Conversion Then and Now

WORKS DISCUSSED IN THIS ESSAY

  • John A. Alic, Lewis Branscomb, Harvey Brooks, Ashton B.
    Carter,
    and Gerald L. Epstein,
    Beyond Spinoff: Military and Commercial Technologies in a
    Changing World
    (Harvard Business
    School Press, 1992).
  • Maryellen R. Kelley and Todd A. Watkins, "The
    Defense-Industrial
    Network,"
    Carnegie-Mellon University, 1992. (Forthcoming as a report for
    the Office of Technology
    Assessment.)
  • Ann Markusen and Joel Yudken, Dismantling the Cold War
    Economy
    (Basic Books, 1992).
  • Ann Markusen, Peter Hall, Scott Campbell, and Sabina
    Deitrick,
    The Rise of the Gunbelt: The
    Military Remapping of America
    (Oxford University Press,
    1991).
  • Seymour Melman, Our Depleted Society (Holt, Reinhart
    and
    Winston, 1965).
  • Seymour Melman, Pentagon Capitalism: The Political Economy
    of
    War (
    McGraw-Hill, 1970).
  • Seymour Melman, The Permanent War Economy: American
    Capitalism
    in Decline
    (Simon and
    Schuster, 1974).

Nine trillion dollars later the Cold War
is over, and the
prospect of converting industries to
peacetime objectives seems at once inevitable, improbable, and
replete with momentous
opportunities. We have been here before, of course. America went
through a very deliberate
conversion process beginning in 1939, which gave way to full
mobilization in 1942, and a
somewhat hectic though still planned "reconversion" in 1945-46.
What is astonishing about
the current transition is the general obliviousness to how
heavily the Cold War economy has
used military spending as both a spur and a crutch. Nor is there
any organized effort to
maximize the conversion opportunity, much less to minimize the
pain.

In part, the absence of a coherent conversion plan reflects wide
disagreement about the effect
of military spending on the economy. To the extent that
mainstream political and economic
opinion has focused on this question at all, observers have
divided into two camps. In general,
those politically hostile to the Cold War found economic reasons
to dislike it as well, while
those who supported its strategic purposes emphasized the
positive "spinoffs" of military
technology. Planning for an economy less reliant on military
outlay requires an accurate
assessment of how the Cold War interacted with non-military
economic life.

For the critics, the military economy is mostly a parasite on
civilian needs, diverting resources,
creating, in Mary Kaldor's phrase, a "baroque arsenal," that
channels scientific resources,
technologies, and corporate cultures onto narrow paths dictated
by the parochial needs of the
Pentagon. Ann Markusen works broadly in this tradition, both in
her new book with Joel
Yudken, Dismantling the Cold War Economy, and in her
earlier The Rise of the Gunbelt,
written with three colleagues. A far more complex and qualified
critique is offered in Beyond
Spinoff
, which holds that defense spending has been a
positive stimulus to the American
economy, at least some of the time, notably by leading and
diffusing technological advance.
The authors include four scholars from Harvard's Kennedy School
of Government, Lewis
Branscomb, former chief scientist of IBM; Harvey Brooks, former
Harvard Dean of
Engineering; Ashton Carter, director of Harvard's Center for
Science and International
Affairs, and Gerald L. Epstein, director of Harvard's research
project on dual-use
technologies. They are joined by John Alic, a senior associate at
the Office of Technology
Assessment.

Where the two works emphatically agree is their common conclusion
that, with the Cold War
over and military outlays declining, the nation needs a civilian
technology policy to replace
what was either partly beneficial (Alic et al.) or mostly malign
(Markusen et al.), but which is,
in any case, rapidly dwindling.



