After the Cold War: Living With Lower

Defense Spending

February 1992

OTA-ITE-524

NTIS order #PB92-152537
Recommended Citation:

U.S. Congress, Office of Technology Assessment, After the Cold War: Living With Lower

Defense Spending, OTA-ITE-524 (Washington, DC: U.S. Government Printing Office,

February 1992).

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ISBN 0-16 -036108-7
Foreword

The great events of 1991 ended the Cold War, banished the threat of global nuclear

conflict, and freed us to redefine national security. While future U.S. defense needs are still

unclear, they will surely require less money and fewer people, as well as shifting in kind. It

is now safe to contemplate very substantial reductions in defense spending-perhaps to the

lowest level in 40 years—and to turn our attention to other pressing national needs.

Welcome as these changes are, adjustment to lower defense spending is not painless.

Many of the workers and communities that depend for their livelihood on the military will

have to find new jobs and new sources of economic strength. Defense companies will have

to adapt to commercial demands, or shrink, or possibly go under. On the bright side, the size

of the adjustment is modest, compared to defense build-downs of the past and to the present

size of the U.S. economy. From 1991 to 2001, perhaps as many as 2.5 million defense-related

jobs will disappear. That averages to 250,000 a year, or two-tenths of 1 percent of the

employed work force in 1991.

Averages, however, can be misleading. The decline could be uneven, with steep drops

in short time periods, making adjustment more difficult. And hardships will be much greater

than average in some communities where defense spending and jobs are concentrated. Another

caveat: the U.S. economy is not as sturdy as it was during earlier defense cutbacks. American

industry faces tough challenges by foreign competitors, especially the Japanese; well-paid

jobs to take the place of defense manufacturing jobs are scarce; and the 1990-91 recession

shows few signs of lifting in early 1992. Government programs can help defense industry

workers, veterans of the armed forces, and communities make the transition, and can lend

assistance to defense firms that want to get into more commercial production. But their

prospects will depend most fundamentally on growth in the national economy.

This is the first report of OTA’s assessment of Technology and Defense Conversion,

requested by several congressional committees and members of the Technology Assessment

Board to examine effects of the defense build-down on the civilian side of the economy. This

report focuses on ways to handle the dislocation of workers and communities that is, to some

degree, inevitable in the defense cutback. It opens a discussion of how defense technologies

might be converted to commercial applications. The second and final report of the assessment

will continue that discussion and will concentrate on opportunities to channel human and

technological resources into building a stronger civilian economy.

U JOHN H. GIBBONS

Director

iii
Advisory Panel—Technology and Defense Conversion

McGeorge Bundy, Chairman

Professor Emeritus of History

New York University

Michael Borrus

Deputy Director, Berkeley Roundtable on

International Economics

University of California

I-I. Kent Bowen

Co-Director, Leaders for Manufacturing

Massachusetts Institute of Technology

Charles Bradford

Director, Apprenticeship, Employment Training,

and Rehabilitation Programs

International Association of Machinists and

Aerospace Workers

Anne Buck

Manager, Economic Adjustment Unit

California Department of Commerce

Philip W. Cheney

Vice President of Engineering

Raytheon Co.

Robert W. Carlton

Vice President, Community and Business Services

Jackson Community College

Robert S. Cooper

President

Atlantic Aerospace Electronics Corp.

Jerry R. Crowley

Entrepreneur

Christopher Demisch

Partner

McFadden Brothers

R.C. Dynes

Department of Physics

University of California, San Diego

Craig Fields

President

Microelectronics and Computer Technology Corp.

Arthur Flathers

Director of Independent Research and Development

GE Aerospace Division

Douglas Fraser

Professor of Labor Studies

Wayne State University

Gregory S. Frisby

Chief Executive Officer

Frisby Airborne Hydraulics

Donald A. Hicks

Professor of Political Economy

University of Texas at Dallas

Frank J. Lewis

Senior Vice President

Harris Corp.

Ira Magaziner

President

SJS Inc.

Ann Markusen

Director, Project on Regional and Industrial

Economics

Rutgers University

John P. McTague

Vice President for Technical Affairs

Ford Motor Co.

Basil Papadales

Business Development Manager

W.J. Schaefer Associates

Suzanne Teegarden

Executive Director

Industrial Services Program

State of Massachusetts

Charles D. Vollmer

Vice President, Technology Initiatives

Booz-Allen and Hamilton Inc.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does

nog however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the background paper

and the accuracy of its contents.

iv
After the Cold War: Living With Lower Defense Spending

OTA Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey B. Buyrn, Program Manager

Industry, Technology, and Employment Program

Katherine Gillman, Project Director

Robert Atkinson, Senior Analyst

Jeffrey Lewis, Research Analyst

Terry Mitchell Mark Roberts Jenifer Robison

Elizabeth Sheley, Editor

Administrative Staff

Carol A. Guntow, Office Administrator

Diane D. White, Administrative Secretary

Publishing Staff

Martha Dexter, Acting Manager, Publishing Services

Denise Felix

Cheryl Davis Dorinda Edmondson Chip Moore

Christine Onrubia Bonnie Sparks Susan Zimmerman

Contractors

Linda Kravitz

Takashi Mashiko

Letitia L. Oliveira
Contents

1: summary

Page

and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2: Policy Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter

Chapter

Chapter

Chapter

Chapter

3:

4:

5:

6:

7:

Displaced Defense Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Engineers: A Special Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Veterans’ Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjustment for States

Defense Companies

Appendix A: Defense Spending

and

. . . .

and

Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . .

Employment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103

129

153

193

229

vi
Chapter 1

Summary and Findings
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

MACROECONOMIC EFFECTS: A HISTORICAL PERSPECTIVE . . . . . . . . . . . . . . . . . . 6

After World War II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

After the Korean War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

After the Vietnam War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Structural Changes in the Civilian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

After the Cold War: The 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

LOCAL AND SECTORAL EFFECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

States and Localities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Industries . . . . . . . . . . . . . . . . . . . . .\. , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

DISPLACED DEFENSE WORKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

The Dimensions of Displacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Prospects for Displaced Defense Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Adjustment Assistance for Displaced Defense Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ENGINEERS: A SPECIAL CASE . . . . . . . . . . . . . . . . . . . . . . . . . . .

VETERANS’ ADJUSTMENT

. . . . . . . . . . . . . . . . . . . . . . . 23

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

DEFENSE-DEPENDENT COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

DEFENSE COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 28

The Outlook for Major Defense Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Small Business and the Defense Industry

. . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

POLICY ISSUES AND OPTIONS

. . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Displaced Defense Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Defense-Dependent Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Defense Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Figures

Figure Page

1-1. Defense Spending, 1940-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

1-2. National Defense Spending, 1950-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1-3. Defense Employment Levels, 1944-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1-4. Defense Employment Levels, 1950-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1-5. Eight States Totaling One-Half of U.S. Defense Spending, 1991 . . . . . . . . . . . . . . . . 12

1-6. Defense Spending as a Percent of State Purchases, 1991 . . . . . . . . . . . . . . . . . . . . . . . . 13

1-7. Eight States Totaling One-Half of U.S. Defense-Related Employment, 1991 . . . . . 14

1-8. Percent of State Employment in Defense, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1-9. Direct Defense Spending in California, 1964-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1-10. Leading Defense Industries by Value of Defense Output, 1990 . . . . . . . . . . . . . . . . . . 16

1-11. Leading Defense Industries by Defense Share of Industry Output, 1990 . . . . . . . . . . 16

1-12. Prime Contracts for Hard Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Table

Table Page

1-1. Projected Defense Spending and Employment Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Chapter 1

Summary and Findings

INTRODUCTION

The dissolution of the Soviet Union and the end

of the Cold War have profoundly changed U.S.

defense needs. Just what a prudent U.S. national

defense system will be in the post-Cold War era is

not yet clear. But it will almost certainly require less

money and fewer people than it did in the 40 years

when this Nation faced a hostile and obdurate

military superpower with a huge army poised at the

borders of Western Europe. Welcome as these

changes are, they have serious implications for the

people, companies, and communities that have

depended on defense spending for their livelihood.

The changes also raise some potentially troubling

questions about adjustment for the Nation as a

whole.

Compared to the size of the national economy, the

current cutbacks in defense spending do not loom

very large. Even at the height of the Reagan buildup,

defense spending never reached as big a share of

gross national product (GNP) as in the Korean or

Vietnam Wars, not to mention World War II, nor has

the decline so far been as steep as in those earlier eras

(figure 1-1). It is quite conceivable that retrenchment

will go farther than either the Congress or the

President has yet contemplated-perhaps far enough

to cut another 40 percent from defense spending by

the year 20011 (figure 1-2). That would accelerate

the build-down and drop defense spending, in

constant dollars as well as share of GNP, to the

lowest levels in half a century; it would also mean

bigger impacts on defense workers and communities

than those envisioned so far. Even so, the decline

would average out to about $12 billion a year (1991

dollars) over 10 years--not a huge amount in an

economy running at $5.5 to $6 trillion a year.

Defense-related employment in defense industries,

civilian jobs in the U.S. Department of Defense

(DoD), and the armed forces might drop from 6.0

million in 1991 to as low as 3.5 million a decade

later, or an average of 250,000 a year2 (figures 1-3

and 1-4), a substantial number, but only about 0.2

percent of the 119 million jobs in the U.S. economy

in 1991.

Several cautions should be noted. First, the

decline may not be gradual; steep cutbacks could

occur in single years, making adjustment more

difficult. Moreover, effects in some localities will be

much more troublesome than the aggregate figures

suggest. Approximately one-half of the defenserelated jobs within the United States are in eight

States, and within the States certain local areas are

exceptionally dependent on defense employment.

For example, up to one in five workers in the

Norwich-New London labor market of southeastern

Connecticut hold defense-related jobs, and many

more are in service, transportation, and commercial

jobs that serve the everyday needs of these workers.

It is in these defense-dependent communities that

reductions in defense spending can hurt most.

Without detailed analysis at the local level, it is

impossible to say just how many American communities are highly defense-dependent, but a rough

estimate (based on the value of prime defense

contracts per capita and the presence of military

bases scheduled for closure) is 160 of the Nation’s

3,137 counties.

Some defense-dependent communities might still

escape serious problems if their local economies are

strong and diverse enough to take up the slack. Also,

the adjustment programs discussed in this report—

IW fiWe is &on tie e~~te of ~~mat of ~fe~ (DoD) spending at a level of $169 billion (1991 dollars) iII 2001, m presented ~

William Kauffman and John Steinbruner, Decisions for Defense (Washington DC: The Brooltings InstitutiorL 1991). The Kauffman-Steinbrunner

estimate is chosen for illustrative purposes because it is near the low end of well-informed estimates. A panel of the Electronic Industries Association

(HA) forecast in September 1991 that the DoD budget in 2001 would be between $160 billion and $240 billio% with the most likely level at about $208

billiow this panel’s forecasts am well-regarded because they have proved reasonably accurate in the past. See Electronic Industries Association

Government Division/Requirements Committee, Ten Year Forecast Subcommittee, Defense Electronics Market: Ten-Year Forecast, U.S. Department

ofDefense and National Aeronaufi”cs and Space Adnu”nistrafi”on Budgets, FY1992 to FY2001 (WashingtorL DC: 1991). For a discussion of future defense

needs and the industrial base required to support therq see U.S. Congress, Office of Technology Assessment, Redesigning Defense: Planning the

Transition to the Future U.S. Defense Industrial Base, OTA-ISC-500 (Washington, DC: U.S. Government Printing Ofllcc, July 1991).

%ased on the Kauffman-Steinbruner projection of DoD spending of about $169 billion a year in 2001, OTA estimates that the active duty rnilitay

forces would number 1.34 milliou DoD civilian employment 700,000, and jobs in the defense industries 1.50 to 1.62 million. The total decline in

defenserelated jobs from 1991 to 2001 would be 2.3 to 2.5 million (see table 1-1 and the discussion in ch. 3). This figure is for positions lost; as discussed

below, actual job loss in the active duty armed forces and in DoD civilian employment is likely to be substantially lower.

-3-
4 ● After the Cold War: Living With Lower Defense Spending

Figure l-l—Defense Spending, 1940-91

Billion 1991 dollars Percent of GNP

8 0 0

6 0 0

400

200

0

.

All

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990

Year

U Outlays in constant — Outlays/GN P

dollars

40

30

2 0

10

0

SOURCE: Steven Alexis Cain, Analysis of the #’ 1992-93 Defense Budget Request, With Historical Budget Tables

(Washington, DC: Defense Budget Projeot, February 1991).

Figure 1-2—National Defense Spending, 1950-2001

Billion 1991 dollars

400

3 5 0

300

2 5 0

200

150

100

50

0

1950 1955

t

1960

!

1965

!

1970 1975 1980 1985 35 1990 1995 200 1

Year

m Historical m DoD estimate - Kauffman estimate

SOURCES: Steven Alexis Cain, Analysis of the W 1992-93 Defense B-et Request, With Historr”cal Bu&et Tables

(Washington, DC: Defense Budget Projeot, February 1991); and OTA projections based on Kauffman, see

note to table 1-1.

retraining and reemployment help for displaced national economy falters, these moderating influworkers and veterans of the armed services, local ences could count for little. Adjustment problems

and regional economic development efforts, assist- that are manageable in good times are much more

ance to firms converting to civilian production--can serious matters in a stagnant or recessionary econcontribute to a smoother transition. However, if the omy, when even small losses in demand can
Chapter 1--Summary and Findings . 5

3 0

2 5

2 0

15

Millions

Figure 1-3-Defense Employment Levels, 1944-91

1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988

Year

- Military ~ DoD civilians ~ Defense industry

personnel

SOURCE: Department of Defense, Office of the Comptroller, Natkma/ Defense Budget Estimate for FY 1992

(Washington, DC: March 1991).

aggravate a downward spiral. While a strong recovery from the 1990-91 recession may yet happen,

there were few signs of it at the end of 1991.

More fundamentally, the U.S. economy is not as

robust as in earlier defense build-downs. Twenty

years ago, the United States was still the world’s

dominant economic power. Now, it is under challenge as never before from extremely able foreign

competitors (principally Japan). U.S. commercial

manufacturing in particular is under siege, and will

be hard put to take the place of defense industries,

which are heavily tilted to manufacturing. Declines

in manufacturing are especially costly to the Nation

because manufacturing provides well-paid jobs,

supports most privately funded research and development (R&D), and dominates international trade.3

The profile of job creation in the United States in the

last decade has been skewed toward low value-

-added services with low pay, poor benefits, and little

knowledge generation.

Other kinds of losses could also follow cutbacks

in defense spending. During four decades of Cold

War, national defense usually has had more money,

prestige, and power than any other government

activity, and it has taken on some important social

and economic responsibilities beyond the strictly

military. A prominent example is equal opportunity

employment. The anneal forces have become the

most color-blind large institution in the United

States, providing opportunities for good jobs, good

training, and advancement to high positions hardly

available to minorities elsewhere. Another example

is in technology advance. DoD pays for some R&D

that has as much importance for commercial as for

military purposes; moreover, defense purchases

have sometimes launched whole new high technology industries (e.g., semiconductors and computers)

and have contributed both new technology and

financial stability to others (aircraft). Granted, military spending is an expensive, unreliable, and

unfocused way of providing support to technologies

and industries of great commercial importance, but

we have relied on it for many decades. If national

defense shrinks as an exemplary source of jobs for

minorities, if its support for the generation of

3F~~ ~dis~m~ion of tie place of ~n~acm in he mtio~ ~oncjmy ad intermtio~ ~dq w U.S. congress, office of T~hology A.SStXSmt?Il~

Paying the Bill: Manufacturing andAmerica’s Trade Dt$icit, O’E4-ITE-390 (Sprin@eld, VA: National Technical Information Service, June 1988). For

analysis of the competitive situation of American manufacturing, see Making Things Better: Competing in Man~acturing, OTA- ITE-443 (Sprir@eld,

VA: National Technical Information Services, February 1990); and Competing Econom”es: America, Europe and the Pacific Rim, OTA-ITIPW9

(Washington, DC: U.S. Government Printing Offk, October 1991).
6 ● After the Cold War: Living With Lower Defense Spending

Figure 1-4-Defense Employment Levels, 1950-2001

Millions

10

n T

‘1950 1955 1960 1965 1970 1975 1980 1985 199 0

Year

11Lti

1995* 2001”

- Military m DoD civilians U Defense industry

personnel

SOURCES: Department of Defense, Office of the Comptroller, Natkma/ Defense Budget Estimate for FY 7992

(Washington, DC: March 1991). Future year estimates by OTA, see note to table 1-1.

advanced technologies and industries declines, and

if no other institutions are created to take on these

responsibilities, then the Nation will be the poorer.

MACROECONOMIC EFFECTS: A

HISTORICAL PERSPECTIVE

After World War II

In the past half century, by far the greatest

adjustment to a fall in defense activity was the shift

to a peacetime economy after World War II. By

1948, defense spending fell from a wartime peak of

38.7 percent of GNP to 3.2 percent, 12.4 million

people left employment in defense industries, 10.6

million were discharged from the armed services,

and 1.8 million left civilian defense jobs (figures 1-1

and 1-3). This huge adjustment was made with little

difficulty; indeed it ushered in a period of growth

and prosperity.4 In hindsight, it might seem obvious

that consumers’ wartime savings and pent-up demands, private firms retained war profits, and lower

taxes would provide enough economic stimulus to

avert community dislocations and unemployment,

but it was not so clear at the time, when memories of

the Great Depression were still fresh.

In addition, some credit for easing the adjustment

is due to government foresight in planning for the

transition, or “reconversion” as it was then called.5

As early as 1943, Federal procurement agencies and

the Office of War Mobilization were preparing for

speedy termination of contracts when the war ended.

Included in the scheme were advance agreements

with contractors on how to handle termination and,

most important, partial payments to contractors-up

to 90 percent of their claims-pending final settlement. The partial payments were a vital source of

working capital for many contractors, especially

smaller ones, during reconversion.6

Government tax policy also contributed to companies’ ability to retool and quickly swing into

qRe~ (com~nt d~l~) GNp ac~y d~l~ every y- from 1944 ~ou@ 1947, most steeply in 1946. However, the xdn reason for ~d~~

was the changeover to civilian production and the rapid departure of women from the labor force. Unemployment rose from the extraordinarily low point

of 1.2 percent in 1944, but only to about 3.9 percent in the years 1946-48; this compares to 14.6 percent in 1940 and 9.9 percent in 1941,

5~te~on ~overment ~licie5 ~~~onve~ion~~rworld WUH is ~wn largely from Jack Stokes BaLlard, The Shock of peace (w-to~

DC: University Press of Americq Inc., 1983), pp. 132-136.

6~i~ p. 136, conge5s rejwt~ advice from tie comp~~~ &ne~ @ de~y p~ents ~tig a review and audit of settlements by hk office, On

the grounds that this would freeze billions in working capital and “would mean unemployment by audit. ”
Chapter I--Summary and Findings ● 7

postwar civilian production. During the war, companies were allowed to charge off new investments in

plant and equipment in just 5 years. This liberal

amortization fattened record wartime earnings, and

because managers generally kept a large share of the

earnings in reserve rather than paying them out to

stockholders, many companies were able to finance

internally their postwar investment needs. At the

same time, banks were overflowing with individuals’ wartime savings, and were eager to lend to

industry. The ample supply of capital drove interest

rates to historic lows, which encouraged further

investment.

Many companies—perhaps as many as 80 percent

-did not even need to retool for the first wave of

postwar production. They simply took their prewar

machines out of storage and put them back into

service in a matter of weeks. General Motors, for

example, started producing its prewar models within

a couple of months of the war’s end. However, some

industries (e.g., aluminum, magnesium, and above

all, the aircraft industry) faced a glut of production

capacity. Postwar unemployment of ex-aircraft workers might have been a real problem, since the

industry’s jobs had surged from 40,000 in 1939 to 2

million in 1944.

Yet it didn’t happen. Although there were no

special programs for reemployment and retraining of

war production workers, the prompt revival of the

auto and other civilian industries opened up millions

of jobs. At the same time, many people withdrew

from the labor force—a total of about 3 million older

workers who normally would have retired if not for

the war and younger people who would have stayed

in school. Moreover, some 2.7 million women

dropped out of the work force between 1944 and

1947. The decline of the average work week from

over 45 to 42 hours also eased the transition to

civilian employment.

For the millions of returning service men and

women, the main adjustment program was the GI

Bill. It offered unemployment benefits for a full

year; government-guaranteed loans for home, farm,

or business; and, most remarkably, financial support

for 4 full years of education or training. All this

enabled 11 million veterans to reenter the labor

market gradually. An estimated 1.7 million exservice men and women did not immediately look

for jobs, and 800,000 enrolled in college in 1946.

The programs gave veterans and their families about

$20 billion in Federal money over 3 years, supplemented by more than $1.5 billion in State bonuses.7

In sum, macroeconomic factors--especially the

high business and personal savings during the war

and the prompt use of them afterwards, both for

investment and for personal consumption—were

central to the surprisingly trouble-free conversion

after World War II, Government adjustment policies

helped. Veterans were given generous choices for

reentry to the civilian world, and industry got

favorable tax treatment for investment during the

war, plus fast, liberal contract termination and

disposal of government property afterwards. The

phrase “back to business” and the term “reconversion” sum up one more reason for the ease of the

transition. There was no large, permanent defense

industry in 1945 as there is today after 40 years of

Cold War. Civilian production and civilian jobs

were the norm for nearly everyone, and people

couldn’t wait to get back to them.

After the Korean War

Adjustment after the Korean War was a much

smaller but rougher affair. Defense spending as a

share of GNP fell from 13.4 percent in 1953 to a

post-Korea low of 9.4 percent in 1956-still more

than double the share in 1948. As figure 1-1 shows,

defense spending never afterwards dropped as low

as it had been before the Korean War, either in

constant dollars or as a share of GNP. Nor did

defense employment ever again fall so far (figure

1-3), though it did drop substantially from 1953 to

1956-by 1.6 million in defense industries, 750,000

in the active military services, and 150,000 in

civilian DoD jobs. The difference was the onset of

the Cold War and the scaling up of American

military power to face the Soviet Union. The cutback

after the Korean War was to a level that became the

Cold War norm.

Despite the higher floor for defense spending and

the comparatively moderate size of the adjustment,

experience after Korea was bumpier than after

World War II. The economy stalled into recession in

1954 and following a brief recovery grew sluggishly

in 1956 and 1957; 1958 brought another recession

~bid., p. 201.
8 ● After the Cold War: Living With Lower Defense Spending

year. Unemployment rates climbed during the period and spiked to 6.8 percent in 1958.

Government macroeconomic policy was a major

cause of the postwar recessions. No fiscal policies

were adopted to offset the decline of military

spending. Federal spending was cut by 10 percent

between 1954 and 1957 (in constant dollars). Meanwhile revenues rose, producing budget surpluses in

1956 and 1957 and a consequent deflationary effect.

Unlike the situation after World War II, there was no

economic stimulus from pent-up consumer demand,

since the Korean War had cut very little into

consumption. No special government programs

were adopted to help defense companies or workers

adjust, but returning veterans got much the same

provisions as World War II veterans (the GI Bill,

guarantees of former jobs, and preference for civil

service jobs).

Altogether, the strains in the post-Korean War

transition were felt rather generally throughout the

economy instead of being concentrated in particular

sectors. Within the defense industry, producers of

conventional battlefield equipment, such as guns

and ammunition, felt the cutbacks most, but some

defense sectors suffered very little, or even grew

with the Cold War buildup. Military aircraft prospered. The Eisenhower administration emphasized

strengthening the Air Force, and by 1955 aircraft

purchases were three-fifths of defense procurement.

The increasing complexity of weapons required for

a strategic intercontinental vigil, rather than for

conventional battles in the field, contributed to the

growth of a dedicated defense industry-as President Dwight D. Eisenhower recognized in his

farewell address, when he cautioned the Nation

about the growing power of the military-industrial

complex.

After the Vietnam War

The experience after the Vietnam War was

uneven, but was especially harsh on the aerospace

industry and the communities dependent upon it.

Although defense spending was $342 billion (1991

dollars) at its height in 1968-about the same as the

high point of Korean War spending-it was never as

prominent apart of GNP as in the Korean War, and

the decline was more gradual--from 9.6 percent of

GNP in 1967 to 5.6 percent in 1974. From 1%8 to

1974 employment in defense industries dropped by

1.4 million, armed forces strength by 1.4 million,

and DoD civilian employment by 250,000. These

declines reflected not only the progressive disengagement from Vietnam during the Nixon years, but

also the Nixon-Kissinger policy of detente with the

Soviet Union.

Mindful of the two recessions, slow growth, and

rising unemployment after the Korean War, the

Johnson administration had planned compensatory

fiscal policies-a modest tax cut combined with

public sector spending-to spur continued expansion after the Vietnam War. However, the Nixon

administration, taking office in 1969, rejected these

policies in favor of fiscal restraint to counter

inflation; the $25-billion Federal deficit of 1968 was

turned into a $3-billion surplus in 1969. The sharp

but brief recession of 1970-71 followed. Then, a

turnaround to more expansionary fiscal and monetary measures helped to bring about 2 years of strong

recovery. The leading cause of the much deeper

1974-75 recession was the oil price shock, although

continuing declines in defense spending may have

aggravated the downturn.

Throughout the post-Vietnam War retrenchment,

even in years when the economy as a whole was

booming, the cutbacks in military procurement were

the direct cause of some crushing impacts on

particular industries and regions. Defense reductions, combined with a steep drop in orders for

commercial aircraft and reductions in the space

program, led to severe shrinkage in aerospace

production and employment. For example, jobs at

the Boeing aircraft company in the Seattle area

dropped from more than 100,000 in the late 1960s to

about 30,000 in the mid- 1970s. This was the time

when aerospace engineers were driving taxicabs and

the wry joke in Seattle was, “Last one out turn off

the lights. ”

When the defense spending reductions of the

period began, there were few Federal Government

adjustment programs to soften the effects. However,

regional distress and rising unemployment led the

Nixon administration to create an interagency Economic Adjustment Committee, and expand a small

existing office within DoD (the Office of Economic

Adjustment) whose job was to help communities

plan for adapting to lower defense spending. A new

$28-million job development and training program

was targeted to scientists, engineers, and technicians. In addition, some States and localities encouraged initiatives by large companies to change
Chapter l---Summary and Findings ● 9

product lines and enter civilian markets-efforts

that mostly ended in failure. Recovery of the

aerospace industry and the regions in which it was

concentrated began with an upswing in commercial

aircraft orders in the late 1970s and was bolstered by

the military spending of the 1980s.

Structural Changes in the Civilian Economy

The most disruptive regional stresses of the past

half century were not related to defense cutbacks,

but rather to structural changes in the civilian

economy. The departure of the textile industry from

New England, the collapse of coal mining in

Appalachia, the exodus of farm workers from the

land after World War II, and the disappearance of 1.7

million manufacturing jobs from the nation’s economy in the 1980s (jobs in basic steel alone dropped

from 570,000 to 330,000 from 1979 to 1984, and

continued to decline through the decade)-all of

these structural changes caused massive dislocation

of workers and some brought about deep, long

lasting decline of communities. Some of the communities have never recovered. Some of those that

made a comeback+. g., New England—took a

generation to recover, and owed much of the

recovery to DoD spending. Indeed, declines in

defense spending, coinciding with a crash in the

finance and construction sectors and a downturn in

the market for high-tech products, pushed much of

New England into an earlier and deeper recession

than the rest of the country experienced in 1990-91.

Note that these severe regional stresses, related to

declines of particular industries, did not necessarily

coincide with economic distress in the Nation as a

whole. The decline of Appalachian coal mining,

New England textiles, and farm work in the rural

South all went on for decades, through good times

and bad. The downfall of basic steel and decay of

communities in Pennsylvania’s central valleys continued throughout the prosperous mid and late

1980s. When and if defense spending drops to a

permanently lower level, the story might be the same

in highly defense-dependent communities-severe,

long lasting local effects but only minor impacts on

the national economy.

For another perspective, the potential job losses

due to defense cutbacks may be compared with

actual worker displacement (mostly unrelated to

defense) in the late- 1980s. Over the 5 years 1985-89,

about 9.2 million workers lost their jobs due to plant

closings or relocation, elimination of a position or

shift, or slack work.8 OTA estimates that over the

4 years 1991-95, 1.0 to 1.4 million positions could

disappear in defense industries, the armed forces,

and DoD civilian employment.9 However, not so

many people as that would actually lose their jobs.

The armed services expect to handle at least

three-quarters of their downsizing through attrition

(accepting fewer new enlisters); similarly, attrition

and a hiring freeze are expected to take care of at

least half the decline in civilian DoD jobs. Assuming

that the number of people actually losing their jobs

in private defense industries would equal the positions lost in those industries,10 the total number of

displaced defense workers over the 4 years could

amount to as much as 1.1 million, or an average of

275,000 a year.ll

Compare this to the actual displacement of about

1.8 million workers per year, on average, from 1985

to 1989. Even in the good times of the late 1980s,

“ordinary” displacement accounted for considerably more job loss than can be expected from

defense cutbacks in the 1990s, based on a range of

cutbacks that appear plausible. However, some of

the late- 1980s displacement came from the normal

8~e ~or Dep@ment’~ Bureau of ~~r S@tistics @~) oversees a special ~ey evq 2 y- of adult workers who have lost jobs for the reasons

cited above. The BLS defines as ‘displaced’ workers who had 3 or more years tenure on jobs they lost in these ways. By this deftitioq some 4.3 million

adult American workers were displaced in the 5 years 1985-89. In additiom 4.9 million adult workers who had held jobs for fewer than 3 years lost their

jobs for the reasons cited. Public programs seining displaced workers make no distinction between workers who had longer or shorter tenure on their

jobs (see ch. 3).

%wer figures for positions lost (1.0 to 1.1 million) are based on the President’s budget proposal for f~cal year 1992, which projected a 19 percent

reduction in defense outtays from 1991 to 1995, The higher figures (1,3 to 1.4 million) are based on a hajectory that woutd cut defense outlays 41 percent

from 1991-2001 (i.e., the Kauffman-Steinbruner projection of defense spending of $169 billion in 2001). See table 1-1. For details and an explanation

of OTA’S employment projections, see ch. 3.

1%5 will not ~ecms~y & the CW; some defense industries will find other customers to replace DoD saltx, so job 10SS maybe less. On the Other

hand, the estimates of job loss for private industry do not include jobs generated by the pay of defense industry workers; this could be a considerable

factor in some defense-dependent communities. It is assumed here that these two factors cancel each other out.

t l~s es~te includ= ~,~~volu~ sepuations from the ~WI forces, 52,()(x) civilian DoD employees reduced in force, and 920,000 people

losing defense-related jobs in private industry. The estimate assumes a rapid build-down (41 percent cut by 2001), and uses the high end of the range

of OTA’S estimate of defense industry positions lost (see table 1-1 and the discussion inch. 3).
10 ● After the Cold War: Living With Lower Defense Spending

churning of the U.S. economy—businesses failing

and new ones starting up; not all of it represented the

kind of permanent structural change, with long-term

decline of certain industries, that can depress an

entire region. Defense cutbacks are more akin to

structural economic change; in some dependent

communities they could have seriously disabling

local effects over the long run. From the national

point of view as well, defense-related displacement

of 275,000 per year is a not inconsiderable addition

to the 1.8 million otherwise displaced. The kind of

jobs lost could make matters worse. By and large,

defense jobs pay well, and in private industry are

heavily tilted to manufacturing. For production and

nonsupervisory workers, defense jobs provide substantial middle-class incomes and good benefits that

are hard to find elsewhere in the American economy

of the 1990s.

After the Cold War: The 1990s

Measured in constant dollars, U.S. defense spending in 1990 was extremely high by historical

standards-nearly as high as at the peak of the

Vietnam War (figure l-l). Even after a sizable cut in

fiscal year 1991 (10.5 percent in real terms), the

regular defense budget of $286 billion was still well

above the Cold War floor of about $215 billion

(1991 dollars) .12 In some ways, however, the prospects for a smooth transition looked better than in

other defense build-downs since World War II. As a

percent of GNP, defense spending was lower, and

the rates of reduction—at least as proposed through

1993—were slower. By 1990, the defense budget

had already declined 13 percent from its 1985 peak

(an average yearly decline of 2.7 percent) with little

apparent macroeconomic effect. Another positive

factor is that many States now have economic

development programs to help distressed communities get back on their feet. The Federal-State

assistance program for helping displaced workers

find or retrain for new jobs has several years’

experience, and has scored worthwhile achievements in the States with the best programs.

Negative factors could offset some of these more

favorable elements. First is the current state of the

economy. Relatively small job losses that can be

comfortably tolerated in a prospering economy are

not so easily swallowed when growth is flat, still less

during a recession. Assuming a job loss from

defense cutbacks in the early 1990s of 275,000 per

Year,13 that figure amounts to only 0.2 percent of

U.S. employment as of mid- 1991. But recession puts

the number in a different light. Total U.S. employment declined 1.4 million from June 1990 to October

1991, while the number of unemployed climbed 2.1

million, to 8.6 million. In such circumstances, an

additional loss of as much as 275,000 jobs in a single

year could be stressful on the national scale.

There is no guarantee either that the rate of decline

in defense-related employment will be gradual and

fairly evenly paced. Estimates of yearly job loss

usually assume a rough correspondence between

reductions in national defense outlays and contraction in employment. This will not necessarily be the

case. Major defense firms that become convinced of

the reality of a steep continuing slide in contract

money, with no prospect of new programs coming

down the road, may decide to downsize quite

radically and suddenly. Share prices of companies

that shed employees often improve, so some firms

may adopt this as an effective strategy for raising

funds and beating out the competition. The result

might be much higher job losses in a single year than

the estimated annual average of as much as 275,000

over the 4 years 1991-95.

Another way of looking at the projected job losses

is to compare them not with total employment, but

with net job creation over a number of years. In the

1970s, the U.S. economy added some 20.1 million

jobs and in the 1980s (when growth of the labor force

slowed), 18.6 million. The loss over a decade of

some 2.5 million positions in the defense sector

looks larger in this perspective. Given intelligent

handling of government fiscal policy, providing

economic stimuli that produce jobs in other sectors,

the transition should be manageable. But with a huge

and increasing Federal debt, it is now more difficult

to use fiscal policy to provide appropriate stimuli

than in the past. Eventually, of course, one way or

another, national economic growth will create new

jobs to supplant the ones that go with defense

spending; no one expects a permanent decline in the

lz~e costs of DCWI Stield and Mert Storm are not included in the national defense budget, but have been estimated at $52 billion for f~d YCZWS

1990 and 1991. Some of the cost, however, represented a drawdown of inventories (e.g., ordnance) that will not be replaced, and much of the rest was

reimbursed by contributions horn allied nations.

lsBmed on a cutback of DoD spending to $218 billion in 1995 and to $169 billion in 2M1.
Chapter l--Summary and Findings ● 11

U.S. economy. However, the options of increasing

government spending in other sectors, or lowering

taxes, or both, that have eased some postwar

adjustments in the past, are narrower now.

In several ways, in fact, important conditions that

smoothed earlier transitions do not exist today.

Unlike the situation after World War II (on the face

of it, the largest transition), many defense companies

and divisions of companies have no civilian business

to go back to and no real abilities or interest in

converting to civilian production. Even if they

wanted to do so, many would lack the means. Major

defense firms have loaded on debt to an exceptional

degree in the past few years. In the economy as a

whole sources for investment are thin. U.S. personal

savings rates reached historic lows in the 1980s.

Government dissaving (the huge deficits of the

1980s and 1990s) kept the steam up under interest

rates.14 And the need to get the deficit under control

leaves less room than in former times for expansionary fiscal policies, should the government wish to

use them to counteract recession, or for selected tax

incentives to foster a more hospitable environment

for investing in new technologies, new equipment,

and new products.

The other, more optimistic, side of the coin is that

the relative size of the adjustment is simply not as

big as it was in past defense build-downs. Consider

the reduction after the Vietnam War, up to now the

most recent and the most similar in size and pace.

From the peak year of the war, 1968 to the postwar

trough in 1976, defense-related employment

dropped from 8.1 to 4.8 million, plunging 1.8

million in just 2 years, 1969 to 1971. In 1987, at the

height of the 1980s buildup, defense employment

was 6.7 million. Assuming a large decline in defense

spending (to an eventual total of $169 billion in

2001), defense-related jobs are estimated at 4.5 to

4.7 million in 1995, 8 years after the peak, with a

maximum drop in defense-related employment of

1.5 million in the 4 years 1991-95.15 Employment

would eventually drop to 3.6 million in 2001, 14

years after the peak (figure 1-4). Considering that

total U.S. employment is much larger in the 1990s

than 20 years earlier (119 million in the recession

year of 1991, compared to 81 million in 1971, when

unemployment was also relatively high), it is clear

that the present adjustment is smaller.

Another source of optimism is that there exist

choices for government policies that could both ease

the adjustment and build a stronger foundation for an

expanding economy and rising incomes. There are

possibilities for new public investments, in areas

ranging from environmental protection to advanced

transportation and communication systems, that

could spur new technologies, support new businesses, and create new jobs. This report only touches

on the possibilities; more will be said on the subject

on the second and final report of this assessment.

LOCAL AND SECTORAL EFFECTS

Vulnerability to cutbacks of defense spending and

jobs is concentrated in particular places and sectors.

The best way to anticipate local impacts would be to

pinpoint the effects of cancellations or steep cutbacks in big weapons programs or of military base

closings on the people and communities where the

weapons are produced or the bases located. For

example, if production of the B-2 Stealth bomber

stops at a handful, as now seems likely, Northrop,

prime contractor for the B-2, may well have to close

down an entire plant in Palmadale, CA and let

thousands of workers go; Boeing, a major subcontractor for the B-2, could lose more thousands of jobs

in its military division in Seattle.

For military base closings, there is likely to be

enough advance warning that the communities and

workers involved can plan ahead for ways to adjust

to the losses. (The round of base closings that

Congress agreed to in 1989 provided as much as 5

years’ notice.) But planning for adjustment to

cutbacks in weapons programs is less certain. First,

the data needed are scattered and inadequate-not

least because DoD does not collect data on defense

subcontracts and because information on DoD’s

“black” programs, such as the B-2, is not made

public. Second, which major weapons programs will

be cut or canceled is speculative. As of late 1991,

neither the administration nor Congress had undertaken the kind of comprehensive review of postCold War defense needs that could define the shape

]qD~g tie 199@91 ~ece~~ion, tie Feder~ Reserve B@ reptedly lower~ interest rates to s~u~te r~ove~ of a s@gMnt economy, However,

as the economy recovers, pressures to raise interest rates will again increase.

IsNote tit 1.5 mllllon is tie projected 10ss ~ defeme.related emplo~ent from 19$)1 to 1995. me n@er of job 10SHS, or displaced defense workers,

is expected to be less (about 1.1 million) because attrition will take care of some of the decline in employment.
12 ● After the Cold War: Living With Lower Defense Spending

of long-term reductions in the overall defense

budget.

Other ways of estimating the vulnerability of

particular workers, communities, and companies to

defense cutbacks are more approximate, but still

useful. A major risk factor is the degree of defense

dependence. Communities like Lima, OH, whose

economic livelihood is tied to production of Army

tanks, are in some jeopardy.

16 The U.S. shipbuilding

industry, which now sells virtually all of its output

to the DoD, is maximally exposed.

The severity of impacts also depends on what else

is happening in the local economy. Size and

diversity help, but even a large, diverse economic

community can be substantially hurt by defense

cutbacks if it is already suffering from weakness in

other sectors. For example, the unemployment rate

in Los Angeles-Long Beach was 8.5 percent in June

1991, well above the national average of 6.9 percent;

the rate had risen from 4.6 percent a year earlier,

reflecting a combination of layoffs in finance,

banking, construction, and aerospace, the last largely

defense.

States and Localities

U.S. defense activities and employment are quite

heavily concentrated in certain regions, States, and

localities. In 1991, over half of all defense spending

was in eight States (figure 1-5).17 Defense spending

amounted to more than 5.8 percent of total purchases

in 10 States (figure 1-6). The national average was

4.1 percent; 32 States fell below that level.18

In some States military bases account for most

defense-related spending while in others defense

spending flows primarily to industries that produce

goods and services for military use. Insofar as

defense spending is reduced through troop cuts,

States and communities where military bases are

closed are hit hardest, whereas cancellation of big,

expensive weapons systems is felt more in the places

that rely on those defense industries.

