US arms buildup reshaping economy

The Carter administration's sudden move toward highr defense spending is leading to a fundamental reshaping of the giant US economy. Already, some economists and historians here are comparing the rearmament effort to the military buildup in the early 1940s and in the Korean war period. The long-term consequences, they say, are beginning to be clearly identified:

* The on-again, off-again recession now has probably been put on the back burner, thanks to new defense spending that could reach a whopping $230 billion annually by the mid-1980s.

At the least, any recession is expected to be sharply mitigated.

* The inflation rate will be exacerbated by government spending on thousands of new tanks, jet fighters, rockets, and helicopters, and on ammunition stockpiles and the other hardware of modern warfare.

* In the long run, many economists believe higher defense spending will lead to greater controls (including possible wage and price controls) over the entire civilian sector of the economy. The Pentagon, it is noted here, already is grousing about shortages of vital metals and other commodities and a lack of skilled manpower. It is looking at the private sector to fill these needs, possibly at the expense of consumer goods.

* Money for the new defense spending, moreover, is expected to come out of the civilian sector of the overall econony. The reason is that while federal expenditures for defense are rising, federal spending for social programs is not being sharply cut back. That, some economists argue, means that there will be less disposable income for Americans to spend on consumer goods.

* Hardest of all to gauge, perhaps, is what will happen to political attitudes. Historians and sociologists note that in the 1940s and 1950s -- before the Vietnam war -- the Pentagon (and the entire so-called "military-industrial complex") enjoyed widespread public clout.

Those in uniform basked in great prestige, and dissenters were largely ignored.

Could that happen again? Was the antiwar turbulence of the Vietnam period an anomaly? No one is yet sure.

The United States, argues Harvard University historian Frank Freidel, a leading expert on the New Deal and the 1930s, now is at a turning point.

"For 10 years," he argues, "we've been aware of a major Soviet buildup, but hoped we were wrong."

Now, with the Soviet invasion of Afghanistan, we've "suddenly discovered" that the Soviets are willing to use their military muscle in ways we hadn't anticipated, he says.

The new defense buildup is going to "have a significant impact on the US economy," argues Adm. Gene La Rocque (USN, ret.), director of the Washington-based Center for Defense Information. The center is a liberal "think tank" that has been critical of large-scale defense expenditures.

"We're on the threshold of a huge military expansion," Admiral La Rocque argues. "Our treasury is broke. Every Monday morning, [the US Treasury] has an auction to borrow money to get us through the week. Further, the federal deficit is not only large, but very large." New defense spending, he argues, without any significant reduction elsewhere in the fiscal 1981 budget, will only accelerate the inflation rate.

Many economists would agree about the likely inflationary impact of stepped-up defense spending.

At the least, argues Dr. Beryl Sprinkel, vice-president and chief economist of the Harris Bank in Chicago, seeking to have "guns and butter at the same time ," raises the possibility that the administration will put off adopting much-needed policies to "encourage greater capital formation" in the US.

Franklin A. Lindsay, chairman of the research-policy group of the Committee for Economic Development (CED), urges that we must "avoid the error during the Vietnam buildup" of seeking to have both guns and butter that "created the overload which launched our now-chronic inflation."

If defense costs rise, argues Mr. Lindsay, chairman of the New England-based Itek Corporation, "so must the revenues to pay for them."

In the 1950s, according to most economists, relatively high defense spending was offset by proportionately low levels of spending for social projects under the essentially conservative Eisenhower administration.

Under President Johnson, in the 1960s, the US sought to have both "guns and butter."

But even the adverse effects of that policy were mitigated somewhat by the fact that the US still had a "growing economy," notes Robert W. Hartman, a public finance specialist with the Brookings Institution. In that sense, there was some room for "guns and butter."

The economy of the 1980s is not a big-growth economy.

The clear "implication of the new Carter defense program," says Mr. Hartman, "although the administration has not yet said as much, is to add up to a squeeze on private consumption."

In turn, he notes, that may mean giving up tax cuts while keeping interest rates at relatively high levels.

"The important thing to remember is that in previous episodes [of rearmament] we didn't start from such a high inflationary base," says George Hagedorn, vice-president and chief economist of the National Association of Manufacturers.

"In World War II, we actually started from a decade of deflation, of depression. Now we're starting from an inflation base of over 13 percent."

Dr. Freidel of Harvard, who is writing what many historians believe is the definitive biography of President Franklin Roosevelt (it is not yet completed, despite a number of volumes), also points out that in the late 1930s and early 1940s a large part of the nation was isolationist, making a military preparedness program more difficult. Today there is a strong "defense related" constituency.

Still, analysts here in part liken the rearmament efforts then, and more particularly in the 1940s and 1950s under Presidents Truman and Eisenhower, to what is happening now.

The reason for the similarity is that the military establishment already is discussing seriously the need for establishing greater control over scarce commodities and manpower pools.

A number of defense programs, particularly involving aircraft, are facing production roadblocks because of lack of parts.

Titanium armor for aircraft, for example, takes from 90 to 100 weeks to be delivered. Forgings for aircraft frames require 114 weeks or so before delivery. Gold, silver, lead, and copper are all in scarce supply.

Manpower, particularly skilled workers, is also in short supply throughout industry. "There is today a shortage of skilled metal workers throughout the US ," argues James A. Gray, president of the National Machine Tool Builders Association.

A new study by his association finds that a hefty 70 percent of its member firms are reporting significant manpower shortages.

For that reason, many military officials are already known to be arguing within the administration for a more formal priority system for materials and manpower -- the effect of which would be to divert supplies away from consumer industries, such as commercial aircraft.

The essential components of such a detailed priority system are already in place, notes Gen. Henry A. Miley Jr. (USA, ret.), president of the American Defense Preparedness Association, which is comprised of individuals and defense-related firms.

Currently, the Pentagon has a twofold priority rating system -- the so-called "DO" and "DX" system. Under the "DX" designation, a military project would have all-out priority over civilian material needs. But getting the administration to use the higher-priority DX designation on a more regular basis has been difficult since the President himself must authority this higher designation.

Throughout the US, there are at least 10,000 factories and plants that could be quickly hooked into such a comprehensive priority system. But would the public accept such a large-scale redirection of the civilian economy at this juncture?

Most officials here assume that conditions would have to get much worse abroad before that were to happen.

All the same, the feeling now is widespread that the course is set, for a while at least. Defense spending will rise.The military will fight harder to untangle production bottlenecks by tapping precious resources flowing to consumer-goods manufacturers.

And the American public will find itself in the middle of what promises to be a severe struggle for these resources.