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This debate is as old and complex as the Cold War itself, and the
literature on conversion is
vast. Seymour Melman, perhaps the most prolific writer on the
subject, is widely known for his
"depletion" thesis first put forth during the 1960s. He has
argued consistently that defense
spending fails to generate economic growth, diverts intellectual,
financial, and material
resources away from civilian industries, militarizes society,
retards research and development,
and preempts a significant share of the nation's capital stock.
In Our Depleted Society, he
maintained that a "depletion process" in American industrial life
followed from the diversion
of capital and technology to the military in the 1960s. In
Pentagon Capitalism, Melman
described the subsequent formation of a Pentagon-based management
over the military
economy, which made the Defense Department a de facto planning
ministry with enormous
power over a substantial portion of America's resources, as well
as exploitive power over
American society and foreign countries. Finally, in The
Permanent War Economy
, he outlined
the workings of a new economy generated by the military system,
which resembles a type of
"state capitalism." This new regime, he argued, contributed to a
loss of individual liberty and
the erosion of industrial productivity.

Though the Cold War did lead to a substantial militarization of
American technical and
scientific capital, it had positive effects as well. As it turns
out, the "sapping" effect of defense
spending on the civilian economy is not quite as enfeebling as
Melman (and others who write
in this tradition such as Lloyd Dumas, John E. Ullman, Mary
Kaldor, and Paul Kennedy)
would frame it. Even Melman concedes that, as a matter of
macroeconomics, Pentagon
spending played an unintended Keynesian role.

Markusen and her colleagues extend the depletionist thesis in a
more subtle and appropriately
complex fashion. In Dismantling the Cold War Economy,
Markusen, a professor of urban
planning and policy development and director of the Project on
Regional and Industrial
Economics at Rutgers, along with Joel Yudken, also at Rutgers,
emphasize the sectoral and
regional effects of Pentagon procurement. The two argue that the
military needs of the Cold
War fostered a new industrial sector comprised of aerospace,
communications, and electronics
industries, "ACE" for short. While this seems a positive
contribution by the Pentagon, the
authors contend that these key industries grew behind a "wall of
separation," dictated by the
peculiar needs of the military and largely isolated from civilian
markets. As whole communities
and industries became dependent upon the Department of Defense
for their survival, a "quiet
industrial policy ... aimed narrowly at the newly emerging ACE
industries" evolved.
Meanwhile, in the absence of a counterpart civilian industrial or
technology policy,
traditionally strong American industries such as steel,
automobiles, and machinery were left to
"languish," while the "comparative advantage of the United States
is increasingly confined to
weapons systems and their high tech spinoffs."

In The Rise of the Gunbelt, Markusen and her colleagues
describe how the military-industrial
complex redrew the economic map of the United States. During the
Cold War, defense
spending and its oscillations became a major determinant of
regional economic prosperity or
decay. The West, South, and East coast reaped enormous gains from
the distribution of
Pentagon money, while much of the Midwest became a commercial
rustbelt. Pentagon
procurement policies raised income and productivity within
regions but also increased the
disparity between them. Two prime examples are California and
Massachusetts, once the
darlings of military technology, now in economic free-fall. As
Michael Dukakis discovered
when the Massachusetts miracle fell apart during his 1988
campaign, what the Pentagon in the
early 1980s gave, defense cuts could take away. Markusen warns
that the diminished role of
defense spending will deprive the ACE industries of a
longstanding engine, and leave them
vulnerable to the caprices of market forces, or to companies
supported by foreign
governments.

A centerpiece of Markusen's argument is her analysis of
"postmodern," military
technologies--missiles, electronic warfare and satellites--which
produce few commercial
spillovers because the Pentagon's agenda tends to narrow the
array of available technology.

Not entirely true, say the collective authors of Beyond
Spinoff
. They have written a truly
groundbreaking book that calls into question Markusen's and
Yudken's conclusions about the
narrowing effect of military spending on the creation and
diffusion of technology in the
American political economy. Where the Rutgers authors emphasize a
wall of separation, the
Harvard group argues that most advanced technology is not only
"dual use," but "multiuse."
Microchips are used in missile guiding systems, children's toys,
automobiles, and in the
machines that manufacture the chips themselves. Furthermore, much
of what we call
innovation is a continuous process of incorporating small
refinements over many years.