Figure 1-5-Eight States Totaling One-Half of

U.S. Defense Spending, 1991

California

Texas

Virginia

New York

Florida

Massachusetts

Ohio

Pennsylvania

E 1 ——4

0 20 40 60 80

Thousands

SOURCE: Department of Defense, Projected Defense Purchases Detal/by

/n&stry mdState, 7991 to 1997(Washington, DC: Novembe”r

1991).

Virginia’s high rank in dependence on defense

spending is due largely to the huge military establishment at the Pentagon and its dependent consulting fins, and to military bases throughout the State;

but the building of Navy ships at Tenneco’s big

Newport News yard and defense production of

telecommunication equipment contribute a large

share as well. Mississippi’s defense dependence

rests almost entirely, and nearly equally, on military

bases and the Ingalls shipyard at Pascagoula. The

active duty military dominates defense spending in

Alaska and Hawaii. The picture is more mixed in the

State of Washington, which has important production of ordnance and aircraft as well as a big Navy

yard and military bases, and in Maryland, which has

a telecommunications industry as well as high DoD

employment. Connecticut and Massachusetts, on the

other hand, owe most of their defense spending to

industry-aircraft engines and submarines in Connecticut, telecommunications in Massachusetts. California, which has far and away the highest defense

spending of any State in dollar amounts, has some of

everything: military bases; industrial production of

ordnance, electronic and communication equipment,

l~h. 6 &-..~e~ tie @W~ on &ffment ~d~ of comm~ti~ of the defe~e b~d.do~ and ~onom.ic development programs tO Cope with the

effects.

171 $~feW ~pmd~t S ~CludeSpmc~sofdefe~ere~t~ goods and s~i~s, bo~dir~tpurc~s (frornprimecontriictors) ~didh~tp~~s

(from subcontractors and suppliers); military pay; and the salaries of DoD civilian employees, “State purchases” differ from State gross product+ since

they include purchases of intermediate goods and services by producers of end products. State gross product and gross national product figures count

only the value of fti products, elimina ting the double counting involved in adding up intermediate purchases. Data on State defense spending is

developed by DoD, using the Defense Employment Impact Modeling System (DEIMS) based on input-output tables for the U.S. economy.

18~e fiwe for DOD spending ~ a -e of W U.S. purc~es (4.1 perc~t iII 19$)1) is not comp~able Am me figure of defense OUhyS M a Share

of U.S. Gross National Product (5.5 percent) becxm.se of differences in definitions.
Chapter I-Summary and Findings ● 13

Figure 1-5-Defense Spending as a Percent of State Purchases, 1991

_ Over 5.8 percent ~[ 3.1 to 4.1 percent

-4.2 to 5.7 percen t ~] Up to 3.0 percent

SOURCE: Department of Defense, Prokted Defense Pur&ases DeM’/. bv State and /rdJstrv. ., 1991 to 1997

(V&shington, DC: November j991).

and aircraft; and a plethora of defense-related

business services.19

About one-half of defense-related jobs within the

United States are in eight States. Again, California

is far in the lead (figure 1-7). In 1991, 5 million

people within the United States had jobs linked to

U.S. defense spending, including employees of

prime contractors to DoD and the primes’ subcontractors and suppliers, men and women in active

duty military service, and civilian DoD employees.

This amounted to 4.2 percent of U.S. employment.

(This figure is used for purposes of analyzing

defense-related employment State by State. However, the hundreds of thousands of defense-related

jobs, mostly military, outside the United States

should be taken into account when the whole

Nation’s dependency on defense jobs is considered.

In 1991, 5.1 percent of all U.S. jobs were defenserelated.)

Defense dependency in employment—the percentage of all jobs within a geographic area that are

defense-related—is likewise concentrated. Three

States, Alaska, Hawaii, and Virginia, plus the

District of Columbia, were far above the average in

defense-dependent employment (figure 1-8); most

of these defense jobs were in active duty military

service and DoD civilian employment, although

Virginia also had a much higher than average share

of defense industry jobs. In eight States defenserelated jobs were 5.8 percent or more of total

employment. Twenty-seven States fell below the

national average of 4.2 percent.

As in the Nation as a whole, defense dependence

has steadily declined even in States that are most

involved with defense industries and military bases.

In California, the top-ranking State in amount of

defense spending and numbers of jobs, defense

spending dropped from 15.6 percent of gross State

product in 1964 to 7.8 percent in 1990. Although

California’s defense spending in constant dollars

was much greater in the 1980s than at the height of

the Vietnam War, the still greater rise in the State’s

gross product lessened defense dependency (figure

1-9).

Statewide averages of defense dependence can

obscure local vulnerabilities. For example, 2.2

]~ep~ent ~f~fm=, Dir~to~e for ~omtion operations and Reports, Projected Defense Purchases Detail by Indusv and State: Caledr

Years 1991 through 1997 (Washington DC: November 1989).
14 ● After the Cold War: Living With Lower Defense Spending

Figure 1-7—Eight States Totaling One-Half of U.S.

Defense-Related Employment, 1991

California

Texas

Virginia

New York

Florida

Pennsylvania

Ohio

Massachusetts

1

t 1 I , 1

0 200 400 600 800

Thousands

SOURCE: Department of Defense, Pt@scted Defense Purchases, DetaI”/

by State and/ndstry, 7991 to 7997( Washington, DC: November 1991); Department of Defense, Office of the Comptroller,

Natkma/ Defense B@@ Estimate for FY 1992 (Washington,

DC: 1991 ); Department of Defense, Washington Headquarters

Services, SelectedManpower Statistics, FY 1990(Washington,

m: 1991).

percent of jobs in Maine were in private defense

industries in 1991—below the national average of

2.5 percent for defense industry employment. Yet

Maine’s largest employer is Bath Iron Works,

located in a little coastal town with a population of

no more than 11,000, but employing 11,700 workers

drawn from a 30-mile strip on the State’s southern

coast. Bath Iron Works gets 85 percent of its

business from ships it builds for the Navy. Its

managers would like to diversify into merchant

ships, but that business is in total collapse in the

United States: one U.S. merchant ship is currently in

production, compared with about 400 in Japan,

Korea, and Europe. In 1990, the president of Bath

Iron Works expected the defense backlog to keep the

company going for another 2 or 3 years; but without

major new business, a reduction of at least 3,000

jobs could be expected over that time.20

Of course, some defense-dependent communities

will continue to do well, if the military programs

they rely on survive. Connecticut, for example,

ranks near the top among all the States in dependence on defense spending, but its unemployment rate

was slightly below average in the 1991 recession

year, and future prospects looked good-at least for

the western part of the State. The Pratt and Whitney

aircraft engine company, located in Hartford, won

the hotly contested decision to make the jet engine

for DoD’s one big new military aircraft program, the

F-22, or Advanced Tactical Fighter; the company

and its local subcontractors are also doing well in the

commercial aircraft business. At the same time, the

aforementioned Norwich-New London-Groton area

of southeast Connecticut, whose livelihood is submarines, is in trouble. Here, United Nuclear Corp.,

which made nuclear engines for submarines, is

already closing, and General Dynamics’ big Electric

Boat outfit, assembler of submarines, has lost

business, is laying off workers, and has announced

that it will close down altogether if it does not win

all the Navy’s dwindling contracts (down to one a

year) for the Seawolf attack submarine.21

Though it is not possible to pinpoint which or

even how many communities are at serious risk in

the defense build-down, data on DoD prime contract

awards by county provide some rough approximations. In 1989,93 of the Nation’s 3,137 counties got

awards worth over three times the national average,

per employed person. Those counties encompassed

8.5 million workers, or 7 percent of the employed

labor force. Another way to measure vulnerability is

to combine concentration of prime contract awards

with the county’s unemployment rate, compared to

the national rate at the time. Using these measures,

138 are most at risk with either high unemployment

(over 6 percent; the national rate was then 5.4

percent) and moderate to high defense dependency

(greater than the national average), or moderate

unemployment (4.5 to 6 percent) and high defense

dependency. These counties were home to 4.9

million workers, or 4 percent of employed people.

Industries

The big buildup in defense spending in the early

1980s mostly went to development and purchase of

hardware, not to higher troop strength. Defense

industry business, especially in aircraft and electronics, expanded enormously. As shown in figure 1-10,

aircraft and communications equipment were the

2%WNiam E. Hagget4 ChairmmL Bath Iron Works, testimony before the Subcommittee on Defense Industry and Technology, Committee on Armed

Services, U.S. Senate, May 4, 199Q and personal comrnunicatioq cited in Linda Kravitz, “Wages of Peace: Community and Industry Experience with

Military cutbacks,” contractor report prepared for the Office of Technology Assessmen~ July 1990.

ZlRo~~ Hol~r, “Navy’s Sei-iwolf Sub Award l%reatens Future of Imsing Shipyard,” Dqfense News, m. 25, 1991.
Chapter I-Summary and Findings ● 15

Figure 1-8-Percent of State Employment in Defense, 1991

P

.

-5.9 percent or more ~{3.0to4.2 percen t

m 4.3 to 5.8 percent ~] Less than 3.0 percent

SOURCES: Department of Defense, Prqkted Defense Purchasesrn, Detai/ by Sfate arrcl /ndustry, 1991 to 1997

(Washington, DC: November 1991); Department of Defense, Offim of the Comptroller, /Vationa/ Defense

Budgef Estimate forFY 1992(Washington, DC: 1991 ); Department of Defense, Washington Headquarters

Servkes, Se/ected Manpower Statistics, FY 1990, (Washington, DC: Department of Defense, 1991);

Department of Labor, Bureau of Labor Statistics, Ernploymentarrcf Earnings, October 1991).

70

60

50

40

30

20

10

0

I

Figure 1-9-Direct Defense Spending in California, 1964-90

1990 dollars Percent of gross State product

1 I

I

l \

t

t

21

18

\

15

12

9

6

3

0

19641966196819701972 19741976197819801982 1984198619881990

m Spending in constant — Spending/gross Stat e

dollars product

SOURCE: California commission on State Finance, Defense Spending in the 1990s: /rnpact on Ca/iforrria

(Sacramento, CA: California Commission on State Finance, summer 1990).
16 ● After the Cold War: Living With Lower Defense Spending

Figure 1-10-ToP 10 Defense Industries by Value of

Defense Output, 1990

Communications equip.

Business services

Aircraft

Missiles, spacecraft

Aircraft parts

Ordnance

Shipbuilding, repair

Electronic component

Aircraft engines

I I T 1 r 1

0 5 10 15 20 25 30

Billion dollars

SOURCE: Department of Commerce, Offics of Business Analysis, unpubIishd data.

largest defense industries in 1990, and both were

highly dependent on defense dollars. Though they

did not approach the near-100 percent defense

dependency of shipbuilding, they did sell between

40 to 60 percent of their output to military purchasers (figure 1-1 1).

Of the major military systems-aircraft, missiles,

ships, tanks and other land vehicles, ammunition—

aircraft got the lion’s share of procurement dollars in

the defense buildup (figure 1-12).22 Similarly, as

defense budgets have declined, aircraft has also

taken the biggest hit, although it is still the leader

among the major military systems. Effects of defense reductions were clearly visible in the aircraft

industry by 1990, and there was every expectation of

still deeper cuts in coming years. Three of the four

tactical aircraft programs of the 1970s and 1980s are

slated to end soon, with only the Navy’s F/A-18

lasting past 1993. Also, in January 1991, Secretary

of Defense Richard B. Cheney canceled the Navy’s

A-12 attack aircraft program because of excessive

cost overruns, resulting in immediate layoffs of

5,000 people from the McDonnell Aircraft Co. in St.

Louis and another 2,000 from General Dynamics in

Fort Worth. Although impacts of defense cutbacks

might be relatively greater in industries that are more

exclusively military, such as ordnance or tanks, the

Figure 1-11—ToP 15 Defense Industries by Defense —

Share of Industry Output, 1988

Shipbuilding, repair

Missiles, spacecraft

Tanks

Ordnance

Aircraft parts

Aircraft

Aircraft engines

Communications equip.

Electronic component

I , , 0 20 40 60 80 100

Percent

SOURCE: Department of Commerce, Bureau of Economic Analysis,

unpubtishsd data.

aircraft industry is the big one, and the size of the

cuts will be greatest there.

The aircraft industry as a whole was not in a

tailspin in 1991. While defense orders were being

slashed and the military airframe companies faced

trouble, the commercial aircraft market was holding

up. Even the Gulf War and the recession did not

greatly dampen the demand of many airlines for new

equipment, and the commercial companies’ huge

backlog of orders stayed relatively intact. Nevertheless, employment in the aircraft and aircraft parts

industry was down by 64,000 (from 708,000 to

644,000) from July 1990 to July 1991, and another

20,000 jobs disappeared in missiles and space

equipment. McDonnell Douglas, for example, abolished over 17,000 jobs in 1990, many in the

commercial business in Long Beach, CA, but about

4,000 on the military side in St. Louis; another 5,000

went with the A-12 decision. Long Island has been

losing aircraft industry jobs since 1987 when the

Fairchild-Republic plant closed up shop, with the

loss of 3,300 jobs, after DoD canceled the T-46 Navy

jet trainer. Grumman, the biggest defense employer

on the Island, reduced its work force from 34,000 to

25,000 in the following 3 years, and in 1991

announced additional cuts of 1,900. Other leading

military contractors on Long Island, such as Eaton

AIL and Hazeltine, abolished many more jobs.23
Chapter l-Summary and Findings ● 17

Figure l-12—Prime Contracts for Hard Goods

Billion 1991 dollars

5 0

~

------- -

20

10 1

----- -x ..- ---- ~ -------- K- ------ -x- ---- 

- -x- ----- ~ ~ .x -- ~ -----

0

I

I I I I I I I I {

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

+ Aircraft + Missiles & space - Ship s

x- Tanks/autos + Electronics & + Weapons &

communications ammun it ion

equipment

SOURCE: Department of Defense, Washington Headquarters Services, FWrne Contracts Awards, fY 1990, P03

(Washington, DC: Depa~ment of~efense, 1991).

In many cases, the prospect of fewer and smaller

defense contracts is driving layoffs in the aircraft

industry, as much as the cancellation or early cutoff

of current programs. For example, the 1990 layoffs

at McDonnell Douglas in St. Louis (before the A-12

decision) reflected the fact that no new defense

programs could be seen coming down the pike.

Many of the 4,000 jobs abolished were in engineering, computer programming, clerical work, and

management—relatively few in production work,

since actual output had not yet declined. Aside from

Boeing, the industry giant, and McDonnell

Douglas,

24 the other time companies have very

little commercial business except for some subcontract work. Some of these military airframes face

“dire prospects, ” according to financia.l analysts.

Too many defense companies are chasing too few

programs, these analysts say, and the “moderate”

work force reductions that have taken place so far are

only the beginning.25

As defense spending winds down, public concerns about effects on the civilian side of the

economy center on two issues: jobs and technology.

Reductions in defense spending will always involve

job losses, with some disruption and hardship even

if other economic activities eventually replace the

jobs. Concentrated job losses in a local labor market

can force many of the job losers into long spells of

unemployment or acceptance of ill-paid dead-end

jobs. If the losses are great enough, the whole

community can suffer. Obviously, defense spending

should not be either a jobs program or an economic

development program, but there is a justified public

concern about the aftermath of government decisions that deprive people of their livelihood. The

concern is not only for hardships to individual job

losers, but also for the costs to society as a

whole--directly in payment of unemployment benefits and loss of tax receipts, and indirectly in the

waste of human abilities.

Another concern is the possible dissipation of

valuable technological resources in the transition to

an economy less devoted to defense. Mainly, this

means people. The thousands of engineers and

2.$~e fi~e of McDome~ ~ug~ ~ a comem~ ~~t~n~ac~m is in some doubt. h Nove& IW1 the company announced its intention

to forma partnership with Taiwanese interests (including the government of Taiwan) to gain enough fmncial backing for production of the MD-12,

which is planned as a competitor to Boeing’s 747.

~htiony Velocci, Jr., ‘ ‘Third-Quarter Results Mask Defense Industry Weakness, “ Aviation WeekandSpace Technology, Nov. 12, 1990, pp. 20-22.
18 ● After the Cold War: Living With Lower Defense Spending

computer specialists being laid off by the military

aircraft industry are technological assets. So are the

managers and productions workers-in small defense companies as well as large ones-with years

of experience in meeting technically demanding

requirements in military contracts. When teams of

people break up, labs close down, and divisions or

whole companies disappear, the technological knowhow those teams and institutions possess can disappear with them.

DISPLACED DEFENSE WORKERS

The Dimensions of Displacement

In 1991, national defense employed about 6

million people in the private defense industry, DoD

civilian ranks, and the active duty military services.

Based on projections of defense spending in the

President’s 1992 budget, as many as 1.1 million of

those positions could disappear by 1995. If defense

spending is cut deeper and faster (to $169 billion, or

41 percent, by 2001), the defense jobs lost in the

4 years 1991-95 could add up to as much as 1.4

million, and in the 10 years ending in 2001, to 2.5

million (table l-l).

Nearly 4 million of the defense-related jobs in

1991 were civilian jobs, about 1 million in DoD and

2.9 million in the industries that produce goods and

services for DoD. From 1991 to 1995, as many as

1 million of those positions could vanish as defense

spending dwindles, and by 2001, 1.7 million.

These figures may overstate the number of jobs

that will actually be lost. As noted, it is likely that at

least half of the loss of civilian jobs in DoD can be

taken care of by attrition without the need for

layoffs. Many private defense jobs are in industries

that provide goods and services not specifically and

uniquely military. Assuming healthy economic

growth, some defense jobs in those industries will

never disappear at all, because commercial customers will take the place of defense procurement. This

could be the case, for example, in such diverse

sectors as banking, textile manufacture, and steelmaking. Defense companies that also make commercial products-especially in aircraft and

electronics-might expand that side of the business

and move some employees over from the military

side. In addition, normal attrition-people moving

to new jobs, retiring, or otherwise voluntarily

leaving the work force-could moderate the impact

of some of the job loss. On the other hand, these

numbers do not count jobs generated by the pay of

defense workers--anything from grocery store clerk

to school psychologist. In communities hit hard by

defense cutbacks such jobs could disappear without

much hope of early replacement.

Prospects for Displaced Defense Workers

In some ways, displaced defense workers are

better off than displaced workers generally. Defense

industries have higher concentrations of professionals and skilled workers than the overall economy;

engineers, scientists, and technicians represent more

than 10 percent of the work force in defense

industries, but only 4 percent of the U.S. work force,

and precision production workers are nearly 7

percent of defense industry workers, but 3 percent of

workers in general. Such highly skilled people are

usually in demand in the labor market.

On the other hand, 57 percent of defense employment is manufacturing, compared with only 17

percent in the economy at large. Manufacturing

workers, especially semiskilled blue-collar workers,

have a harder time than other displaced workers in

finding new jobs. The continuing decline in manufacturing employment generally does not bode well

for the less skilled manufacturing worker displaced

from the defense sector. Also, lower and midlevel

managers may be caught in the squeeze of streamlining production and the automation of many of their

tasks.

A positive factor is that public and private efforts

to help displaced workers find or retrain for new jobs

are better developed than in the past. First, the

Worker Adjustment and Retraining Notification Act

(WARN) that took effect in 1989 means that many

displaced defense workers will get at least 60 days’

notice of layoff (though some will not, because of

exceptions and loopholes in the law). Lead time of

at least 60 days is crucial in providing effective

adjustment services. Second, public adjustment

services are more experienced and better funded

than in times past, and most large defense companies

now provide some services for their displaced

workers.

These positive factors must also be qualified. The

major assistance program for displaced workers is

the federally supported Economic Dislocation and

Worker Adjustment Assistance (EDWAA) program
Chapter 1--Summary and Findings ● 19

Table l-l—Projected Defense Spending and Employment Levels

Total defense Active duty DoD Defense industry Defense

outlays (051) military civilians employment employment

Year (billions) (thousands) (thousands) (thousands) (thousands)

1991 DoD estimate . . . . . . . ., . . . . . $287.5 2,049 1,044 2,900 5,993

1995 DoD estimate . . . . . . . . . . . . . . $235.7 1,653 940 2,280 to 2,370 4,873 to 4,963

Loss from 1991 . . . . . . . . . . . . . . . $51.8 396 104 530 to 620 1,030 to 1,120

Percent loss . . . . . . . . . . . . . . . . 18% 19“!0 10% 18 to 21 % 17 to 19“/0

1995 faster paced reduction . . . . . . . $218.0 1,653 940 1,980 to 2,080 4,573 to 4,673

Loss from 1991 . . . . . . . . . . . . . . . $69.5 396 104 820 to 920 1,320 to 1,420

Percent loss . . . . . . . . . . . . . . . . 24% 19% 1 o% 28 to 32% 22 to 24%

2001 faster paced reduction . . . . . . . $168.6 1,340 697 1,500 to 1,620 3,537 to 3,657

Loss from 1991 . . . . . . . . . . . . . . . $118.9 709 347 1,280 to 1,400 2,336 to 2,456

Percent loss . . . . . . . . . . . . . . . . 41 ”/0 350/0 33% 44 to 48% 39 to 4170

Loss from 1995, . . . . . . . . . . . . . . $49.4 313 243 360 to 580 916 to 1,136

Percent loss . . . . . . . . . . . . . . . . 23% 19Y0 26% 18 to 28% 20 to 24%

NOTES: All dollars are constant 1991 dollars. Total employment in this table includes DoD civilian and military personnel stationed overseas.

SOURCES: DoDestimatesf rom the Office of the Assistant Secretary of Defense (Public Affairs), “FY 1992-93 Department of Defense Budget Request,” News

Release No. 52-91, Feb. 4, 1991; except defense industry employment, which is estimated by OTA based on DoD projection of defense

purchases. Faster pace alternative budget estimates from William Kauffman, G/asnost, Peresfroika and U.S. Defense Spending (Washington,

DC: Brookings Institution, 1990; and William Kauffman and John steinbruner, Deu’sions for Defense (Washington, DC: Brcmkings Institution,

1991 ). The 2001 alternative uses projections of troop and civilian personnel levels given by Kauffman in G/asmst, Perestroike and U.S. Defense

Spending (Kauffman’s scenario D). Industry employment levels estimated by OTA from budget estimates given by Kauffman. The 1995 budget

estimates are from Kauffman and Steinbruner, Decisions for Defense, and reflect savings through reductions in procurement of new systems and

a reduction in nuclear forces, assumina no additional reduction in the estimates of manmwer aiven bv DoD. Industrv emdovment for 1995 was . . 1.

estimated by OTA based on level of &fense purchases.

(originally created by Congress in 1982 as Title III

of the Job Training Partnership Act (JTPA) and

amended and renamed EDWAA in 1988). EDWAA

programs are operated at the State and local levels,

and they are uneven in quality. The best have

benefited from nearly a decade of experience and are

doing an excellent job, but the majority fall below

that level—some far below. As discussed below,

some problems in the design and administration of

EDWAA hinder even the top programs from doing

their best. As for large private firms, most are more

generous with services for salaried workers (managers, professionals, and other white-collar workers)

than for their blue-collar production workers; however, a few make no such distinctions, providing top

quality services for all,

An important negative influence in 1991 was the

recession and weak recovery, which made job

prospects for many displaced workers bleak and put

adjustment programs under strain. EDWAA funding

has recently been higher than ever before, at $527

million in fiscal year 1991 and $577 million in 1992.

Even so, by fall 1991 many States were in danger of

running short of money in the 1991-92 program year

because the recession had greatly increased demand

for services. Congress has supplemented the regular

EDWAA appropriation with an extra $150 million

in DoD funds earmarked for services to displaced

defense workers from 1991 to 1993, but there are

problems in getting this money quickly to where it

is needed.

The recession hit especially hard in some defensedependent areas. In Los Angeles-Long Beach, the

unemployment rate was 9.3 percent in September

1991, and in the mid-Massachusetts industrial belt,

10 to 12 percent, compared to a national unemployment rate of 6.6 percent. Worker adjustment programs that work quite well in good times are of less

use when job openings scarcely exist. The fact that

only about 30 percent of unemployed workers were

receiving unemployment insurance benefits in 1990,

compared to 50 percent in previous recessions,

added to the negative outlook for workers displaced

from defense jobs.

Adjustment Assistance

for Displaced Defense Workers

Many studies and years of experience have shown

that well-run adjustment assistance projects are a

genuine help to displaced workers. On average,

workers who take part in adjustment projects find

jobs sooner, stay employed more steadily, and earn
20 ● After the Cold War: Living With Lower Defense Spending

more than they would without such help.26 The

elements that make for success in a displaced worker

program are also well established. Key factors are:

. early action-offering adjustment services before layoffs begin if possible,

. cooperative efforts by management, worker

representatives, and public service agencies,

. a full range of services, and

. training that is carefully matched to workers’

background and abilities.27

Projects supported by EDWAA can offer an array

of services, including counseling, skills assessment,

job search skill training, job development, relocation

assistance, and retraining (including training in

basic skills of reading and math when needed). As

noted, FY91 and FY92 appropriations for EDWAA

were relatively generous, and were supplemented by

funds to be transferred from DoD.28

In its first few years, the Title III program was

moderately successful in getting jobs for participants, achieving placement rates of 65 to 70 percent,

but it was reaching only about 5 to 7 percent of

eligible workers. Related problems were that many

States did not have active programs, were failing to

spend their allocated funds, and were carrying over

large and increasing unspent funds every year. Few

States were getting services to workers quickly after

layoff-or still better, before layoff-which was one

reason the program reached so few workers; participation rates are much higher and outcomes better if

services are available early .29 Further, many projects

were giving scant attention to training.

The 1988 EDWAA amendments were designed to

put more emphasis on rapid response, give more

attention to training, and set up incentives for

spending appropriated funds to serve the needs of

more displaced workers. Two years after the amendments took effect, one visible positive change is that

the proportion of eligible workers served had risen

to about 9 percent. Participation will never be, and

should not be, 100 percent; many displaced workers

are well able to find new jobs on their own. Judging

by experience in Canada (which has long had a small

but effective rapid response program run by the

government), 30 an overall participation rate between

two and three times the current one-say 20 to 25

percent-might be expected as the program improves.

31

The biggest continuing shortcoming in the EDWAA

program is that rapid response is far from universal

and often nonexistent. The responsibility for rapid

response lies mainly with States, some of which

(e.g., Colorado, Massachusetts) are doing an excellent job. But for every State where rapid response is

working, there are probably two more where it is not.

One recent study for the U.S. Department of Labor

(DOL) found that of 15 States examined, five had

rapid response procedures that were well established

and working well, six had problems, and four had a

“low commitment” to rapid response.32

The way EDWAA funds are divided up, both

among the States and within the States, puts further

obstacles in the way of quick response. The money

is distributed in advance, and may not be where the

displaced workers turn out to be. By law, 80 percent

of EDWAA funds are allocated to the States; the

~For a summary of studies evaluating such projects, see U.S. Congress, ~lce of Technology Assessment, Technology and Structural

Unemployment: Reemploying Displaced Adults, OTA-IT’E250 (Sprin&eld, VA: National Technical Information Service, Februmy 1986), ch. 6,

especially pp. 231-233.

27rbid., epi~y pp. 233-42.

m~e till ~owt my not be ~de av~able to displaced defense workers. I.11 1990, CO~eSS app~pfiti $Zoo million in DoD funds to mskt

workers and communities affected by the defense build-dowq $150 million for workers and $50 million for communities, in fiscal years 1991-93. The

defense authorization and appropriations acts passed by Congress in November 1991 provided that up to $30 million of the $200 million could be

transferred to the Small Business Administration for loans to small businesses that suffered ‘‘sevexe economic injury’ as a result of the emergency

deployment of troops to the Persian Gulf after July 31, 1990. Threequarters of the $30 million would come from the fund for workers, the otlxa

onequarter from the fund for communities. The full $30 million may not be grantd the seriously injured small businesses may turn out to be rather

few.

%id; also, U.S. Congress, OffIce of Technology Assessment, Plant Closing: Advance Notice andRapidResponse, OTA-ITE-321 (Sprin@el& VA:

National Technical Information Service, September 1986), pp. 13-18.

~or discussion of Canada’s Industrial Adjustment Service, see U.S. Congress, Office of Technology Assessment Technology and Structural

Unemployment: Reemploying Displaced Adults, OTA-ITE250 (Springfield, VA: National Technical Information Service, February 1986).

31p@c1pation is Often muchh,igher+p t. 70 or 80 ~~nt—in ~slayoffs ~d phnt CIOSingS when projects provide a good range of WViCeS (%l@,

at least by the time of the layoff. Ibid.

32s~ ~temtio~, st~y of the Implewntation of the Econo~”c Dislocation and Worker Adjustment Assistance Act, IWpOtt prepared for the U.S.

Department of Labor, Employment and Training AWstration (Washington, DC: October 1990), p. VI-19.
Chapter I--Summary and Findings ● 21

allocation occurs at the beginning of the fiscal year,

9 months before the program year begins. (The

reason is to give States and localities time to plan for

their next year’s programs.) At least half of the State

allotment must be further allocated in advance to

substate areas. The law takes some account of the

unpredictability of displacement, allowing States to

reserve 10 percent of their allocation to be spent as

the need arises in substate areas, and keeping 20

percent of the whole EDWAA appropriation in a

national reserve fund, to be dispensed to States and

localities as needed by the Secretary of Labor.

However, the emergency reserve system does not

work well; delays at both the Federal and State levels

mean that the money is often not available until

weeks or months after the layoffs for which they are

intended.

Staff at DOL have tried to hasten the process, but

there are still bureaucratic roadblocks that could be

removed, especially requirements for exacting detail

in proposals for grants from the fund. Also, virtually

every State EDWAAfficial interviewed by OTA

said that delays in services are aggravated by the

DOL rule that prevents State and local agencies from

paying for services up front with their own money

and then getting reimbursed for their share if and

when the national reserve fund comes through. If

they respond to the present need with their own

funds, they risk not being able to respond to layoffs

later in the year.

The 1990-91 recession highlighted the problems

of getting the Federal discretionary funds to where

they are needed. It was already evident in October

1991, barely into the second quarter of EDWAA’s

1991 program year, 33 that demands for services were

so exceptionally high that several States could run

out of funds before the year was over. Some State

managers were practicing a form of triage, giving

only minimal services to workers they thought had

the best chance of finding jobs on their own. Yet at

the same time, requests for grants from the $105

million in the national reserve fund were running

behind the rate that would exhaust the fund by the

end of the year. A major reason, according to one

DOL official, is that many State EDWAA managers

simply can’ t handle the complexities of applying for

the grants; the few that can are too swamped with

work to write more than a limited number of

proposals. The same reasons may explain why

requests for grants from the $150-million fund

earmarked for displaced defense workers have been

few so far.

Some problems are apparent in the quality and

mix of services, especially when provided by

organizations whose primary purpose and experience is in employment and training services for

low-income and disadvantaged people, not displaced workers. The 1988 amendments required

States to establish substate areas with at least

200,000 population and allocate 60 percent of the

States’ EDWAA funds to them. Within the substate

areas, the grantee responsible for providing services

is often the Service Delivery Area agency (SDA),

which also provides services in the much bigger

JTPA program for low-income people. The law does

not require that States designate SDAs as the local

agencies to serve displaced workers, but more often

than not they do--partly because many of the SDAs

have powerful political patrons. Some SDAs do a

good job serving displaced workers, but many do

not, because their outlook is shaped by their

experience with low-income people.

Problems sometimes arise from the law’s requirement that half of EDWAA funds be spent on

training, not for other adjustment services. (In

particular projects, State Governors may reduce the

requirement to 30 percent). The requirement can

have perverse effects, leading service providers to

choose expensive training or ignore other programs

that might provide training funds. And it can reduce

flexibility in projects trying to serve a large number

of displaced professionals, whose needs may not

include training. Another problem is that DOL

policy generally rules out EDWAA training for

displaced workers who are already skilled but want

to refresh or upgrade their skills in the same

occupation. This limitation is at cross purposes with

the goal of providing a more adept and highly skilled

work force to U.S. industry and thereby improving

competitiveness.

Finally, DOL’s information sharing and technical

assistance to States and localities is scanty, reflecting in part a small budget and bare bones staff at

headquarters. This is one reason for the big gap

33~e EDWAA Progm YW rum fim July 1 to the following June 30, and is funded by appropriations made 9 months before fOr the fiscal year

ending September 30, or the end of the fwst quarter of the EDWAA program year. Thus, the $527 million appropriation for fiscal year 1991 (October

1, 1990 to September 30, 1991) was to be spent in the program year July 1, 1991 to June 30, 1992.
22 ● After the Cold War: Living With Lower Defense Spending

between best practice in a few States and typical

practice.

DoD civilian employees are in a less exposed

position than defense industry workers. First, it is

not likely that many will be laid off or RIFed

(reduced in force), because a DoD hiring freeze and

attrition will take care of much of the downsizing.

However, individuals in some positions and some

locations will still face displacement. For example,

all eight Navy shipyards are scheduled for RIFs in

1991, and further cuts are expected in future years.

Furthermore, DoD estimates of civilian positions to

be eliminated do not include those that will disappear in the second round of military base closings.

Most of these closings and associated job losses will

not occur until 1995 and thereafter.

DoD civilian workers who are laid off are eligible

for EDWAA, but the department has also set up

several other programs to help its displaced workers.

The cornerstone program is the Priority Placement

Program (PPP). Under the program, RIFed employees must be hired to fill DoD openings for which

they are qualified. DoD employees receiving RIFs

are automatically signed up for PPP, but may specify

locations where they are willing to work and are not

expected to take more than minor reductions in pay

or status.34 Once they are offered a job under PPP,

they must decide within 24 hours whether to accept

it; refusal is usually grounds for revocation of DoD’s

generous severance pay (though exceptions can be

made). While PPP has worked well in the past, there

is some question whether it can take care of the large

number of people threatened with RIFs in the

defense build-down. However, the rate of natural

attrition from DoD, plus the fact that PPP registrants

can be hired under the hiring freeze, make it likely

that PPP will continue to place a moderate proportion of registrants (say one-quarter, compared to

more than one-third in the past). DoD also makes

many of its military transition programs available to

civilian workers; among them is the Transition

Assistance Program, a 3-day workshop that provides

skills assessment, job search skills training, and

other outplacement services. However, the quality of

this program varies from one DoD facility to

another, and links to the EDWAA program, which

provides more complete, longer term services, are

not well established.

Most large private companies provide some

reemployment assistance. However, the quality and

extent of services varies greatly among fins, from

outstanding to virtually nonexistent. For example,

both Texas Instruments and General Electric provide

not only outplacement services but also training

money for displaced workers. At the other extreme,

at least one large defense company provided almost

no services itself, and refused to allow local EDWAA

providers into the plant to acquaint workers with

what was publicly available. Some companies give

more advance warning than the 60 days required by

law, but others have scheduled layoffs in ways that

escape WARN requirements.

Although company-provided services for salaried

workers are often superior to those for blue-collar

workers, some companies (e.g., GE Aerospace in

Burlington and Pittsfield, MA) offer high quality

services to all displaced employees in one physical

location. 35 Many of the best company programs are

developed and operated by labor-management committees, or at least with the cooperation of labor.

Company participation at the early stages of a layoff

can be especially valuable, because company managers are the frost to know of layoff plans and can

promptly provide space and staff to kick off provision of services early.

The displaced defense workers likely to be hardest

to reach are those who are laid off from small firms

that lack the resources to provide assistance, and

who don’t get WARN notices because the layoff is

too small to trigger the requirements or even to get

much public attention. The other group of defense

workers likely to fare badly are those living in

defense-dependent communities where prospects

for alternative sources of economic growth are poor.

For some displaced workers in such communities,

the best recourse is to move, as professionals and

managers often do. For example, when 4,900

workers were laid off between 1986 and 1991 in

Pittsfield, MA (population of about 50,000), virtually all professionals and top managers moved away.

Very few of the blue-collar workers moved. Many

had roots in the community going back several

generations; moreover, relocation is a high risk

choice for workers without the distinctive resumes

that managers and professionals usually have. Also,

for families that depend on income from two wage
Chapter 1--Summary and Findings ● 23

earners, moving is risky for the working spouse who

has not been laid off. A valuable service displaced

worker projects can perform is to collect information

about work opportunities in other areas for blue-

-collar workers or lower level managers, to help them

in a realistic evaluation of their options.36

ENGINEERS: A SPECIAL CASE

Engineers form a higher proportion of the defense

work force than of U.S. industry at large. With the

scaling down of the defense industry, many of these

highly qualified employees will be let go. As many

as 127,000 of the estimated 342,000 defense engineering positions in 1990 may evaporate by 1995.37

As a group, these engineers embody the kind of

technical know-how that the United States needs to

improve commercial competitiveness. It is in the

national interest to integrate these workers into the

civilian sector as quickly and fully as possible.

In the long term, for the Nation as a whole,

displacement of engineers is not likely to present

major problems. In 1970-73, the civilian aerospace

industry declined at the same time the Vietnam War

was winding down, and the combination triggered

an intense bout of unemployment among defense

industry engineers. Today, the civilian aircraft

industry, a major alternative employer, has plenty of

orders. At the same time, the supply of engineers is

falling. The number of new graduates has been

decreasing and is likely to continue doing so, as the

college age population falls and fewer students

choose engineering. Experienced engineers displaced from defense industry jobs might be able to

fill the gap left by a smaller supply of young

engineers entering the work force.

Despite the generally positive long-term outlook,

engineers losing their jobs in the current cutbacks

will need help in finding new employment. During

the defense buildup of the 1980s, if there were

layoffs at one defense company another one was

hiring. Most laid-off defense engineers simply

moved on to the next contractor. In layoffs since

1989, many engineers have also moved to other

defense fins. However, this source of jobs is drying

up in some previously rich areas, such as southern

California. And those who took new jobs in defense

may find themselves laid off again as military

spending continues to shrink.

Defense contractors, the government, and the

engineers themselves have all taken steps to cope

with the loss of defense engineering jobs. Many of

the services displaced engineers need are the same as

for any displaced worker: skills assessment, counseling, job search skills coaching, and job development, including company-sponsored job fairs. However, engineers and blue-collar workers may require

a different mix and duration of services, since the

engineer’s job search is likely to take longer and

range more widely across the country .38

The most important of the relevant Federal

Government programs for displaced engineers are

the mandate for early notification of layoffs (WARN)

and the program for reemployment assistance (JTPA/

EDWAA). However, State and local EDWAA

programs tend to focus more on the needs of

blue-collar workers than of engineers and other

white-collar workers, often from the belief that those

with superior academic and professional qualifications are better able to fend for themselves-but

sometimes simply from inexperience in dealing with

professionals. State agencies vary widely in what

they are prepared to do for engineers. In the 1991

recession year, when demands for services outran

available EDWAA funds in a number of States,

some State managers decided they had to sacrifice

services for engineers and other professionals and

save resources for needier workers.

On the other hand, most large defense companies

are providing quite substantial outplacement services for their displaced engineers, managers, and

other salaried workers-better services as a rule than

are offered to blue-collar workers. State agencies

~Note tit relwation ~sis~~, Wtie helpful to the workers involved, may have some ill effects on the community left behind, if it removes he

more highly skilled, educated, or motivated people.

3TT@d defen~ eng~ring WOrk for= estimated by OTA on the basis of BLS figures for total engineering employment (1 .862 milfion k 1990 and

National Science Foundation survey data on defenserelated employment of engineers; National Science Foundation U.S. Scientists and Engineers:

1986, NSF 87-322 (Washingto% DC: 1987). Imss estimate is based on an assumption that engineering positions are cut in the same proportions as

positions in the private defense industry and in DoD civilian employment. However, if spending cuts for research developmen~ testing, and evaluation

(RDT&E) are relatively smaller tbanforotherparts of the defense budge$ engineering jobs could be affected less than other kinds of work and the number

of positions lost smaller.

381t is ~mon for ~g~y paid ~Mgem ~d professionals to tie a lowm time ~ production workers to fmd new jobs tit~ layoff. (he provider

of services for displaced workers estimated that for every $10,000 in pay it takes a month to fmd a new job.
24 ● After the Cold War: Living With Lower Defense Spending

that do provide assistance tailored to the needs of

professionals often do so, initially at least, through

projects set up by the companies, which can often act

more quickly than the local government. The government provides funds and technical assistance,

and often takes over service delivery after the initial

company response.

