Do We Need Special Federal Programs to Aid Defense Conversion

Abstract : Among the actions being urged on the new administration are special steps to assist "defense conversion," which is the process by which the workers and firms engaged in the production of defense-related goods and services are converted to constructive civilian pursuits. A recent report by the Defense Conversion Commission suggests caution in this regard. Such caution is in order. There is an unquestioned national interest in speeding the transfer of valuable resources from military to civilian pursuits. But federal assistance aimed specifically at the defense sector or at firms within the defense sector will almost certainly not prove the most effective mechanism for facilitating this transfer. This issue paper examines three arguments in support of special governmental assistance for defense conversion: we must "keep faith" with defense suppliers, reductions in defense spending create particularly severe local problems, and defense suppliers are more than the sum of their parts. The authors conclude that there is no good justification for programs designed to aid only the conversion of defense industries. They suggest that government assistance should be triggered by any economic dislocation, regardless of its cause or the particular industry affected. They claim that the economy would be better served by policies that improve the quality and flexibility of all U.S. workers. They also caution that, to the extent that government policies shield workers, managers, or investors from the consequences of changing economic circumstances, these policies weaken incentives for the decisions that will finally result in the conversion of resources to new and productive uses. Excessive efforts to ease the pain of conversion will only slow it.