As the Harvard authors point out, "Companies compete on the basis
of existing products, not
those yet to be created. For these products, companies engage in
a very different process of
innovation in which they seek constant, incremental
improvements." It is upon these very
rapid "incremental improvements" that competitiveness depends,
not the once-in-a-while
revolutionary developments in high technologies and science.

According to Alic, Branscomb, and colleagues, the Pentagon has
been more nurturing of
generic technology than some of its critics contend. The Defense
technology establishment has
been shrewd enough to appreciate that its own narrow interests in
military technologies often
depended on broader technical advances, of which the
microprocessor is a signal example.
Often pursuing broad technologies with no immediate military
relevance, the Pentagon
typically "financed rapid movement down the learning curve until
commercial markets took
over." Far from being serendipitous "spin-off," the Pentagon's
strategy of sponsoring more
generic R&D was often deliberate, though accidential
spin-offs sometimes occurred, too.
According to the authors, "Very few technologies proceeded
effortlessly from defense
conception to commercial application." Rather, this transfer of
technology from defense to
civilian applications reflected a complex Pentagon-led technology
policy, quite at odds with
America's general pretensions to laissez-faire.

In short, the "technological relationship between defense and
commerce was much richer and
more complex than the spin-off model implies." Many of our most
dynamic postwar
industries, such as semiconductors, computers, jet aircraft, and
communication satellites
would have developed commercial applications much more slowly
without the involvement of
the Department of Defense. Indeed, defense spending was not "just
helpful" to these sectors,
but "thoroughly dominated them during their formative years
through the sheer volume of
Pentagon spending." Notwithstanding the Pentagon's often
parochial interests and its concern
to bottle up some very sensitive technologies such as missile
propulsion, encryption, and
nuclear weaponry, technological innovation has a way of
spreading.

Beyond its R&D role, the Pentagon has also been an important
source of technical diffusion,
particularly in the application of advanced manufacturing
techniques. Here again, the Cold
War has substituted for a civilian policy of what some have
termed industrial extension. This
diffusionary role played by the Pentagon has been emphasized in a
recent report, "The
Defense-Industrial Network," prepared for the congressional
Office of Technology
Assessment. The authors, Maryellen R. Kelly and Todd A. Watkins,
argue that the bulk of
Pentagon procurement goes to "dual use" firms that, unlike purely
civilian American firms, are
collaborative in their relationship with customers, technology
vendors, subcontractors, and
competing plants. This network was created by Pentagon technology
policies mandating the
sharing of expertise and information. The result is a
highly-integrated, often efficient network
of defense industries--our only equivalent to Japan's
keiretsu system. In that system, large
companies support enormous networks of suppliers, to which they
diffuse advanced
manufacturing techniques and quality controls; they also provide
long-term markets, which
allows small subcontractors to invest in advanced capital
equipment. Although some
commercially-oriented American firms, such as auto makers, do
have supplier networks, they
provide neither the diffusion nor the permanent partnership of
the keiretsu system.

According to the OTA report, however, the industries constituting
the defense supply network
include some of the most advanced and vital sectors of our
economy with respect to capacity
and efficiency. This is particularly true of the plants producing
manufacturing technology and
equipment, such as the incorporation of computer-aided design
into advanced industrial
machinery. To waste this developed capacity during the process of
conversion would be
devastating.

On balance, the depletionists have a strong case that the Cold
War put regional "gun-belt"
economies at the mercy of defense spending, and that a defense
industrial policy developed at
the expense of a civilian one. But they have overstated the
association between the
military-industrial complex and economic decline. The pre-emption
of resources by the
Department of Defense, though a contributory factor, was only a
part of the problem.
Moreover, in its day, a Pentagon-led technology policy was
probably the best we could have
managed. It is doubtful that the American political culture would
have tolerated a "civilian"
industrial policy during the Cold War. Perhaps it was only
possible to have an industrial policy
which was cloaked by urgent concerns of national security.
Further, some of the skewing of
resources had less to do with the size of the defense economy
than with other effects of
America's hegemonic role. For example, the federal government has
placed controls on the
export of technologies thought vital to national security. These
export controls have prevented
American industries from capitalizing on defense-produced
technologies in global commercial
markets, while our competitors emphasized commercial sales and
burdened their producers
with fewer controls.

