Less Defense Strengthens Municipals

The municipal bond market is headed for a period of renewed growth and prosperity as the United States cuts defense spending and moves to strengthen its meandering economy.

President Bush's announcement on Sept. 27 that he planned to eliminate 3,000 short-range nuclear weapons marked an important turning point, and it doubtless will be followed by earnest debate over the shape of federal budgets for years to come. Money will shift away from armaments, which are by definition unproductive, to real investment, which may stem the decline in Americans' standard of living. The broad picture is full of hope.

To fulfill the promise, the United States must utilize its financial assets much more wisely in the 1990s than it did in the 1980s. That period will be remembered for the monstrous federal deficit financing incurred to pay for huge weapons systems and to rescue under-regulated but government-insured financial institutions. Too little investment was made in privately-owned productive enterprise and in badly needed government-owned infrastructure.

As soon as Mr. Bush outlined his plan to slash nuclear arms, Congress jumped to cut weapons spending even more, and the Pentagon's $291 billion budget for fiscal 1992, which began last Tuesday, will be revised. The B-2 Stealth bomber, the fleet of Seawolf submarines, and the Strategic Defense Initiative seem unlikely to survive in the post-Cold War world.

Mr. Bush played down the idea of a peace dividend, asserting that it could not be measured in dollars. But as David Obey, a powerful Democratic congressman from Wisconsin, countered: "To tell the American people that we're not going to be able to save any money is unreal." Last week, the debate began over how to divide savings between tax relief and budget balancing.

A major reason the economy has remained "sclerotic," to quote Paul McCracken, a former chairman of the President's Council of Economic Advisers, is that the United States has become a land of low investment. Workers need more and better equipment, and workers and managers need to be trained better. Capital equipment and a better trained work force are essential, and both will benefit from a redirection of money away from arms. Nothing can come in the way of this important shift if the country is to regain its former march toward greater prosperity and a higher standard of living.

States and cities have neglected their facilities, and they must be able to invest much more if the general economy is to prosper. Private investment needs a solid foundation from states and cities, a foundation of stronger transportation facilities, better educational facilities, better all-around infrastructure.

With President Bush's decision to reduce nuclear arms, the debate has begun, and the debate will lead to a fundamental shift in economic priorities. The municipal bond market will be a beneficiary.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.