The median cost of the outplacement services

provided by 11 aerospace firms in 1989-90 was

$1,000 per employee. Services typically included

job search training, counseling, and the use of

facilities to prepare resumes and reach potential new

employers. Few companies provide grants for retraining, usually the most costly of services; GE

Aerospace, with generous education and training

grants for displaced employees, is an exception.

Most company projects rely on government programs for training funds. However, few engineers

are actually getting retraining or continuing education through EDWAA. Many displaced engineers

have so far been able to find new jobs, and have not

asked for retraining, but if they do the EDWAA

project may not be able to comply. Meaningful

training for engineers is likely to be longer term than

the typical 4-month EDWAA training course; training for even a few engineers could use up all of a

project’s training funds. If EDWAA funds are

available for an engineer’s training, the DOL policy

that discourages upgrade training could be an

obstacle.

Not many firms have attempted large-scale retraining of engineers for new positions within the

company. One of the few examples is a program at

the Wichita Division of Boeing’s Commercial

Airplane Group that is training mechanical, civil,

and aeronautical engineers from the military side of

the firm in structural engineering. A few employers

have supported programs to train engineers and

scientists who are about to be laid off or retire to

become high school math or science teachers. This

is a more attractive option for retirees than for most

younger engineers, since school teacher pay usually

does not equal that for engineers, but it can be a

highly beneficial option for society.

A stereotypical view of defense industry engineers is that they expect higher salaries than their

civilian counterparts, are narrowly specialized in

skills peculiar to defense and, in the case of those

losing their jobs in the present cuts, are too old and

set in their ways to adapt to a different environment.

This reputation, which could handicap engineers

seeking civilian jobs, appears to be unwarranted.

Although much of the data is anecdotal, statistical

evidence suggests that salary levels for engineers

with comparable experience and academic qualifications are not clearly higher inside defense than

outside. There is also evidence that a large number

of engineers did in fact move from military to

civilian jobs in the 1980s.

Some groups of engineers are having difficulty

finding jobs during the current cutbacks: older

engineers, those without bachelor’s degrees (who

therefore lack the broad foundation of technical

knowledge that allows easy acquisition of new

skills), middle-aged midlevel managers, and those

who have spent a long time in narrow military

fields. 39

Typically, engineers have been willing to relocate

to find new jobs; this is probably getting to be more

difficult with the increasing prevalence of twoearner families, but it remains an important factor in

displaced engineers’ success in finding new jobs.

What emerges as the most important factor, however, is whether the engineer has remained flexible

by keeping technical skills up-to-date. Career-long

education-a responsibility of both the engineer and

the company, achieved through postgraduate courses

and job rotation-is paramount.

VETERANS’ ADJUSTMENT

By 1995, the U.S. active duty military forces will,

according to congressional mandate, be 23 percent

smaller than in 1990, shrinking from 2.1 to 1.6

million. This will make it the smallest military force

the United States has had since 1950. The Army and

the Air Force are facing the largest reductions both

in absolute numbers and percentages.

To meet the reduced manpower levels Congress

has mandated, some military personnel will have to

be separated, or laid off, involuntarily. However,

because of the high rate of turnover, especially in the

39A subs~~ n-r of displac~ enginmrs could be in these categories. In 1986, 23 percent of employed engineers were over 55 years old, and

11 percent were recorded as lacking a bachelor’s oradvaneed degree. (’There maybe some overlap in these categories.) Data are not available on numbers

of engineers in midlevel managerial positions or in narrow military fields. Source of the data is National Science Foundation U.S. Scientists and

Engineers: 1986, NSF-87-322 (Washington DC: 1987), tables B-12 and B-14.
Chapter L-Summary and Findings ● 25

enlisted ranks, most of the reduction in manpower is

likely to be accomplished through normal attrition

combined with reduced levels of accession (enlistment). Involuntary separations are not expected to

exceed 100,000 or about 20 percent of the total

reduction. The officer ranks will be thinned by more

involuntary separations, but these will probably still

account for less than half of the reductions.

The numbers of dislocated military personnel are

thus likely to be small compared to workers losing

jobs in defense industries, but there are special

problems involved. A top drawing card for the

military services during the era of All Volunteer

Force (AVF) has been job security. Involuntary

separation of soldiers can have a negative effect on

the morale of those who remain and may discourage

others from enlisting. For these reasons, as well as

equitable treatment of the Nation’s service men and

women, it is important that military separates make

a smooth transition to the civilian economy.

In general, today’s ex-service people should be

better able to move into the civilian economy than

their predecessors in the Vietnam and early AVF

eras. The occupational distribution within the military is now more like that of the private sector;

therefore, more soldiers should have transferable job

skills. Perhaps more important, the education and

aptitude levels of today’s soldiers are higher than

they have been at any point in the last 25 years, and

are at least comparable to the levels of their civilian

age cohort. Nearly all enlisted personnel today have

high school diplomas.

Despite the relatively manageable overall impact

of reduction in the military forces, it could have a

bigger adverse effect on minorities, especially

blacks. African Americans are several times more

dependent on the military for employment than

whites. Of all employed black men between the ages

of 18 and 29, 10.6 percent are in military service,

compared to 5.4 percent of white males. Not only are

African Americans overrepresented in the military,

they may again be overrepresented among those

involuntarily separated. Because the military services have been integrated so successfully and have

given unusual opportunities to minorities, the impact of the drawdown on young black people is of

special concern.

In response to the planned reduction in forces,

DoD, in cooperation with the Department of Veterans’ Affairs and DOL, has developed several programs to provide transitional assistance to service

people. Every departing service member will receive

job search skills trainingin the Transition Assistance

Program (TAP), a 3-day seminar that covers the

basics of resume writing, interviewing, and looking

for job leads. In addition, each of the military

services has also developed its own program of

transition assistance. The most advanced of these is

the Army ’s. The Army also faces the largest cut (50

percent of all reductions).

Benefits available to service people will include

generous severance pay for those serving more than

6 years; like civilians, veterans will also be eligible

for up to 26 weeks of unemployment compensation.

In addition, more than 70 percent of servicemen and

women have Montgomery GI Bill educational benefits. The GI Bill can provide up to $25,000 of tuition

assistance. Many service members will also receive

transitional health care and relocation benefits.

Military personnel, unlike most defense industry

workers, will have about 180 days of notice before

being separated from the services.

While it is too soon to assess the success of the

transition services offered by the military, the basic

programs appear to be more accessible and complete

than adjustment programs for displaced defense

industry workers. The larger cost of the drawdown

may be borne by those who will not be able to join

up in the future-a genuine loss of opportunity for

minorities and disadvantaged young people. This is

also a loss to society, unless comparable training/education/

upward mobility opportunities are created in other

ways.

DEFENSE-DEPENDENT

COMMUNITIES

The number of State and local economies that are

highly dependent on defense spending is not very

large. Assuming that the national economy resumes

growth at a healthy pace, most U.S. communities

will not be seriously affected by spending cuts.

However, places like Groton, CT, Bath, ME, and

Newport News, VA, where defense has been the

community’s livelihood, are at risk. Closure of

military bases or sharp drops in defense orders could

cause real distress, especially in smaller defensedependent communities. A few larger cities such as

St. Louis, where the local economy depends considerably on defense dollars, will also be affected,

though probably not to the degree of the smaller
26 ● After the Cold War: Living With Lower Defense Spending

places. Defense cuts could also add to the distress of

some cities, such as Boston, that have already lost

other sources of economic support.

Without detailed local analysis, it is not possible

to pinpoint all the States or communities likely to

suffer most from defense cuts. However, it is

possible to identify factors that put communities at

risk and suggest how economic development programs might mitigate the damage.

A major risk factor is defense dependence: the

higher the share of the local economy that rests on

military spending, the greater the vulnerability. As

discussed above, the less-than-robust competitive

condition of the U.S. economy adds vulnerability at

the national level and may make recovery more

difficult for affected communities now than in the

post-Vietnam era. Factors that reduce vulnerability

are a large, prosperous, and diverse local economy,

as well as a growing national economy. Gradual

reductions in defense spending over several years, as

well as plenty of advance notice to affected communities, make the impacts more manageable.

Because per-capita defense spending is three

times greater in metropolitan than in rural areas,

larger cities are likely to bear most of the brunt of the

cuts, and that is a hopeful sign. To the extent that

defense cuts occur in crowded, expensive metropolitan areas such as Long Island, Los Angeles, and

Washington, DC, and not in rural areas or slow

growing cities, overall adjustment will be easier. In

fact, lower defense spending in congested metropolitan places can have some offsetting effects by

reducing the pressure in an overheated economy,

stemming immigration, and possibly encouraging

some outmigration. It can reduce relative business

costs (e.g., rents, wages) and improve local quality

of life (e.g., lower housing costs), which in turn can

make recovery easier.

While any defense spending cuts can cause

dislocation, fears of disruption from military base

closings are often exaggerated. In fact, military base

closings are likely to be easier for communities to

tolerate than equivalent cuts in defense production

or R&D. Military bases are usually less interconnected with local economies than defense manufacturing firms or R&D facilities, because they tend to

buy less from local suppliers. The impacts on the

local employment rate are less since most military

people (and some civilians) from closed bases are

transferred to other facilities and do not add to the

rolls of the jobless locally. Finally, while the closure

of a few bases could cause significant local impacts,

the effects will be minor in most cases. The majority

of closures in the first round will involve virtually no

job loss. In fact, 52 of 91 facilities to be closed are

stand-alone housing units. There are 3,800 DoD

installations in the United States; 173 are slated to be

closed or cut back in the two rounds. About 55

communities can expect more than minimal impacts

from the closures. In 24 of these, jobs at risk at the

base represent more than 1 percent of local employment. In seven of the communities, 2 to 8 percent of

local jobs are at risk, and in six, 11 to 21 percent. On

the other hand, some metropolitan areas whose

economies are strong and diversified may actually

benefit from using for other purposes the land these

military facilities relinquish.

Reuse of closed bases for new civilian activities

can create new jobs. However, the process can take

time, especially if planning and redevelopment are

delayed. Certain Federal policies and practices could

threaten an early start. A critical element in successful reuse is prompt disposal of land, but disposal of

base property can be cumbersome. There are legal

obstacles (e.g., other claimants besides the local

community, including Federal agencies and representatives of the homeless, have to sign off first);

also DoD may not be fully aware that prompt

disposal is important to community economic

health. Another potentially more serious problem is

that pollution at some bases could make civilian

reuse difficult. Most DoD facilities have environmental problems, some so bad that they may be

beyond remediation. Current law is unclear as to

whether reuse of the nonpolluted part of the property

can begin before a base is completely cleaned up.

Environmental difficulties are already obstructing

the transfer of several bases slated for closure.

Despite mitigating factors, some communities are

very likely to suffer economic distress from the

defense build-down-rising unemployment and outmigration, an eroding tax base, and underused public

and private investments. Federal, State, and local

economic development programs can soften the

blow. But weaknesses in the funding, organization,

and strategic orientation of these programs limit

what they can accomplish.

Federal economic development and infrastructure

programs played a significant role in helping defensedependent communities adjust to the post-Vietnam
Chapter l-Summary and Findings ● 27

defense build-down. Today, States and communities

cannot expect more than minimal assistance from

this quarter. Federal programs are simply no longer

funded at levels adequate to provide much meaningful help. Depending on how it is defined, Federal

funding for economic development declined by 60

to 90 percent in constant dollars from 1978 to 1991.

While the $50 million appropriated by Congress in

1991 for community adjustment to defense cutbacks

is a significant increase, funding is still less than it

was in the 1970s. Moreover, 1 year after Congress

legislated that DoD transfer $50 million to the

Economic Development Administration (EDA) for

community adjustment, the finds still had not been

transferred. If the build-down proceeds rapidly and

if national economic growth remains sluggish, the

resources for community adjustment will certainly

fall short of what is needed.

A bright spot for communities is DoD’s Office of

Economic Adjustment (OEA), whose job is to

coordinate a Federal response to community disruption brought about by military cutbacks. OEA

provides communities with both technical assistance

and grants for economic development plans. Staffed

by competent professionals, OEA usually responds

quickly and flexibly. However, OEA support stops

at the preparation of plans. Many communities have

a harder time with the next step of implementing the

plans.

The EDA’s Sudden and Severe Economic Dislocation (Title IX) program is the main Federal source

of financial help to communities affected by defense

cuts. Delays in releasing what funds are available

and administrative inflexibility compound the general insufficiency of funds. Communities often wait

a long time for approval of an EDA grant and

meanwhile miss the chance to get a vital early start

on efforts to stimulate economic recovery. Because

it is impossible to predict which communities will be

most affected by reductions in defense spending, and

when it will happen, rapid, flexible response is

particularly important.

With the shrinkage in Federal programs, the

mantle for economic development has passed to the

States and localities. Many of them have put in place

aggressive economic development programs and

strategies, including business finance, manufacturing

modernization, technology development, management assistance, and export programs. However, the

increased State and local activism has not fully

.3 Ub-lYY - 92 - 2

compensated for the decline in Federal support. Nor

are all States and cities so activist; some have

well-funded, well-designed, and innovative programs, but others do not. Recent budget difficulties

in States and cities have made matters worse. Many

of the State and local efforts, including some of the

best, are being cut back or eliminated in the face of

budget crises.

Two additional factors make economic development efforts less effective than they could be. First,

despite widespread recognition that industrial recruitment or “smokestack chasing” is a zero-sum

game, many cities and States still play it. At a time

when, more than ever, States and cities need to

invest in infrastructure, education, and programs for

improving manufacturing competitiveness, they often

find themselves caught in a self-defeating race to see

who can provide the biggest subsidies to companies

considering moving. Worse, economically distressed

areas are not the only ones bidding for firm

relocations. Communities that are quite well off also

compete, making it more difficult for those hurt by

defense cuts or other blows to their economy to

attract needed industry.

Another serious shortcoming of some public

economic development programs is too much focus

on financial incentives that reduce short-term costs

of business, instead of services that help manufacturing and technically oriented service firms develop

new products, increase productivity and quality, and

find new markets. Costly business subsidies are not

aimed directly at improving competitiveness. Industrial service programs are.

Some States and cities have recognized these

weaknesses and are taking steps to improve their

efforts. A new model of economic development is

emerging. It provides a full range of industrial

services to manufacturing and technically oriented

service industries, including training for workers

and managers, selection and use of modern equipment, support for product innovation, marketing,

financing, and promotion of cooperative industrial

networks. Often the services are provided by intermediate nongovernmental organizations that have

the specialized knowledge needed to work effectively with particular industries. Business organizations are often active players in designing, funding,

and operating these services. An important feature is

access in one place to the range of services. Too

often, governments establish separate programs for
28 ● After the Cold War: Living With Lower Defense Spending

various business needs (e.g., financing, marketing,

technology). Firms must then be adept at locating

the right agency, whether at the Federal, State, or

local government level-or perhaps in a university—

to find the help they need.

Another important feature is to target economic

development programs to the kinds of enterprise that

are basic to the local economy, that create economic

activity and jobs in other sectors (i.e., have a high

multiplier effect), and that sell goods and services

outside the local community. For example, a manufacturing plant or a service enterprise that sells to

more than local customers would get more support

than a mom-and-pop dry cleaning plant. Most public

economic development programs, particularly at the

Federal level, are not targeted to industries that

generate added economic activity.

Given the problems and weaknesses of economic

development programs, how well have they worked

in the past? Are they likely to lessen distress from

defense spending cuts in the future? While little

systematic work has been done on their effectiveness, informed opinion and anecdotal evidence

indicate that the programs do make a difference but

cannot by themselves revive a stalled community

economy. Local communities in serious economic

trouble require other favorable factors working

together-most importantly, a growing national or

regional economy. However, economic development programs can surely work better if they are

funded adequately and the money is spent on

genuine services to industry rather than on subsidies

to recruit firms or incentives to lower business costs.

DEFENSE COMPANIES

Defense companies are facing serious long-term

adjustments. In constant dollars, defense outlays

were higher in the 4 peak years of the 1980s than in

any 4-year period of the Vietnam or Korean Wars.

Although defense spending as a share of GNP never

reached the heights of those earlier wartime periods,

DoD sales in the 1980s were fully as significant to

companies doing military business as at any time

since World War II.

Declines in defense spending are now cutting

deeply into programs that defense companies expected to sustain them for years to come. These cuts

are threatening the stability, perhaps the existence,

of some defense contractors. This raises concerns

that a weakened industrial base may not be able to

meet future defense needs. OTA is addressing these

national security concerns in a companion assessment; this assessment is concerned with issues

related to defense companies from the standpoint of

the civilian side of the economy.

On the civilian side, the chief worries about the

survival of defense companies include effects on

jobs, communities, and technologies that could

support commercial competitiveness. Effects on

jobs are already evident, with tens of thousands of

layoffs by defense companies in 1990-91. Some

communities are feeling the pinch, especially where

defense cutbacks aggravate the effects of recession.

The other major concern about defense companies

is that if they shrink drastically or close down R&D

facilities, valuable experience and technologies will

go with them. The huge amount of defense spending

in the past four decades has resulted in some

remarkable advances in commercial technologies,

though there is some evidence that benefits to the

civilian side have slowed in recent years. Even

though military R&D and production may not be

efficient or reliable sources of commercially important technologies, they have had beneficial effects

through sheer size. If labs close down, production

lines stop, and teams of people disappear, the tacit

technological knowledge those teams possess can

disappear, too.

The strategies of major defense companies in the

face of spending cutbacks are considered here from

the perspective of jobs, communities, and technologies. A major question is the potential for conversion

in both large and small defense companies—that is,

replacing lost military business with commercial

business in ways that use the current work force and

develop commercial applications for military technologies. Some of the implications of companies’

adjustment strategies are touched on only briefly

here, and are reserved for a later report. The potential

for redirecting technological resources-including

those that defense companies possess—from military purposes to dual use or strategic commercial

applications will be the subject of a second and final

report in OTA’s assessment of Technology and

Economic Conversion.

The Outlook for Major Defense Companies

The top defense companies, in terms of the dollar

amounts of DoD prime contracts they receive, vary

greatly in their dependence on government sales.
Chapter I--Summary and Findings ● 29

Some, like General Dynamics, Grumman, and McDonnell Douglas, count on DoD for over half their sales.

Another group, including Martin Marietta, Raytheon, and Lockheed, are heavily dependent on the

government for their sales, but their major customers

include other agencies besides DoD-notably NASA

and the Federal Aviation Administration. Still others

are diversified commercially, counting on the defense for less than one-third of their sales; this group

includes United Technologies (the parent company

of the aircraft engine manufacturer Pratt and Whitney), Boeing, and Rockwell International. A final

group is made up of large firms that are fundamentally commercial but maintain defense divisions;

among them are General Electric, Westinghouse,

General Motors, IBM, GTE, and ITT.

From the community and workers’ point of view,

however, this description is misleading. Defense

dependence at the corporate level gives an idea of the

vulnerability of the company, its managers, and its

stockholders to defense cutbacks, but it does not

accurately portray the impacts on jobs in particular

communities. For example, General Electric as a

corporation is low in defense dependence, but its

aerospace division is essentially a defense company.

When GE Aerospace employment drops from 7,800

to 2,900 in a town like Pittsfield, MA, with its

population of 50,000, the community effects are just

as devastating as if a whole defense company had

gone out of business.

Most large defense companies see two principal

options: one is to stay concentrated in defense and

the other is to broaden out into the civilian economy.

Most companies are following more than one of the

strategies outlined below, although they may single

out one as their main choice.

Companies that decide to stay concentrated in

defense may have to shrink substantially, laying off

workers and getting down to a smaller core defense

business. They may also try to increase military

exports, as part of their overall plan to adjust to lower

levels of U.S. defense spending. Although international competition for defense markets is intense, the

superior performance of American weapons in the

Persian Gulf War has increased foreign demand for

them. A policy allowing increased export of U.S.

weapons might help a few of the larger defense

companies maintain profits in the short run, but it

would also increase the risk of proliferating advanced conventional weapons and the associated

military technologies.40

If the option chosen is greater activity in the

civilian economy, one alternative is to diversify at

the corporate level through purchase of going

concerns that already sell commercial products. An

option in the aircraft business, and perhaps a few

others where military and commercial products have

much in common, is to switch resources into making

the commercial product, The potential for this kind

of switch is probably greater with subsystems and

components than with end products, though much

depends on the companies’ marketing abilities.

Some firms, figuring they know how to deal with the

government, are pursuing nondefense government

agencies as customers for systems and technologies

originally developed for the military. Not part of

company plans, but an interesting possibility from

the standpoint of technology transfer, is the startup

company formed by a few entrepreneurs peeling off

from R&D labs of large defense fins, to exploit

technologies of military origin for commercial

markets. The option that comes dead last, in the

estimation of most large defense companies, is what

is usually termed conversion: that is, the company

itself develops a new commercial product line that

makes use of plant, equipment, work force, and

technological know-how formerly devoted to military products, and lines up the financing and

marketing needed to make large-scale production

viable.

The main reason defense companies give for

reluctance to venture into commercial production is

the great differences in company practice and culture

between defense and commercial business. Most

large defense contractors that assemble complex

weapons systems or make major subsystems are

geared to low-volume production of highly specialized, expensive equipment. In designing the equipment, the main emphasis is on technical performance. In contrast, many commercial products have to

combine reliability and affordable cost with highvolume manufacture. The DoD practice of imposing

rigid, detailed specifications and standards throughout procurement further exaggerates the differences.

Still more pervasive are different management prac-

~or a discussion of the international arms trade, set OTA’s recent assessment, Global Arms Trade: Commerce in Advanced Military Technology

and Weapons, OTA-ISC-460 (Washington, DC: U.S. Government Printing Office, June 1991)
30 ● After the Cold War: Living With Lower Defense Spending

tices. These are, in large part, a response to close

government supervision, which involves detailed

recordkeeping and frequent reviews and audits—

and Criminal liability for failure to comply with the

government requirements. The reason for requiring

such detailed oversight has been the government’s

concern to prevent fraud and waste of the taxpayers’

dollar. But it does add to the differences in commercial and defense company culture, requiring a

different outlook and abilities in managers and

officers. And it creates high overhead expenses that

are passed along to the government, but would be a

heavy burden in commercial markets. An important

factor beyond all this is that commercial marketing

and distribution are alien to defense companies and

divisions. Finally, many defense companies are

burdened with a heavy load of debt. They are not in

financial condition to launch risky new enterprises.

The record of defense companies’ attempts at

conversion in the 1970s is not quite the unmitigated

disaster that is often portrayed. There were some

modest successes, especially in technological innovations. There were also some large technological

failures, as aircraft companies ventured into the

unfamiliar but seemingly simpler businesses of

making light rail cars and buses. It proved harder

than it looked. Another significant factor was the

different demands on managers in a commercial

versus a defense business, including both manufacturing and marketing know-how. Finally and importantly, the companies’ difficulties were compounded

by shifting government policy. For example, after a

few years’ experience, Boeing managed to correct

the technical problems that originally plagued its

light rail cars; Boeing-manufactured cars are still

giving satisfactory service in Chicago and San

Francisco. But when the Federal Government first

drew back from a policy of promulgating uniform

national standards for light rail cars and then, in the

early 1980s, sharply reduced support for mass

transit, the long-term prospects for light rail cars

took a nosedive. At the same time, the government’s

vastly increased orders for military hardware promised greater profits in that direction.

The fact remains that many defense companies

have developed technologies for military use that

they recognize as possessing commercial, or at least

nonmilitary, promise. The easiest move is into

nondefense sales to governments. Also, it is more

feasible to move into products, as well as markets,

that the defense companies know best. Two kinds of

products that seem promising are information management systems and monitoring systems that rely

on remote-sensing devices. The latter might find

application in environmental programs, as well as in

security systems. In addition, defense technologies

that have achieved high performance in hostile

environments might find uses by commercial companies that operate under similar conditions (e.g., in

the deep sea, the desert, or polar regions).

The same factor, product similarity, also makes it

feasible for many companies in the aircraft business

to shift from military to commercial work. None of

the dedicated defense companies that do final

assembly of military airplanes plan to become

full-scale commercial airframes but all are doing

subcontract work for the commercial companies or

plan to do so. Some have gone into repair and rework

of commercial aircraft on a fairly large scale. At the

subsystems and components level, the opportunities

to shift to the commercial side are still greater.

What major defense companies are reluctant to do

is embark on large-scale production of big hardware

systems with which they have no familiarity+. g.,

subway cars. The transit business was frustrating to

aircraft companies in the 1970s not only because of

their technological and management inexperience,

and consequent false starts or failures, but also

because of inconsistent government policy. However, there could be a new opportunity in the 1990s

for defense companies to use their technical expertise in developing some challenging new transportation technologies-electric vehicles, “smart” cars

and highways. In California, the State government

strong support for developing these technologies

makes the prospects more attractive.

Small Business and the Defense Industry41

Many large companies in the defense business can

expect to survive cutbacks, though perhaps at the

cost of brutal downsizing. Many smaller companies

face just two choices: get more commercial business

or go under. Not only the motivation but also the

opportunities for switching over may be greater for

small firms, which typically make parts and components, than for large prime contractors whose

41A sw business is defined as one that is independently owned, is not do-tin its field, and has no more than a spedled number of employees

(500 to 1,000, depending on the product). For serviee companies, the criterion is dollar volume of sales.
Chapter 1--Summary and Findings ● 31

business is assembling big ticket items such as tanks

or missiles. Machine shops, for example, regularly

use the same tools and processes to make metal parts

for trucks as for tanks.

Although information about small defense companies is limited, it appears that they supply a

significant share of DoD purchases of goods and

services. Roughly one-third of the total DoD buys

from private businesses, directly through prime

contracts and indirectly through subcontracts, comes

from small business.42 There is also evidence that

most small defense firms have both military and

commercial customers. It seems reasonable to expect that these small companies are in position to

increase their commercial sales. In these small fins,

the managers and work force, very often the production equipment, and sometimes the product itself are

the same for military and commercial customers.

Unlike larger companies that have both defense and

civilian business, small companies rarely have

separate defense divisions. Small metalworking

companies, in particular, are inherently dual use.

While it may be technically feasible for these

companies to substitute commercial work for declining defense contracts, it is not necessarily easy.

There may not be enough commercial work to go

around. Aside from this difficulty, many small

companies prefer commercial to defense business.

The owner of one small metalworking shop explained that there is no loyalty in DoD contracting

and little repeat business, which means there is a new

learning curve on each order, which in turn lowers

profits. DoD business also involves waste of timein waiting for contracts, waiting for clarification of

drawings, extra paperwork, and the incredible detail

of military specifications, down to packaging. With

commercial customers, the shop can develop longterm relationships and trust, take orders or ask for

clarifications over the phone, and get orders for

many different parts or long runs of particular parts

without going through new bids and competition.

The main worry of most small to medium-size

defense firm in shifting to more commercial

business is in sales and marketing. Those who have

succeeded have indeed made vigorous efforts to sell

to new customers, including hiring a new sales force

with experience in the commercial world. But efforts

did not stop there. Successful companies also had to

improve productivity and lower costs. In some cases,

this was achieved by a new management style based

on improved worker training and labor-management

collaboration.

Several government programs that are designed to

assist small business generally could be suitable for

helping small defense firms expand their commercial business-notably, technology extension and

other kinds of technical assistance.43 The contribution technology extension can best make to small

firms is not so much state-of-the-art products

straight out of the R&D lab, but rather acquaintance

with best practice in manufacturing. In addition,

these firms can make good use of financial, marketing, and product development assistance, especially

if these services are provided in a one-stop center.

States are the chief providers of this kind of

assistance (the Federal program of technology extension to small manufacturers is still very small and

new), but few offer a broad, integrated, well-funded

range of services.

POLICY ISSUES AND OPTIONS

Several Federal programs are in place to help workers and communities adjust to economic disruption,

and a few exist to help companies improve their

competitive performance. These programs can be

extended to help workers, communities, and companies affected by defense spending cutbacks; in fact

Congress has already earmarked extra funds for

defense-related adjustment efforts, But the programs

Z$ZSW and medium.si~ fiis (’ ‘smti business’ received 19 to 20 percent of DoD prime contract awards over the past decade. Complete figures

on subcontracts are not available, but it appears that subcontracts bring the total for small business to about 35 to 37 percent. See ch. 7.

ASTWO recent OTA repo~, Mak”ng Things Better: Competing in Manufacfun”ng, OTA-IT’E-443 (Washington, DC: U.S. Government Wttig OffIce,

February 1990) and Competing Economies: America, Europe, and the Pacific Rim, OTA-HE-498 (Washingto~ DC: U.S. Govermlcnt Printing OffIce,

October 1991 ) discuss in some detaiI options for improving technology diffusion to small and medium size manufacturers. They also discuss broader

options for improving competitiveness of U.S. manufacturing, including options to improve the U.S. financial environment for long-term investments

in new technologies and modem production equipmen~ to upgrade education and training of American managers, engineers, and production workers;

and to form industry-government partnerships for R&D in commercial technologies that are risky or long-term but have the potential for large public

benefits. Competing Economies also considers options for creating a new governmental body that, in collaboration with industry representatives, could

develop and supervise a strategy for raising U.S. competitiveness. A strategic approach would coordinate the financial, human resource, and technology

policies mentioned above, together with trade policies where appropriate, to foster the growth and survival within the United States of industries that

create well-paid jobs and advance knowledge.
32 ● After the Cold War: Living With Lower Defense Spending

need improvement in quality, reach, and resources if

they are to be effective in easing the transition to a

more commercially oriented economy.

State and local agencies run the day-to-day

operation of federally funded programs for displaced

workers. Their performance is highly uneven. A few

do an excellent job, many fall considerably below

that level, and some do very little at all. Strong

Federal efforts are needed to help bring the performance of the average State program nearer to the level

of the best. A signal weakness of many displaced

worker programs is failure to respond promptly to

calls for help. While current Federal funding for the

displaced worker program is generous compared to

levels in the past, the 1990-91 recession has increased needs for services and is straining many

States’ ability to react.

The main Federal economic development programs-located in the Commerce Department’s

Economic Development Administration (EDA)--

have been starved for funds and repeatedly threatened with extinction for the past decade. They may

now lack the institutional know-how to offer effective help to defense-dependent communities. They

are certainly underfunded compared to the postVietnam era, despite recent increased appropriations

from Congress.

44 In the past decade, many States

and communities took over responsibility for aggressive, innovative economic development programs, but not all have done so. Today, some of the

best are slashing their programs because of budget

crises.

Defense companies that want to convert to more

commercial production could benefit from government programs that offer technical assistance for

manufacturing modernization, better marketing, improved management, and possibly financial aid to

acquire up-to-date production equipment. Some

government programs of this kind exist, mostly

targeted to small and medium-size manufacturers.

They could offer real help to defense companies in

conversion efforts, as well as improving competitiveness among manufacturing firms generally, if

they were widely available. They are not. Federal

programs for this purpose are small and new, though

Congress has shown considerable interest in expanding them. Programs at the State level are a bit

more numerous and experienced but are nevertheless scattered and underfunded. Once more, States’

performance is uneven.

Some of these programs can give a real boost to

economic performance, growth, and prosperity.

Some, however, are mainly reactive. They apply

band-aids. And the band-aids have been applied

repeatedly in the past decade, as American industry

struggled to meet increasingly adept foreign competition. There are other, more proactive choices.

In the post-Cold War era, there are some signs that

a new national purpose is taking shape, based on a

redefinition of national security to include excellence in economic performance, the provision of a

comfortable and rising standard of living for all

Americans, and renewed leadership in a more

peaceful, prosperous, democratic world. Several

new national initiatives could contribute to this

purpose. One might be a strong commitment to

environmental protection and cleanup that would

also promote an internationally competitive environment industry. Another could be rededication to

top quality education and training so that our

managers, engineers, and workers are equal to the

world’s best. A third possibility is restoration of a

first-class transportation and communication infrastructure, including support of advanced technologies such as electric cars.

This report focuses mainly on adjustment programs and policies. Discussion of new national

initiatives that could generate new technologies,

spur the formation of new enterprises, and contribute

to greater industrial competitiveness is reserved for

the final report of this assessment. Adjustment

programs can help displaced workers find better jobs

sooner than they might on their own; they can help

keep distressed communities from falling into a

downward spiral; and by working with firms on

adoption of best-practice technologies and new

product development, they can make a real contribution to improving American industrial competitiveness. But they are not the whole story. It takes a

wholehearted national effort in everything from

public school education to technology partnerships

between government and industry to grow the

knowledge-intensive, wealth-creating industries the

Nation needs to strengthen its economic security.

~111 fiuc~ Y- 1978, total funding for EDA was $957 million (1990 dollars) and in f~cal year 1990, $216 million. EDA’s ptiipd program for

economic development aid to distressed communities (Title IX) was funded at $137 million in 1978 (1990 dollars) and at $48 million in 1990. The regular

Title IX appropriation for 1990 was $24 millioq but Congress provided an extra $24 million to help communities damaged by Hurricane Hugo.
Chapter I---Summary and Findings ● 33

Displaced Defense Workers

The federally funded EDWAA program is the

main source of reemployment and retraining help for

workers displaced from defense industries, and is

also open to displaced DoD civilian workers and

ex-members of the armed forces. Building on nearly

a decade of experience, the EDWAA program has

inched upward in the proportion of displaced workers served and has a respectable record of placements for participants. A major failing of the

program has been and continues to be uneven quality

from one State to another. Federal program managers cannot solve this problem alone. The law gives

much of the responsibility to States and localities.

But it is up to DOL managers to make stronger

efforts than they have so far to collect information

from the best-run State programs, share it with the

others, urge and help the average State to do better,

and strive to make relationships with State EDWAA

officials collaborative, not adversarial. Regular,

structured meetings at the regional level could help

to make Federal technical assistance effective.

Congress may wish to encourage these efforts

through oversight.

Rapid response is the problem most in need of

attention. All the States need to understand that rapid

response means genuine delivery of services as soon

as possible in one well-located center—not a single

visit by a State official telling workers where to go

to apply for unemployment insurance. Congress

might consider requiring States to report on how

quickly they arrange for these services to be

provided after notice of layoff. This would help to

identify States that are doing poorly and need help

or incentives to improve, and those that are doing

well enough to serve as models.

Another approach is to encourage faster and more

flexible responses by DOL to proposals for EDWAA

discretionary funds, which the Secretary of Labor

controls+ specially since all the extra $150 million

earmarked for displaced defense workers is in these

discretionary funds. One option would be to direct

that DOL allow State and local agencies to pay

themselves back from these funds, if and when

granted, for money they have advanced up front for

rapid response. Also, Congress may wish to encourage DOL to simplify the requirements for proposals

for discretionary funds.

Congress might revisit the issue of training. The

1988 amendments to EDWAA require that every

project spend half its funds on training (unless, in

specific cases, the State Governor reduces the

requirement to 30 percent). The amendment has the

laudable purpose of encouraging training, but it does

reduce project flexibility and may be counterproductive in projects serving professionals and managers.

(Defense industry layoffs so far have included a

relatively high proportion of engineers and related

professionals; many of them do not want or need

retraining.) Yet while both the law and DOL insist

on the primacy of training, DOL policy discourages

the use of EDWAA funds to improve a worker’s skill

in his or her same occupation, if the worker already

possesses marketable skills. This could affect both

professionals and blue-collar workers who want to

take advantage of EDWAA-funded retraining to

improve their skills, their appeal to employers, and

their earning power. It is not only hard on the

individual worker involved, but could defeat the

purpose of providing a more adept and highly skilled

work force to U.S. industry and thereby improving

competitiveness. Congress might wish to state

explicitly that EDWAA funds may be used for

displaced workers to upgrade their skills.

Many of the options to improve EDWAA services

for displaced workers in general apply equally to

engineers (e.g., rapid response). Displaced engineers’ retraining needs are often special, however.

As noted, many engineers have salable skills and

don’t want retraining. On the other hand, meaningful

training for the engineers who want it could take an

inordinate share of an EDWAA project’s budget.

Government-sponsored retraining for engineers might

be designed specifically for them, especially since

there is a long-recognized but often unmet need for

continuing education for engineers, whether or not

they are displaced. Congress might wish to consider

adding other government sources besides EDWAA

for engineers’ training. For example, the National

Science Foundation might provide grants and scholarships for continuing education for engineers; or

something like the 1950s-era National Defense

Education Act might be revived to pay tuition for

displaced or retiring engineers who want to teach

math or science in public schools.

Congress might also want to consider the option

of providing Federal support for retraining workers

who are currently employed in defense companies.

Managers, engineers, and production workers might
34 ● After the Cold War: Living With Lower Defense Spending

all benefit from training in technologies and skills

that are needed in commercial production. In general, EDWAA funds can be used only for workers

who are laid off or have received notice of layoff, but

a portion of the extra $150 million that is earmarked

for displaced defense workers can be used in

demonstration projects for training of active workers; Congress might wish to encourage DOL in such

a project.

Another aspect of EDWAA as amended in 1988

might be reexamined by Congress. The law requires

that 60 percent of the EDWAA funds allocated to

each State be further allocated to substate areas, with

substate grantees in charge of running the local

programs. Very often, States appoint as substate

grantees Service Delivery Areas (SDAS), which are

responsible for the larger JTPA employment and

training program for low-income and disadvantaged

people and often have little experience dealing with

displaced workers. The mandatory allocation system

has had only a 2-year trial so far. Through oversight,

Congress might wish to examine how it is working

in several respects: 1) Does it splinter the States’

EDWAA funds into such small portions that it is

hard to create viable entities? 2) Does it deprive

States of the flexibility needed to respond to

unforeseen displacement? and 3) Are SDAs generally the right service providers for displaced workers, or should States look further for grantees?

Finally, Congress may wish to keep a close watch

on EDWAA funding to see whether the present

funding, even though generous by the standards of

the past, is adequate. The recession has already

presented many States with more demands for

services than they can meet. Furthermore, as programs improve--especially if rapid response becomes more widespread--demand for services is

likely to rise. The difficulty of predicting when

demands stemming from defense reductions will be

at their greatest underscores the importance of

keeping an eye on adequacy of funding. Multiyear

tiding, as Congress provided in the DoD appropriations for services to displaced workers and distressed communities, are especially useful when the

timing of maximum impacts is so uncertain. Equally

important is streamlined program administration

that will allow these funds to get out quickly to the

States and localities where they are needed.

Defense-Dependent Communities

Federal funding and institutional capacity to help

communities recover from economic losses is at a

low level. Not only is Federal economic development funding itself cut to the bone, compared to the

post-Vietnam build-down, but Federal infrastructure

programs of the 1970s that had the added effect of

promoting community development are gone or

nearly so. The Commerce Department’s Economic

Development Administration, weakened by years of

struggle to stay alive, has little ability to originate or

carry out innovative programs, and is hampered by

inflexibility and delay in responding to communities’ calls for help. DoD’s small Office of Economic

Adjustment (OEA) is fleeter and more flexible, but

its services stop with planning; also, it has more

experience with military base closings than with

defense plant cutbacks or shutdowns.

In October 1990, Congress appropriated an extra

$50 million in DoD funds, to be transferred to EDA

for economic development assistance to defensedependent communities in fiscal years 1991-93 (the

funds had not yet been transferred at this writing, 1

year later). This is a notable increase over the $12

million otherwise available to EDA’s Sudden and

Severe Economic Dislocation (SSED) program, but

is far short of the resources available in the 1970s.45

States and localities have put some creative and

useful economic development programs in place,

but many States are now running short of funds and

cutting the programs.

Congress may wish, first of all, to monitor the

availability of funds for economic development

assistance to defense-affected communities, and

consider providing more if needed. Congress may

also wish to encourage faster responses to community distress and concentration of limited resources

on the most effective measures and the neediest

communities. Congress might opt to set deadlines

for response to community proposals; or it might

allow OEA to give planning grants to defensedependent communities before plant closings are

announced. OEA and EDA could focus efforts on

communities with a large proportion of jobs in

defense and with high unemployment and low job

growth. They could encourage and assist States and

communities to target their business development

45~e ss~ pro-iS ~derEDA*s Tifle ~pro~~, which *O includes assis~nce to communities suffering from longer term decline. The regUhU

appropriation for all of Title IX was about $24 million in fiscal years 1990 and 1991.
Chapter l-Summary and Findings ● 35

assistance to industries that are basic to the local

economy, that generate economic activity in other

sectors, and that sell goods and services outside the

local community.

