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owesor A Public Service Message lrom the American Income Life Insurance Co.Waco, TexasBernard Rapoport, Chairmin of the Board and Chief Executive Or. Defense Dependence, Industrial Competitiveness, and the Economic Prospects of Texas and the Nation These remarks by Lloyd J. Dumas, Professor of Economics and Political Economy at the University of Texas at Dallas, are based on a draft discussion paper presented at the “Dallas 2000 and Beyond: Critical Issues for the Next Generation” conference held in Dallas on March 3, 1989. Bernard Rapoport INTRODUCTION There is little question that heavy concentrations of military-serving activity around Texas \(e.g., military bases surrounding San Antonio, military industry in Dallas/Fort Worth, nuclear provided a short-term cushion for those areas in recent years. While tumbling oil prices and serious farm problems have created deep recession in much of the state, the enormous military buildup produced a strong, continuing flow of military dollars into the state’s pockets of military economy. Yet there are compelling reasons why the military dependence that appears to have been a short-term asset for these areas in the recent past has been a long-term liability, and one which is likely to soon become a short-term liability as well. THE CHANGED CONTEXT Between fiscal year 1980 and fiscal year 1989, spending on “national defense” more than doubled, from $134 billion to roughly $294 billion. At the same time, the national debt of the United States more than tripled from $914 billion to $2.8 trillion, as the nation cut taxes and borrowed heavily, largely to finance that military buildup. \(It is interesting to note that the savings which would have resulted from a flat Department of Defense budget over that period would have wiped out more than 70 percent of the increase in the debt in turn led to a near tripling of the net interest on that debt, from $53 billion to $152 billion. Without this explosive increase in the national debt, the interest savings alone would have taken us two-thirds of the way to balancing the federal budget. This federal spending binge, coupled with a refusal to pay for it with tax revenues, has also crowded out a great deal of productive private business investment. And it has put a considerable squeeze on the ability of state and local governments to raise the funds they needed. It is therefore not difficult to understand why there are now powerful political pressures to balance the federal budget. In FY 1987, spending on the military and interest on the national debt alone accounted for almost 90 percent of all the federal income tax revenues collected from all individuals and corporations in the United States combined. Without draconian tax increases or slashes in federal social programs much greater than the public was willing to accept from the previous Administration, significant cuts in the military budget are highly likely. In their absence, there is virtually no prospect of balancing the federal budget in the foreseeable future. This is not a question of ideology or political preference. It is simply a matter of fiscal reality. THE LONG-TERM LIABILITY There are also long-term structural economic forces pushing the nation toward reduced military expenditures. Much as been written about the pressing problem of the failing competitiveness of American industry. In the mid-1980s, President Reagan appointed a special Commission on Industrial Competitiveness to look into this issue \(more than two-thirds of its members were major industrialists and bankers, including Mark Shepherd, Chair and CEO of Texas Instruments, and Edwin Harper, Executive VP of the Commission issued its strongly worded report, saying During the past year, 30 leaders from American business, labor, government, and academia have come to remarkable consensus. . . . Are we meeting the competitive challenge? Not well enough. Our ability to compete in world markets is eroding. . . . This report contains compelling evidence ‘of a relative decline in our competitive performance. For more than three-quarters of a century, from 1894 to 1970, every single year the U.S. exported more than it imported. This remarkable performance reflected the ability of American industry to produce so efficiently that it could pay the world’s highest wages and still make products people wanted at a price they could afford to pay. In the 1970s, these continuing trade surpluses turned into deficits, despite a decline in American industrial wages relative to the rest of the world. \(U.S. industrial labor costs -per hour, including fringe benefits, had fallen to about ninth in the world as of merchandise trade deficit had reached an all-time high of roughly $67 billion. By 1987, this record had been shattered the deficit had more than doubled, despite a fall in the value of the dollar and weak oil import prices. American industry had become relatively inefficient, and so had lost its long-term competitive edge. Why has this happened to the nation which used to be a model of industrial efficiency for the rest of the world through much of its modern history? Though many things affect the efficiency of industry, there are two factors which are critical the availability of sufficient engineering and scientific talent to generate a continued flow of improvements in technology that allow producers to make better products at lower cost, and the availability of sufficient investment capital to deploy those improvements. Over the past four decades, the large, well-funded military has diverted large amounts of both those key resources from the civilian, commercial economy. Roughly 30 percent of the nation’s pool of engineers and scientists and a comparable fraction of its capital have been taken by the military sector. The long-term drain of these key resources has undermined the ability of U.S. industry to maintain its competitive position, especially relative to those whose commercial industries are only lightly burdened by that drain. American Income Life Insurance Company EXECUTIVE OFFICES: P.O. BOX 208, WACO, TEXAS 76703, 817.772-3080 BERNARD RAPOPORT Chairman of the Board and Chief Executive Officer THE TEXAS OBSERVER 13