The several critics agree, however, that a new era requires new
technology policies. The
authors of Beyond Spinoff agree that the Pentagon's
dominant role in high-tech R&D has had
constraining, as well as facilitating, effects. The former
include arcane contracting
requirements, a cost-plus approach to procurement, security
restrictions on technical data, and
some relationships with producers of esoteric products that are
virtually wards of the military.
However, rather than proposing to scrap the Pentagon role
entirely, the Harvard authors offer
a variety of recommendations to take advantage of the "dual-use"
potential of military
procurement and R&D support, to lower the wall cited by
Markusen.

Their title, Beyond Spinoff, is intended as both a call
for a more sophisticated understanding of
how the Pentagon has influenced technology, as well as a plea for
us to recognize that,
however beneficial Pentagon patronage of technology may have been
in the past, it is no longer
sufficient. During the post-war years we could afford to overlook
the inadequacies of an
indirect technology policy since international competition posed
little economic threat. The
new era is characterized by two key differences: increased global
competition and a diminished
presence of the Pentagon as a covert source of industrial
policy.

Both sets of authors call for a new national technology policy.
Where the Harvard group still
sees a major role for dual-use, Pentagon-led R&D, Markusen
and colleagues want the whole
shooting match to be civilianized. They call for a set of
regional economic development
policies not dependent on the Pentagon at all, as well as a
comprehensive conversion policy for
both industries and workers.


THE OTHER CONVERSION

How may our own past inform conversion planning now? As America
prepared for World
War II, officials carefully studied the recent history of their
own era, and were determined not
to repeat the mistakes of World War I. We can similarly profit by
examining the conversion
and reconversion experience of World War II. The debate
surrounding the conversion to a
wartime economy began in 1939, when the architects of war
mobilization were busy designing
and building what would become known around the world as the
Arsenal of Democracy. The
public, industrial leaders, and politicians understood that this
mobilization would be reversed
at war's end.

The Second World War marked America's introduction to large-scale
national economic
planning, and the military's potent influence on investment in
technology and innovation. At
war's end, the American public and its politicians believed that
the future prosperity of
America depended upon a smooth transition to peace, and that
reconversion was an
opportunity to change the direction of the nation. Though our
future is as foreboding at the
end of the Cold War, no such agreement exists in the 1990s.

The robust macroeconomic performance of the U.S. economy during
the post-World War II
reconversion was unprecedented. The conclusion of past wars had
brought economic
dislocation--inflation, unemployment, or both. But in 1945-46,
high employment prevailed
and only a short rise in the general price level occurred, thanks
to newfound purchasing power
and the increased productive capacity of American industry--both
legacies of the
mobilization.

This happy result reflected both fortuitous circumstances and
deliberate planning. War bonds
provided the savings for consumers to indulge their pent-up
demand for consumer goods. The
GI Bill functioned both as an income-support and a retraining
policy. The release of controls
on the production of consumer goods, particularly consumer
durables, allowed supply to meet
demand without unacceptable inflation. This enormous pent-up
demand for badly needed
refrigerators, cars, and washing machines fueled the reconversion
of production to former
peacetime production schedules. Investment in war production had
recapitalized American
industry, and led to a profusion of new technologies. Finally,
the government did have a
policy, albeit a truncated one, to lubricate the transition from
military to commerical
production.

By contrast, no such backlog of demand exists in 1992. Nor has
the American industrial plant
been recapitalized; on the contrary, its capital is substantially
depleted. There is no counterpart
to the GI Bill as a retraining or income-support policy. Indeed,
the unemployment level is
high, wages are low, and Americans are not in the mood to spend
money.