Because States are now the main actors in

economic development efforts directed toward growing new businesses and expanding existing ones,

Congress may wish to direct some Federal funds into

support of those programs (as discussed below).

Also, Federal economic development agencies could

be encouraged to collect and share with other States

information on the best of these State programs.

Finally, Congress may wish to consider some

adjustment in policies related to closure of military

bases. Although the communities facing serious

problems from base closings are relatively few,

recovery in these communities could be difficult,

especially if base reuse efforts do not begin promptly.

To speed these efforts, Congress might direct or

encourage base commanders to work with local

communities in rapid transfer of property, possibly

vacating sections piecemeal and leasing them on an

interim basis. Congress might wish, in a very few

cases of exceptional defense dependence, to direct

that DoD transfer property to communities at below

market prices, or even free. Perhaps the most

important obstacle to transfer of base property is

interpretation of the law to require environmental

cleanup of the entire property before any part of it

can be transferred. Congress may wish to allow DoD

to transfer portions of bases as they are cleaned up.

Also, priority for cleanup might be given to bases

scheduled for closure.

Defense Companies

Although some major defense companies consider the strategies they adopt in response to defense

cutbacks their business alone, there are possibilities

for a constructive government role in the transition

of defense companies into more commercial activities. The potential is perhaps greatest for small and

medium-size companies. Many already have some

commercial customers, but need to shift to more

commercial production to survive. Technical, marketing, or financial assistance from government

programs can help some small firms make the shift.

As a first step, Congress may wish to add

resources and focus to existing programs for technology diffusion that could also help defense companies make the transition to more commercial

production. At the top of the list is a Federal-State

partnership. Congress might wish to expand significantly the National Institute of Standards and

Technology (NIST) program of support for existing

State technology extension programs (STEP). So far

the STEP program has been limited in scope, with

finding never more than $1.3 million a year. The

defense authorization act passed by Congress in

1991 provided for a much broader program of

Federal support for State technology extension

efforts, to be funded at $50 million a year. However,

Congress declined to fund the program for fiscal

year 1992. Nevertheless, congressional interest in

stronger support for technology extension programs

for small and medium-size manufacturers appears to

be growing. For example, Congress raised the FY92

appropriation for the Federal Manufacturing Technology Centers supervised by NIST, to $15 million

from $10 million the year before.46

A more comprehensive option would be Federal

support for State programs that offer a wide range of

services to improve companies’ performance, including such things as financial and marketing

services, worker training, and projects to generate

new technology development, as well as manufacturing modernization. Federal support might be

designed to encourage States to provide an array of

services in one center (e.g., Pennsylvania’s Industrial Resource Centers). Defense companies might

be singled out for priority in such programs. Federal

finding of about $25 million per year would be

enough to help States serve as many as 5,000 to

20,000 defense firms, depending on the level and

kind of service.

Another option Congress might wish to consider

is technology assistance to help small firms create

cooperative networks for purchase of equipment,

bids on large contracts, and marketing efforts. Still

another would be to form a government purchase

and leasing system for modern production equipment, such as computer numerically controlled

machine tools or robots. The system could serve two

purposes: to be a reliable purchaser of U.S.-made

advanced equipment, and a supplier of the equip-

~~e ~Wse of~e Centen is demom~ation of upto-date technologies and diffusion of the t=holo@~ tos~ ad m~i~-s~ man~ac~~;

five centers have been established and a sixth will open soon.
36 ● After the Cold War: Living With Lower Defense Spending

ment at subsidized rates to U.S. manufacturing

fins, especially small fins. Such a system might

be particularly helpful to small defense firms wishing to convert to commercial production, but would

also contribute more generally to stronger performance by American manufacturers. The cost to the

government of such a program might rise from about

$5 million in the first year (assuming a modest

beginning) to a few tens of millions per year for a

mature program.47

Another set of proposals might be useful for

defense firms that see possible commercial applications for technologies developed for the military, but

are unwilling to bear all the risks involved.48 A small

program for government-industry partnership in

generating new technologies already exists (NIST’s

Advanced Technology Program); Congress increased

funding for the program to $47 million for fiscal year

1992, up from $36 million the year before. Another

idea is to found regional Critical Technology Application Centers, based around geographic concentrations of firms and supported cooperatively by

industry, the Federal Government, State and local

agencies, and universities, to help firms commercialize critical technologies.49 Still another proposal is

to establish companion government-industry cooperative programs in the Departments of Defense and

Commerce to develop commercial applications of

defense companies’ military technologies.

Congress might wish to give tax breaks to defense

companies converting to commercial production,

possibly in the form of a tax credit for R&D to

develop commercial products, or as accelerated

depreciation for investments in new production

equipment. There is some question about the efficacy of such tax measures, and they are certainly

expensive---especially tax incentives for investments in new equipment.50 The problem of expense

is aggravated in a time of towering budget deficits.

However, the relatively high capital costs paid by

American manufacturers are a distinct competitive

disadvantage; U.S. firms generally would benefit

from lower capital costs, to stimulate long-term

investments in new technologies and equipment. If

Congress wishes to consider tax incentives to

stimulate long-term investment, the potential benefits from making the incentives broadly applicable

are clearer than the benefits from limiting the

incentives to conversion by defense companies.

There is one kind of tax incentive that might

usefully be targeted to defense companies. Defense

companies that do not want to enter commercial

production themselves might still be encouraged to

help entrepreneurs do so. Congress might consider

giving favorable tax treatment to investments by

large companies in startup companies formed for the

purpose of developing commercial applications of

military technologies; for example, the large company might be allowed to deduct such investments

from taxable income. Alternatively, the same tax

treatment could be available to any large company

that provides financial assistance to a small entrepreneurial spinoff company, whether or not the technology involved was originally military.

Finally, Congress might direct DoD to abolish its

requirement that companies pay the department back

for what it spent on a military technology if the

company develops the technology commercially

and sells the product to a non-DoD customer.

Nothing in law specifically requires DoD to demand

a payback under these circumstances. The requirement is inconsistent with laws that encourage

granting private companies intellectual property

rights to technologies developed in Federal laboratories, and is an impediment to commercialization of

military technologies. DoD’s insistence on control

over data rights related to development of military

technologies and systems could also be a barrier to

commercialization. Congress may wish to encourage DoD to work with industry on a settlement of

this issue in ways that protect legitimate government

interests but also allow companies to keep data

rights secure, so that commercialization of the

technology is more appealing.

47A s~i]m pro~~ in Japan leased or sold (on preferential installment purchase terms) $350 million of equipment iII 1987. Ass* g that the

government paid 20 percent of that cost in subsidies and administrative expenses, the government cost would be $70 million a year.

4aFor f~er discussion of ~s subj~t, see OTA, Making Things Better, op. Cit., c@?IptVing Economies, oP. cit..

4~e Defen= Authofi~tion Act autho~d $50 million for critical Technology centers, but the COIIferenCe committee on appropriations d=l~ed

to fund the program.

SOOTA, M~ing Thing~Betrer, op. cit., chs. z ~d ‘3, ad competing E~.ono~”es, op. cit., ch. z, &CUSS the fuci~ enViroIIIIlent fOr IOng-te~ (%pitd

investments in the United States, comparing it to the more hospitable environments of Japan and Ge rmany. Botb reports discuss several options for

improving the U.S. environment (including tax incentives).
Chapter 2

Policy Issues and Options
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

DISPLACED DEFENSE WORKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

DOL Supervision of, and Assistance to, State and Local Programs . . . . . . . . . . . . . . . . . . 42

Rapid Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Effective Allocation of EDWAA Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Unemployment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Retraining of Active Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Civilian Employees of the Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Veterans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

DEFENSE-DEPENDENT COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

DEFENSE COMPANY ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Government Programs for Technology Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Government-Industry Partnership for Technology Development . . . . . . . . . . . . . . . . . . . . 53

Tax Incentives for Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Intellectual Property Rights and Development Cost Recoupment . . . . . . . . . . . . . . . . . . . 54
Chapter 2

Policy Issues and Options

INTRODUCTION

Several Federal programs are in place to help

workers and communities adjust to economic disruption, and a few are designed to help companies

improve their competitive performance. These programs can be extended to serve workers, communities, and firms hit by defense spending cutbacks; in

fact Congress has already earmarked some extra

funding for defense-related adjustment efforts. The

major policy questions are whether existing programs are appropriate for meeting adjustment needs

in the post-Cold War period, and if so, whether they

are big enough and good enough.

Defense-related adjustment for workers and communities is not very different from adjustment to

other disturbances and dislocations. Communities

that suffer from defense cutbacks share many of the

same problems as those hit by structural change in

the civilian economy, and economic development

efforts work in much the same ways for both.

Affected defense workers differ somewhat from the

general run of displaced workers, as they are more

likely to be engineers or skilled technicians; existing

programs for displaced workers may need some

rethinking to meet their needs. For the most part,

however, entire new Federal programs targeted to

these new users are not necessary. What is needed is

improved performance of existing programs and

possibly some increased funding.

State and local agencies do most of the actual

operation of federally funded programs to assist

displaced workers. The Federal role is mainly to

guide, help, and require these agencies to adopt best

practice, but performance of the Federal role is often

disappointing. Stronger efforts are needed to bring

the average State program up to the level of the best.

In particular, Federal managers could hammer home

the importance of early action in response to calls for

help.

Federal economic development programs, starved

for funds and repeatedly threatened with extinction

during the past decade, may now lack the institutional capacity to offer effective help to defensedependent communities. They are certainly underfunded compared to the post-Vietnam War era,

despite recent increased appropriations from Congress.

1 In the past decade, many States and communities took over responsibility for aggressive, innovative economic development programs. But today,

some of the best are slashing their programs because

of budget crises.

Most of the major defense companies are quite

unlike the commercial companies that compete in

the civilian economy. After four decades of Cold

War, they have developed a different culture. Some

have announced they have no plans or desire to

substitute commercial production for declining military orders, and others may find it difficult to

manage. Nonetheless, some of the big defense

companies have taken initial steps to get into civilian

markets. Many smaller companies already produce

for both commercial as well as military customers

and would like to do more on the commercial side.

They could benefit from government programs that

offer technical assistance for manufacturing modernization, better marketing (including exports),

improved management, access to financing, and

possibly financial aid for conversion to efficient

commercial production.

Some government programs to improve the competitive performance of manufacturing firms already

exist; most could be useful to defense firms wishing

to convert, although these firms may need some

extra, specialized assistance. As matters stand now,

Federal programs to improve manufacturing performance are few, small, and inexperienced. However, congressional interest in expanding and supporting such programs is definitely on the rise. More

programs exist at the State level, but they vary

greatly in range and quality. A few States do an

excellent job, but many do much less and some that

were formerly outstanding are now cutting back

their programs because of severe budget troubles.

Because community economic development and

technical assistance to firms are so closely linked

(often they are identical), management of federally

funded programs in these areas needs to be closely

coordinated.

IDWnd@ on how it is defim~, F~~ fund~ for COmmunity economic development dropped 60 to 90 pfXCf3d ~ ~ @rms from 1978 to 1991.

_39–
40 ● After the Cold War: Living With Lower Defense Spending

Altogether, adjustment assistance for workers,

communities, and companies affected by the defense

build-down will take the combined efforts of Federal, State, and local governments. The Federal

displaced worker program is designed as a cooperative one with States and localities, and most of the

existing community economic development and

industrial extension programs are at the State and

local level. But this does not mean that the Federal

Government can abdicate responsibility for adjustment assistance, leaving it to States and local

communities. National security needs are the responsibility of the whole Nation. When those needs

change in ways that affect the livelihood of communities and citizens, help with the transition is also a

national responsibility. The cost should be supportable. Adjustment programs for workers and communities affected by the defense build-down might cost

an additional $100 million per year in Federal funds;

the extra cost of including defense companies in

Federal programs for technology diffusion and

generation is hard to estimate but probably should be

no greater.2

Some adjustment programs--especially those that

help companies adopt improved technology or help

workers better their skills-can give a real boost to

economic performance, growth, and prosperity.

Some, however, are mainly reactive. They apply

band-aids to the nicks, cuts, and more serious

injuries delivered to various parts of the economy by

imports from capable and aggressive trading partners; by clean air laws that threaten high-sulfur coal

users and endangered species laws that halt logging

of old-growth Western forests; by agreements that

open U.S. markets to lower-wage neighbors (the

Caribbean countries and Mexico); and by steep cuts

in big defense budgets that are outmoded in a

post-Cold War world. Are there other options

besides a proliferation of band-aids? Clearly, delaying defense cutbacks simply because they threaten

job loss or community disruption is not one of them.

Defense is not a jobs program. But there are other,

more proactive choices.

For 40 years, Americans were united in an

overriding national purpose of resisting communist

expansion. There are some signs that a new national

purpose is taking shape, based on a redefinition of

national security to include excellence in economic

performance, the provision of a comfortable and

rising standard of living for our citizens, and the

restoration of American leadership in a more peaceful, more prosperous, and newly democratic world.

Several new national initiatives might contribute

to this purpose. One, for example, might be a strong

commitment to environmental protection and cleanup,

which would also provide support for an internationally competitive U.S. environment industry. Another could be rededication to top quality education

and training, so that our managers, engineers, and

workers equal those of our best competitors. A third

possibility is restoration of a first-class transportation and communication infrastructure, including

repair of worn-out systems, construction of up-todate new ones, and support for the advance of new

transportation technologies (e.g., electric cars).

Defense production, aside from its explicit goal of

protecting U.S. military security, offers other genuine benefits to the Nation, the communities in which

it resides, and the workers it employs. Compared

with the U.S. economy as a whole, the defense sector

is research and development (R&D) intensive, has a

higher than average concentration of skilled workers, and pays better than average wages. Part of the

point of new national initiatives is to foster the

creation of new firms and industrial sectors with

these same valuable characteristics on the civilian

side of the economy.

This report focuses on adjustment problems and

policies. Discussion of national initiatives that could

spur new enterprises and contribute to stronger

economic performance is reserved mostly for the

second, and fina1, report of this assessment-though

some of the options considered here (i.e., governWhese are very rough estimates. At present levels of service, an extra $50 million per year would be enough to serve about 25,000 displaced defense

workers per year (see the discussion below). It is more diftlcult to judge whether an extra $50 million per year would meet the economic development

needs of defensedependent communities. That amount is a big increase in Federal economic development funds; it is about four times what has been

available in recent years for all communities faced with sudden and severe economic distress, and it would be enough to provide 40 defense-dependent

communities per year an average of $1.25 million in community ad~stment assistance. Still more difficult to judge is the extra cost of including defense

companies in federally funded technology programs. Several proposals in Congress (discussed below) would expand the present small Federal

technology diffusion and generation progmrns to the level of some $200 to $300 million per yeaq how much of this would be available to defense

companies wishing to convefl to commercial production is speculative.
Chapter 2---Policy Issues and Options ● 41

ment programs for technology diffusion and government partnerships for technology development)

would fit well with new national peacetime initiatives.

The adjustment programs discussed in this chapter can help displaced workers find better jobs

sooner than they could on their own; they can help

to keep distressed communities from falling into a

downward spiral; and by working with firms on

adoption of best-practice technologies and new

product development, they can make a real contribution to improving American industrial competitiveness. But they are not the whole story. It takes a

wholehearted national effort in everything from

public school education to technology partnerships

between government and industry to grow the new

knowledge-intensive, wealth-creating industries that

the Nation needs to strengthen its economic security. 3

DISPLACED DEFENSE WORKERS

Many studies and years of experience have shown

that displaced workers benefit from well-run assistance programs, and that the good programs have

several key features in common: early action—

ideally, early enough to provide comprehensive

services by the time layoffs begin; collaborative

efforts among the company, the workers, and public

agencies; a full range of services to meet differing

needs; and well-planned training suited to various

workers’ backgrounds and abilities.4

Some of the State and local agencies that operate

the federally funded assistance program for displaced workers do very well by all of these

measures, but the majority fall short. The most

obvious weakness in programs of various States and

localities is that help doesn’t arrive soon enough;

many workers are disillusioned or dispersed by the

time assistance is finally available. Those who miss

out are likely to be unemployed longer or settle for

worse jobs than they would have with timely,

effective help. In solving this and other weaknesses

in how displaced worker projects actually operate,

one element is better information sharing and

guidance from the U.S. Department of Labor (DOL).

Some changes in administration of the law, and

perhaps in the law itself, may also be desirable.

The big Federal adjustment program for displaced

workers, Title III of the Job Training Partnership Act

(JTPA), is open to all workers displaced in the

defense build-down-people losing jobs in private

defense industries, civilian employees laid off from

the U.S. Department of Defense (DoD), and veterans

involuntarily discharged from the armed forces. The

Title III program was created in 1982, and in 1988

was amended and renamed the Economic Dislocation and Worker Adjustment Assistance (EDWAA)

program (it is often still known as JTPA Title III). In

fiscal years 1991 and 1992 it was funded at all-time

highs of $527 and $577 million. Congress also

appropriated an extra $150 million in DoD funds to

be transferred to DOL and earmarked for services to

displaced defense workers in fiscal years 1991-

1993.5 This kind of multiyear appropriation could

prove especially useful in the defense build-down,

because the consequent displacement of workers

could be bunched up rather than evenly spaced over

the years, and it is impossible to predict when the

greatest impacts will occur.

The JTPA Title III program had some modest

success in its first few years (ch. 3), but several

interrelated problems became evident. The 1988

EDWAA amendments were aimed at solving them.

The main problems were: 1) adjustment services

were not provided soon enough after notice of

layoff; 2) the program was not reaching enough

3Tw0 r~ent OTA reports, Making Things Better: Competing in Manufacturing om-~ 3 (Washington DC: US. Government Printing OffIce,

February 1990) and Competing Econom”es: America, Europe, and the Pacijic Rim OTA-ITB-498 (Washington, DC: U.S. Government Printing Office,

October 1991) discuss the kind of cooperative government-industry partnerships that promote the growtb of knowledge-intensive, wealtb-creating

industries.

4US. con=e~s, ~fice of Te~~ology Assessment, Technology and s~ctural l-,lnemploy~nt: Reemploying Displaced Adults, OTA-ITE-250

(Springtleld, VA: National Technical Information Service, 1986), ch. 6, esp. pp. 231-242, and Plant Chring: Advance Notice and Rapid Response,

O’E4-ITE-321 (Springfield, VA: National Technical Lnforrnation Service, 1986), pp. 12-16.

s~e f~ mount my not, however, be tieavai]ab]e to displaced defeme workers. In 1990, Congress appmpfiated $200 m~lion in DoD fllnds

to assist workers and communities affected by the defense build-down, $150 million for workers and $50 million for communities, in fiscal yews 1991-93.

T’he defense authorization act passed in November 1991 provides that up to $30 million of the $200 million can be transfemd to the Small Business

Administration for loans to small busimxses that suffered *‘severe economic tijury’ as a result of the emergency deployment of troops to the Persian

Gulf after July 31, 1990. Tbree-quarters of the $30 million would come from the fund for workers, the other on.vparter born the fund !or communities.

National Defense Authorization Act for Fiscal Years 1992 and 1993, sec. 1087. The fill $30 million may not be granted; the seriously injured small

businesses may turn out to be ratber few.
42 ● After the Cold War: Living With Lower Defense Spending

eligible workers; and, 3) many States were doing so

little for displaced workers that unspent funds were

piling up higher every year. Since the 1988 amendments took effect, participation has risen somewhat

(from 5 to 7 percent of eligible workers to about 9

percent), and States are spending more of their

allocated funds. However, thorny problems remain.

DOL Supervision of, and Assistance to,

State and Local Programs

DOL cannot by itself bring up the level of all State

EDWAA programs to that of the best. JTPA Title III

made the States partners with the Federal Government in the displaced worker program, and the States

bear much of the responsibility. However, DOL is in

a better position than any one State to collect

information about best-practice employment and

training efforts and offer technical assistance in

applying them. Through oversight, Congress might

encourage DOL to operate more as a partner than as

an adversary to States-perhaps by forming a

Federal-State policy council, or similar regional

councils, that meets regularly to share information

and discuss issues on the program’s operation.

Congress could also encourage DOL to help local

EDWAA agencies respond appropriately to local

conditions as affected by defense cutbacks. For

example, if a community is in deep distress (e.g.,

from closure of a military base or defense plant in an

isolated small town) and there are scant prospects of

new jobs in the local area, DOL could make sure

State and local authorities are aware of the full range

of EDWAA options, including relocation assistance,

long-term skills training, and contributions to local

economic development. The extra funds Congress

appropriated specifically for services to displaced

defense workers in fiscal years 1991-93 are all to be

spent when and where the Secretary of Labor

decides they shall be (most EDWAA funding is

allocated differently, as discussed below). Thus,

DOL has a special opportunity and responsibility to

see that EDWAA money is spent where it can help

most in the defense build-down.

Rapid Response

Despite the emphasis on rapid response in the

1988 amendments, and despite the Worker Adjustment and Retraining Notification (WARN) law that

requires 60 days’ notice of major layoffs, the

majority of displaced workers still do not receive

adjustment services at the optimal time, which is

before layoffs begin. A few States (e.g., Colorado,

Massachusetts) do an outstanding job of bringing

services to displaced workers quickly, but many are

mediocre at best, negligent at worst. Through

oversight, Congress might specifically encourage

DOL to collect information from the more successful States on rapid response and share it with the

others.

If more forceful action seems desirable, Congress

might require States to report to DOL the average

time lapse between notice of layoff and provision of

certain key services (e.g., personal counseling, skills

assessment and career counseling, job search skills

training). This would identify the States that are

doing poorly and need help or incentives to improve,

and those that are doing well enough to serve as

models. Possibly, Congress might wish to consider

a State’s record on rapid response as an indicator of

EDWAA program performance, rewarding those

with good records. For example, a certain percentage

(perhaps 10 to 20 percent) of EDWAA funds might

be allocated to States on the basis of their rapid

response performance.

State EDWAA officials are virtually unanimous

in reporting that the WARN law has helped them

learn about layoffs earlier and respond faster than

they could otherwise. Several have also noted,

however, that compliance seems to be somewhat

spotty. Congress may wish to consider these options:

. Investigate the extent to which employers are

complying with WARN legislation, given that

no agency is assigned to enforce the law.

. Consider whether the triggers for WARN

(numbers of employees and percentage of work

force laid off within a 30-day period) may be

causing anomalous results, i.e., some larger

layoffs escape triggers that apply to smaller

layoffs.

Some of the problems with rapid response are

related to delays in getting access to the national

reserve funds controlled by DOL. Eighty percent of

EDWAA funds are distributed to the States; 20

percent remain in the hands of the Secretary of

Labor. These discretionary national reserve funds

are distributed to States and local EDWAA agencies

on the basis of need, in response to formal proposals.

They are intended to meet unforeseen needs, since

the whereabouts of plant closings and mass layoffs

cannot be reliably predicted. Removing delays in the
Chapter 2--Policy Issues and Options ● 43

distribution of DOL discretionary funds is especially

important for displaced defense workers, since all

the extra funds that Congress appropriated to meet

the needs of this group is to be allocated and spent

at the discretion of the Secretary of Labor. A

particular problem for States and local agencies is

that, even if they eventually receive national reserve

grants, DOL rules do not allow them to recoup from

the grant what they have already spent up front from

their own (often limited) funds to assure quick

delivery of services.

There are reasons, of course, for DOL to require

that applicants for grants make a solid factual case,

to guard against dangers of waste or abuse. The

opposite danger, however, is that bureaucratic rules

can get in the way of fast, effective action. Part of the

answer is to strengthen cooperative relations and

trust between DOL and the State and local agencies.

Congress may also wish to consider some of the

following specific changes in handling discretionary

EDWAA grants:

●

●

●

Direct DOL to allow States and local EDWAA

agencies to be reimbursed from discretionary

grants (when and if granted) for EDWAA funds

they have already spent to hasten the delivery

of services to displaced workers.

Encourage DOL to respond faster to requests by

States and local EDWAA agencies for grants

from the national reserve and other discretionary funds; this might be done by limiting the

amount of detail required in grant proposals and

by giving States clearer guidance on the requirements for applications.

Require that DOL turn around proposals for

discretionary grants within 10 business days.

Training

The 1988 amendments to JTPA Title III required

that 50 percent of EDWAA funds be spent for

training; in specific cases, State Governors may

reduce the requirement to 30 percent. This requirement was a response to findings of too little

emphasis on training in EDWAA’s early years, and

reflected a laudable public policy goal. However, the

mandated 50 percent for training does tend to

interfere with project flexibility, especially when the

preponderance of displaced workers in a project are

professionals or highly skilled technicians, as is

quite often the case in defense layoffs (see the

discussion below of retraining for engineers displaced from defense industries). DOL officials

sometimes insist on an even higher proportion of

funds spent for training as a condition of approval for

grants from the national reserve fund.

Another problem is that, even though the law

places few restrictions on training, DOL policy is to

limit training to displaced workers who are ‘most in

need’ or are unlikely to find work in their same

occupation. This means in practice that displaced

workers who are already skilled but want to improve

their skills in the same occupation may be barred

from getting EDWAA training. This is not only hard

on the individual worker involved, but could defeat

the purpose of providing a more adept and highly

skilled work force to U.S. industry and thereby

improving competitiveness. It could be an obstacle

to using EDWAA funds for retrainin g of displaced

managers or engineers who might want to choose

that option.

Some options that Congress may wish to consider

for adding flexibility, improving the quality of

training, and making it available to a wider range of

displaced workers are as follows:

●

●

●

Direct DOL to offer retraining to displaced

workers who are interested in and able to

benefit from it, including workers who want to

upgrade their skills; Congress might wish to

clarify the language of the law so as to make it

unequivocal that training may be offered to

people who already have marketable skills.

Make the present mandatory allocation of 50

percent of EDWAA funds for trainin g a guideline rather than a requirement; any change in

the 50 percent training requirement should be

accompanied by redoubled efforts by DOL to

offer State and local programs technical assistance so that training does not get short shrift.

Allow projects more than 1 year in which to

meet the 50 percent training requirement.

Effective Allocation of EDWAA Funds

The full EDWAA appropriation is divided up in

two ways. First, 80 percent of the funds are allocated

among States on the basis of unemployment in each

State and how that relates to national unemployment. (The other 20 percent, as noted, goes into the

national reserve fund, to be distributed at the

Secretary’s discretion to States or local agencies.)

Before 1988, States had full control of their Title III

funds, but under the amendments, the States must
44 ● After the Cold War: Living With Lower Defense Spending

distribute to substate areas half their allocation at the

beginning of the program year, and distribute

another 10 percent in the course of the year as the

need arises. Part of the reason for requiring allocation to substate areas was that many States were not

spending their money or delivering services adequately to displaced workers. Another reason was

probably political; local government officials (who

usually dominate in the substate areas) and longtime

providers of employment and training services have

considerable influence with Congress. Another

change in the 1988 law is that if States carry over

more than 20 percent of their year’s EDWAA

finding, the Secretary must reallocate that carryover

to other States that have spent at least 80 percent of

their own allocation.

It is not clear that these changes are having the

intended positive effects. It is also questionable

whether the formula for allocation of EDWAA funds

to States is as effective as it might be in meeting the

needs of displaced workers. Since the 1988 amendments have been in effect for only 2 full program

years, Congress may wish to gather information

through hearings and other oversight about how the

amendments are working before considering changes

in the law. Questions to investigate might include

the following:

●

●

Is the present allocation system splintering

State EDWAA allocations into such small pots

of money at the substate level that it is often

hard to create a viable entity to respond to

layoffs?

Does the mandatory distribution of 60 percent

of the State’s allocation to substate areas

deprive State programs of needed flexibility

and responsiveness to unforeseen displacement?

Many States have chosen Service Delivery Areas

(SDAs) to develop services for displaced workers,

even though the SDAs’ experience is in employment

and training for low-income and disadvantaged

people, not displaced workers. Although some

SDAs do a good job with displaced workers, others

do not. Alternatives to the SDAs, or competition

from other service providers, could result in services

that better meet the special needs of displaced

workers (particularly among displaced defense workers, the needs of engineers and highly skilled

technicians). Further questions Congress might wish

to pursue include:

●

●

●

Can States be educated and encouraged to look

further than the SDAs for well-qualified grantees at the substate level?

Is the mandatory reallocation of EDWAA

carryovers of more than 20 percent having the

desired effect of bringing services to more

displaced workers? Are some local agencies

using EDWAA money for other purposes

simply to avoid the reallocation-for example,

serving with EDWAA funds disadvantaged or

low income clients, such as the homeless, who

are eligible for other employment and training

programs?

Is the mandatory reallocation of carryovers

leaving too little flexibility to respond to

varying economic conditions? Would it make

sense to allow DOL to accumulate a “rainy

day” EDWAA reserve fund that it could draw

down in recessions and build up in prosperous

times, since the demand for services to displaced workers is greater during hard times

(especially for training, the most expensive

service).

Congress may also wish to consider modifying

the formula that governs allocation of EDWAA

funds to States, to reflect more accurately the States’

experience with displacement.6 The 1988 law mandates that data from DOL’s Bureau of Labor

Statistics (BLS) Mass Layoff Survey be given a

weight of 25 percent in the formula, but this is not

done because the survey is incomplete. An alternative might be to include BLS data on unemployment

due to job loss in the formula for allocation of

EDWAA money to States. Although these data

include people who were Freed from their jobs as well

as those who were laid off, they are more closely

correlated with dislocation than the aggregate unemployment data that are now used in the formula.

Unemployment Insurance

Adequate unemployment insurance (UI) is especially important for displaced workers because it is

often the only form of publicly provided income

support for those who want to undertake skills

training. Because of various changes in eligibility

rules and the virtual elimination of extended UI in

bsee Chapters for discussion of the EDWAA fud@ fo~~a.
Chapter 2--Policy Issues and Options ● 45

the past decade, only 32 percent of unemployed

workers were drawing UI in 1990, compared to a

range of 42 to 75 percent in the 1970s.7

Congress may wish to consider providing extra

income support for displaced workers who opt for

skills training—not only because of the benefits to

the individual workers but also because training can

provide a more capable work force for U.S. firms.

Although EDWAA funds may be used as income

support for workers in training, this is rarely done.

Extending UI benefits for this purpose is a possibility. Another Federal program, Trade Adjustment

Assistance (TAA), offers as much as 78 weeks of

income support, at the level of UI benefits, to

workers who are certified as having lost jobs due to

imports and are enrolled in approved training

courses. In 1990, some 18,400 of the 62,618 workers

certified as losing their jobs due to imports enrolled

in TAA-sponsored training courses.

The cost of extended income support (whether as

extended UI benefits or in some other form) for

displaced workers in approved training could be

substantial. One way to contain costs would be to

require evidence of a real commitment to training,

for example, workers might be required to sign up

for training no later than the mid-point of their

regular 26-week eligibility for UI benefits, rather

than waiting until the benefits run out. Another

possibility would be to limit the program to displaced defense workers.

To get a rough idea of the possible costs of such

a program, assume that workers in long-term training would, on average, receive an extra 26 weeks of

income support at $160 (the estimated U.S. average

benefit in 1990) so that the average extra cost per

worker would be $4,160. The demand for long-term

training is likely to be limited; even in EDWAA

projects that emphasize training and do a good job

of it, only about 20 to 30 percent of participants

choose that option, and presumably fewer still would

select long-term training. About 163,000 displaced

workers enrolled in EDWAA projects in 1989-90; if

15 percent of them were in long-term training, the

extra cost of income support for a year would be

some $100 million. If the benefit were limited to

displaced defense workers, the cost might be around

$16 million a year. This estimate assumes that

displacement of civilian defense workers would be

200,000 per year over the 4 years 1991-95. (Because

most ex-service men and women who want training

can use the more generous GI Bill, they are not

included). It further assumes that about 12-13

percent of civilian defense workers enroll in EDWAA

(which is somewhat above recent enrollment rates),

and that 15 percent of those choose long-term

training, meaning that 3,750 displaced defense

workers per year would be receiving extended

income support while in training.

Retraining of Active Workers

One possibility for encouraging firms to convert

from military to commercial production, using at

least some of their current work force, is to offer

some government help in retraining workers, Commercial production often involves different and in

some ways more demanding work than military

production. The EDWAA program does not extend

to active workers, but only to workers who have

been laid off or have received notice of layoff. Some

States have programs that help fund training of

active workers—notably California’s Employment

Trainin g Panel, which is funded by a small employers’ payroll tax similar to the UI tax. However, there

is little experience at the Federal level with public

programs to help retrain active workers.8 The extra

$150 million that Congress appropriated for services

to displaced defense workers is a possible source of

funds for a demonstration project to retrain active

workers, since demonstration projects are allowed

under the legislation. DOL could be encouraged to

create a pilot project for retraining active workers in

a defense company converting to commercial production.

Funding

In earmarking $150 million in DoD funds, to be

transferred to the EDWAA program for adjustment

services to displaced defense workers, Congress

chose a way to provide for this group without adding

bureaucratic complications or depriving other dis7~ Novaba lg91, ~OnPs~ and he a&s&a@n r~ch~ a~~m~( on ext~d@ ~ benefi(s for ~riods of 4 to 20 weeks, depending on (he

local unemployment rate. This change will increase the coverage of UI, but not to the peak levels of the 1970s.

8see u.S. con@ess, Office of T~~olo~ As~~smeng Worf&r Training: co~peh~g in the New l~ter~tionai Economy (Washington, ~: U.S.

Government Printing Office, September 1990).
46 ● After the Cold War: Living With Lower Defense Spending

placed workers.9 With EDWAA funding at a high of

$577 million in fiscal year 1992, and with the

addition of the extra $150 million, it might be

expected that the funds would prove adequate to deal

with the extra burden of displacement from defense

cutbacks. However, both State and Federal EDWAA

officials told OTA in fall 1991 that many States and

localities were getting so many demands for services

that, at the current pace, their regular allocations

would run out before the end of the program year

(June 30, 1992). The recession, frequent layoffs, and

high unemployment rates seemed to be the main

reason for the exceptional demands for service,

though they might also reflect the effects of WARN

notices and expanding knowledge about the EDWAA

program among companies and workers.

However, at the same time regular allocations

were running low, State and local requests for grants

from the Secretary of Labor’s national reserve fund

were coming in so slowly that it seemed that fund of

about $105 million might not be exhausted by the

end of the year. DOL officials speculated that some

State and local officials who were strapped for

regular EDWAA funds don’t really know how to

apply for the grants effectively, and those who do

may be too overwhelmed with work to take time for

the demanding job of grant application. All this adds

emphasis to the need to streamline the process for

applying for DOL discretionary grants. This is

especially important for displaced defense workers,

since all the extra $150 million designated for

services to that group is DOL discretionary funding.

Supposing DOL solves the problems of getting its

discretionary grants promptly to where they are

needed, the extra $150 million may be sufficient for

serving displaced defense workers, If 200,000 defense workers are displaced per year over the next 3

years (a high estimate, see ch. 3), and if 12-13

percent of those workers should opt for EDWAA

services (a moderate estimate, considering recent

participation rates of less than 10 percent), then

about 25,000 displaced defense workers per year

might apply for services. If the cost of services is

about $2,000 per participant (as it was in program

year 1990), then an extra $150 million might prove

roughly adequate. 10 The fact that it can be spent over

3 fiscal years adds flexibility. However, if the

economy remains weak, demands for EDWAA

services could continue at high levels and funds

could run short. Also, the $150 million from DoD is

all in DOL’s discretionary funds and, as noted, there

are serious delays and difficulties in getting those

funds to the places where they are needed. Finally,

if the quality of services were upgraded-for example, by providing extended income to workers in

long-term training-the present level of funding

could fall short. Congress may wish to monitor the

rate of spending, both of the regular appropriation

and the extra amount from DoD, to make sure that

the funds fit the needs.

Civilian Employees of the

Department of Defense

The number of civilian DoD employees displaced

by defense spending reductions will be relatively

few, since DoD plans to effect most of the reduction

through attrition. However, some will certainly be

affected (e.g., there are already substantial layoffs at

several naval shipyards). In many ways, adjustment

services for displaced civilian DoD employees are

broader than for workers displaced from defense

industries. Through oversight, Congress may wish

to see whether the programs that look good on paper

are working well in practice. A few additional

options might be considered.

●

●

DoD and DOL could be encouraged to make

sure that all installations know about EDWAA

and how to use its services, especially the

training options. DoD could also encourage

directors of the transition assistance programs

on military bases to make sure their program

services reach displaced civilian DoD employees as well as military personnel.

DoD could be encouraged to provide information and technical assistance to base commanders and personnel officers on the value of

aggressive outplacement efforts and labormanagement committees to take part in or

direct retraining and reemployment efforts.

9As noted, this tlmd may be dtished by as much as $22.5 millioq since Congress decided to make this portion available for loans to small

businesses seriously injured as a result of troop deployments in the Persian Gulf War.

10~e ML es~ale for cost ~r EDWAA client is about $1,350 for progr~ y~ 1990. However, DOL’S method of fi~g the cost hlvOIVeS double

counting of EDWM clients, since it counts all participants for the program y~, including those who enrolled the previous year. OTA’s cost-per-client

estimate is based on the number of new enrollees in the program year. Total participants in the EDWM program were 282,089 in 1990. New enrollees

were 186,888. EDWAA spending was $380.3 million.
Chapter 2--Policy Issues and Options . 47

● DoD might be given authority to keep civilian

employees eligible for employee assistance

programs up to 6 months after separation.

Engineers

Among displaced defense workers, engineers are

of special concern. First, they are being laid off in

relatively large numbers in the defense build-down,

because they are disproportionately employed in

defense jobs, and also because they are first in line

to go when new weapons systems are canceled or

postponed. Second, it is a waste of a valuable

national resource if engineers do not find new jobs

that make use of their technical abilities.

So far, it appears that despite the recession, most

engineers laid off from defense jobs are not having

as much trouble finding new jobs as those caught in

the build-down after the Vietnam War. A positive

factor is the fairly prosperous condition and hefty

backlogs of orders in the commercial aircraft industry. Another plus is that many engineers are willing

to relocate, and have something of a national job

market through their professional associations. Still

another is that many of the large defense companies

are offering reemployment services to their displaced engineers (often serving engineers and other

salaried employees more quickly and more effectively than their displaced blue-collar workers). On

the other hand, it is not always easy or automatic for

an engineer to switch from defense to the commercial side even in the aircraft industry. A substantial

share of displaced engineers who have found new

jobs are reemployed in the defense industry and may

be heading for further displacement as the builddown continues.

Many of the options that Congress might consider

to improve services to all displaced workers apply

equally to engineers, especially improvement in

rapid response. However, some special considerations also apply, in particular with regard to training.

Two factors distinguish engineers’ retraining needs

from those of most other displaced workers. First,

many do not want or need retraining; their skills are

salable. This is why the requirement that 50 percent

of an EDWAA project money be spent on training

is often misplaced in projects serving engineers.

A contrary consideration is that when engineers

do need retraining, a meaningful course of study

is likely to be longer and more expensive than

the average 4-month training courses offered to

EDWAA clients. When engineers are served in the

same projects as other workers (often a favorable

arrangement), the retraining needs of a very few

engineers could soak up all the project’s training

budget. An answer that makes sense for retraining

engineers displaced from defense work might be

applied more broadly as well; there is a longrecognized but often unmet need for engineers to

continue their training throughout their working

lifetimes.

Funds from multiple sources could be sought to

support retraining of displaced engineers and continuing education for engineers in general. It is in the

national interest to make use of engineers’ skills, and

it makes sense to provide some public funds to meet

their training needs. It also makes sense to tap other

government programs, beyond EDWAA, for the

purpose. Private companies and the engineers themselves also benefit from continued training and

retraining, and should take some of the responsibility. For retraining of engineers, Congress might

consider the following options:

●

●

●

●

Provide through the National Science Foundation grants and scholarships specifically targeted to engineers for continuing education.

Encourage through tax incentives company

training programs for midcareer engineers,ll

such as Boeing provided for some engineers

from its military aircraft division in Wichita to

enable them to work in the commercial division;

Establish a technical assistance program to collect and sham information on successful companyprovided training for midcareer engineers.

