocations (and consequently political opposition to conversion) at the level of individual firms. The US government is less prepared to

plan civilian economic transfers, as we have seen, for reasons of both economic philosophy and lack of planning apparatus. The Department of Defense (DoD) is the largest federal planning agency, and will likely take over any conversion planning (although its interests conflict with smooth military cuts). While the Bush Administration's Defense Conversion Committee recommends that integration of conversion efforts be directed from the Office of the President, it retains an indefinitely large conversion role for the DoD (DCC, 1992, pp. v, 47-49, 60-61). The DoD conversion perspective remains the enabling approach that guided reconversion in 1944-47 and thus has serious flaws. A recent major DoD study of conversion, for example, continues to promote the conventional view of planning (President's Economic Adjustment Committee, 1985). The DoD distinguishes its traditional approach to conversion - the 'economic adjustment' approach - from the conversion planning approach. In this view of adjustment, the DoD implicitly assumes that firms are units of financial wealth rather than social institutions located in specific communities and in which people derive a living. By this assumption, under current economic institutions, adjustment means primarily that capital should move to the most profitable use. For the DoD, federal participation in the adjustment process consists of reactively and secondarily supplementing state and local government efforts to re-employ workers after capital moves and after defense jobs are eliminated (President's Economic Adjustment Committee, 1985). In so far as this ignores aggregate demand and labor market shocks implied by this policy, the DoD has an incomplete adjustment vision. The new Clinton Administration proposals for the next five years retain much of this reactive posture in small programs for job retraining and helping small business, and somewhat larger, although vague, efforts to encourage civilian spinoffs of military goods and development of dual use technology (Olgeirson, 1993). Combining current macro-economic problems, distributional conflicts over a shrinking federal

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Military Conversion Policies in the USA

31

budget, and the DoD conversion perspec- sive conversion plans need to address not tive outlined above, we anticipate specific only adequate aggregate demand, but also outcomes based upon interests of military advance government plans for orders in contractors and the DoD. First, if conver- industries most hit by military cutbacks, sion policy continues to follow the DoD local plans for retooling by firms unlikely to adjustment model, defense contractors will receive civilian orders, and broad plans for be free to acquire and dispose of military new training of both uniformed and civilian industry capital assets at will. Consequently, defense workers in civilian production. defense-dependent communities will be forced to play the same zero-sum game of economic development forced upon others NOTES during recent decades of rapid structural 1. Ballard, 1983, pp. 44-51; Somers, 1950, p. 187; and Nelson, 1946, ch. 20. change. 2. The author's search of CED archives in New York Second, conventional adjustment policy City confirms considerable effort by city, region, rejects coordinating fiscal stabilization with and industry to survey resources and potential conversion needs of either communities or markets, and to upgrade production and sales effort once war production ended. firms. While, for example, rebuilding infrastructure or education would be extremely 3. They expressed an interest in only 10% of the plant and equipment (White, 1980, p. 98). useful for generating demand to convert 4. Means, 1944; Kaplan, 1944b; and papers by Livworkplaces and to transfer labor to civilian ingston, Ellis, and Wallace, in Harris, 1945. production, such policies would be formu- 5. Craf, 1947, pp. 37-38; Kaplan 1944a, pp. 276-279; Kaplan 1944b, ch. 4; White, 1950, pp. 98-111; lated incidentally, or independently of con1983, pp. 138-139. version needs, as discussion among new 6. Ballard, Kessler-Harris, 1982; Tobias & Anderson, 1974; Clinton advisors manifests (see Ricks, Trey, 1972; Pidgeon, 1947; Wool & Pearlman, 1947; 1992). Because defense contractors traBaruch & Hancock, 1944. ditionally adjust only after military spending 7. As late as June 1943 only 11% of those polled indicated that they intended to spend the savings they cuts and have a poor record at adjusting were accumulating in war bonds once the war particular facilities to civilian production, ended, and of those only 45% had definite plans and since any likely Administration facing (Bruner, 1943). fiscal crisis will be slow to adjust expendi- 8. Means, 1944; Bowles, 1971; Ballard, 1983; and the papers by Hansen, Ezekiel, Colm, Livingston, and tures, the consequence of piecemeal adjustin Harris, 1945. ment planning will likely be significant 9. Ellis Recent estimates of job loss differ in assumptions uncompensated job loss. The loss of one and time period covered. These include 1,010,000 in million jobs since 1989 confirms this. defense industries between 1990 and 1996 (Wartzman, 1992); 1.8 million defense industry jobs lost by In this historical study we cannot discuss 1996 for a 25% military budget cut, or 3.3 million issues of the efficiency and justice of subsijobs lost for a 50% cut (Farrell & Mandel, 1992); 2 dizing military industry conversion, the million by 1996 (Myers, 1993); and, by the Pentaextent of subsidy and planning required to gon's Defense Conversion Committee, 0.96 million between 1991 and 1996 (DCC, 1992, p. 61). do the job, or the agents who should be responsible. (These issues are difficult but not insurmountable. For discussion of some, see Alexander, 1989, 1992; Melman, REFERENCES 1983.) The critical lesson of the 1944-47 ACDA (US Arms Control and Disarmament Agency), 1962. Economic Impact of Disarmament. Washplanning record for the 1990s is that pieceington, DC: US Government Printing Office. meal planning crowded out comprehensive Alexander, David, 1989. 'Peace without Depression'. planning of resource transfer and fiscal Briefing Paper no. 7, National Commission for Econstabilization. The controversy is not, as omic Conversion, Washington, DC. some opponents of planning put it, one of Alexander, J. Davidson, 1992. 'Structural Barriers to Converting Defense Firms', Defense Analysis, vol. 8, decentralized planning vs. centralized planno. 2, pp. 147-164. ning. Comprehensive planning can occur Ballard, Jack Stokes, 1983. The Shock of Peace: Milithrough decentralized channels with labor tary and Economic Demobilization after World War and community participation. ComprehenII. Washington, DC: University Press of America.

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J. DAVIDSON ALEXANDER, b. 1945, PhD Philosophy (Pennsylvania State University, 1972), PhD Economics (University of Massachusetts, 1987); Assistant Professor of Economics, College of Wooster, Ohio; Adjunct Professor, Graduate School of Public and International Affairs, University of Pittsburgh. Conversion research begun while Lament Research Fellow, Columbia University, 1987-88.

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