The government's reconversion role at the end of World War II was
cut short by Roosevelt's
death and the headlong rush to decontrol that followed. But there
was far more conversion
planning than there is today, in part because there was a much
greater acceptance of economic
planning during the war. The federal government had mapped out
the country's industrial
transition long before the ending of hostilities. To start with,
the government negotiated the
cancellation of over 300,000 contracts, which involved a
potentially devastating financial
commitment of $63.5 billion. The Office of Contract Settlement,
legislated into existence in
1944, began its work early; by 1945, it had settled of five out
of six of these contracts through
advance payments and loans, an appeals boards, and extensive
training programs.

Furthermore, the Surplus Property Act of 1944 authorized the sale
of government-built
warplants to private business. These facilities were often sold
to firms at 20% of their market
value. They amounted to well over one-half of the value of all
manufacturing plants in
existence in 1940.

Despite the continuation of abnormally large profits accruing to
business after the war, the
Revenue Act of 1945 called for an immediate repeal of the excess
profits tax. This law also
repealed the capital stock tax and lowered corporate taxes,
placing the business community in
a strong postwar financial position. A Tax Adjustment Act, passed
in July of 1945, raised
exemptions and sped up refunds and credits, again ensuring the
postwar financial strength of
American business.

Despite its broad success, the reconversion process was far from
perfectly smooth at the local
level. After V-J Day, the overnight cancellation of some $24
billion in war contracts triggered
strikes, massive layoffs, and job-downgrading throughout
industry. Unemployment reached
almost two million by October 1,1945, and isolated pools of
unemployed workers dotted the
country.

The Brewster Aeronautical Corporation, for example, was given
only a moment's notice that
its contract for Navy fighter planes was terminated. The
corporation's 9,000 workers staged a
"stay-in" strike, demanding permission from the government to
begin the manufacture of
household appliances. In the end, Brewster's Long Island City
plant was closed, its tools
equipment and parts were auctioned off, and its workers took to
the streets.

Still, the problems during the reconversion of 1945-46 remained
largely local and contained;
without the federal government's guidance, they might have
exploded into a national trend.
And by 1948, as the Cold War dawned, a more protracted form of
military stimulus reshaped
our political economy. What remained of the arsenal of democracy
was slowly transformed
into a semi-perpetual Cold War machine which provided enough
technology and growth for
our economy to rule world markets.

Today, the lack of an identifiable enemy, coupled with the rise
of foreign competition,
increases the urgency of a coherent conversion policy. The Cold
War economy has become a
way of life for many industries having no memory of competing in
the market. To date, only
piecemeal attempts at conversion policy have been made. The
funding set aside in the Defense
Authorization Act of 1992 for retraining, community adjustment,
and dual-use technology is
but a small lever facing a mountain of structural problems.
Without a clear policy from the
federal and state governments, contractors will continue to
diversify, lobby for cutback
restraint, lay off workers, and wait for another war.

A high-profile agency outside the cabinet and directly
responsible to the president may be the
solution. Such agencies were successful during the World War II
because they could operate
freely, and were regulated mainly by public opinion. Markusen has
argued for a Temporary
Office of Economic Conversion that would develop conversion
programs, work to get
cooperation from local and state governments, and generate data
on conversion, and endeavor
to reconstitute the networks of diffusion. It could advise on the
size and composition of future
budget cuts and coordinate the departments of Labor, Commerce,
and Defense. It would also
have an advisory board made up of representatives from defense,
labor, unions, professional
science and engineering associations, and state and local
development offices. It would remain
small, achieving its goals through technical and financial
assistance.

After more than four decades of reliance on the Cold War as the
organizing principle for the
American economy, we need a different path. Only a concerted
effort at conversion, easing the
adjustment of communities, conserving the manufacturing
capabilities of the defense
industries, and launching a technology policy aimed at diffusion,
will suffice.



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