Provide financial support for retiring and laidoff scientists and engineers who want to pursue

second careers as junior and senior high school

math and science teachers. Partial payment of

tuition costs for alternative credentials programs (now becoming more widely available)

might be provided through EDWAA, if DOL is

directed to allow EDWAA training funds to be

used for the purpose even though the displaced

professional has marketable skills. An alterna1 loTA~~ ~wmt ~ep~ wor& Training (op. cit. 19$)()) propos~ a num~r of pofiq options to encourage or induce companies to k more aCtiVe h

providing training for their employees. One option was to impose a payroll training levy to pay for public &air@ programs, but to exempt employers

who provide adequate training themselves.
48 ● After the Cold War: Living With Lower Defense Spending

tive is to revive a program like the 1950s-era

National Defense Education Act, which provided loans for tuition and then forgave a

portion of the principal and interest for each

year the recipient taught.

In addition, some more general options to improve the delivery of government funded services to

displaced engineers might be considered. Through

oversight, Congress might direct DOL to give State

and local EDWAA agencies technical assistance and

encouragement to attend to the training and reemployment needs of engineers and other technically

trained workers. Most EDWAA agencies have little

experience with professionals and white-collar workers and some are reluctant even to offer them

services, believing that highly skilled people can do

well enough on their own. However, if Congress

wishes to encourage provision of adjustment services to engineers and other professionals, it may also

have to monitor adequacy of EDWAA funds. In late

1991, with the continuing recession and heavy

demands for services, some State programs were

conducting a form of triage. They saved most of their

scarce resources for what they regarded as the

neediest workers, and sacrificed services to engineers.

Veterans

Quite a broad range of transition services is

available to members of the armed forces who may

be involuntarily retired or denied the chance to

reenlist. In addition, severance pay is offered to

involuntary separates who have served more than 6

years but are not eligible for retirement. Congress

has recently passed several laws that improve these

transition and separation services. Oversight of how

they are working is probably the major option

Congress will now wish to consider. It seems likely

that ex-service men and women returning to civilian

life will be better regarded by prospective employers

and have chances at better jobs than veterans in some

previous eras, both because they are better educated

and trained than many civilians in their age cohort

and also because the Gulf War enhanced the

reputation and public perception of members of the

armed services.

The group most likely to be adversely affected by

the defense build-down is not veterans, perhaps not

even those involuntarily separated (who probably

will be relatively few), but young people deprived of

the chance to enter the armed services in the first

place. The services are the most color-blind large

institution in the United States, and have offered

unusual opportunities both for training and employment to young black men, especially those from the

South. Alternative institutions offering similar opportunities (e.g., a national youth service corps)

might conceivably be created, but unless they have

strong goals of their own as institutions, they are not

likely to command the respect and attract the same

caliber of young people as the armed services.

DEFENSE-DEPENDENT

COMMUNITIES

For the communities that will be seriously affected by withdrawal of defense spending, government programs for economic development assistance can contribute to recovery, though they cannot

by themselves restart a stalled local economy.

Federal programs for community economic development must be based on cooperation with the States

and localities. And they must, by their nature,

involve cooperation with and assistance to private

businesses. Economic development and programs of

technical assistance to business (as discussed below)

are closely related.

Today, States are far more active in economic

development than the Federal Government, and

some (e.g., Pennsylvania) do a creative, effective

job. However, performance among different States

is very uneven, and in 1991, when many State

governments were financially strapped, some that

were formerly outstanding (e.g., Michigan) pulled

back and abandoned some of their economic development programs. Even in better times, there is a

limit to the funds States have to offer. There is a

place for Federal action, though it is not likely to

have as much effect as it did in the 1970s. Not only

was direct funding for economic development much

higher then than it is today, but other Federal

programs that supported community development

(e.g., clean water programs) were also far larger.

In 1990 Congress appropriated an extra $50

million in DoD funds to assist defense-affected

communities. 12 This is a big addition to the pre12A5 noted, this amount maybe ~“ “ hed by as much as $7.5 millio% since Congress has made this portion available for loans to small fms that

were seriously injured as a result of troop deployments in the the Pemian Gulf War.
Chapter 2-Policy Issues and Options ● 49

existing Federal program to help distressed communities restart their economies; it was funded at about

$12 million a year. However, if the defense builddown proceeds rapidly, this augmented Federal

support probably will not be enough to meet the

need, even given the increased State and local

capacities. Compared to the amounts spent responding to the defense build-down of the 1970s, $50

million will not go far.13

DoD is supposed to funnel the $50 million in

economic development funds to the Commerce

Department’s Economic Development Administration (EDA), which can then spend the funds through

fiscal year 1993. However, as of November 1991,

the transfer of funds from DoD to EDA had not yet

been accomplished. EDA’s Title IX program offers

planning and implementation help to communities

affected by sudden and severe economic disruption.

DoD’s own small Office of Economic Adjustment

(OEA, funded at about $6 million in fiscal year

1992) helps communities plan for coping with both

defense plant layoffs and military base closings,

though it has much more experience with the latter.

Considering the small size of the Federal effort

today, it is especially important to target the

resources where they are most needed, and to

provide help fast and effectively. Congress might

consider several options along these lines:

●

●

●

Congress may want to closely monitor the

demand for the funds appropriated so far, to see

whether communities hit by defense cuts are

able to get what they need. If the funds are near

depletion, Congress may want to consider

appropriating additional funds.

EDA’s worst failing has been delay. Congress

might wish to set mandatory deadlines for EDA

to respond to proposals from communities for

economic development grants.

Congress may want to allow and encourage

OEA to provide planning grants to defensedependent communities before any layoffs or

closures are announced. If communities begin

early to organize and plan economic development, they will be in a better position to

respond to defense cuts if and when they

happen.

●

●

●

●

Both EDA and OEA assistance could be

focused better on the neediest communities.

OEA could concentrate its responses to military base closings and defense industry layoffs

on places where the jobs loss is significant in

the local economy. For EDA grants, the thresholds that determine whether communities are

eligible could be refined; communities with a

combination of high unemployment and low

employment growth could qualify for development grants ahead of others, even with smaller

absolute numbers of dislocated workers.

Federal community economic development and

business assistance programs might encourage

and assist state and local applicants to direct

their support chiefly to the kind of enterprises

that are basic to the local economy, that create

economic activity and jobs in other sectors (i.e.,

have a high multiplier effect), and that sell

goods and services outside the local community; for example, a manufacturing plant or a

service enterprise that deals with more than

local customers would get more support than a

mom-and-pop dry cleaning plant.

If limited funds are more focused, EDA could

be encouraged to market its programs more

actively, particularly to defense dependent

communities; many communities find out quite

belatedly that EDA development grants exist.

Most defense-dependent states and cities are

attempting to cope with the threat of defense

cuts. However, they are not always aware of

approaches adopted by their counterparts in

other parts of the Nation. Congress could

encourage EDA or OEA to fund organizations

such as the National Governors’ Association

and the National League of Cities to operate

clearinghouses of information on economic

development and employment adjustment responses to the defense build-down.

There are also possibilities for better cooperation among the Federal agencies responsible for

economic development, or perhaps for reassigning

responsibilities:

● Relevant agencies in the Department of Commerce could be directed to coordinate their

activities with EDA and help improve the Title

13FOr ~xmple, ~c F~er~ G~ve~nme~t ~rOvi&d $20 ~lfion from 1971 to 1975+53 flion ~ 1991 doll~—k Wonomic development &NSiStMICe

to Wichit% KS during the defense build-down after the Vietnam War. This compares with the total of $50 million Con~ess has provided for aid to all

communities affected by the present defense build-down for the years 1991-93. (See ch. 6 for details).
50 ● After the Cold War: Living With Lower Defense Spending

IX program; for example, the National Institute

of Standards and Technology, which operates

the Federal Manufacturing Technology Centers, might advise EDA on how to support

manufacturing modernization as part of a

community economic development program.

At present, the responsibilities of DoD’s Office

of Economic Adjustment mostly stop with

helping defense-affected communities plan for

economic development. One alternative would

be to give OEA, rather than EDA, responsibility for implementing plans for defense-affected

communities, using the extra $50 million in

DoD funds appropriated for the purpose. OEA’s

advantages include a tradition of quick response to community calls for help, and long

experience in planning responses to military

base closures. It could be helpful to have one

agency involved in both planning and implementation of responses to defense cutbacks,

rather than having OEA hand off to EDA.

Traditionally OEA’s expertise and work has

been focused on helping-communities respond

to military base closings. It is less practiced in

dealing with community impacts from layoffs

in defense industries, but is gaining experience.

The impacts from the defense build-down in the

1990s will probably fall at least as heavily on

communities dependent on defense industry as

on communities dependent on military bases.

OEA could be encouraged to work more

actively with communities and regions dependent on defense industries.

Congress might also consider some adjustments

in policies specifically related to base closings.

Generally, the community impacts from base closings will be relatively moderate and the places

seriously affected will be few. However, a few

closings are large enough, and the communities

involved are dependent enough, that recovery could

be difficult, particularly if base reuse efforts do not

begin promptly. For these cases, the following

options might be considered.

. DoD’s policy of selling bases for full market

value could interfere with recovery in some

●

●

●

communities; some success stories of the past

depended on the community’s receiving the

property at less than market value. Congress

may want to direct DoD to develop a pricing

policy that takes community effects into account, transferring the base to the community at

reduced or even no cost where impacts from the

closing are likely to be substantial. OTA’s

calculations suggest that moderate to significant impacts might result from the closure of 10

to 17 bases in Rounds One and Two (ch. 6).14

Prompt action is important if communities are

to reuse military bases for economic development purposes. Congress might wish to encourage the military services to make base commaders aware that early action and cooperation with

local communities on base reuse are high

priority duties. Base commanders might be

instructed to schedule transfer of base property

before the base closes, if possible. This could

include a schedule for vacating sections of the

base and leasing them to the community on an

interim basis.

The law’s requirement that DoD give other

military services, other Federal agencies, and

representatives of the homeless rights of frost

refusal before communities can bid on base

property delays the disposal process. Congress

may wish to put time limits on the rights of

other bidders for the property, or perhaps move

communities toward the front of the line.

Current law can be interpreted to require that *

environmental cleanup of all the base property

be completed before the property can be

transferred. Because few bases will be completely cleaned up before closure, this makes

prompt disposal difficult. Congress may want

to allow DoD to transfer portions of bases that

are clean, or perhaps allow transfer of the entire

base so long as cleanup efforts have begun.15

DoD might also be directed to give priority for

cleanup to bases that are slated for closure.

Measures would have to be in place to ensure

that DoD remains accountable for the cleanup.

Finally, Congress may want to consider developing a Federal policy that would discourage the

ld~e Defense Au~o~tion Act as passed by the senate (S. 1507) contained a provision that would require DoD to transfer bases to be closed to

communities at no cos~ unless the community is not experiencing or will not experience a significant adverse economic impact from the closure. This

provision might have covered as many as 50 or 60 bases. However, the conference committee deleted the provision.

15A bi~ ~ tie 102d ConWmS, HR. 2179, p~posed to ~low Fede~ agencies to subdivide property for transfer, thus dlowhlg p~eh Of b=es

scheduled for closing to be transferred while other parcels await or undergo cleanup.
Chapter 2---Policy Issues and Options . 51

practice of competitive bidding by States and

localities to induce firms to locate new plants or

facilities within their area. From the national point of

view, this is at best a zero-sum game, and it can be

costly and destructive. Several approaches are possible, without infringing on states’ and localities’

traditional authority over land use decisions. For

example, Congress might encourage the Secretary of

Commerce to invite all the Directors of State

Departments of Commerce to a national meeting to

discuss the problems in providing inducements to

firms.16 The Secretary could work with the States on

an agreement to eliminate or at least limit the

incentives States provide to foreign firms. Similarly,

OEA and EDA could encourage communities,

especially larger ones, to focus their efforts on

helping new firms start and existing ones expand,

and reemphasize industrial recruitment as a solution

for all defense-affected communities.

DEFENSE COMPANY

ADJUSTMENT

Although some major defense companies consider their strategy in response to defense cutbacks

their business alone, there are possibilities for a

constructive government role in the transition of

defense companies into more commercial activities.

The potential is perhaps greatest for small and

medium-size companies. Many of these companies

already have some commercial customers, but need

to shift to more commercial production to survive.

Technical, marketing, or financial assistance from

government programs can help small companies

make the shift. Some government programs of this

sort already exist to help businesses, especially

manufacturing firms, improve their competitive

performance. The programs are mostly at the State

level, but few States have a very broad range of

well-established technical assistance services to

business. The few small programs at the Federal

level are barely established (none is more than 3

years old). Altogether, these programs would need

more resources and more focus if they are to make

a substantial contribution to helping defense companies expand their commercial business-as well as

helping firms in general make good use of technology to better their performance.

It is possible to envision government programs

that would help to develop technologies with both

military and commercial applications (dual use

technologies), and to strengthen industries that

could both supply defense needs efficiently and

compete successfully in world commercial markets

(dual use industries). The final report of this

assessment will consider whether and how such

programs might be developed. It will also discuss (at

least in general terms) programs that would advance

new, peacetime national goals while strengthening

the competitiveness of U.S. firms and industries.

The policy options outlined below for company

adjustment are only a first installment. Further

policy options for company adjustment, related to

the development of dual use technologies and

industries and to fulfillment of new national goals,

will appear in the final report of this assessment.

Government Programs for

Technology Diffusion

As a frost step, Congress may wish to add

resources and focus to existing programs for technology diffusion that could also help defense companies make the transition to more commercial

production. At the top of the list is a Federal-State

partnership. So far this is rudimentary. The National

Institute of Standards and Technology (NIST) program of assistance to State technology extension

programs (STEP), created in 1988, has so far been

tiny, with funding that has never exceeded $1.3

million per year. In November 1991, Congress

authorized the creation of a new, far more ambitious

program of support for State and local technology

extension efforts (the National Manufacturing Technology Extension Program), to be funded by DoD at

$50 million per year.17 However, the conference

committee on appropriations declined to fund the

program for fiscal year 1992. The purpose of the

program would be to improve the quality, productivity, and performance of U.S. manufacturing ‘ ‘foundation’ firms (under 500 employees); Federal

grants would match funding from State and local

governments and nonprofit organizations to support

technology extension programs that have government and industry participation. Options along this

line might include the following:

lblndummen~ t. newly es~blished fo~ign fiis Cm be a special competitive problem for Iongerestablished LJ. S.-OwrIed firms, which have benefited

from no such inducements.

IT~S ~rovislon was included in the Defense Authon=tim ~t.
52 . After the Cold War: Living With Lower Defense Spending

●

●

●

Broaden NIST support to State programs that

provide a wide range of industrial services to

improve companies’ performance. The services

might include consulting services to improve

manufacturing processes, grants to work with

universities in developing new products, and

help in finding new markets. NIST might give

encouragement and special consideration to

State programs that provide comprehensive

services to firms in a one-stop center (e.g.,

Pennsylvania’s Industrial Resource Centers).

Increase funding substantially for the Federal

Manufacturing Technology Centers.18

Extend technology and financial assistance to

help small firms- create cooperative networks

for purchase of equipment, joint training, bids

on large contracts, and marketing efforts. Some

small defense firms are already forming such

networks in an attempt to get into more

commercial business. Congress might also

consider legislation to explicitly remove antitrust restraints from cooperative networks of

small firms that band together to bid on

commercial orders.19

In addition to measures that maybe helpful to all

firms in improving their competitive performance,

including defense firms that want to move into more

commercial production, Congress may wish to

consider some options directly targeted toward those

defense firms making the transition:

●

●

●

In providing Federal support for State industrial

service programs, direct that priority be given

to firms wishing to convert to commercial

production. Federal funding on the order of $25

million per year would be enough to help States

serve as many as 5,000 to 20,000 fins,

depending on the level and kind of service.

Provide additional economic development funds

for defense-affected communities and direct

EDA to use the funds to help defense firms

expand into commercial markets; this might be

done by funneling the Federal money into

existing State programs, as described above.

Allow the DoD funds already provided for

defense-related worker and community adjust-

●

ment to be used proactively to avoid closures

and layoffs, in such activities as retraining of

the active work force and technical and management assistance for defense firms wishing to

move into more commercial production.

Add to the list of purposes for NIST’s Manufacturing Technology Centers technical assistance

in converting from defense to commercial

production.

Many of the options outlined above have the

broad aim of modernizing America’s manufacturing

firms and strengthening U.S. commercial competitiveness. At the same time, they could ease conversion and support dual use manufacturing abilities.

Another approach with the same aim might be a

government purchase and leasing system for up-todate production equipment. A public or quasi-public

entity could buy from U.S. producers such items as

computer numerically controlled (CNC) machine

tools or robots, and lease them at subsidized rates.

The system would have the dual advantages of

providing U.S. equipment builders with a reliable

purchaser, and promoting the use of modern machinery among U.S. manufacturing firms, especially

small firms that are less likely to do so on their own

than larger fins. In recent years, after the U.S.

machine tool industry went into precipitous decline,

the United States has limited imports of machine

tools on national defense grounds. A purchase-andleasing system could strengthen U.S. machine tool

builders in a positive way, and could be especially

appropriate in helping defense firms convert to

commercial production with better chances of success.

● Congress may wish to establish a leasing

company for modern production machinery

such as CNC machine tools, buying them from

U.S. companies and leasing them at subsidized

rates to small firm, or to defense firms

converting to more commercial production, or

possibly to any U.S. firm. The cost to the

government of such a program might rise from

about $5 million in the first year (assuming a

modest beginning) to a few tens of millions per

year for a mature program.20

18~e C~rlweSS ~u~Onz~ $15 fi~on for tie progr~ ~ fisc~ y- 1992, Up from $10 million in f~cid year 1991.

l~~s ~ be Iozd Conwss @R. 1~ ad S.4’79) would w~ti~st res~ts On Coopative production ventures, but are nOt explicitly dir@d

to small fins.

mA s- Prowm fi Japan l~ed or sold (on pref~enti~ fi~hent p~che terms) $s50 mi~on of quipment kl 1987. As- g that the

government paid 20 percent of that cost in subsidies and administrative expenses, the government cost would be $70 rnitlion a year.
Chapter 2--Policy Issues and Options ● 53

Government-Industry Partnership for

Technology Development

Another set of proposals might be useful for

defense firms that see possible commercial applications for technologies developed for the military, but

are unwilling to bear all the risks involved. The

general argument for government-industry partnership in developing generic or precommercial technologies is that some of these technologies promise

large benefits to society but are so risky, and the

payoff to individual firms is likely to be so small,

that industry will not undertake them without

government help.21

In 1988, Congress established the Advanced

Technology Program (ATP) under the direction of

NIST to take part in such government-industry R&D

partnerships. ATP can contribute a minority share,

up to half of the project costs. ATP’s first awards,

amounting to $10 million, were given in 1991 to 11

grantees (consortia and single companies), chosen

from 249 applicants. Congress provided ATP with

$35 million for the next round of awards (of which

$10 million will probably go for continued work by

the first round winners), and has increased ATP

funding for fiscal year 1992 to $47 million. Other

proposals in Congress would set up additional

government-industry partnerships for the development of critical technologies, under the aegis of

various agencies including DoD, the Department of

Energy, and the National Aeronautics and Space

Administration. 22 Still another proposal is to create

industry-led National Centers of Manufacturing and

Process Technology, to focus on testing and application of process technologies within specific fields,

such as advanced materials, electronics fabrication,

or general manufacturing .23

. If Congress adopts proposals before it for

substantially increased funding for governmentindustry partnerships for new technology de-

●

velopment, some defense firms will undoubtedly take advantage of them in projects to

convert military technologies to commercial

use.

24

To focus more tightly on development of

defense companies; military technologies for

commercial uses, Congress might establish

companion programs in the Departments of

Commerce and Defense that would contribute

government funds to industry-led ventures for

this kind of technology development. Technologies selected for development could be for

new or improved products or manufacturing

processes, and might be developed for dual use

as well as commercial applications.

Opportunities for adapting military technologies

to civilian uses could arise in connection with

commitment to new national goals. As noted, this

subject will be further explored in the final report of

this assessment, but a suggestion is offered here.

Transportation in the United States is ripe for new

technologies. The field of smart highways and smart

cars is especially promising. A tiny Federal program

to support R&D in intelligent vehicle and highway

systems is in existence, and is supplemented by State

programs, in particular California’s. Expansion of

this program might provide some exciting opportunities for defense companies, especially some of the

highly sophisticated aerospace companies concentrated in Los Angeles, to adapt their military

technologies to a new, important commercial use.25

Similar opportunities exist in electric vehicle manufacture, again particularly in the Los Angeles area,

where tough clean air laws effectively require that a

growing proportion of the city’s vehicles be electric.

The Surface Transportation Act of 1991 includes a

program to fund electric vehicle consortia that enencourages defense and aerospace firm participation. This program could be expanded if successful.

zlFor fificr discussion of this subjec~ see U.S. Congress, OffIce of Technology Assessment, Mah”ng Things Better, op. cit,, ch. 2; co~etin~

Econom”es, op. cit., ch. 2.

~see, e.g., the c~tic~ Technologies Act of 1991 (s. 1327) and Advanced Manufacturing Technologies kt of 1991 (S. 1328), w~ch were roUed

into the Defense Authorization ACG also, the High Performance Computing Act of 1991 (HR. 656), and the Manufacturing Strategy Act of 1991

(s.1330).

~s. 1330, theM~ufac~g s~ate~ Act of 1991. The centers would have to receive at least half their funds from sources that are not Federal, and

could, if successful, be funded for up to 10 years. A similar scheme, the Critical Technology Application Centers, was authorized by the Congress in

the Defense Authorization Act, but the conference committee on appropriations denied funding for the program.

~For emple, one of the f~s[.ro~d Am awmds went to a pmjcct for develop~g flat p~el tisplay tt?Ch.IIOIOgy tit WW fih~ in O@I1.

25~ese oppo~tieS may be more appropriate ad appeating to first ad ~ond tier subcontractors who SUpply components to prime aerospace

contractors than to the primes themselves (see ch. 7).
54 ● After the Cold War: Living With Lower Defense Spending

Tax Incentives for Conversion

Still another approach to encouraging or easing

conversion is to provide tax breaks for companies

making the transition to more commercial production. Possibly, companies making investments in

R&D to develop commercial products might be

allowed a tax credit for the expense; or a company

investing in new production equipment might be

allowed rapid depreciation of the investment or a tax

credit. In a previous report, Making Things Better,

OTA discussed in some detail the pros and cons of

tax expenditures for lowering the cost to business of

investing in new technology or production equipment. 26 There is some question as to the efficacy of

these tax measures. There is no question that they are

expensive, especially investment tax incentives.

And the problem of expense is aggravated at a time

of towering Federal budget deficits-plus a budget

agreement that requires reduced spending somewhere else, or compensating rises in taxes elsewhere, for every new spending program or tax

expenditure. However, there is plenty of evidence

that something is needed to lower capital costs for

U.S. companies, to stimulate long-term investments

in technology development and adoption. Moreover,

a complex mixture of tax stimuli has been used very

effectively in Japan, together with other measures to

keep capital costs to business low.

Tax incentives might be focused solely on defense

companies converting to commercial production on

grounds of the advantages to society, first, in

avoiding disruption to defense-dependent communities and loss of jobs, and second, by preserving R&D

teams that may be able to adapt military technologies to valuable commercial purposes. However, the

policy would give defense companies an advantage

that may be unfair to competing companies that have

never been in the defense business and have not

needed to convert. A tax incentive policy for

conversion is in any case a blunt instrument. It could

be used by more or less technologically adept

companies, in more or less defense-dependent communities, so that the desired social effects from

conversion would be diluted. If Congress wishes to

consider tax incentives to stimulate long-term investment, the potential benefits from making the

incentives broadly applicable are clearer than the

benefits from limiting the incentives to conversion

by defense companies.

One tax incentive, however, might be specifically

directed to encouraging the transfer of military

technologies to commercial applications. Defense

companies that do not have the interest or ability to

get into commercial production themselves might

still be encouraged to help. In the past, at least one

major defense company (GE’s Aerospace Division)

helped to form small startup companies to exploit

commercially military technologies the division had

developed; some of the entrepreneurs involved were

former GE managers and engineers. The help from

GE Aerospace took the form of licensing technology

on affordable terms and, in some cases, putting up a

sizable chunk of equity funds for startup financing.

Congress might consider giving favorable tax

treatment to investments by large companies in

startup companies formed for the purpose of developing commercial applications of military technologies; for example, the large company might be

allowed to deduct a portion of such investments

from taxable income. Alternatively, the same tax

treatment could be available to any large company

that provides financial assistance to a small entrepreneurial spinoff company, whether or not the technology involved was originally military.

Considering that many large defense companies

are in difficult financial straits, with heavy debt

loads and declining profits, even substantial tax

breaks might not induce them to invest in spinoff

enterprises. However, they should be in a good

position to identify military technologies they have

developed that have commercial potential and may

respond to tax incentives to license those technologies to others.

Intellectual Property Rights and

Development Cost Recoupment

Certain DoD practices or regulations that are

intended to make defense procurement cheaper or

easier to manage may be a serious impediment to

companies’ developing commercial applications of

military technologies. One of these is the DoD

regulation that requires companies to pay the department back for what it spent on a military technology

if the company sells a product based on that

~u.s. Co-ss, Office of Techolo~ Asscssmen~ Making Things Better, op. cit., February 1990, pp. 41-49 discusses OptiODS tO imprOW tie U.S.

fmcial environment for long-term investment in technology development and production equipment. .
Chapter 2-Policy Issues and Options . 55

technology to a non-DoD customer. Nothing in law ●

specifically requires DoD to demand a payback if a

company sells a commercial product based on

DoD-funded technology. It is inconsistent with laws

that encourage granting private companies intellectual property rights to technologies developed in

Federal laboratories, and forms a barrier to commer- ●

cialization of military technologies. Another problem for defense companies is DoD’s insistence on

taking control over data rights related to military

technologies for which DoD has paid all or part of

the development costs. If these proprietary data are

released to other companies, they could lose much of

their appeal for commercial development by the ●

originating company.

Congress may wish to consider the following

options to lower or remove these barriers:

Direct DoD to abolish its requirement for a

payback on its development

technologies if companies

commercial products based

gies.

costs for military

want to develop

on the technoloEncourage or direct DoD to work with companies on settlement of the data rights issue in

ways that protect legitimate government interests but also allow companies to keep data

rights secure, so that commercialization of the

technology is appealing.

Direct DoD to license technologies developed

for military purposes and paid for (partly or

wholly) by DoD funds on a royalty-free basis to

companies with plans to develop the technology for commercial purposes.
Chapter 3

Displaced Defense Workers
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

THE DIMENSIONS OF DEFENSE-RELATED DISPLACEMENT . . . . . . . . . . . . . . . . . . 59

Displacement in Defense Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Civilian Workers at the Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

THE COSTS OF DISPLACEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

ASSISTANCE FOR DISPLACED WORKERS: WHAT WORKS . . . . . . . . . . . . . . . . . . . . 67

Advance Notice and Early Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Cooperation Among Companies, Workers, Public Agencies . . . . . . . . . . . . . . . . . . . . . . . 70

A Full Range of Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Retraining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

PUBLIC PROGRAMS TO HELP DISPLACED DEFENSE WORKERS . . . . . . . . . . . . . . 74

Unemployment Insurance and the Employment Service ● . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Winker Adjustment and Retraining Notification Act (WARN) . . . . . . . . . . . . . . . . . . . . . . 75

Economic Dislocation and Worker Adjustment Assistance (EDWAA) ..............77

DEPARTMENT OF DEFENSE TRANSITION PROGRAMS FOR

CIVILIAN EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Advance Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

DOD-Wide Placement Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Severance Pay and Unemployment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Job Search Assistance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92

INDUSTRY EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

HOW ARE LAID-OFF DEFENSE WORKERS LIKELY TO FARE? ................97

Boxes

Box Page

3-A. Conversion and Retraining in the Japanese Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . 68

3-B. Civilian Transition at Colorado Army Bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Tables

Table Page

3-1. Projected Defense Spending and Employment Levels . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3-2. Employment in National Defense, 1966-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3-3. Defense-Related Employment by Industry, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3-4. Defense-Related Employment in Selected Non-manufacturing Industries, 1990 . . . 63

3-5. Defense-Related Employment in Selected Manufacturing Industries, 1990 . . . . . . . . 63

3-6. Occupational Distribution in Defense Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

3-7. Planned Reductions in Force at Naval Shipyards as of 1991 . . . . . . . . . . . . . . . . . . . . . 67

3-8. Unemployment, UI Covered Unemployment, and UI Coverage . . . . . . . . . . . . . . . . . 75

3-9. JTPA Title III (EDWAA) Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

3-10. Enrollments and Outcomes in JTPA Title III (EDWAA), Program Years

1983-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

3-11. Provision of EDWAA Services in Selected Defense Layoffs . . . . . . . . . . . . . . . . . . . . 80

3-12. Selected Defense Layoffs: Worker Services Provided . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

3-13. Workers’ Experience Following Selected Defense Layoffs, 1990-91 . . . . . . . . . . . . . 98
Chapter 3

Displaced Defense Workers

INTRODUCTION

Jobs are at the heart of concern over adjustment to

declines in defense spending. As with adjustment

problems generally, employment concerns are most

acute at the regional and local levels—in particular

communities that bear the brunt of cutbacks in

particular defense programs or of local military base

closings. At issue are not only the hardships for

individual job losers, but also losses to the economy

from interruptions in using the talents and resources

of trained, experienced people. Moreover, from the

standpoint of equity, if displacement is part of the

price for having a dynamic economy, then it seems

fair for society to share in paying the price by

providing assistance to displaced workers.

Reemployment for workers losing defense jobs

could take several forms. Companies that have

commercial as well as military business (e.g.,

manufacturers of aircraft and major components)

might switch employees to the commercial side.

Defense companies might change over to commercial production and employ some of their workers in

the new enterprise. Communities might devise

various ways to encourage the startup or expansion

of businesses that offer productive new jobs. These

possibilities are considered in following chapters of

this report, on adjustment of companies and communities to defense spending cutbacks. This chapter

examines the situation of people who actually lose

defense jobs and have no immediate prospect of

reemployment. It considers the probable extent of

displacement due to defense cutbacks, and discusses

the effectiveness of programs to help displaced

workers find or train for new jobs. It concentrates on

the prospects for defense industry workers and

civilian employees of the Department of Defense

(DoD), leaving for the next two chapters engineers

and active duty military personnel.

THE DIMENSIONS OF DEFENSERELATED DISPLACEMENT

About 6 million people were employed directly or

indirectly in national defense in 1991. Of these,

some 2 million were active duty military service

men and women, over 1 million were DoD civilian

employees, and 2.9 million were workers in civilian

defense-related industries, employed by prime contractors, subcontractors, or suppliers of goods (e.g.,

steel, food, semiconductors) or services (e.g., air

travel, insurance, hotels).

OTA estimates that by 1995, defense employment

could fall to between 4.6 and 5.0 million, eliminating 1.0 to 1.4 million positions, or an average of

250,000 to 350,000 a year. Some 396,000 positions

would be eliminated in the active duty military

service, 104,000 in civilian DoD employment, and

from 530,000 to 920,000 in private defense-related

employment (table 3-1). The lower figures for

positions lost (1.0 to 1.1 million) are based on the

President’s budget proposal for fiscal year 1992,

which projected a 19 percent reduction in defense

outlays from 1991 to 1995.1 The higher figures (1.3

to 1.4 million) are based on a trajectory that would

cut defense outlays to $169 billion (in 1991 dollars)

or 41 percent, from 1991 to 2001.2 Between 1991

and 2001, defense employment might drop from 6

million to as low as 3.5 million later.

There is no guarantee that the rate of decline in

defense-related employment will be gradual and

evenly paced. First, estimates of defense cuts place

more employment loss at the beginning of the

decade than at the end. Assuming the faster paced

reduction, an average of 330,000 to 355,000 positions a year will probably be lost between 1991 and

1995, but the rate is expected to slow later in the

decade, with losses of 150,000 to 190,000 positions

a year. Second, if major defense firms become

convinced of the reality of a steep continuing slide

in contract money, with no prospect of new proIWi~~ tie two ~Stiwt6, there tie ~. mnges of numbe~ for tie num~r of positions lost in indus~, The highm number &lSUKIleS a linear

relationship between the percentage decline in DoD purchases and the percentage decline in defense industry jobs. The lower number assumes a slower

decline in jobs and is based on a regression model of the historical relationship between defense industry jobs and the value of defense purchmes.

Zwlllim Ka~fmu G/a~no~~, peres~oi~ and u,S, D#ense Spending (Washington, DC: The Brookings Institution 19~); William Kauffman and

John Steinbruner, Decisionsfor Defense (Washington, DC: The Brookings Institution 1991).

–59–

305-199 - 9? - 3
60 ● After the Cold War: Living With Lower Defense Spending

Table 3-l-Projected Defense Spending and Employment Levels

Defense Total

Total defense Active duty DoD industry defense

outlays (051) military civilians employment employment

Year (billions) (thousands) (thousands) (thousands) (thousands)

1991 DoD estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287.5 2,049 1,044 2,900 5,993

1995 DoD estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $235.7 1,653 940 2,280 to 2,370 4,873 to 4,963

Loss from 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51.8 396 104 530 to 620 1,030 to 1,120

Percent loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18% 19“/0 10% 18 to 21940 17 to 19“/0

1995 faster paced reduction . . . . . . . . . . . . . . . . . . . . . . . . $218.0 1,653 940 1,980 to 2,080 4,573 to 4,673

Loss from 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.5 396 104 820 to 920 1,320 to 1,420

Percent loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24% 19% 10% 28 to 32%. 22 to 24%

2001 faster paced reduction . . . . . . . . . . . . . . . . . . . . . . . . $168.6 1,340 697 1,500 to 1,620 3,537 to 3,657

Loss from 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118.9 709 347 1,280 to 1,400 2,336 to 2,456

Percent loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41% 35% 33% 44 to 48%. 39to41“h

Loss from 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.4 313 243 360 to 580 916 to 1,136

Percent loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23% 19% 260/o 18 to 28% 20 to 24%

NOTES: All dollars are constant 1991 dollars. Total employment in this table includes DoD civilian and military personnel stationed overseas.

SOURCES: DoDestimates are from theofficeof the Assistant %cretaryof Defense (PublicAffairs), WY 1992-93 Department of Defense Budget Request,” News

Release No. 52-91, Feb. 4, 1991, except defense industry employment, which is estimated by OTA based on DoD projection of defense

purchases. Faster pace alternative budget estimates are from William Kauffman, G/asrrost, Perestrokaand U.S. Defense Spand/ng(Washington,

DC: Brookings Institution, 1990) and William Kauffman and John Steinbruner, Deu”sions for Defense (Washington, DC: Brookings Institution,

1991 ). The 2001 alternative uses projections of troop and civilian personnel levels given by Kauffman in Glasnost, %restroka and U.S. Defense

Spending (Kauffman’s scenario D). Industry employment levels estimated by OTA from budget estimates given by Kauffman. The 1995 budget

estimates are from Kauffman and Steinbruner Decisions for~efense, and reflect savings through reductions in procurement of new systems and

a reduction in nuclear forces, assuming no additional reduction in the estimates of marpwer given by DoD. Industrv. emdovment . . for 1995 was

estimated by OTA based on level of defense purchases.

grams, they may decide to downsize quite radically

and suddenly. Share prices of companies that shed

employees often improve, so some firms may adopt

this as an effective strategy for raising funds and

beating out the competition.

The numbers of defense positions at risk appear

rather moderate on a national scale. Peak year losses

are not likely to exceed 400,000 positions; in 1991

that was about one-third of 1 percent of the U.S.

civilian work force of 119 million. In addition, the

number of defense positions eliminated will be

larger than the number of defense workers who will

actually be displaced. Perhaps as much as 75 percent

of the decline in DoD military personnel will come

from attrition as the armed forces simply accept

fewer new enlistees (see ch. 5). DoD expects to

handle much of the decline in its civilian personnel

through natural attrition and a hiring freeze. In

defense-related industry, some of the people whose

positions are lost may never actually be laid off but

will take up a new job in the same company, as the

company replaces military with civilian customers.

Some will not even see it as a “new” job because

they will be doing exactly the same work (e.g.,

checking in customers at a hotel), but the wages and

salaries that support their job will no longer come

from defense. Offsetting this reduction, however, is

some likely loss of pay-generated jobs in the

relatively small number of communities that are

hard hit by cuts.

Assuming the fast-paced reduction, it is possible

that defense-related workers who will actually lose

their jobs will number about 970,000 to 1.1 million

in the 4 years 1991 to 1995, or 240,000 to 275,000

per year.

3 This assumes that one-half of the loss of

civilian DoD positions will be actual job losses,

one-quarter of military positions, and all of the

3~s ~~ugh ~S~te iS illuS~tive ~d sho~d not be &&en t~ liter~ly. It ~cludes an es-e of 99,000 mih@ry personnel and 52,000 civilians

losing their jobs due to involuntary separations and reductions in force. It is not likely that all DoD industry position losses will translate into job losses,

especially considering the fact that the model that calculates defense industry jobs includes jobs not just in large prime contractors, but in a long chain

of subcontractors and suppliers. However, the OTA estimate assumes that loss of pay-generated jobs in highly defense-dependent communities will be

an offsetting factor so that the number of defense industry job losers will be roughly equal to positions lost. ‘I’he estimate for job loss from private defense

industries is 820,000 to 920,000. The total for job loss in the three categories is about 970,000 to 1.07 million. The estimate for job loss 1991 to 2001

is 177,000 military, 173,000 DoD civilians, and 1.3 to 1.4 million for private industry, for a total of 1.65 to 1.75 million jobs.
Chapter 3--Displaced Defense Workers ● 61

Table 3-2—Employment in National Defense, 1966-91

DoD military DoD Defense Total

active duty civilian industry defense

employment employment employment employment

Year (thousands) (thousands) (thousands) (thousands)

1966 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,094

3,377

3,548

3,460

3,066

2,714

2,323

2,253

2,162

2,128

2,083

2,077

2,067

2,032

2,073

2,101

2,130

2,163

2,184

2,207

2,233

2,244

2,209

2,203

2,144

2,049

1,254

1,399

1,406

1,391

1,364

1,189

1,159

1,099

1,110

1,078

1,046

1,022

1,016

991

991

1,019

1,028

1,064

1,085

1,126

1,112

1,133

1,105

1,117

1,073

1,044

2,640

3,100

3,174

2,916

2,399

2,031

1,985

1,850

1,860

1,800

1,690

1,730

1,765

1,860

1,990

2,085

2,310

2,530

2,785

3,100

3,315

3,365

3,310

3,295

3,150

2,900

6,988

7,876

8,128

7,767

6,829

5,934

5,467

5,202

5,132

5,006

4,819

4,829

4,848

4,883

5,054

5,205

5,468

5,757

6,054

6,433

6,660

6,742

6,624

6,615

6,367

5,993

SOURCE: Department of Defense, Office of the Comptroller tVationa/ Defense 8udget Es?irnates forFY 1992

(Washington, DC:1991)

private sector positions. 4 For these years, that would

add about 12 to 14 percent to the decade-long

average of 2 million workers a year losing their jobs

through no fault of their own but because of plants

closing or moving away, cutbacks in production, and

slack works While these numbers do not appear

overwhelmingly large, that many job losses could be

a seriously aggravating factor in a weak or recessionary national economy. Numbers and concentration

of displaced workers are a more important factor in

regional or local economies. Even when the national

economy is growing at a healthy pace so that

defense-related displacement has little overall effect, those losses can still hurt seriously in places

where many layoffs are clustered.

Displacement in Defense Industries

Some of the employment loss from the defense

build-down has already happened. As shown in table

3-2, from 1987, the high point of defense industry

employment in the buildup of the 1980s, to 1991,

some 416,000 defense-related positions in private

industry were lost.6 The defense cutbacks called for

in the President’s budget would result in the

41tiS~SS1ble~t~~ne~rtW~ pfic~my~s disp~cement co~ds~geupwmd,p er~ps astigh~~,ooo,butthis wouldmeanthatdisplacement

inotheryears overthe decade would be correspondingly less.

