Defense Cuts: No Guarantee Of Boom Times

Arms reductions may ease the threat of a nuclear war, but not all Americans will sleep easier.

"Any cut in defense spending itself is a negative for the economy," said Robert Dederick, chief economist at Northern Trust Corp.

Experts agree that reducing the defense budget eventually would create a so-called peace dividend. The administration wants to cut defense spending by 25% from previously planned levels by 1995.

That means more dollars will be available to cut the federal budget deficit, cut taxes, or allocate to new programs. But for now, spending cuts are creating unemployment.

People in Victorville, Calif., for example, are paying a high price for the easing of superpower tensions. The southern California town had one-third of its jobs tied to an Air Force base that was closed this year.

Thousands Laid Off

Defense contractors also are slashing payrolls.

At a Lockheed Corp. plant in southern California, 12,000 workers have lost jobs since the end of 1989.

McDonnell Douglas Corp. has given pink slips to 20,000 workers in the past 12 months. In July, the aerospace company unveiled a plan to cut costs by $700 million.

What to Do with Savings?

It is early to say for sure how the government will apply the savings.

Jerry Jordan, chief economist at First Interstate Bancorp, Los Angeles, is convinced that the spending cuts will go to reduce the budget deficit -- allowing the market to channel into more productive areas funds the government would otherwise have to borrow.

The Path to Higher Growth

"We will get a higher growth rate down the road," Mr. Jordan said, "and we will have more of those things that Americans now want," such as environmental protection and infrastructure improvements.

But getting to the point where defense spending cuts help the economy could be painful.

"The Niagara River five miles above the falls and five miles below the falls is equally calm," Mr. Jordan said.

"But the transition can be deadly."

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