ECONOMIC IMPACT OF DEFENSE BUDGET CUTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001002540005-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 3
• Document Creation Date: December 20, 2016
• Document Release Date: April 17, 2007
• Sequence Number: 5
• Content Type: REPORT

Approved For Release 2007/~~~t IA-RDP84B 00498001002540005-0
Economic Impact of Defense Budget Cuts
One purpose of the Reagan defense program is to improve the defense
industrial base.
--We need to strengthen our defense industries in order to
compete with the Soviets in strategic, conventional and
power projection forces.
--The industrial base is now seriously deficient. Defense
industrial capacity as a share of U.S. economic activity
is now only half as large as in the pre-Vietnam era (see
Table 1). Employment in the defense industries has dropped
by 20 percent in the past 15 years. Moreover, there are
major shortages in the supply of key components and raw
materials.
A strong commitment by the Administration to sizable, sustained growth in
military spending will contribute to strengthening the defense industrial
base and to overall economic recovery:
--The prospect of an increased long-term Government demand
for military hardware will stimulate investment and
increase employment in defense industries.
--It will also encourage expansion in key supporting industries --
capital goods, electronics, semifinished and raw materials.
--But if the business community doubts the seriousness of the
Administration's commitment, the incentives for new invest-
ment will be greatly reduced. The perception of a fluctuating
(rather than a steadily increasing) demand for defense goods
would be particularly damaging.
Defense spending has a different kind of economic impact than other
Government expenditures have:
--It creates more direct demand for real goods and services.
Defense accounts for nearly three-quarters of Federal
Government purchases, but only about one-quarter of the
federal budget.
--About 40 percent of each defense dollar is for hardware;
only 5 percent of non-defense Government spending goes for
direct purchases from industry.
The reduction in defense spending proposed by OMB would be costly in
terms of revitalizing the industrial base:
--It could reduce employment in defense and related industries
by more than 200,000.
--It would primarily affect procurement of weapons, reducing
incentives for new capital investment and increasing unit
costs by cutting production runs.
--It could lead to actual reductions in capacity in such critical
industries as shipbuilding.
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Table 1
Defense Shares of U.S. Economic Output (Percent)
Pre-Vietnam
Current
1965
(1979-1980)
GNP
9
5
Industrial Output
18
8
Electrical and Electronics
Industries
22
11
Transportation Equipment
(Excluding private automobiles)
55
38
D
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