5S~d1es of tie numbers ad experiencfi of displac~ workers rely mostly on data provided by the bieti Displac~ WOfi~ S~eY conduct~ bY

the Bureau of the Census (Department of Commeme) for the Bureau of Labor Statistics (BLS) (Department of Labor). OTA reviewed findings fimn

the January 1984 survey in U.S. Congress, OffIce of Te&nol@y Assessmen4 Technology and Structural Unemployment: Reemploying DisplacedAdults

(Springfield, VA: National Technical Information Service, 1986). Later surveys were conducted in January of 1986, 1988, and 1990 each covered

experience over the previous 5 years, starting in 1979 and going through 1989. The numbers of people losing their jobs each year for the causes mentioned

were greater in the earlier years of the decade, which included the deep 1981-82 recession, and fewer later (varying from 2.2 million to 1.7 million per

year). In its analysis, BLS defines as “displaced” only those workers who held the job they lost for 3 years or more and were aged 20 or older. That

produces a number of displaced workers about half as large.

@TA’s figures for employment in private defense industries in 1990 and 1991 are based onDoD estimates made in 1989. Those estimates are based

on the same methodology used in earlier years. New estimates released by DOD in 1991 use a different methodology that makes comparisons with earlier

years impossible, DoD now estimates that there were over 3.1 million private sector defense-related jobs in 1991. In order to maintain comparability

with estimates for earlier years, OTA has used the estimates DoD produced in 1989 using the older methodology.
62 ● After the Cold War: Living With Lower Defense Spending

Table 3-3-Defense-Related Employment by Industry, 1991

Industry as

Defense-related percent of total

Industry employment defense employment

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,638,000

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,000

Transportation, communication and utilities . . . . . . . . . . . . . . . . . . 191,000

Service-producing industries

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591,000

Wholesale and retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,000

Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000

Agriculture, forestry, and fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,000

57%

3

1.5

7

20

10

2

1

100%

SOURCES: Industrial sector shares of total defense employment are for 1985, the latest year available, and are taken

from David K. Henry and Richard P. Oliver, “The Defense Buildup, 1977-1985: Effects on Production and

Employment,” Month/y Labor Review, August 1987. These shares were applied to 1991 total defense

employment from Department of Defense, Office of the Comptroller, National Defense Buc@# Estimates

for /%’ 7992, (Washington, DC: March 1991), p. 151.

elimination of another 530,000 to 640,000 positions

between 1991 and 1995, A faster paced reduction

could eliminate from 820,000 to 920,000 positions

(table 3-l).

A closer look at these figures shows why the

number of job losers is likely to be less than

positions lost. Estimates of defense industry employment are derived from input-output models of

the economy and thus include not just firms that sell

directly to DoD but also subcontractors and a whole

host of firms that provide goods or services, For

example, bank workers handling transactions for a

big defense contractor are counted in defense

industry employment. Whether such people will lose

their jobs when defense companies shrink or close

down depends entirely on whether the banks can find

other customers to make up the lost business. And

that does not depend on the bank’s venturing into a

new business, but on whether the local and national

economies are robust enough to support the generation of new Firms that will take the place of the old

defense firms in buying bank services.

Thus, when considering the fate of these 2.9

million workers, it is appropriate to view their level

of risk of layoff on a continuum, with workers in

some industries (e.g., missiles, submarines, tanks) as

highly vulnerable from defense cuts, and workers in

other industries (e.g, restaurants) as less vulnerable.

For example, most of the 590,000 defense-related

workers employed in mining, agriculture, wholesale

and retail trade, finance and insurance, and transportation, communication, and utilities (table 3-3) are

not doing jobs specific to defense production.7 In the

manufacturing sector, where 57 percent of defenserelated workers are employed, some industries also

make products that are relatively adaptable to either

defense or civilian commerce. For example, the steel

that goes into a tank might equally well be made into

a truck (assuming a customer can be found). So long

as other businesses arise to take the place of defense

business, firms in these industries can provide the

same services, and employ the same people, with

very little disruption.

Without close, detailed analysis of the industries

that contribute to defense production, it is not

possible to make a quantitative estimate of the jobs

that are not just defense-related but defense-specific.

The point that can be taken from table 3-4 is that

some substantial portion of these jobs are equally

adaptable to the defense or civilian sides of the

economy.

However, jobs in some industries are involved

directly in defense work (table 3-5). For example,

the tank itself has no customer other than the DoD or

the defense ministry of a foreign country. Similarly,

there are business services, such as engineering

services for the design of weapons systems, that are

tied just as tightly to defense production as anything

7~eSe ~Stimtes ~based on ~ysis done by David Henry, Us. Department of commer~, and Mctid Oliver, U.S. Department Of Labor, of

defense production and employment by sector. David K, Henry and Richard P. Oliver, “The Defense Buildup, 1977-1985: Effects on Production and

Employment,” Monthly Labor Review, August 1987.
— -.

Chapter &-Displaced Defense Workers ● 63

Table 3-4-Defense-Related Employment

in Selected Non-manufacturing Industries, 1990

Defense as

Defense-related

Industry

percent of total

employment industry employment

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 2.2%

Educational services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,000 6.8

Eating and drinking places . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,000 1.4

Hotels and lodging places . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 87,000 5.5

Motor freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,000 4.6

Personnel supply services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000 2.5

Maintenance and repair (nonresid) . . . . . . . . . . . . . . . . . . . . . . . . . . 37,000 5.2

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 2.7

Total, all non-manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,354,000 1.6%

SOURCES: Data on defense employment by industry is from Data Resources, Inc., cited in Linda Levine, “Defense

Spending Cuts and Employment Adjustments” (Washington, DC: Congressional Research Service, June

27, 1990). DRI estimates of 1989 employment by industry were reduced by 8 percent to adjust for lower

total defense employment in 1990. Data on U.S. employment by industry are 1990 annual averages from

the Department of Labor, Bureau of Labor Statistics, Errrp/oymentandEarrtings (Washington, DC: Bureau

of Labor Statistics, May 1991) p. 237 and Department of Labor, Bureau of Labor Statistics, unpublished

data.

Table 3-5-Defense-Related Employment in Selected Manufacturing Industries, 1990

Defense U.S. defense share of

Industry employment employment total industry jobsa

Radio and TV communication equipment . . . . . . . . . . . . . . . . . . . . 194,000 460/0

Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,000 44

Shipbuilding and repairing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,000 98

Guided missiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 90

Aircraft parts and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 49

Aircraft engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000 43

Ammunition, excluding small arms . . . . . . . . . . . . . . . . . . . . . . . . . . 29,000 77

Other ordnance and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 68

Tanks and tank components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 75

Total, all manufacturing . . . . . . . . . . . . . . . . . . . . . . . .. ............3,150,000

aThiS is the Share of total industry jobsdependent on DoD purchases. lt does not include the share of jobs dependent

on foreign military purchases. For example, 75 percent of jobs in the manufacture of tanks and tank components were

dependent on DoD purchases, while the rest depended on foreign military purchases.

SOURCES Defense share of total employment by industry are OTA estimates based on defense share of output by

industry, Department of Commerce, unpublished data, February 1991, and estimates by Data Resources,

Inc. cited in Linda Levine, “Defense Spending Cuts and Employment Adjustments” (Washington, DC:

Congressional Research Service, June 27, 1990). Data on total U.S. employment by industry are 1990

annual averages from Department of Labor, Bureau of Labor Statistics, ErnP/oyrnenf and Earnings

(Washington, DC: February 1991 ) and unpublished Bureau of Labor Statistics Data.

in manufacturing. To avoid layoffs from defense

spending cuts, these firms would have to remake

themselves to serve commercial customers.

Some industries may be able to do this more easily

than others, as some complete weapons systems

have a good deal in common with commercial

counterparts, ships and airplanes being the leading

example. It seems that there would be at least some

opportunity for workers displaced from these defense industries to get jobs making similar commercial products, for example, to move from building

Navy destroyers to building oil tankers. However,

commercial shipbuilding in the United States has

almost vanished, having fallen victim to lower-cost

competition in other countries, especially Japan and

Korea.

The U.S. commercial aircraft industry, on the

other hand, is doing well. Despite a falloff of orders

during the Persian Gulf War and the 1990-91

recession, both U.S. producers of large commercial

jet transports (Boeing and McDonnell Douglas) had

large backlogs of orders in 1991. Even while jobs are
64 ● After the Cold War: Living With Lower Defense Spending

vanishing in the defense-related aircraft and parts

industry, total output in the industry may well rise in

the mid- 1990s because of growth in the commercial

side of the business. This is not to say that workers

making military aircraft will not be displaced. Many

have been already. But if total aircraft industry

output rises as projected in the next few years, some

defense aircraft workers may eventually find new

jobs in the commercial industry, especially if they

are willing to move to where the jobs are. Even so,

this shift will not be as easy as the switch from one

military aircraft company to another in the balmy

days of the defense buildup. For example, as many

as 2,000 of the 6,600 workers laid off from Rockwell

in Palmdale, CA when B-l B production ended

between 1986 and 1988 simply “crossed the tarmac ’ in the same sprawling military production

complex and went to work for Northrop on the new

B-2 bomber.

Workers making electronic goods and components for the military may also find new jobs in the

commercial electronics industry, since its output,

too, is expected to rise in the next few years. Some

electronic components are in fact similar for military

and commercial applications, and whether there is

displacement among companies making these goods

depends entirely on economic growth in the commercial side of the industry (the same situation as in

services such as banking or versatile goods such as

steel). 8 Even electronics companies that specialize

in making final products for the military might be

able to switch to commercial products, assuming

demand is strong enough and assuming company

managers know how to produce for, and sell to,

commercial customers (see ch. 7).

The upshot is that estimates of 820,000 to 920,000

defense industry positions to be lost over the 4 years

1991-95 overstate the amount of actual displacement to be expected in those industries. However,

the estimates do not take into account the ripple

effects on community employment due to loss of

jobs generated by the pay of displaced defense

industry workers. These ripple effects could be

serious in communities that are exceptionally dependent on defense and do not soon find other

sources of economic growth.

Two factors that distinguish displaced defense

industry workers from displaced workers in general

affect the former’s reemployment prospects. On the

one hand, they could find it more than ordinarily

difficult to find good new jobs because defense

employment is so concentrated in manufacturing.

U.S. manufacturing employment has been declining

since its peak at 21 million in 1979; it was about 19.1

million in 1990 and dropped to 18.4 million in the

recession year of 1991.9 This means that, on the

whole, manufacturing jobs outside defense could be

scarce. It is not easy for displaced manufacturing

workers, in particular blue-collar workers, to switch

to comparable service sector jobs. For production

and other nonsupervisory workers (i.e., blue-, pink-,

and white-collar workers who are neither professional nor managerial), pay in the service sector is

lower than in manufacturing jobs. Moreover, the

education and skills required, the work environment,

and the whole culture of many service sector jobs are

different. Experience with displaced workers generally shows that those displaced from manufacturing

take longer to find new jobs than those losing jobs

in service industries.10

The loss of manufacturing jobs may aggravate the

growing income inequality as family-wage manufacturing jobs are replaced by lower wage service

jobs. This appears to be happening in Los Angeles,

where for the last 10 years high- and low-paying jobs

have increased while those in the middle have

declined. Because the majority of defense jobs in

Los Angeles pay middle wages, defense cuts may

worsen the inequality and create a community

increasingly polarized between haves and havenots. ll Los Angeles has a large and growing

population of immigrants, many of whom begin in

low-skill jobs. Without the good manufacturing jobs

provided by defense (or other industries), opportunigHowever, for other electronic component makers, DoD xments regmb d~abfiitys @O rmance, and design make transfer to commercial

markets more dMcuh.

%J.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, September 1991, table B-1.

l~or ~~ple, data from the 1988 displaced workex survey show that 1 to 5 YWUS titer hyoff, unemployment rates for manufacturing workem were

15.9 percent as compared to 13.8 percent overall and 11.5 percent for workers unprofessional services. (Diane E. Herz, ‘Worker Displacement in a Period

of Rapid Job Expansion: 1983-87, ” Monthly Lubor Review, vol. 114, May 1990, table 3.) In 1990, 29 percent of displaced manufacturing workers were

either unemployed or no longer in the labor force as compared to 21 percent of displaced service workers. (Diane E. Hew “WorkerDisplacement Still

Common in the Late 1980s,” A40nthly Lxzbor Review, vol. 115, May 1991.)

IIbS ~gel= Economic Rowdhble, “Attachment 8: Employment and Wage Trends in Ims Angeles County,” Feb. 22, 1991.
— ————— ———.

Chapter 3-Displaced Defense Workers ● 65

ties for the poor and immigrants to better themselves

will become scarcer.

On the more positive side, there is some evidence

that defense industry workers have more education

and are more highly skilled than U.S. workers in

general, and this bodes well for their prospects.

Studies of displacement agree that professionals and

skilled craftworkers find jobs sooner and take lesser

pay cuts after displacement than semiskilled and

unskilled blue-collar workers .12 One study, for

example, found that, on average, displaced professionals had only a 3 percent drop in reemployment

earnings (adjusted for inflation) and skilled blue-

-collar craftworkers had a 10 percent drop, while

semiskilled and unskilled blue-collar operatives had

18 to 22 percent declines. Managers, however, were

an exception; despite generally high levels of

education, they had a 16 percent decline in average

earnings after displacement.13

Defense industries have greater concentrations of

engineers, scientists, technicians, and other skilled

workers than U.S. industry in general, Table 3-6

shows the national picture. Other evidence on the

same point comes from local studies. For example,

a report to the Los Angeles Economic Roundtable

found that 24 percent of defense workers in the area

were in professional or technical specialties, compared to 16 percent of the Los Angeles work force in

general. The same study found that defense workers

were much less likely than the average Los Angeles

worker to be classified as low skilled (33 vs. 44

percent) .14 In five avionics defense firms on Long

Island, NY, 34 percent of the workers were engineers, compared to 3 percent in the area generally .15

And in Massachusetts, 57 percent of workers in

defense-related manufacturing firms had some college, compared to 43 percent in other manufacturing

firms. l6

None of this is meant to play down the difficulties

many displaced defense industry workers will face.

Managers in particular, as well as less skilled

blue-collar workers, could be in for some tough

times. Managers and professionals are making up an

increasing share of displaced workers, in large part

because displacement has declined in blue-collar

occupations over the decade, but also because

automation and streamlining of management tasks is

creating more displacement in the managerial ranks. 17

According to one report, five-sixths of the Nation’s

leading 1,000 corporations cut back on managerial

staff in the 5 years 1986-90. As a result of the

widening layoffs and recession, laid-off executives

were taking more than 8 months to find a new

position in 1991, compared to 3 months in 1988.18

Outplacement officials at GE Aerospace in

Pittsfield, MA reported that low- to mid-level

managers are having the most problems getting

reemployed. 19 They said that displaced engineers

and higher level managers have the credentials and

education that allow them to move to other firms,

and that their blue-collar workers have factory floor

skills and lower wage demands. But their lower level

managers without college degrees and with skills

acquired for GE’s specific needs are not easily

transferred to new jobs.

Civilian Workers at the Department of Defense

DoD employed over 1 million civilian workers in

1991. Their jobs run the gamut from pipefitters in

naval shipyards to secretaries and managers in the

Pentagon. From 1991 to 1995, DoD plans to reduce

civilian employment by about 104,000, for an

annual average reduction of 26,000. About threelzForarevle. of many .studiM of displacement, including ~~1~ from tie BLS biefi~ ~eys, *U.S. Congress, Offi@ of Technology Assessment,

Technology and~tructwaf Unemployment, op. cit., ch. 3. See also Michael Podgursky and Paul SwaiIU ‘Job Displacement and Earnings Imss: Evidence

from the Displaced Worker Survey, ” Indusm”aI and bbor Relations Review, vol. 41, no. 1, October 1987, and “Duration of Joblessness After

Displacement, “ Industrial Relations, vol. 26, no. 3, 1987.

lgMichael Po@ursky and %UI SWti “Labor Market Adjustment and Job Displacement: Evidence from the January 1984 DispIaced Worker

Sumey, ” report prepared for the U.S. Department of Labor, Bureau of International Affairs, January 1986.

14Je~m R. Welch, Robirt ~w, ~d ~is T-M, ‘‘~fertse Indus~es, Workem and comm~ties in LOS Angeles County, ” a University Of

Southern California research report prepared for the Ims Angeles Economic Roundtable, September 1990.

15peMl M. Kamer, ‘‘Maxirnizing the Potential of Ung Island’s Defense Sector in an Era of Change, ’ Long Island Regional Planning Board, 1988.

16 Mm5achu5et~S Dep~ent of Employment and Training, Field Research Service, ‘ ‘Defense hdus~ Profile, ” June 1989.

iTFrom 1979 t. 1983, 1‘j percent of tie workers di5placed were m~gms and prof~sio~s, but from 1985 to 1989 their m&s accounted for 20 percent

of displaced workers. (l&z, “Worker Displacement Still Common in the Late 1980s, ” op. cit.)

1

8 David Kirkpatrick, “The New Executive Unemployed, ” Forrune, Apr. 8, 1991.

l~ntewiews with OTA staff, Mmch 1991.
66 ● After the Cold War: Living With Lower Defense Spending

Table 3-6-Occupational Distribution in Defense Industries

Defense Total U.S.

Total category employment, 1985 employment, 1990

Administrative support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9% 16.2%.

Professionals, technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 17.3

Engineers, scientists, and technicians . . . . . . . . . . . . . . . . . . . 10.3 3.9

Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 12.8

Machine setters and operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 6.5

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 13.6

Handworkers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 1.7

Precision production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 3.3

Mechanics, installers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 4.2

Helpers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 0.2

Transportation operators.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 4.2

Marketing, sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 11.9

Construction trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 4.1

Another . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.7 20.5

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.O% 100.O%

SOURCES: Dataonoccupational distribution ofdefenseemployment are from DavidK.Henryand RiehardP.Oliver,

“lheDefenseBuildup,1977-85:Effectson Productionand Employment:'Month/yLabar/?ev/ew,August

1987Dataondefenseenginawsjscidsts,andta&nkaa . nsarefmrn @MrnentofDefense,l@klctedLMwlse

Purchases Detai/ by State and /n&sfry, fY 1997 to IV f997(Washington, DC: DoD, November 1991).

Data on total U.S. employment by occupation are 1990 annual averages from U.S. Department of Labor,

Bureau of Labor Statistics, Employment and Earnings, April, 1991.

quarters of these jobs are expected to disappear

because of defense cutbacks, with the other onequarter coming from improved management.20These

numbers do not include the 27,800 positions to be

abolished through Round Two military base closures.

21 Most of the job losses from Round TWO, as

well as Round One, will not occur until after 1995.

Given the significant decline in DoD employment

and only limited growth in other government jobs, it

might seem that DoD workers are in for a hard time.

However, DoD expects natural attrition to exceed

the number of positions eliminated, thus reducing

the need for RIFs (reductions in force). In recent

years, DoD has averaged 100,000 voluntary separations (retirements, quits, and transfers out of DoD)

per year.

22 However, since the DoD hiring freeze

instituted in late 1989, it appears that attrition may

continue to be greater than positions lost.23 The

target for DoD civilian employment was 1,052,000

by the end of fiscal year 1991, but because of

attrition the number was only 1,044,000.

While the aggregate numbers are favorable, individuals in some places and some occupations will

still face displacement. For example, all eight naval

shipyards are scheduled for RIFs in 1991, further

significant cuts are expected throughout the 1990s

(table 3-7), and at least one yard, the Philadelphia

Naval Shipyard, is slated to close in the mid- 1990s.

Similar cuts are planned for Air Force maintenance

and repair stations. Many military bases are going to

be closed. In certain areas and in some kinds of jobs,

attrition is not likely to keep up with staff reductions.

THE COSTS OF DISPLACEMENT

As OTA has concluded in earlier studies, worker

displacement is a serious problem that calls for a

coordinated public and private response. 24 Although

many displaced workers get right back to work with

little trouble, many others, lacking the background

m’ ‘Pentagon Repofi Progress of Management Improvements, ’ News Release, Office of the Assistant Secretary of Defense for Public Affairs, Apr.

25, 1991.

zlRomd Two base clos~es will rtidt in losses of 50,951 positions at the closing or realigned bases. However, rt%eivhg bases are expected to gti

23,155 of these positions. (This number may be less as the Defense Management Review process elimina tes more positions.) (Defense Base Closure

and Realignment Commission Recommendations, Closure and Realignmerrt Impacfs by lnsfullation and State, Washington DC: July 8, 1991.)

22DaQ provid~ by tie Assistant Secretary for Force Management ad pmsome~.

ZDOD units may add two external hires for every five sepmatio~.

‘U.S. Congress, Office of Technology Assessment Technology arid Structural Unemployment, op. cit.; Plant Closings: Advance Notice and Rapid

Response (Springi3eld, VA: National Technical Information Service, September, 1986).
Chapter 3-Displaced Defense Workers ● 67

Table 3-7—Planned Reductions in Force at

Naval Shipyards as of 1991

Shipyard RIFs

Mare Island . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long Beach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Norfolk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pearl Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Puget Sound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Portsmouth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Charleston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,100

1,000

800

1,200

1,000

1,400

1,200

1,000

8,700

SOURCE: Departmentofthe Navy, 1991.

or skills that are in demand, go through long spells

of unemployment or have to settle for poorly paid

dead-end jobs. 25A small but significant minority of

displaced workers can become discouraged and

leave the labor force entirely,26 and the longer

workers are out of the labor force, the less likely they

are tormenter it. Extended unemployment represents

lost income for both society and the individual as

national purchasing power declines. Moreover, the

costs of unemployment compensation to displaced

workers (and welfare payments if unemployment is

lengthy) are borne indirectly by society as a whole.

The business tradition in the United States is to

view employees as a variable rather than fried cost.

More than in other advanced industrial nations, U.S.

firms are likely to let workers go when technology

or business conditions change, rather than try to find

other work for the employees within the firm. In

contrast, large Japanese companies customarily take

responsibility for maintaining jobs for their workers

through business declines, after providing retraining

for new tasks (see box 3-A). In many European

countries, both law and custom encourage companies to keep their work force employed if possible.

In the United States, however, legal requirements

that stand in the way of flexibility in hiring and firing

are seen as burdens to business and the economy.

U.S. Government programs are directed instead to

helping workers recover from displacement by

offering reemployment and retraining assistance.

The same reasons for government to assist displaced workers in general apply equally to defense

workers. High-quality adjustment services can not

only improve the displaced workers’ chances, they

can also help move people and other resources out of

Shrinking defense industries into growing industries,

and thus benefit the whole economy.

ASSISTANCE FOR DISPLACED

WORKERS: WHAT WORKS

The elements that make up an effective displaced

worker program are well known and long established. 27 The conclusions of a pioneering report on

what works for displaced workers, written 25 years

ago by George P. Shultz (later Secretary of State)

and Arnold Weber, still hold good.28 Their findings

have been confined and enlarged by a decade of

experience in the 1980s. The key factors are as

follows:

Early action is critical. The best time to start a

displaced worker program is before layoffs

begin. It is the best time for workers to get

financial, personal, and job counseling, to

explore options, and to find a new job without

demoralizing delay.

Cooperation among management, workers, and

public service agencies is extremely helpful.

No one is in a better position than employers to

know when layoffs will occur and to contribute

the basics--staff and space-at the beginning.

Some of the best programs are those run by

labor-management committees, chaired by a

neutral experienced person. And public programs tailored to the needs of displaced workers offer money and experience not available

anywhere else.

Good worker adjustment programs should offer

a full range of options to meet the differing

needs of different people under different local

conditions. The range of services should include everything from individual counseling to

job search assistance to training.

Retraining in a new skill or occupation is the

best way for many displaced workers to get a

~Dic+la~~ ~orke~ ~out of ~~rk from W. t. fom tieslongm tin ~employ~ workers not displaced. (Podgursky and SW*, ‘‘rkatiOn Of

Joblessness Following Displacement’ op. cit., p. 223.)

‘Ibid.

27For de~~ dismssion of tie e]ement~ ~ sucwssfil displa~ worker programs, S= U.S. Congress, OffIce of Tmbology A.SSHSmCnt, Technology

and Structural Unemployment, op. cit., ch. 6.

28@.orge p Shultz ~d ~nold We&.., s~aregi~~~~r the Di~/aced worker (WmtpO~ m: Gwnwood PK5SS, 1966).
68 ● After the Cold War: Living With Lower Defense Spending

Box 3-A-Conversion and Retraining in the Japenese Steel Industry

The steel industry was a pillar of Japan’s economic development for most of the 20th century. Only with the

first oil crisis in 1974, and the following structural shift away from heavy industry, did steel’s solid position begin

to erode. The strong yen of the early 1980s handicapped Japan’s steel exports, and fierce competition from newly

industrializing competitors such as Korea aggravated the industry’s difficulties.l

Japan’s steel industry had to shrink The government, the companies, and the workers participated in managing

the decline, attempting to mininize displacement of steel workers and disruption of steel-dependent communities.

This included efforts by the major steel companies to diversify into new lines of business, convert plants, retrain

some workers and find company-sponsored jobs for others; government financial support for the companies’ efforts;

and employee efforts to learn new skills.

In 1987, the Ministry of Labor designated steel a depressed industry under the Special Measures Law for the

Stabilization of Employment m Specific Depressed Industries. This status lasted for 1 year, from July 1,1987 to

June 30, 1988, and it allowed the government to compensate firms for some retraining costs-up to three-quarters

of the wages of employees undergoing conversion training, or four-fifths in the case of small companies. The

government offered similar subsidies to companies setting up retraining facilities in areas heavily affected by the

industrial decline.2

In the face of debts and mounting losses, each of the big steel companies formed its own rationalization plan.

The plans included the closure of furnaces and mills and reductions in personnel, but also the formation of new

businesses that were apparently planned to serve two rather different purposes: first, to add new activities that would,

if they succeeded, replace in part the declining steel business; and second, to launch (but not permanently support)

new firms that could absorb company employees who were thought unlikely to succeed in the company’s new

activities.

The six largest Japanese steel makers set up over 500 new ventures from 1986 to 1989. 3 Those that the

companies selected for diversification included high technology businesses such as videotape manufacture,

semiconductor production, and software design. Not all of their choices turned out well. Fields such as videotape

and semiconductor manufacture were already crowded with plenty of competitors more experienced in marketing

of these products. Kawasaki Steel tried semiconductor production and found little support from other Japanese

companies.4Minebea a maker of minaature ball bearings, canceled its venture in electronics in which it had invested

23.5 billion Yen

Software design appears to have been a more successful choice, since some steel company ventures in this field

were still active in late 1991 (nonformation was available on whether they had yet turned any profits). Nippon Steel,

in particular, having some experience in the use of computer systems in its production plants, set out to retrain some

of its workers as systems engineers and programmers. The company selected younger employees (under 40) for

retraining on the basis of aptitude tests, and provided courses in its own facilities with company training staff for

half a year. Using idle iron foundries in Muroran, Sakai, and Yawata, Nippon Steel set up professional schools to

prepare candidates for the information examinations.5Tne schools were originally supported cooperative ly

by the company and outside investors or a government agency, the Ministry of Labor’s Employment Promotion

Projects Corporation. At Muroran, the city was a joint investor, and at the Sakai foundry a regional development

group contributed.

other steel firms also offered formal training, though often for shorter periods. But in all cases, a substantial

share of the burden of acquiring new skills fell on the shoulders of the individual engineers. After the formal training,

IMost of the matcdal for this box was drawn from a series of kid reports propard by Thkashi Mashko“ for the Office of Technology

Assessment. In additioQ some materhl Comos tim Scott Davis and Miaoru Ito, Japan Institute of Labor, ~inteaviow, Nov. 13,1990.

2j~k-yotk *d-M~anlmzlt assistance to compdcs and imdustdca involved in structural changq imluding a

series of “TcanporaryMeasum# Laws,” forwbichthe Minis&y of hl&lMtiOIld’hd@ andhdustry (hfm’) iS tb hd -.hh% provide

that *state shall take ncccssmymasurcs to prcvcntunemploymcnt and to Stabilim Unploymcntrnindustrk that arcdcsignatcd for assistance.

The Ministry of bbor also has a hand in prcvandng uocmploymcnt due to structural change, offering govcrnm cnt support both for Mrainhg

and for tapted job creation in designated regions and Mastrks.

3“Jaw’s sm~s~Fj~e,” TJM&OWda, A%. 19, 1991, PP. 51-52.

‘%@ Davis and Minoru Ito, kkparlhlstitutc of Labor, pcrsond COmUWidiO~ NOV. 13,1990.

s{tNippn steel PdUCCS S- Br@mcrs Itself,” Nihon Keim” Shindun (NW), July 19, 1988.
. -.——

Chapter &-Displaced Defense Workers ● 69

the engineers were expected to fend for themselves, buying books for study at home, and learning on the job from

an experienced group leader. The adjustment proved hard for some;6 Nippon Steel’s conversion project found that

it had to relocate some individuals from their new placements when the change proved too great.7

A popular choice in quite a different field selected by several steel companies, was to build amusement resorts

and housing; this choice took advantage of the companies’ considerable real estate holdings. For example, Nippon

Steel’s closed mills and furnaces stood on 17,500 acres. Its best known real estate development is Space World,

opened in April 1990 on the southern island of Kyushu. This Y30 billion space travel theme park is on spare land

in the Yawata steel works in the city of Kitakyushu. It was once the site of the country’s largest blast furnace, whose

idle hulk now stands beside the park’s main attraction--a full size replica of a space shuttle on its launching pad.

Employment at the steel works has fallen from its 1%3 figure of 40,000 to 11,600. The city had hoped to emulate

the high technology diversification successes of Pittsburgh. Kitakyushu officials feared that Space World would not

benefit the city, but the company disagreed, and has closed its research center as well as production facilities. The

park is attracting visitors,8 but whether it will succeed as a profitable venture is not yet known.

By mid-1990, some 3,750 of Nippon Steel’s employees--2,100 white-collar and 1,650 blue-collar-had been

transferred to new businesses in electronics and communications, new materials, biotechnology, and urban

development Another 950 employees-300 white-collar and 650 blue-collar-had been placed in Nittetu Business

Promote (NBP) companies.9 The central NBP was set up as an incubator and supporter of a variety of new

businesses, established as separate regional companies in fields such as textbook marketing, soft drink marketing,

manufacture of work clothes, and production of health foods (including a soya bean-based artificial ham).10

Employment for Nippon Steelworkers who were thought not suitable for retraining and relocation in the company’s

high technology ventures, and support for local economies suffering from the closure of steel plants, were evidently

the main purposes of NBP. In any case, Nippon Steel closed the program in the fall of 1990, and cut off its subsidiary

NBP companies. Some of the companies have continued to operate independently.ll

Meanwhile, steel production held up better than expected, as the Japanese economy recovered quickly and

strongly from the rise of the yen. Demand for steel rose to 108 million tons by 1989, rather than the 90 million

predicted. 12 With the number of blast furnaces in Japan down from 54 in 1986 to 47 and the production work force

down 23 percent to 114,000, the industry found itself facing a shortage of skilled workers. The profits from

steel-some Y800 billion among the big companies in 1989-compensated for losses in new businesses, estimated

by some Tokyo analysts to be at least Y90 billion and possibly as high as Y215 billion.13 Nonetheless, the big steel

makers are maintaining their diversification programs, although failed ventures have been pruned and Nippon Steel

has ended its support for the startup NBP companies.14

Nippon Steel’s employment strategy for downsizing combined retraining and relocation to new spinoff

businesses with reductions through attrition and retirement. After June 30, 1988, when the steel industry lost its

status as a depressed industry and its eligibility for government support, the company continued its employment

programs on its own at considerable expense. For example, Nippon Steel sent a number of managers to its new

subsidiaries; they usually drew a lower salary at the new company, but Nippon Steel made up the difference until

retirement age (typically age 60 in Japan) .13 Like other large Japanese steel companies, Nippon Steel honored the

traditional Japanese commitment obliging the company to look after its workers, in return for workers’ loyalty to

the company.

6~4~el@ Wok ~W NO wti for Displac~ hbor,” Ni&on KeizuI” Shi*, JdY 13, 1987.

7NipPn St&l, bbr~“ g Office ropmemative, persomd Communication October 1991.

8Nihon Kei~” Shimb~, Apr. 28, 1~, p. 1.

9Nippon Steel, Labor Planning Office. Nittctu is a contraction of th word “Nippon” ad “tctsw” the Japanese word for steel.

l% 1987, NBp ~ho~ Coq., a m~id~ of Nippon St=l, ~produc@ l@120 ~of fil~~kfK)wU m ~~,CV~

month for supply to schools, hospitals, and the lhiwancse export market. The ilrm employed 66 former steel workers. (“Grueling Work Beats

No Work for Displaced Labor,” op. citJ

114 CNippon St=l @ ~b~ sn~~,” N&i &ngyo s~”x, ~t+ 26, 1990, p. Id, Acco~ to MS newspaper, 1,200” former

Nippon Steel employees were by this time working in NBP companies.

12Masahim shine@ “Industry Smadmng “ “ despite demand growt4° Nihon Keim” Shim&un, Oct. 28, 1989, p. 4.

13~~v~ is i~ o-~~” The Economisr, Apr. 28, 1990, p. 79.

14~~NipPn st~l_~rizons forgrowtiq Metal corn, new businesses burgeom” Nihon Keizui Shimbun, Oct. 12, 1991.

~5D~s and Ito, op. Cit.
70 ● After the Cold War: Living With Lower Defense Spending

new job with good prospects, but it is not for

everyone. The majority of displaced workers

want to get back to work and make a living as

soon as possible. But a good training program

can attract and effectively serve a sizable

minority-perhaps 20 to 35 percent.

The elements that work in helping displaced

workers in general find new jobs or get training

apply as well to displaced defense workers.

Advance Notice and Early Action

Early action is critical for several reasons.29 First,

displaced workers are much more likely to take part

in adjustment projects that begin before a plant

closing or major layoff than afterward .30 Some

useful programs have been established months or

even as long as a year after the layoff, but by that

time people are hard to find, and if found are likely

to be skeptical or disillusioned.

The evidence is that participation has positive

results. 3l Several studies have concluded that about

one-third of displaced workers handle the adjustment themselves-get new jobs, retire, or whatever

is their choice-independently. For the other twothirds, an effective assistance program makes a

difference. It helps them find jobs sooner at better

pay, or make better choices for training, than they

would on their own, and it saves public expense

(e.g., in unemployment insurance). For example, in

1989, when the Fort Carson, CO, Army Base

announced 9 months ahead of time that 289 jobs

would be abolished, the State displaced worker

agency and the Army jumped into action (see box

3-B). By the time of layoff, all but one person on the

RIF list had jobs. According to Colorado State

officials, this prompt action saved $700,000 in

unemployment insurance benefits.

Another major advantage is time for preparation.

Peak demand for help in finding or training for new

jobs usually comes in the first few days after layoff.

It takes time to prepare worker adjustment services—

ideally several months, although experienced people

can set up some worthwhile services in less time,

sometimes in a few weeks. Also, the best time to

arrange help from the company or cooperative

efforts by a labor-management team is before the

layoffs.

Finally, individual displaced workers benefit in

many ways from knowing well ahead that their jobs

are going to disappear. It gives them time to come to

terms with the loss, and may save them from

financially disastrous decisions (e.g., buying a new

house, deciding that a spouse can quit a job). It also

gives them time to think about the option of training

for a new skill or occupation and to get into training

soon, perhaps even before layoff and certainly while

they still have the maximum amount of unemployment insurance for income support.

Cooperation Among Companies, Workers,

Public Agencies

Management and workers each have much to

contribute to displaced worker projects, especially if

they work as a team. On-site space for an assistance

center, which many companies provide, is convenient and attractive as a place to go for service before

layoff, and afterwards gives workers a familiar

“office” to use while looking for a job. Another

valuable service a company can offer is to invite

prospective employers into a plant while it is still

operating, so they can see the workers in action.

Many companies hold job fairs, both before and after

layoff. After eliminating some 4,000 jobs in St.

Louis in 1990, McDonnell Douglas held two job

fairs, one with over 100 firms from across the Nation

attending, and another with about 75 local fins.

There are even more energetic and ingenious ways

to approach employers. McDonnell Douglas ran an

ad on broadcasts of St. Louis Cardinal baseball

games, calling attention to the skills and availability

of their laid-off workers.32 When a Westinghouse

plant in Maryland laid off 1,100 workers after the

A-12 was canceled, the company ran full-page ads in

~etailed discussion of the advantages of early action are in U.S. Congress, Office of Technology Assessment, Plant Closings: Advance Notice and

Rapid Response, op. cit., pp. 12-17.

~Seve~ ~wlac~ worker pmjWts have reported participation rates of 50 to 80 percent before layoff; rates tim Iwoff range downwwd fiorn 29

pe~ent (in a project with an energetic outreach campai~ which included knocking on doors) to near zero. Ibid., pp. 13-14.

qlsee U.S. CoWess, OffIce of Technology Asstxrnen~ Technology and Structural Unemployment, op. cit., pp. 225-233; ~so, GW B. -em

“Layoffs, Plant Closings, and Worker Displacement in America: Serious problems That Need a National SolutiorL’ Journal of Socia/ Issues, vol. 44,

No 4, winter 1988.

32~omtion provid~ by David Hutc~, D~~tor of ~ploymen~ MCDonnc~ Dough fictit corp. h the ad, the company announced a hotline

number for employers to call to announce jobs or request resumes, and received calls from as far away as Tennessee and Arkansas.
Chapter 3--Displaced Defense Workers ● 71

the Baltimore Sun and the Washington Post promoting its workers.

A great advantage to having a labor-management

team direct or participate in the assistance center is

that a strong labor role contributes to workers’

acceptance and trust.33 Workers can be especially

effective as staff in displaced worker assistance

centers; they know the people involved and have a

stake in the outcome. The Mare Island Naval

Shipyard in California, for example, released a few

of its own workers to spend their time calling local

employers for job possibilities for the soon-to-be

laid-off shipyard workers.

Despite its advantages, however, few defense

firms have taken the labor-management approach to

operating displaced worker services, possibly reflecting a tradition of adversarial relations between

unions and aerospace industries. One firm that has

embraced this approach is GE Aerospace in its

Pittsfield, MA facility; a labor-management team

there has operated successfully and won the confidence of displaced blue-collar workers.

No matter how dedicated and active the company

and worker representatives may be, there are some

services that only public agencies can provide. Few

companies take on the expense of trainin g; that is

generally paid for with public funds. Government

agencies, including displaced worker agencies and

the Employment Service, have resources the companies lack for turning up job openings and matching

them with qualified workers. Most important, State

displaced worker agencies have the responsibility

for organizing a rapid response to layoffs and plant

closings. As we shall see, many State agencies are

not yet doing a creditable job of rapid response, but

that is their responsibility and no one else can

entirely fulfill it.

A Full Range of Services

Projects that offer a broad range of services can

best meet the needs of a diverse group of displaced

workers under different economic conditions. A

good program begins with one-on-one personal and

financial planning and assessment of the worker’s

background and skills. At this stage, many workers

can use help in choosing immediate job search,

retraining, or, in some cases, early retirement.

Next, a full menu of job search assistance is

essential. Many displaced workers, especially blue-

-collar workers, have been with the same company

most of their working lives and have no idea how to

look for a job; for example some of the workers laid

off by McDonnell Douglas in Long Beach, CA were

20-year veterans at the company and had never

written a resume. Most displaced worker projects

offer 1- to 3-day workshops in resume-writing,

interviewing (often with videotaped practice interviews), and locating jobs. The project itself can and

should help with finding jobs, by employing job

developers who canvas likely employers for unannounced openings; by tapping into job banks or

professional job networks; and by matching qualified displaced workers with the job openings.

Subsidies to employers for on-the-job training, used

by many displaced worker projects, are probably

more effective as a tool for job placement than for

acquisition of transferable skills leading to longterm employment. Helping displaced workers who

want real retraining in a new skill choose the right

kind for themselves is a service of central importance, as discussed below.

Moving out of an area hit hard by defense industry

cutbacks or a military base closing may be the best

choice for many workers, though professionals and

managers are far more likely to move than are

blue-collar workers. For example, at the GE Aerospace facility in Pittsfield, MA, a town of about

50,000 people, some 4,800 positions were abolished

between 1986 and 1991. Virtually all of the laid-off

engineers and higher level managers moved elsewhere for work.34 Very few blue-collar production

workers moved, even though jobs are very hard to

find in and around Pittsfield. Many of these people

have roots in the area that go back several generations; moreover, moving is a high risk choice for

workers who do not have distinctive resumes to

present to prospective employers elsewhere, as

professionals and managers often do. For many

two-wage-earner families, moving entails considerable risk and uncertainty for the working spouse who

hasn’t been laid off. Finally, while relocation may

help the displaced worker, it can weaken the

ssRuth I-f. Fedrau and Kevin P. Balfe, ‘‘Cooperative Labor-Management Worker Adjustment progr~, “ blbOrblW~OUTfd, vol. 40, March 1989,

p. 143.

341~omatiOn provid~ by ~ c~, director of the GE prof~sio~ Assismnm Center, Pittsfield, MA.
72 ● After the Cold War: Living With Lower Defense Spending

Box 3-B--Civilian Transit&mat Colorado Army Bases

In 1988, the Fort Carson (CO) Army base announced that it intended to lay off 289 employees m the next 9

months. In addition, at the end of that year, the first Base Closing Commission announced that the Pueblo Army

Depot in Pueblo, CO, was among the 86 installations slated for realignment or closure. Some 750 jobs would

eventually be eliminated at Pueblo, with about 300 disappearing by 1992. In response, the Colorado Governor’s

Office of Job Training initiated an effort to help civilian employees at these two facilities make a successful

transition to other jobs. The effort was named CETAP, the Civilian Employees Training and Assistance Program.

Because the two DoD layoffs were announced in advance--the one at Pueblo had a warning time of more than 2

years--State and Army employment and training officials had unusual opportunities to intervene well before the

layoffs.l

On hearing about the coming RIF at Fort Carson, Colorado’s Rapid Response unit (the State unit responsible

for implementing the Federal dislocated worker program) suggested to the Fort’s Commander that they cooperate

in providing services to the dislocated works. Working together, State and Army officials setup an outplacement

center and held two workshops, one to describe services available to the workers and the other to train the workers

in job search skills. While there was not enough time for extensive retraining in new occupational skills before the

RIF, some workers were trained for typing positions that were opening up at the Fort.

The results at Fort Carson were highly favorable. Of the 289 workers affected, all but one had a job by the time

of the layoff. About one-third were placed in other DoD jobs, through a computerized job placement pro-and

the rest got non-DoD jobs through the center’s efforts. Because nearly everyone had jobs before the layoff, no one

drew unemployment insurance benefits. According to Colorado officials, that saved the State $700,000, while a total

of $28,0(M) of the State’s dislocated work assistance funds for the outplacement center were spent. Thomas R.

Kalter, Director of Civilian Personnel at the F-praised the outplacement center as “one of the best tools I’ve ever

used in effecting personnel drawdowns.” He said it represented management’s commitment to actively support

adjustment services for workers and a commitment by labor and management to work together.

The effort at Pueblo was similar but more extensive. After the December 1988 announcement of the Depot’s

intended closure, the State worked with the Depot commander in setting up a labor management committee to

IMm~ a~~ ttm M Carson and Pueblo outplti~t program W8a psOvidcd by @ieials of Colorado’s “dlskatd worker

progmm and Army officials at Fort C!amon and Pueblo.

community, particularly if those who leave are the the interests of getting the clients back to work

more skilled and more educated, and are likely to be

community leaders. Even so, displaced worker

projects can collect information about out-of-area

job opportunities and help people make realistic

assessments of relocation as an option.

Retraining

The last 10 years of experience with displaced

worker programs have taught that training is a

centrally important feature of displaced worker

programs, but it has to be well designed, with a

careful matching of trainees’ skills and background

to the courses offered. Even the best of training

programs cannot be expected to attract more than

about one-third of displaced workers.35 However, a

displaced worker program that neglects training in

quickly and cheaply is depriving many people of

their best chance for a job with a future. It is

especially important to have good training available

in an economic slowdown or recession. When the

national and local economies are thriving, most

displaced workers will want to look for new jobs

right away, and a large number will fiid something

satisfactory. Training looks like abetter option when

times are bad. Many workers would prefer to

improve their skills instead of sitting idle.

Training is also important from the standpoint of

producing the skilled workers that U.S. industry

needs to keep up in a highly competitive world. But

effective retrainin g of displaced workers can do only

a minor part of that job. It depends much more on

providing a good public school @ucation for all our

MS= u-s, CoW=s, ~lce of T~oloW &Ws=m~ Technology ad sr~c~raf UMm@Oy~nf, op. cit., pp. 250-60 for descriptions of SO=

unusually successful tmining programs in displaced worker projects, as well as some that failed dismally.
Chapter Misplaced Defense Workers . 73

oversee the outplacement activities. State Representative Bill Thiebout, Jr. was appointed the neutral chairperson.

An outplacement center began operations on the base in August 1989, and several workers were trained as peer

counselors to work with their fellows.

By mid-1991, some 140 positions at the Depot had been eliminated, but no one had been laid off. Some workers

retired some found private jobs, and some were placed in other military facilities in the region. About half of the

workers found interim employment by transferring to other positions in the depot. According to Mike Guagliardo

of the Colorado AFL-CIO Division of Employment and Training,the agency that oversees outplacement and

training at the Pueblo center, the approach so far has succeeded so well that he hopes to avoid all involuntary layoffs

throughout the process of closure. Some of the Depot’s workers have taken advantage of job search skills training

and other outplacement services, but many have seized the opportunity to improve their occupational skills. The

long lead time before closure is a major benefit in this regard The State setup an extensive training program in

which workers contribute half the time and get the other half in leave. (For example, in a 2-hour session, workers

put in an hour of their own time and get the other half in release time). Over 400 workers have been trained at the

center in computer use, including DOS, Lotus, D-Base, and WordPerfect. Pueblo has a large Hispanic work force,

many of whom needed training in English as a Second Language, especially the written language. There were also

some who needed to brush up on reading and math. English and remedial courses were offered to all employees

who needed them; after a year in the program many have gone onto occupational skills training. One worker who

completed the remedial education course said: “I have more self-confidence within myself and I am challenging

and proving to the supervisors or bosses around that I can do the job. I’m not afraid to tackle what’s given to me.

Some workers took training programs off the base. For example, one enrolled in a 22-week fast-track course

in machining technology at the local community college and then got a machining job with a local firm. Another

worker, who wanted to own a truck driving firm, took entrepreneurial training.

When first approached by State officials about setting up the program Depot managers were dubious. They

were afraid that it might send a message to workers that the management had given upon them and wanted to let

them go. Now, Depot managers are 100 percent positive toward the program. Chet Tutor, Civilian Executive

Assistant at Pueblo, says that they “haven’t made abetter decision.” Productivity at the base has never been higher,

even counting the “lost time” spent in training. The last three Army inspections of the Depot have given

compliments to the Depot on the high state of morale despite the scheduled closure. One reason for the high morale,

according to State officials, is that the workers themselves have been involved in the design and operation of the

entire outplacement program.

children; creating productive school-to-work transi- are not replaced by other orders, more blue-collar

tion programs for the ‘‘forgotten half’--our young

people who are not college-bound; and promoting

better training of adults in the active work force,

starting with their frost jobs and continuing throughout their work lives.36

Many of the people losing their jobs in the first

wave of defense-related layoffs are managers, engineers, software programmers, and other professionals who do not want or need retraining. Or if they do,

the training that would interest them may be much

more extensive and costly than the typical 4-month

training courses offered in displaced worker projects.

When production runs end for the last orders of

certain military airplanes, missiles, and tanks, and

workers will be laid off from defense industries.

These workers will probably seek retraining in about

the same proportions as other displaced workers.

Again, the success of retraining will depend on

suiting the training to the particular skills and

background of the workers. A successful example

comes from the United Nuclear Corp. of Mountville,

CT, which in 1990 began closing down a plant that

made nuclear engines for submarines and started

laying off its 1,100 workers. Many of the workers at

UNC were trained in dealing with nuclear materials

and could potentially help fill the large demand for

cleanup technicians at Department of Energy facilities around the country. To provide them with the

special additional skills needed, the UNC displaced

worker project joined with the local technical

36For C~nsldemti~n of ~~t ~co~q ~cks and w~t it n~s to do in &aining of worke~, ,sm U.S. CO~SS, mice of Technology ASsessmen~

Worker Training; Competing in the New International Economy, OllA-ITE-457 (Washington, DC: U.S. Government Printing Offke, 1990).
74 ● After the Cold War: Living With Lower Defense Spending

college to create a l-year associate degree program

in environmental cleanup, with a certificate at the

end of the year, for UNC employees.

Remedial training in basic reading and math skills

is another essential piece of complete services for

displaced workers. Studies in the 1980s showed that

while as many as 20 to 25 percent of displaced

workers needed this training, most displaced worker

projects neglected it, although such projects could

be an excellent place to provide it. Because the frost

wave of defense layoffs has hit many managers,

professionals, and other white-collar workers, the

need for remedial basic skills trainin g has been less

evident. At least one example, however, of an

outstanding basic skills program for defense-related

displaced workers is at the Pueblo Army Depot in

Colorado (described in box 3-B).

Much more could be said about the elements that

make up a good displaced worker program. Only the

briefest of summaries has been offered here. It is

worth emphasizing, however, that two great virtues

are early action, before people get dispersed, discouraged, and disillusioned; and enough flexibility

to meet the needs of different people and respond to

different circumstances.

PUBLIC PROGRAMS TO HELP

DISPLACED DEFENSE WORKERS

Most of the public programs to help displaced

defense workers find or train for new jobs are

available more broadly either to all displaced

workers or to the public generally. The following

discussion briefly covers some of the more important government programs that are open to anyone

but provide essential help to displaced workers. It

then concentrates more closely on the Federal

program that is designed for displaced workers in

particular, the Economic Dislocation and Worker

Adjustment Assistance (EDWAA) program in Title

III of the Job Training Partnership Act (JTPA) of

1982, as amended in 1988.

Unemployment Insurance and the

Employment Service

The U.S. unemployment insurance (UI) system is

a Federal-State program, with Federal law applying

a tax on employers that is largely offset if States

provide some UI coverage through payroll taxes on

employers. States manage their own tax rates, trust

funds for payment of benefits, and rules of eligibility. The Federal Government has a backup trust fund

account from which States may borrow. The system

has three reasons for existence: frost, to tide workers

over temporary layoffs and keep them from penury;

second, by maintaining some spending power even

among the unemployed, to help an economy in

recession recover; and third, to help businesses

retain their trained workers during temporary layoffs. The UI system in the United States was never

very generous compared to that of many other

developed nations, and in the 1980s its value as a

safety net declined further.

Only a portion of unemployed workers are eligible for UI. New entrants or re-entrants to the labor

force are not eligible. Workers who voluntarily quit

their jobs may have to wait for many weeks to

qualify, or may not be eligible at all. Generally

speaking, workers out of work more than 6 months

do not qualify for additional UI benefits.

The share of unemployed workers covered by UI

was close to or over 50 percent through much of the

1970s (and climbed above 70 percent, with Federal

help, in 1978). In 1990, the percentage of unemployed workers covered was 32 percent (see table

3-8). The reason for the decline was twofold. First,

States ran through their UI trust funds in the 1981-82

recession. They then passed laws to make UI

eligibility stricter; in the anti-tax environment of the

1980s and early 1990s, they declined to raise

employers’ payroll taxes sufficiently to loosen

eligibility rules once the fiscal crisis was over.

Second, under laws Congress passed in 1981, the

U.S. Government became much less supportive of

UI benefits than before.37 One of the changes

allowed the Federal Government to charge States

high interest rates (up to 10 percent) for borrowing

from the Federal UI trust-which discouraged

States’ borrowing and was a factor in tightening

eligibility.

Another change almost brought to an end the

once-important program of extended benefits (EB),

which allow an extra 13 weeks of UI in times of high

unemployment, and the costs of which are shared

equally by the Federal Government and the States.

EB were rarely triggered in the 1990-91 recession. In

June 1991, despite a total unemployment rate of 6.9

37Gary Burtless, ‘‘The Tattered Safety Net,” The Brookings Review, spring 1991.
Chapter 3-Displaced Defense Workers ● 75

Table 3-8-Unemployment, UI Covered

Unemployment, and UI Coverage

UI covered Percent of

Unemployment unemployment unemployed

Year rate rate covered by UI

1970 . . . . . . . . . . 4.9% 3.4% 48%

1971 . . . . . . . . . . 5.9 4.1 42

1972 . . . . . . . . . . 5.6 3.0 41

1973 . . . . . . . . . . 4.9 2.5 48

1974 . . . . . . . . . . 5.6 3.4 52

1975 . . . . . . . . . . 8.6 6.1 45

1976 . . . . . . . . . . 7.7 4.4 41

1977 . . . . . . . . . . 7.1 3.7 50

1978 . . . . . . . . . . 6.1 2.8 75

1979 . . . . . . . . . . 5.8 2.8 67

1980 . . . . . . . . . . 7.1 3.9 56

1981 . . . . . . . . . . 7.6 3.5 43

1982 . . . . . . . . . . 9.7 4.7 42

1983 . . . . . . . . . . 9.6 3.9 50

1984 . . . . . . . . . . 7.5 2.7 41

1985 . . . . . . . . . . 7.2 2.8 45

1986 . . . . . . . . . . 7.0 2.8 44

1987 . . . . . . . . . . 6.2 2.3 34

1988 . . . . . . . . . . 5.5 2.1 34

1989 . . . . . . . . . . 5.3 2.0 33

1990 . . . . . . . . . . 5.5 2.4 32

SOURCE: Department of Labor, Unemployment Insurance Service.

percent, only 6 states qualified for EB; in the 1980

recession, with an unemployment rate of 7.0 percent

(annual average), all 50 states offered EB.38 In

November 1991, after two attempts by Congress that

were nullified by President Bush (on grounds that

Congress had failed to provide funding), Congress

and the President agreed on an amendment to the UI

law that eased the terms for EB, making the program

available to millions of workers who had been

unemployed for more than 26 weeks .39

Still, the tighter eligibility for UI remains in effect

in many States. Also, the benefits are less generous.

UI benefits became fully taxable in the 1986 tax

reform law, but nominal amounts were not raised in

compensation, so their value has declined about 20

percent.

40 What all this means for displaced defense

workers is that UI benefits are a declining source of

support for a prolonged job search or, perhaps more

importantly, for training. This makes it less likely

that the workers will opt for trainin g, especially

longer-term training in higher level skills. However,

some states, such as California, extend UI benefits

for an additional 26 weeks for displaced workers

enrolled in approved training courses. Massachusetts extends benefits for some kinds of training, but

not for degree programs.

The Employment Service (ES) manages the UI

system at the State level. Its other job is to help

match people seeking jobs with employers offering

them. State governments have the primary responsibility for design and operation of ES. While the ES

can provide necessary services to displaced workers,

the charge is much broader, extending to any worker

looking for a job. With this responsibility, the ES

system has so much to do and so many people to

serve-and its budgets have been in such long-term

decline-that it is hard-pressed to offer help tailored

to the needs of displaced workers. In establishing

JTPA Title III (also called EDWAA), Congress

created a program that would focus specifically on

displaced workers and thereby ease structural changes

in the economy.

Worker Adjustment and Retraining

Notification Act (WARN)

Since the WARN legislation took effect in February 1989, any company with 100 or more full-time

employees has been required to give at least 60 days’

notice to workers in plants that are closing or

planning “mass layoffs.” The WARN requirement

is triggered when, during any 30-day period, a

closing causes a loss of at least 50 jobs, or a layoff

causes a loss of 500 or more jobs, or 50 to 499 jobs

if they comprise at least 33 percent of the employer’s

work force. In these situations, the employer is also

required to notify the State ‘dislocated worker unit

and the chief elected official of the local government. Employers who violate the advance notice

requirement are liable for back pay and benefits for

each day of violation up to 60 days.

3gThe r=son for tic difference lay in the 1981 law, which raised the State triggers for extended benefits (EB) md eliminated the natio~ trigger mat

could activate EB in all states. In additioq the ‘insured unemployment” rate, which is the percent of workers who are collecting benefks, was the trigger

for EB and in recent years it has been much lower than the total unemployment rate, reflecting the fact that a declining share of workers get UI (table

3-8). Using the insured unemployment rate as the trigger for EB not onty continuously raised the trigger throughout the 1980s (as UI coverage declined)

but also led to some anomalous results. Because the rate leaves out all the people who are not eligible for UI, including those who have exhausted their

benefits, some States with high total unemployment did not qualify, while other states with much lower rates did. For example, in May 1991, Oregom

which had a total unemployment rate of 5.8 pereen~ qualified for EB while Massachusetts and Michigan, with a rates of 9.2 percent and 9.0 percent

(highest and second highest in the nation) did not.

~yund~ tie mended law, tie total unemployment rote, IIOt the insured rate, triggers n.

‘Burtless, op. cit.
76 ● After the Cold War: Living With Lower Defense Spending

The WARN law includes several exemptions

besides the ones for small business and relatively

small layoffs. These include cases in which a

temporary facility is closed, or a particular project

that employed people specifically for that project is

completed, or where there is a strike or lockout that

is not simply intended to evade the early warning

requirement. The notification period maybe reduced

if the closing or mass layoff is due to natural disaster

or business circumstances that were not foreseeable,

or if the employer has been actively seeking capital

or business that could reasonably be expected to

postpone the shutdown or layoff.

Dislocated worker officials interviewed by OTA

were unanimous in their praise of WARN.41 They

say that early warning has benefited both the

assistance programs and workers individually. In

some cases it has helped the company, too. In

1988-89, when Lockheed of Marietta, GA laid off

over 8,000 military aircraft workers, EDWAA and

WARN combined were an aid to the company in

managing the layoffs without disrupting production

requirements.42 Union rules Of seniority still operated, but they also permitted merging of labor units

as assembly functions were finished.

WARN’s main value to service providers, of

course, is in helping to identify closures and layoffs

that are about to happen. In Los Angeles, local

employment and training officials used to rely on

informal means, such as newspaper accounts and

reports from individual workers. Since WARN, they

get from the State fax notices of impending layoffs

and can move into action. The Missouri Department

of Labor credits the WARN-mandated 60-day notice

that McDonnell Douglas provided in its 1990 round

of layoffs with reducing the number of unemployment insurance recipients from an expected 80 to 90

percent to about 70 percent. Some of the displaced

workers found new jobs before the layoff or very

soon after. Others moved away. In contrast, after the

January 1991 A-12 cancellation, 85 percent of the

5,000 workers laid off from McDonnell Douglas

with less than 2 weeks notice applied for unemployment insurance.43

While WARN is a big improvement over the past,

it has some problems. The requirement that at least

one-third of the work force must be laid off to trigger

WARN means there can be sizable layoffs (up to 499

workers) at large plants that do not trigger WARN,

while the same size layoff in smaller plants would.

In a 1990 report prepared for the U.S. Department of

Labor, SRI International found that one large

corporation was able to lay off nearly 500 workers

without giving a WARN notice because less than

one-third of the work force was affected.44 SRI also

found that several employers phased down their

work force without triggering WARN by repeatedly

laying off just under 50 workers in each 30-day

period. Further confirmation of this practice came

from the human resources director of one large

defense company, who told OTA quite frankly that

it was his company’s policy to manage layoffs in this

way; the company opposes the whole idea of

advance notice but does give laid-off workers

severance pay depending on length of service

(though not necessarily in compensation for 60

days’ notice).

Overall, in the 15 States examined in the SRI

report, displaced worker officials in 3 States reported widespread noncompliance with WARN, and

in several others officials reported that many employers were giving less than 60 days’ notice.45 On the

other hand, EDWAA officials in a few States told

OTA that the WARN legislation seems to have

brought home to some employers the value of early

warning, and that some have voluntarily provided

notice of layoffs when the law did not require it.

Another problem with WARN is that no agency is

assigned to enforce it. Eligible workers who have not

been given notice, their representatives, and units of

local governments can take the company to court,

but it is unclear how effective this provision is in

encouraging companies to comply.

alms ~tion is -m~gely ~m Om intaims with directors and staff of 21 assistance projects serving workers displaced by defense ~dusm

cutbacks and military base closings, and from Linda KraviG ‘‘The Wages of Peace: Community and Lndustry Experience with Military Cutbacks,”

contractor report prepared for the OffIce of Technology Assessment, July 1990.

dz~temims titifh@ @rdon, former DirWtor of Personnel at Imckheed, and Edwad Van Steduq Director, Derson GOUP, Ltd., tie private h

that managed outplacement services, ibid.

43E. Terrence Jones, ‘The Layoffs at McDonnell Douglas: A Survey Analysis,’ prepared for the St, Imuis County Economic Council, October 1991.

44SW ~t=mtio~, ~ *S~dy of tie ~plemm~tion of fie EConomic D~location ~d Worker Adjustment Assistance Act:’ report to the U.S.

Department of Labor, Employment and Training Administration, October 1990.

4SIbid., p. VI-20.
Chapter 3-Displaced Defense Workers ● 77

Economic Dislocation and Worker

Adjustment Assistance (EDWAA)

A Federal program of assistance to displaced

workers was created in 1982 in Title III of the Job

Training Partnership Act.46 Amended in 1988 and

now referred to as EDWAA, this is the main Federal

program offering assistance to displaced defense

workers. The program is funded and supervised at

the Federal level, but operated by States and local

agencies.

In its earlier years the program was usually funded

at about $200 million a year, but was given more

generous funding after the EDWAA amendments

(table 3-9). Regular appropriations rose to an alltime high of $577 million in fiscal year 1992; in

addition, Congress has directed DoD to transfer an

extra $150 million to the Department of Labor

(DOL) for EDWAA services earmarked for dislocated defense workers in fiscal years 1991-93. After

several months’ delay, the funds were transferred in

June 1991. In program year 1990 (July 1, 1990 to

June 30, 1991), the first year under EDWAA, a

record number of displaced workers were served;

there were 282,089 participants, including 186,888

new enrollments and 95,201 holdovers from the year

before (table 3-10).

In its frost few years, the original Title III program

had some modest accomplishments, placing participants at rates of about 65 to 70 percent. However, the

program was reaching only around 5 to 7 percent of

eligible workers. 47 Several other shortcomings also

surfaced: most State Title III programs were slow in

responding to layoffs, which was one reason for the

low participation rates; some States were carrying

over large amounts of unexpended funds from one

year to the next; and many projects were not giving

enough attention to training, possibly reflecting

Table 3-9--JTPA Title Ill (EDWAA) Appropriations

Appropriations

Fiscal year (million dollars)

1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,

1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

216.5

222.2

95.5

195.6

286.6

278.6

463.6

527.0

577.0

SOURCE: Department of Labor, Office of Work Based Learning.

overemphasis on low cost per worker served.

Congress amended the Title III program in 1988,

renaming it the Economic Dislocation and Worker

Adjustment Assistance Act (EDWAA) and redesigning it to put more emphasis on rapid response to

layoffs, give more attention to training, and set up

incentives for spending appropriated funds, thus

serving the needs of more displaced workers.

At this writing, only 21/2 years have passed since

the Title III program started to operate under the

EDWAA amendments, so it is still too early to judge

their full effect. One visible, positive change is that

the proportion of eligible workers served has risen

(and was rising even before EDWAA), partly

because fewer workers were displaced in the prosperous 1985-89 period than previously, but also

because absolute numbers of new enrollees rose in

program years 1988 and 1989. The proportion of

eligible workers served was nearly 9 percent in

program year 1989 (July 1989 through June 1990).%

However, in quality of service provided, there

remains a wide disparity among the States. A few

States provide excellent services to displaced workers, but most fall considerably below that level and

some do very little at all. A major, persistent

~itle IIA and HB of JTPA is directed to the employrmmt and tmining needs of disadvantaged and low-income workers and youth. It is a much biggea

program than Title III, typically funded at about $2.5 billion per year.

470TA put tie paCen~g~ sad at abut 5 pr~nt of eligible workers m of 1985 (IJ.S. Cowess, ~lm of Technology Assessment Tech?dogy and

Structural Unemployment, op. cit.), and the General Accounting Office (GAO) estimated it at 7 percent as of mid-1986 (U.S. Congress, General

Amounting Oflice, Dislocated Workers: Local Programs and Outcomes Under the Job Training Partnership Act, GAO/HRD-87-41 (Washington DC:

March 1987). Both OTA and GAO compared the number of workers enrolled in the program each year with the total number of workers 1osing jobs

per year due to plant closings or relocation, cutbacks in productio% and slack work as reported in the biennial BLS/Census survey of displacement. GAO

compared the 145,000 new enrollees served in the JTPA Title III program from July 1, 1985 to June 30, 1986 with the BLS estimate of 2.16 million

workers losing their jobs each year tiom January 1981 to January 1986 for the r~ons described above. Note that BLS defines as ‘‘displaced’ only those

workers who had held the jobs they lost for 3 or more years; however, eligibility for Title III or EDWAA services is not limited to displaced workers

with 3 years tenure on the job.

4s~m~~g t.& B~/Ce~s Smey, 9.2 ~lion workers were displaced from their jobs in the 5 YWUS 198S-89 ~ause of Pl~t closi%s or

relocations, production cutbacks, or slack work. New enrollees in EDWAA were 162,834 in program year 1989, or 8.8 percent of the average of 1.85

million workers displaced annually in the 5-year period ending in 1989. These are the latest available figures on numbers of displaced workers.
78 ● After the Cold War: Living With Lower Defense Spending

Table 3-10-Enrollments and Outcomes in JTPA Title Ill (EDWAA), Program Years (PY) 1983-90

PY 1983’ PY 1984 PY 1985 PY 1986 PY 1987 PY 1988 PY 1989 PY 1990b

New enrollments . . . . . . . . . . . . . . . . . . . . . . 96,100 132,000 145,773 143,335 116,142 151,507 162,834 186,888

Terminations . . . . . . . . . . . . . . . . . . . . . . . . . 50,500 113,600 149,692 149,692 129,984 135,566 139,642 164,856

On board at end of period . . . . . . . . . . . . . . 45,600 64,100 76,287 69,910 56,068 72,009 95,201 117,233

Entered employment

Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,500 72,200 92,287 102,111 91,591 93,929 91,999 115,721

Percent of terminations . . . . . . . . . . . . . . 72% 65% 69% 68% 70% 69% 66% 70%

Wage at placement . . . . . . . . . . . . . . . . . . . na na na $6.93 $7.11 $7.54 $7.58 $7.73

aprogram year9 ~ver July through June, except 1983, which covers October 1983 through June 1984, the first period of the program.

bPreiiminary.

SOURCES: U.S. Congress, office of Technology Assessment, Technology and Structural Unemplopent: Reempio@g Displaced Adults, OTA-ITE-250

(Washington, DC: U.S. Government Prfnting Office, 1986), p.174; and Department of Labor, Office of Work Based Learning, unpublished data.

shortcoming is that rapid response is far from

universal and often is nonexistent. Problems are

apparent in the quality and mix of services, especially those provided by organizations whose primary purpose and experience is in employment and

training services for disadvantaged people, not

displaced workers. Requirements for training under

the law and DOL policy have sometimes had

perverse effects. DOL’s information sharing and

technical assistance to States and localities is still

scanty, resulting in part from a small budget and a

bare bones staff at headquarters. The lack of Federal

guidance is a principal reason for the continuing gap

between best practice and typical practice among the

States.

The following discussion concentrates on aspects

of the EDWAA program that could be improved,

especially on changes in the law made in 1988, some

of which are not working out exactly as hoped.

However, the fact that over 1.1 million displaced

workers entered this program from October 1983

through June 1991, and that over two-thirds of those

leaving it had jobs, is a respectable record for a big

public employment and training program, bettered

by the fact that the last few years have seen arise in

participation, both in numbers and in share of

eligible people served. EDWAA is not a giveaway

program. It requires effort from its participants. If

more people participate, it is reasonable to conclude

that they are getting something out of it.

Changes in EDWAA

Congress left major features of the previous JTPA

Title III program unchanged in EDWAA. It remains

an employment and training program especially

designed for and targeted to displaced workers. It

authorizes a range of services, including job or

career counseling, testing and assessment, job

search skills training and placement assistance,

support services, and many forms of training (including remedial education, on-the-job training,

entrepreneurial training, and even out-of-area job

search and relocation, as well as occupational skills

training). The criteria for eligibility are quite broad,

extending to all workers who have been laid off or

received notice of layoff in permanent closures or

substantial layoffs of any facility or enterprise;

workers who have been laid off or received notice of

layoff, are eligible for or have exhausted UI benefits,

and are unlikely to return to their previous industry

or occupation; and workers who are long-term

unemployed and have limited chances of reemployment in a similar occupation, including older workers for whom age may be a barrier. EDWAA added

to the list self-employed people (specifically including farmers and ranchers) who are unemployed

because of general or local economic conditions, and

displaced homemakers.49

As noted, a significant change in EDWAA is its

emphasis on rapid response. Under the 1988 law,

each State must establish a Dislocated Worker Unit

with the duty of providing rapid response after a

closure or layoff announcement. The rapid response

team is supposed to reach employers and employee

representatives, usually within 48 hours, to offer

comprehensive information on what public programs are available to help the workers; encourage

the prompt formation of labor-management committees under the direction of a neutral, experienced

chairman; coordinate a broad array of services; or

otherwise help line up comprehensive services

quickly, to be offered in one convenient place.

d~isp~c~ homem~ers, defined as ‘‘additional dislocated workers, ’ can be served as long as doing so would not reduce services for other dislocated

workers.
Chapter 3--Displaced Defense Workers ● 79

A second major change in EDWAA introduces

new incentives to bring services to more displaced

workers and avoid carrying over unspent funds. This

change addressed a situation in which only a small

percentage of displaced workers were receiving

services, yet on a nationwide basis unspent funds

grew every year except 1986, when Congress cut the

Title III appropriation in half because of the carryovers. The problem was an uneven one; some States

were spending all their allocated funds (with a

prudent amount for carryover), but many were not.

States may now carry over 20 percent of their

allocated funds at the end of each program year,50

but the Secretary of Labor must reallocate to other

States the surplus from any State that failed to spend

at least 80 percent of its EDWAA allocation from the

immediate previous program year, plus all unexpended funds from any prior year.

EDWAA also removed the predominant authority

over the displaced worker program originally given

to the States under Title III, and split it between

States and local authorities. Of the total EDWAA

funding, 80 percent is allocated among States under

a formula based on unemployment rates. The States

may reserve up to 40 percent of the funds for their

own activities, including rapid response, coordination, technical assistance, and administration. At

least 50 percent of the States’ share is distributed up

front, by formula, to substate areas with populations

of at least 200,000, and the States must distribute up

to 10 percent to substate areas during the first 9

months of the program year on the basis of need. The

State selects a grantee in each substate area to

provide services to displaced workers, either directly

or through contracts. The law allows a wide choice

of substate grantees; possibilities include nonprofit

organizations, educational institutions, labor organizations, local or State government agencies, and

private industry councils. In most cases, however,

the grantee is the Service Delivery Area (SDA),

which also administers the much larger JTPA

program for low-income and disadvantaged workers

under Title III.

As under the previous Title III, some discretionary funding remains in the hands of the Secretary of

Labor-20 percent of the total EDWAA appropriation. Known as the “national reserve fund, ” this

discretionary money can go for services to workers

caught in mass layoffs (including those caused by

Federal actions or by natural disasters), for industrywide and multistate projects, and for supplements to

the 80 percent of EDWAA money allocated to the

States.

Rapid Response

Despite the emphasis Congress placed on rapid

response in the 1988 EDWAA amendments, it is still

more an ideal than a reality. SRI International and

Berkeley Planning Associates, in a recently completed study of EDWAA for DOL found that of the

15 States examined, 5 had rapid response procedures

that “were well established and working well,” 6

were “experiencing some problems,” and 4 had a

“low commitment to rapid response.”51 Further,

SRI reported that 19 of 30 substate areas investigated ‘‘narrowly viewed the purpose of rapid

response as providing information on the availability of services . . . and did little, however, to ensure

that such individuals eventually applied for or

received EDWAA services. ’52 SRI recommended

that DOL and States stress the importance of using

rapid response activities to practical effect, making

sure that displaced workers receive appropriate

EDWAA services.

A report by the National Governors’ Association,

the National Association of Counties, and the United

States Conference of Mayors presented similar

conclusions. These organizations found in every

case examined a lag of at least 2 months between

layoff and provision of services.53 OTA’s investigation of 21 defense-related layoffs, although based on

a small number of cases, supports these findings. In

only 7 of the 21 cases were adequate EDWAA funds

(sufficient for complete, continuing services) available before layoff. All seven had advance notice of

at least 3 months, and four of the seven had 1 year or

more (see table 3-1 1).

% each fiscal year (October 1 through September 30), Congress appropriates EDWAA funds to be spent in the following program yeas (July 1

through June 30). The delay is intended to give State and local agencies time to plan the next year’s EDWAA program.

SISW Intematio~, Op. Cit., p. W-19.

521bid.

53~e Natio~ Governors

> Asswiatioq me Natio~ ~s~iation of Comties, and me u~ted States Cotierence of h-fayors, EDWW Finuna”aZ

Resource Management: Issues and Strategies (Washington DC: Fetm.uuy 1991), p. 20.
80 ● After the Cold War: Living With Lower Defense Spending

Table 3-1 l—Provision of EDWAA Services in Selected Defense Layoffs

Months Months before or

of notice after (–) the layoff

Firm or installation before Iayoff EDWAA services provided

Rockwell (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mac-Douglas, Hughes, Northrup (CA)a . . . . . . . . . . . . . . . . . . .

Grumman (NY) (1969) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lockheed (GA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GD Electric Boat (CT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General Dynamics (TX, A-12) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lockheed (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fairchild-Republic (NY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mare Island Naval Shipyard (CA) . . . . . . . . . . . . . . . . . . . . . . . .

UNC Naval Products (CT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General Dynamics (TX, 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . .

McDonnell Douglas (MO, A-12) . . . . . . . . . . . . . . . . . . . . . . . . .

GE Aerospace (MA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

McDonnell Douglas (MO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Portsmouth Naval Shipyard (NH) . . . . . . . . . . . . . . . . . . . . . . . . .

Grumman (NY) (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fort Carson (CO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kelly AFB (TX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GE Guidance Systems (MA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GE Jet Engines (MA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pueblo Depot (CO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chanute AFB (IL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

na

o

3

2

0

7

0

5

3

3

0

4

2

9

4

3

4

12

24

20

53

- l o

- 7

- 7

- 6

- 6

- 5

- 4

- 4

- 3

- 3

- 2

-1.5

-1

0

0

2

2

2

6

12

12

. , 34

asouthern ~lifornia SDAS appli~ for National Reserve Funds to serve mUitiple layoffs in defense aerospace.

SOURCE: office of Technology Assessment, 1991.

Advance notice does not guarantee rapid response

by EDWAA agencies, however. In 10 of the other 14

cases, there was at least 2 months’ advance notice,

usually more. For example, in 1990, the Portsmouth,

NH Naval Shipyard gave 9 months’ notice that 890

positions would be abolished, but an EDWAAfunded displaced worker center did not open until

the week the workers were laid off. Meanwhile, the

Navy had provided several kinds of reemployment

services, including four job fairs and extensive

offers of relocation to other Navy facilities, but not

retraining, an option with considerable appeal to the

shipyard’s work force. The only training offered was

a 3-week course in welding for 40 workers, paid for

by the union. As for EDWAA, SDAs from two

States (Maine and New Hampshire) were involved.

Because the project resulted from a Federal action

and was multistate, and because the States and SDAs

had little money on hand to serve the workers, they

applied for a national reserve fund grant. It took 6

months for the SDAs in the two States to get the

application written. (One reason is that EDWAA

services cannot be provided until workers get notice

of layoff, and notices in this case were delayed.)

There was a further, although briefer, delay at DOL.

State agencies have the primary responsibility for

rapid response, and while some do a good job, others

are not as committed to or adept at providing it. In

1990, 22 States made fewer on-site visits (the first

step in rapid response) than the number of WARN

notices they received, while 22 made more. The

variation is substantial: one State responded to only

30 percent of their WARN notices, while another

responded to over four times as many sites as the

WARN notices they received.54

Several causes for the spotty and still unsatisfactory record of rapid response under EDWAA are

discussed below, in connection with other aspects of

the program. It is worth emphasizing, however, that

most State and local EDWAA agencies still need a

freer understanding of the pivotal role of rapid

response, and there is an important Federal responsibility in supervision and guidance to further this

understanding.

Discretionary Funds

One hindrance to rapid response arises from the

way EDWAA funds are distributed, both among

States and between States and substate areas.

Because most of the money is allocated by formula

~Da~ provid~ by he mployment and Training Administration U.S. Department of hhr.
Chapter Misplaced Defense Workers ● 8 1

before the program year starts, and because displacement is hard to predict in advance, the money simply

may not be where the displaced workers are. Under

an ideal system, places with a rash of large layoffs

would get generous funds for adjustment services

right away, while places with trivial layoffs would

get little or no money.

Recognizing that it is impossible to predict where

displacement will occur, EDWAA provides for

reserve funds at both the national and State levels.

Throughout the year, States and local EDWAA

agencies in need of additional funding can apply to

the Secretary of Labor for grants from the national

reserve. The trouble is that it takes time to write

applications and get approvals at both the State and

Federal levels for these discretionary funds-often

so much time that response to the workers’ need is

long delayed.

The Secretary of Labor attempts to rule on

proposals for grants from the national reserve within

45 days. Although longer delays were reported in

1990, DOL stated in mid-1991 that it was turning

proposals around in an average of 38 days. However,

38 days added to the time it takes to prepare the

application is still too long to allow rapid response.

Several factors contribute to delays. DOL requires

detailed information about the layoff in the grant

application; this takes time to review and even more

time to collect. Service providers must state, for

example, in which occupations displaced workers

are likely to be trained and what jobs they are likely

to take. Getting accurate and useful information on

questions such as these is a formidable, not to say

impossible, task. States often simply guess. After the

States spend weeks collecting such detailed information, DOL may return the application for more

specifics. As one State EDWAA official commented, only somewhat facetiously, ‘‘If the idea is

rapid response, we can’t know everybody shoe size

up front.

If rules for applying to the fired are unclear, that

further delays the process. While DOL does publish

rather voluminous and detailed reserve grant application guidelines each year in the Federal Register,

many States, according to the National Governors’

Association, have a hard time determining DOL’s

criteria for judging proposals.ss For example, a

Washington State official reported applying for a

discretionary grant only to be told that 60 percent of

the workers must be enrolled in retrainin g. Since this

requirement was in neither the law nor DOL

regulations, the official was puzzled as to how it

could be known ahead of time. Another State official

compared the DOL grant process to ‘‘shooting into

a dark room—you might hit something but you’re

not sure why, or if you could do it again. ’ DOL’s

view is that it strictly adheres to the guidelines in

evaluating proposals for possible funding, but State

managers are less sure of what is expected and many

doubt their ability to comply. A number of States

were in danger of running out of EDWAA funds in

1991 because the recession greatly increased displacement and demands for services, yet most States

were choosing not to apply for reserve funds,

because the process is simply too obstacle ridden.

According to one DOL official, many State EDWAA

managers cannot handle the complexities of the

grant application, and those that do know how are

too busy responding to client’s urgent needs to write

demanding, detailed grant proposals.

In many cases, the longest delays in the application process are not at the Federal level, but

elsewhere along the way. As mentioned, in the

Portsmouth Naval Shipyard layoff, it took half a year

for the two SDAs from two different States to

complete an application for a DOL grant. SDAs

within States can delay applications, too. For

example, when Secretary of Defense Richard

Cheney canceled the Navy’s A-12 fighter aircraft

because of delays and cost overruns, 3,400 General

Dynamics employees at Fort Worth were laid off

without notice (legal under the WARN law, since the

cancellation was unanticipated). DOL has a special

set of emergency procedures for streamlining approval of national reserve fired grant applications in

certain crisis situations, and this was one of them.

Yet, mainly because of delays at the local level,

Federal money was not received for 4 months.

An example of delay at the State as well as the

Federal level comes from California, where local

agencies waited more than 7 months in 1990-91 for

funding to deal with mass layoffs in the timber,

electronics, and defense aerospace industries. The

State frost sent in a proposal that DOL rejected on

grounds that it did not contain adequate detail. The

State took 2 months to amend the proposal; according to State officials, the application was more than

ssInterview ti~ Jo~ ~erer, Senior Policy Analys~ Human Resources Policy Studies, National Gvemors’ ASSOCtitiOQ ~ch, 1~1.
82 ● After the Cold War: Living With Lower Defense Spending

3 inches thick-the volume necessary to respond to

DOL’s requirements. It then took nearly 3 months

more for DOL to approve the proposal. Another 2

months went by before the State made the DOL

funds available to the local agencies. The agencies

received the funds in mid-March 1991. The terms of

the grant, ironically, precluded service to workers

laid off after March 31, 1991.

There are also problems in getting discretionary

State money to localities that need funds for rapid

response. Some States distribute most of their

EDWAA allocation to substate areas at the outset,

leaving little for emergencies.56 With those that do

have a reserve, there are often delays. Many States

use formal Requests for Proposals to distribute the

reserve funds, which delays the process significantly. 57 Others simply fail to get the money out to

the substate areas quickly. Some States have streamlined their review process and are approving funds

within 10 days. Still others provide startup grants out

of their reserve funds so the local service provider

can get in early and begin to offer the first, most

basic adjustment services. For example, in Massachusetts, substate areas can get up to $10,000 from

the State within 48 hours. Not all States have such

policies.

This leads to another major sticking point in

tapping into the national reserve fund. Virtually

every State EDWAA offlcia1 interviewed by OTA

said that delays in services are aggravated by the

DOL rule that prevents States and substate areas

from paying for services up front with their own

money and then getting reimbursed for their share if

and when the national reserve fired comes through.

Some DOL officials defend the rule on the grounds

that if States (or substate areas) have the money to

spend in the first place, then they don’t need Federal

reserve funds, and therefore should not be reimbursed. While this may make a certain amount of

bureaucratic sense, the practical effect is to delay

provision of services to displaced workers. States

that respond rapidly by spending their own money

up front risk not being able to respond to layoffs later

in the year. If subsequent reimbursement from

Federal discretionary money were allowed, that

would decrease the risk.

These delays and restrictions mean that if services

for displaced workers depend on discretionary

funding, chances are that the services will not be

ready until after workers are already laid off and

collecting unemployment insurance.58 It might be

reasonable to decide that if States are trusted to

administer 80 percent of the EDWAA funds, they

could be given more leeway in using the reserve

funds. There is a choice to be made: either require

detailed time-consuming applications and prohibit

reimbursement, or contribute to rapid response, but

don’t expect to have it both ways.

Quality of Services

One reason for uneven quality of service in

EDWAA programs is that, very often, the substate

area grantees are more accustomed to and interested

in serving disadvantaged workers than displaced

workers. JTPA includes two distinct programs

serving two quite different populations: Title IIA for

low-income and disadvantaged people and Title III

for displaced workers. In many substate areas, the

local EDWAA authority is the Service Delivery

Area (SDA), which also has responsibility for

serving disadvantaged clients under JTPA Title IIA.

In some cases where the SDA is the grantee,

programs for displaced workers take second place.

For example, one employment and training official

in St. Louis commented that many of his colleagues

resent the attention paid to laid-off McDonnell

Douglas workers. Their attitude was that those

workers do not need help. In Connecticut, when the

United Nuclear Corp. approached the local SDA

about its impending layoff, it got no response for

more than 2 weeks because the staff was busy on

Title IIA matters.

Some SDAs seem content to let workers be laid

off before they begin to provide services. According

%TA’s discussions with State EDWAA offkials support SRI’s findings that States with considerable rapid response experience predating EDWM

devote a large share of their40 paced funds to responses to specific closings that the substate areas’ formula funds do not adequately cover. In contras~

States with little previous rapid response experience are givhqI more of those funds, which they could reserve for distribution as need@ directly to the

substate areas by formula SRI International and Berkeley Planning Associates, “Study of the Implementation of the Economic Dislocation and Worker

Adjustment Assistance Act: Review of State EDWAA Plans and First Quarter Expenditures,” February 1990, pp. II-8.

flT~m ~sm~tion of private Industry councils, Luid ~: The Texas Response to Plant Closings andkyoffs (Austin, TX: 1990), p. 18.

~Natio~@vernors’ Association Natioti Association of Counties, United States Conference of Mayors, EDWM FinancialResource Management

hues and Strategies (February 1991), p. 20. An example of the papenvork involved was California’s 3-inch thick application for reserve funds for three

different industry-wide grants.
Chapter Misplaced Defense Workers ● 8 3

to one State official, a lot of SDAs in his State ‘‘still

wait for people to come out the door with their pink

slip before providing them services."59 Some deliberately postpone action until just before the layoff

date because they believe that workers do not benefit

from services provided earlier; one waited 4 months

after advance notice of a layoff for this reason.60

Some State agencies share in this misconception.

SRI reported that one State deliberately holds

orientation meetings at plant closings near the actual

time of the layoff.61

Another problem, according to SRI, is that

reliance on SDAs for running displaced worker

projects usually means less use of labor-management coremittees. Although some SDAs rely on

labor-management committees, more traditional approaches are the norm.62

The needs of disadvantaged workers and displaced workers often differ significantly. Displaced

workers usually have stronger work histories and

often higher skill levels; some need little more than

adjustment assistance administered promptly and

effectively. An SDA that has specialized in serving

disadvantaged workers may have trouble serving

displaced workers, especially the professional, managerial, and other white-collar workers being laid off

in defense industries.

Thus it is not surprising that the Title IIA service

system may be ill-suited to displaced workers. SRI

found that of 15 State displaced worker programs

studied, only 8 gave higher priority to recently

laid-off workers than to long-term unemployed.

(The law defines long-term unemployed workers as

eligible for EDWAA services, but emphasizes the

factor of displacement in all other categories of

eligible workers.) In fact, one State, with few large

scale layoffs, targeted its EDWAA activities to

long-term unemployed. Similarly, of the 30 substate

areas SRI examined, only 13 gave priority to

recently dislocated workers, while 9 gave long-term

63 Apparently, som e unemployed the top priority.

SDAs saw the EDWAA program as an opportunity

to supplement Title IIA services. Given their orientation, many SDAs see no need for specialized

readjustment services for displaced workers. In 20

SDAs studied by SRI International, 8 provided no

stand-alone basic readjustment services beyond

initial assessment, while the remaining 12 provided

the same readjustment services that Title IIA clients

received. 64

Some of the problems with SDAs might be solved

if State agencies were to do a better job of educating

them on the needs of displaced workers, the value of

early action, and the usefulness of labor-management committees. However, this is not simply a job

of education. Several State officials told OTA that it

is politically difficult to deal with the SDAs; they

have their own longstanding, well-established power

bases.

The quality of services for displaced workers

might be improved if States were to pursue more

aggressively options to use service providers other

than SDAs. Nonprofit organizations are another

choice. For example, in 3 of Massachusetts’ 15

substate areas, educational institutions have been

designated as service providers. Many of the State’s

dislocated workers in other substate areas are served

in on-site centers, run either by labor-management

committees or by experienced service providers who

specialize in assisting displaced workers. Massachusetts officials find that services involving the

company and work force in centers designed specifically for dislocated workers function well.65 One of

the best projects OTA staff visited was at GE

Aerospace’s Burlington, MA facility, where GE is

now providing the services after receiving startup

help from the State. (GE is using a State nonprofit

organization as a financial administrator.)

59SRI Intermtional, “Study of the Implementation of Economic Dislocation and Worker Ad@tment Assistance ACL Draft Final Repoz” 1990, p.

VI-15.

~bid., p. VI-15.

‘

t Ibid.

GZSRI ~temtio~ and Berkeley Phmning Associates, ‘‘Study of the Implementation of the Economic Dislocation and Worker Adjustment Assistance

Act: Issues in promoting Labor Management Cooperation” 1990, p, V-3; Texas Association of Private Lndustry Councils, Luid Ofl, op. cit., pp. 37-38.

‘3SRI Lntermtional, “Study of the Implementation of Economic Dislocation and Worker Adjustment Assistance ACL Draft Final Report,” op. cit.,

III-5 and IV-9.

‘Ibid., , p. VIIi-12.

6%terviews with Suzann e Teegarden, Director, Industrial Services Program, State of Massachusetts, and Barbara Baraq Director of Employment

Services, Industrial Service Program State of Massachusetts.
84 ● After the Cold War: Living With Lower Defense Spending

An advantage of the Massachusetts approach is

that it introduces competition into the system.

Giving SDAs money automatically on a formula

basis creates a monopoly and inhibits this qualityenhancing public sector competition.

As noted, EDWAA does allow State Governors

and local leaders to designate many kinds of

organizations as substate grantees, but in most States

Title IIA SDAs are chosen,66 either because of

inertia at the State level, or because of the considerable political clout that many SDAs possess.

Division of Funds and Responsibilities

Between States and Substate Areas

The mandatory division of funds between States

and substate areas adopted in EDWAA has, in some

cases, resulted in underfunding and understaffing of

local EDWAA agencies. Substate areas are numerous and becoming more so. In 1990, there were 638

substate areas, up from 605 in 1989. In some States,

EDWAA funds are spread so thinly that individual

substate areas can hardly marshal enough resources

to exist.67 For example, in program year 1989, 12 of

Florida’s 24 substate areas shared EDWAA funds of

less than $155,000 (an average of $13,000 apiece),

while in North Carolina, one substate area received

$11,771. @ Such limited funds make it virtually

impossible for smaller substate areas to mount a

program targeted to displaced workers, including

fast response to layoffs. In the words of one State

EDWAA director, there maybe little choice in these

cases but to “just lump it into the Title IIA program

and serve any long term unemployed worker who

comes wandering in the door. ’

One State found a creative solution to the problem

of reconciling the formula allocation to substate

areas with targeting EDWAA resources to displaced

workers. Nothing in the law says that States must

fund all substate areas equally. In Program Year

1989 (before the recession caused high levels of

displacement in nearly all parts of the State)

Massachusetts funded only 7 of its 15 substate areas,

directing the funds to those that appeared likely to

have the most displacement. Most States, however,

fund all their substate areas.

Another drawback to giving substate areas equal

control with the State over EDWAA programs is that

it adds a layer of bureaucracy. Before EDWAA, only

one agency and one set of officials were needed to

serve displaced workers. Now service delivery

contractors must not only deal with the State, but

also with the local substate area-in a big metropolitan area, often with more than one. An experienced

contractor involved in a layoff that crossed lines of

three substate areas commented that dealing with

several bureaucratic layers ‘‘saps your energy. ”

Some States, especially big ones like California,

probably need to rely on established public sector

organizations at the substate level to share in the

tasks of administration. Los Angeles alone has more

defense-related worker displacement than many

entire States. A permanent professional staff assigned to this area can establish procedures for

responding promptly to the layoffs. In fact, some of

Los Angeles County’s SDAs, as well as those in

neighboring Long Beach, do specialize in services to

displaced workers. However, many smaller States

are well able to manage EDWAA themselves,

offering services through the State dislocated worker

unit and through grantees that specialize in helping

displaced workers.

Training

EDWAA requires that at least 50 percent of a

project’s funds must be spent on training; individual

projects may get a waiver from the Governor to

reduce this to 30 percent, but few do it. The law’s

training requirement was a response to weaknesses

in the Title III program in the early years, when many

service providers focused most of their resources on

relatively cheap and simple adjustment services,

such as job search skills workshops. While the

change in the law reflects laudable goals, it does rob

some projects of the flexibility needed to serve

various kinds of clients. It can be difficult to meet the

requirement in layoffs of highly skilled defense

industry workers with few needs for retrainin g. Most

66 SRI ~temtio~ ~dBerkel~ planning Associates, Study of the Implementation of the Economic DislocXion and Worker Adjustment Assistance

At: Review of State EDWAA Plans and First Quarter Expenditures, op. cit., p. II-3.

67SRI ~temtio~ and Berkeley Planning Associates, ‘‘Study of the Implementation of the Economic Dislocation and Worker Adjustment Assistance

Act: Substate Issues,” April, 1990, p. 37; also interview with Barbara BaraxL Director of Employment Semices, Massachusetts Industrial Semices

Program, MarclL 1991; also, HanserL op.cit.

@Da@ supplied by the Employment and Training Adrninistratiou U.S. Deptient of ~bOr WY 13, IW1).
Chapter 3-Displaced Defense Workers . 85

of the engineers, computer programmers, and middle managers losing jobs in the big aerospace layoffs

of 1990-91 did not want training; but if they had, the

training was likely to be so expensive that a project

would find it hard to justify spending so much on a

handful of clients.

More generally, not all displaced workers need or

want training. Some need little more than information about resources available to them; others need

job search skills training and job leads. These

cost-effective adjustment services can help displaced workers find jobs quickly, reducing unemployment and its costs to the government. However,

in programs that offer a good selection of training

choices and careful matching of candidates with the

available courses, a sizable minority of displaced

workers will make the commitment to retraining.

Adjustment services are critical in helping people

choose whether they need training and if so, what

kind. When workers are not counseled about the

kinds of training they may need, they may choose

courses that are inappropriate and unproductive.69

One State EDWAA director gave the example of

tractor trailer driving. “Hundreds of guys want it,”

she said, “but the course is expensive and there are

no jobs. ’ Before it learned better, one center trained

20 people in tractor trailer driving, but only 1 found

employment. “With that money,” she said, “we

could have owned a tractor trailer. ’

Prior to EDWAA, service providers could count

expenditures on training-related counseling as training, but no longer. The law itemizes many activities

as training, including some that are fairly far afield

(relocation expenses), but not counseling. Unless it

is specifically and narrowly defined as trainingrelated counseling, DOL has ruled it out as a training

expense.

Sometimes, the 50 percent training requirement

has unintended consequences. SRI found that the

rule can create a perverse incentive for service

providers to seek out higher cost training, or to avoid

using sources of training funds outside EDWAA

(including Trade Adjustment Assistance training

funds and vocational education resources) .70

There are other difficulties with EDWAA training, some of them longstanding and with no obvious

solution. One is the fact that few displaced workers

can afford to take off much time for training. Up to

25 percent of EDWAA funds may be spent on

income support (’‘need-related payments”) and

other supportive services for workers in training, but

only rarely do projects provide such payments.71

Nationwide, spending for this purpose has ranged

between 5 and 7 percent of total funds; it was 6

percent in program year 1989. Income support for

displaced workers in training is limited mostly to UI,

which typically covers no more than 26 weeks (and

not even that if the worker fails to start training at the

time of layoff). This means that most EDWAA

training courses are short, usually 12 to 16 weeks—

only enough for narrow, specific courses such as

word-processing for clerical workers. A complicating factor is that skills trainin g courses are often

open only twice a year, which may not match the

time slot available to displaced workers. Some

community colleges have begun to offer courses

with open enrollment, beginning every week or two.

For example, Jackson Community College in Jackson, MI has an open-entry 6-month course in

manufacturing technology that is designed specifically for displaced workers.

Another hindrance to productive training is that

DOL policy and regulation discourage the use of

EDWAA funds to train workers for advanced skills

in their same occupation. The reason DOL officials

give for opposing such training is that limited

EDWAA funds should be focused on workers most

in need. Since laid-off electricians, for example,

already have a marketable skill, they are not the

clients most in need--even if they could benefit

greatly from further specialized training in electronics. The law itself does not demand distinctions

between training in a new skill and upgrading

existing skills, particularly for workers laid off as a

result of plant closings or mass layoffs-nor does

DOL regulation state the distinction explicitly.

However, DOL policy does not, in general, support

upgrade training. When this policy is applied, it may

not only lessen a displaced worker’s chances of

getting a good replacement job but may also defeat

@National Governors’ Association et al., op. cit., p. 11; also Interview with Barbara B% Massachusetts Industrial Services Program, October, 1990.

mSRI ~te~tio~ and Berkeley Planning Associates, “Study of the Implementation of the Eeonornic Dislocation and Worker Adjustment Assistance

Act: Substate Issues in the Implementation of EDWAA, ” p. 24; also National Governor’s Association et al., op. cit., p. 12.

TITo be eligible for these payments, displaced workers need to be CXWOkd h training by the end of their 13th week of unemployment and have

exhausted their UI benefits. Workers are sometimes not made aware of this requirement and do not get into &airing in time to qualify for income support.
86 ● After the Cold War: Living With Lower Defense Spending

the purpose of improving the skills of the American

work force and thus contributing to better competitive performance.

The DOL policy on training in the same occupation and the reasoning behind it arise from a certain

vision of the EDWAA program. DOL officials

responsible for EDWAA say they see the program as

one of three legs: financial support provided by the

UI system; adjustment services (e.g., job search

skills training, job development) provided by the

Employment Service; and training, particularly for

lower-skilled workers, provided by EDWAA. There

are problems with this view, not the least of which

is that Title III was designed as the primary

adjustment program for dislocated workers. The

language of the law is explicit on this point, listing

not only training but also many ‘‘basic adjustment

services” among those to be provided, although

funds for such services are limited by required levels

of expenditures for retraining.72 To expect the

Employment Service to offer all adjustment services

other than training to displaced workers is unrealistic; as discussed above, it is already hard-pressed to

serve unemployed workers in general and is in no

position to offer help tailored to the needs of

displaced workers.73 Moreover, it lacks the resources for rapid response to layoffs. If EDWAA

does its job and provides service very shortly after

notification of layoff, many workers will not even

need UI, services from the Employment Service, or

even training, because they will be employed.

Federal Responsibilities

A central challenge to a decentralized system such

as EDWAA is to see that best practice becomes

common practice. At present, best practice is not

always emulated; worse, it is often not even known.74

Some States respond rapidly, provide pre-layoff

services, and see that service providers do a good job

of offering training and services. Many others—

probably the majority---do not. As steward for the

system, DOL is responsible for systematically helping States advance to a more consistent high level of

service. States are not now getting adequate policy

leadership and technical assistance to help them

advance. 75

A

Better information sharing is the first essential.

Many service providers are simply not aware of the

latest developments in the field and find themselves

floundering or duplicating the efforts of others.76 For

example, the manager of a dislocated worker center

for laid-off blue-collar defense workers in California

told OTA visitors that the center was a real

breakthrough and a one-of-a-kind experiment. The

manager seemed unaware that many similar centers

have been set up around the nation over the past 10

years (and that models from as long as 25 years ago

are still useful). This manager was learning from

scratch what has become common knowledge elsewhere. The frequent turnover of personnel in State

EDWAA agencies leaves little institutional memory

of how to deal with displaced workers and thereby

compounds the problem.

A rather simple way of getting more information

on variation in program quality among the States

might be to require reports on rapid response.

Reporting requirements for EDWAA are minimal;

very little data that might form the basis for

indicators of program performance is required from

EDWAA managers. One of the few reporting

requirements is for placement rates (percentage of

workers leaving the program with jobs), but that is

a crude measure, subject to creaming (selecting only

the most job-ready applicants) and misleading

reporting (enrolling people only when there is a job

ready for them). Variation in local conditions also

creates difficulties in comparing service providers

by such measures as placement rates or wage rates

at placement. A better measure of program quality

that is less subject to misinterpretation or manipulation might be the average time it takes to provide a

set of key adjustment services (e.g., personal counseling, skills assessment and career counseling, job

search skills training) after the announcement of a

plant closing or mass layoff. This measure could

help identify both States that are doing poorly and

need help to improve and those that are doing well

enough to serve as models.

72~blic ~w lw18, Subtifle D-Employment and Training for Dislocated Workers, SX. 314 (c).

7SAS long ago ~ lg@ Shtiti Ud Wekr (op. cit) concludti that placement efforts for displaced workers should be on a special project basis; routie

Employment Service procedures are inadequate to handle the problems of mass layoffs.

74s~ Ha~n, op. Cit.

751bid.

TsIbid.
Chapter 3-Displaced Defense Workers . 87

Some consideration might be given to using

incentives, in addition to technical assistance and

information sharing, to raise the level of States’

practice. The EDWAA funding allocation system

gives the same amount of formula funds to a State

regardless of the kind of job it does.77 States might

perform better if there were some link between

funding and performance.78 For example, States

with a good record of rapid response might be

rewarded with a modest increase in funding.

DOL efforts to help States improve their programs

have included demonstration programs of rapid

response and labor-management committee operation of services for displaced workers, modeled on

Canada’s Industrial Adjustment Service; planning

for a second round of rapid response training;

development of an EDWAA financial management

guidebook for substate areas; and occasional roundtables convened by DOL regional offices. However,

many State officials have suggested a need for more

constant and systematic sharing of information

about what is working where.79

Insufficient funding and staff is the first reason

why DOL has not done more. The Office of Work

Based Learning, which is responsible for EDWAA,

simply does not have the resources to do much more

than send out money and minimally monitor what

happens to it. The staff comprises just 12 people, too

few to manage a decentralized nationwide dislocated worker system effectively and also keep in

close touch with State and local program staff.

Another reason for weakness in leadership is that

DOL’s relations with the States and local service

providers tend to be more adversarial than enabling.

DOL does monitor State performance, but more for

rule compliance than for service quality. Moreover,

some DOL officials treat the States as an interest

group rather than as a policy-making partner.

Systematic, frequent contacts between DOL and

the States and localities could help to promote the

active, continuing adjustments that any public program needs for success. Some of this does occur. At

the initiative of the National Governors’ Association

State JTPA Liaisons Group, DOL participates in

focus groups with selected State JTPA providers to

discuss specific issues in detail. More of these

interactions could be helpful.

Formulas for Allocating EDWAA Funds

Any system that allocates funds by formula to

anticipate future events is bound to overfund some

places and underfund others. Beyond this, however,

the formula for allocating EDWAA funds to States

does not adequately recognize the past record of

displacement. EDWAA requires that DOL use three

different unemployment measures in the allocation

formula. 80 Because dislocation is not necessarily

strongly correlated with unemployment, the EDWAA

formula system awards too little money to some

States and too much to others.81

States with very similar rates of displacement get

widely varying amounts of funds per capita. For

example, in 1991 the State getting the most EDWAA

funds per capita, West Virginia, received $10.23 per

employed person while the lowest-funded, Hawaii,

received 92 cents.82 Yet, according to data collected

by the Bureau of Labor Statistics (BLS) on mass

layoffs in 1989,4 workers per 1,000 were laid off in

Hawaii while West Virginia had only slightly more,

~~e s~retw of Labordocs set aperforrnance standard for substate areas, based on entered employment rate (64 percent employed), but tie m~asurc

is not used to allocate funds to States. If a substate area fails to meet the perfo rmance standard, the State Governor is required to provide technical

assistance to the service provider. After 2 years of failure to meet the standard, the Govemormay designate another service provider. Because the standard

is fairly recent and relatively easy to meet, this seldom happens in practice. Governors are also allowed to use a portion of the State’s 40 percent funds

to reward substate area performance.

Ts~e effwtivcnc~s of raising or lowering funding as an incentive to improve program Perfo rmance is uncertain. Past attempts to use such a reward

system for the State Employment Services were not carried through far enough to attow a fair evacuation of the results; devising a reasonable measure

of performance is difficult for the Employment Services. EDWAA’S rule limiting carryover of funds greater than 20 percent has apparently motivated

more spending by nearly all States, including the former IaWards, but it is probably easier simply to spend money than to improve program quality.

7~amem op. Clt,; OTA interviews with State EDWAA officials.

monc.~fid of tie 80 percent of DWAA allmatlons is allotted among he s~tes on be basis of tie relative number of unemp]oy~ individuals In

the State compared to unemployed in the U. S., one-third on the basis of number of unemployed in excess of 4.5 percent, and one-third on the basis of

relative number who are unemployed moie than 15 weeks.

Slsee James F, Ragan, Jr. and Daniel J. SIOttJe, “Alternatives to Unemployment-Based Funding Formulas in the Allocation of Federal Grants, ”

Growfh and Change, winter, 1989, pp. 17-33.

BzData suppli~ by tie Employment and Training Administration, U.S. Department Of hbor.
88 ● After the Cold War: Living With Lower Defense Spending

5 per 1,000. 83 In one of its evaluation reports on

EDWAA, SRI found that States with low unemployment rates (and hence low EDWAA funds) were

spending their limited funds faster than States with

high unemployment rates and higher EDWAA

allocations. 84 This indicates that despite their low

unemployment rates, these States had moderate to

high dislocation rates.

This problem was anticipated in EDWAA. The

law mandates that as soon as mass layoff data being

developed by BLS are satisfactory, they shall be

used in the formula. It is not clear, however, when or

even whether these data will ever be satisfactory.

Although BLS has developed mass layoff data for

most States, several, including California, have

resisted adapting their UI systems to collect the

data.85 Because of their reluctance, the system is on

hold and cannot be used. Another problem is that

although many States, particularly the smaller ones,

have very few mass layoffs, they have many smaller

layoffs that the BLS system does not count. Finally,

it is unclear just how accurate the system is in

reporting mass layoffs. Several States commented to

OTA that they had serious doubts about the validity

of the numbers for their States.

The distribution of EDWAA funds within States

is also troublesome. EDWAA requires that in

allocating half the funds by formula to substate

areas, States must use at least six factors, including

data on unemployment, plant closings and mass

layoffs, and declining industries, but the States can

weight the factors in any way they choose. According to SRI, many States repeat the mistake of the

national formula, giving too much weight to unemployment rates. 86 Most States, SRI found, either do

not have good information about declining industries and plant closures, or do not use it in their

formulas. Among States that did not use dislocated

worker data in their allocation formula, only 16

percent of the substate areas had appropriate funding, while among States that used the data, 55

percent of the substate areas had appropriate funding. 87

Spending Rules

There was good reason for the change Congress

made in Title III spending rules when EDWAA was

enacted in 1988. This was the fact that States had

continuing, and mounting, carryovers of unspent

Title III funds under the old regime. The first attempt

to fix the problem, urged by the Reagan administration and adopted by Congress in fiscal year 1986,

was simply to cut the Title III appropriation in half.

But this penalized the States that had created

vigorous, functioning displaced worker programs

more than those that had done little or nothing and

were the very ones carrying over most of the excess

funds. Carryovers began to rise again the next year,

after the Title III funding level was restored.

Under the original Title III, the Secretary of Labor

could, at his or her discretion, reallocate obligated

funds from one State to another, but this never

actually occurred. Under EDWAA, the reallocation

became mandatory. It is difficult to evaluate the full

effects of the new spending rule. It certainly has cut

the carryovers. According to DOL officials, there

was virtually no carryover of more than allowable 20

percent of formula funds allocated to States in 1990

or 1991.88 The fact that participation, both in

numbers and percent of eligibles, reached an all-time

high in program year 1989 reflects not only the

increased program funding, but also the pressure to

spend more of the allocated funds. Whether this

pressure is all to the good is hard to say until local

programs are better evaluated. States and substate

areas under pressure to spend may find creative ways

to do so. Some States and substate areas have spent

sscdc~td on the basis of data in the 1989 Mass Layoff Survey, U.S. Department of Labor, BWWW of Labor Statistics, Mass Luyoffs in 1988

(Washington, DC: Government Printing Office, 1990).

~SRI Inter-national and Berkeley Planning Associates, ‘‘Study of the Implementation of thelkonomic Dislocation and Worker Adjustment Assistance

Act: Review of State EDWAA Plans and First Quarter Expenditures,” op. cit., pp. II-4.

gssome Stites ~ve ~ist~ b~~ of the incrwti cost in adapting their systems to collect this information. In addition+ some view the ww Of ~

data narrowly and oppose using it for the purposes discussed hem.

USRI Internationatand Berkeley PhmK@ Associates, “Study of the Implementation of the Economic Dislocation and Worker Adjustment Assistance

Act: Substate Issues in the Implementation of EDWAA,” op. cit., 37.

87s~ ~t~tio~, ‘ CSmdy of tie ~pl~en~tion of &ononlic Dislocation ~d work Ad@s~nt Assistice A@ Draft Final Repo~’ op. cit.

ss~~ Cqovas r~ch~ a hi~ of$20g ~lion and w percent of allocations to States in mid-1986 (the end of the 1985 pro- Y@; inm.id-lm

carryovers were down to $114 million and 34 percent of the year’s allocation to States. However, these amounts include carryovers of funds from

discretionary grants from the national reserve fund, which are often made vexy near the end of the program year. Carryovers of the States’ own allocations

were not more than 20 percent.
Chapter 3-Displaced Defense Workers . 89

EDWAA funds on projects for drug addicts, the

homeless, or welfare mothers, defining them as

long-term unemployed.89 While employment and

training projects may be valuable for these clients,

they can be served by the much larger JTPA Title HA

program. Another drawback to the spending rule is

that it encourages substate areas to spend their

money quickly early in the program year so they are

sure not to have to give any back. If layoffs occur late

in the year, many substate areas have already spent

their money, and the only recourse is to apply for

discretionary funds, which usually means delay.

Where the spending rule might create a serious

problem for some States is in giving too little

cushion for higher spending in recession years.

Demands for EDWAA services rise in recessions,

when layoffs are increasing and job openings are

few. Moreover, when no jobs are available, displaced workers are more inclined to choose training

in order to make constructive use of their time, and

training is the most expensive of EDWAA services.

EDWAA funding is not countercyclical. Congress

appropriates the annual funding for EDWAA long in

advance. Appropriations bills are timed with the

fiscal year, which begins October 1, and EDWAA’s

program year, in which those funds are spent, begins

9 months later, on July 1 of the following calendar

year. The level of funding thus has little to do with

business conditions at the time States and substate

areas start spending the money.

Although EDWAA funding rose from $283 million in fiscal year 1988 to $527 million in 1991 and

$577 million in 1992, these increases were for

growth in the program, not for meeting greater

demands due to recession. With the 1990 recession

and persistent high unemployment in 1991, many

States found themselves running short of funds. In

1990, some States told their substate areas to ‘put on

the brakes’ and not enroll too many people, so as not

to run out of money halfway through the program

year. In October 1991, only 3 months into the 1992

program year, DOL officials reported that many

States were spending their formula allocations at

such a rapid pace that their funds would not last out

the year. However, as noted above, in 1991 requests

were coming in slowly for grants from the national

reserve fund and for the special $150 million fund

earmarked for displaced defense workers. The problems of getting access to these discretionary funds

are apparently deterring States from using them for

their intended purposes.

DOL cannot set aside unexpended funds for tough

times, and the carryover rule means that States and

substate areas cannot set aside more than 20 percent

of their formula allocation each year. Lacking the

ability to save for a ‘ ‘rainy day reserve, the

program may fall short of meeting needs during

recessions.

DEPARTMENT OF DEFENSE

TRANSITION PROGRAMS FOR

CIVILIAN EMPLOYEES

All displaced DoD civilians are eligible for

EDWAA services, but DoD provides extra services

as well. The Department itself has developed programs, as have the individual services and some

individual facilities and bases. Many of these efforts

to help civilians are less than 1 year old, and some

are still being established.

As with most other matters related to the armed

services, civilian transition policies are handled in a

somewhat decentralized and uncoordinated reamer.

The Secretary of Defense sets overall policy but

leaves each service to manage its own layoffs. As a

result, the services differ considerably in their

progress toward handling civilian layoffs. Within

each branch, there is still more variation. Some

commands are quite active, while others have done

little. Similarly, some bases slated for closure are at

the forefront, while others lag. Although this allows

a certain amount of flexibility at the local level, it

also means that assistance to laid-off workers varies.

Nevertheless, the range of services offered to DoD

civilians adds up to considerably more than the

average defense industry worker receives, particularly blue-collar workers and workers in small fins.

Advance Notice

The WARN act requires private employers to

provide at least 60 days’ notice to workers affected

by mass layoffs. A new rule from the Office of

Personnel Management (OPM), taking effect November 6, 1991, now requires the same for all

Federal employees, including DoD employees. Even

before the rule took effect, all the military services

13SSM ~termtio~ and Berkeley Plming Associate-s, ‘‘Study of tbe Implementation of the Economic Dislocation and Worker Adjustment Assistance

Act: Substate Issues, ’ op. cit., p. 38; OTA interviews with State and local EDWAA ot%cials.
90 ● After the Cold War: Living With Lower Defense Spending

except the Navy required a minimum of 60 days’

notice. (The Navy required that each facility establish some kind of outplacement effort and sign up

workers for DoD’s internal placement program

before the RIF, and individuals had to be given an

additional 30 days’ notice if they asked for it.)

According to a General Accounting Office (GAO)

study of 16 defense installations undergoing RIFs,

one gave 44 days’ notice while the other 15,

including 3 of 4 Navy installations, gave 60 days or

more .90

DoD- Wide Placement Programs

DoD concentrates its efforts on computerized

employee placement programs, primarily the Department’s Priority Placement Program (PPP), but

also the Displaced Employee Program of the OPM

(available to all Federal employees) and an automated resume referral service. These programs

supplement the outplacement efforts that each service operates independently.

The Priority Placement Program

The centerpiece of the Department’s efforts is the

PPP, established in 1965 to respond to a number of

base closures at that time. It is an automated system,

matching employees who are scheduled to be

separated or downgraded with vacant DoD positions

for which they are fully qualified.91 The system not

only benefits employees but also yields savings to

DoD in severance pay, unemployment compensation, and lump sum annual leave payments. All DoD

employees who are scheduled to be separated and

are entitled to severance pay are automatically

registered in PPP. At the time of registration,

participants may specify the locations they are

willing to accept (which must include, at a minimum, the employee’s own geographic area).

PPP’s computerized listings contain the grade

level of participants and as many as five skills for

which they are qualified. The listings are sent

biweekly to every DoD Civilian Personnel Office in

the world. Personnel staff are responsible for matching eligible candidates on the list with vacancies in

their organization. If the new job requires a move to

another location, moving costs are borne by the

government.

The key to PPP is that when a vacant position

matches the skill and grade of a PPP registrant, all

recruiting action stops and that job must be offered

to the registrant. However, the registrant typically

has only 24 hours to decide; a registrant refusing a

job in a location he or she has previously selected as .

acceptable is removed from the system and does not

qualify for additional benefits such as severance

pay.

92

From 1965 to 1990, over 90,000 registrants found

jobs through PPP; the number in 1990 was 3,159. In

many cases, PPP gives a significant boost to

outplacement efforts. For example, in layoffs from

the Pueblo (CO) Depot, nearly one-third of those

laid off found jobs through PPP. In the Portsmouth

Naval Shipyard layoffs, one-quarter of RIFed employees were placed through PPP. Local DoD

outplacement officials interviewed by OTA were

unanimous in their belief that PPP works well. In

fact, most claimed that any employee willing to

relocate would find alternative DoD employment

with PPP.

When PPP finds a position for a registrant, it does

so quickly. In 1990, one-third of the total placements

were made within 30 days of registering, and nearly

two-thirds within 60 days.93 Since most DoD

civilians get at least 60 days’ notice, the program

apparently finds jobs for most people before they are

laid off. Note, however, that contractors and noncivil-service employees are not eligible for PPP. In

some cases, these people make up a significant

number of employees on a base.

While PPP has apparently worked well in the past,

there is some question as to whether it can take care

of the large number of people threatened with RIFs

in the defense build-down. The rate of PPP usage has

recently increased, with registrations in the first 4

months of 1991 already surpassing total registrations in 1988. At the same time, the placement rate

%Tcs~~ny on AdvanCe N~tiCe: public and fivate Sector poIicy and ~actice, by Fratiin Fr~ier and Bernard L. I_Jngar, GAO, before the

Subcommittee on Human Resources, House Committee on Post Office and Civil Service, Apr. 18, 1991.

91DOD is s~eml~ng he ppp re@ation5 ad ~50 ~ng it possible for perso~el offic~ mound the world to enter the &@ directly onto ~S ~d

upload the data directly to the PPP data center in Daytow OH.

Y~According t. DOD spokesmen, this rt~ufiement is applied wi~ some flexibility. For ex~ple, a registrant whose situation h~ changed (Say, Wugh

illness in the family) so that a previously selected location is no longer acceptable might not be removed from the PPP system or forfeit severance pay.

gsoffice of the A~sis(ant Secretary of Defense for Force Management and Personnel.
—— .-

Chapter 3--Displaced Defense Workers ● 9 1

for PPP declined, falling from a high of 48 percent

placed in 1989 to 35 percent in the first 4 months of

1991. However, not all registrants stay in the system;

some retire, some decline a PPP offer, and in many

cases, RIFs are canceled. Given the rate of natural

attrition from DoD and the current hiring freeze, it is

likely that PPP will continue to provide placements

for a significant number of DoD civilians. A helpful

factor is that people hired through PPP do not count

against the hiring unit’s freeze, which provides an

incentive to hire from PPP. In addition, the fact that

layoffs from Round Two of base closings will not

begin until 1995 means that some of the big layoffs

will be spread out over time, thus increasing the

chances of PPP placement.

PPP works best where there is a large concentration of civilian DoD jobs, such as Washington, DC

and San Diego, CA. In areas with few DoD jobs,

people may be unwilling to move to get a job

through PPP. For example, one reason for setting up

an aggressive outplacement program at the Mare

Island (CA) Naval Shipyard was the belief that few

employees would want to leave the San Francisco

Bay area, but DoD jobs there were relatively scarce,

Similarly, PPP was of only limited use in the RIF of

890 positions at the Portsmouth Naval Shipyard in

1990. About 600 employees registered with the PPP

and 95 got placed. Forty declined offers, primarily

because they did not want to move out of the area.

According to base officials, PPP was able to place

everyone willing to move out of the region.

OPM Placement Program

The Office of Personal Management also operates

a placement program, the Displaced Employee

Program (DEP), for all Federal employees who are

involuntarily separated or notified of separation.

OPM prohibits agencies from filling positions from

outside the government when qualified DEP registrants are available, but it does allow them to cancel

vacancies or fill them internally. In a 1983 study,

GAO concluded that the OPM program can provide

some placements but is less effective than DoD’s

PPP because it does not require hiring from the list.94

In fiscal year 1990, the program placed only 25 of

the 724 priority referrals in permanent Federal

Positions. 95 Notwithstanding the program’s limited

record of success, DoD makes this program available to displaced DoD civilians.

Defense Outplacement Referral System

As discussed in chapter 5, DoD is establishing an

automated resume referral service. This system

primarily targets private sector firms (although other

Federal and State agencies can use it) who, by

calling a 900 number, can receive resumes of DoD

military personnel. While the system was originally

designed for military personnel, DoD has made the

system available to civilians. DoD civilians also

have access to a computerized Transition Bulletin

Board that allows employers to list employment

openings.

Severance Pay and Unemployment Insurance

Displaced DoD employees may receive severance

pay of up to 1 year’s salary, depending on age and

length of service. In many States they are also

eligible for unemployment insurance benefits, usually for up to 26 weeks after severance pay runs out,

although in some States, UI benefits are reduced by

the amount of severance pay received.

As structured at the moment, DoD transition

benefits sometimes offer perverse incentives to their

civilian employees, and to military separates as

well. Because employees departing voluntarily are

not eligible for severance pay, incentives for leaving

early before a formal RIF are mixed. 96 Thos e

expecting a RIF might want to get a jump on the

process of finding a new job; on the other hand, they

might never have to leave if enough others depart

voluntarily before the RIF. And if they wait until

they are formally RIFed, they can collect severance

pay, DoD civilians around the Nation have recommended that DoD provide some type of bonus to

individuals who voluntarily leave before a RIF, on

the grounds that this not only would save DoD

money but also would reduce the number of people

involuntarily separated. However, because of the

costs involved and because legislative action would

be necessary, DoD believes that at this time adminis9dGA0 fomd tit ~ 1983, ~genclc~ ~ancel~ or fill~ inttimlly ~most h~ of tie 5,183 vacancies for w~ch OPM had referred registrants ~d that

OPM placed only 648 (9.9 percent) of the 6,569 registrants. Statement of Rosslyn S. Kleema~ Associate Director, General Government Division, GAO,

before the Subcommittee on Human Resources, House Committee on Post Office and Civil Service, Oct. 2, 1984.

~sFr~icr and Ungar, GAO testimony, op. cit.

96volun~ jobleaver5tienotel~@blc for ~ el~er, but severance pay is set at he level of tie employee’s s~~, Witi u benefi~ limited to a rather

low Ievcl. Thus the incentive to collect UI is less,

305-199 - 92 - 4
92 ● After the Cold War: Living With Lower Defense Spending

trative measures such as the hiring freeze and

outplacement efforts are sufficient.

Another problem is that DoD civilian workers are

not eligible for employee assistance programs after

they have been separated. These include access to

personal and financial counseling. DoD is working

with OPM to modify the rule so that laid-off

civilians will be eligible for these programs up to 6

months after separation.

Job Search Assistance Programs

In addition to the job referral systems described

above, DoD is encouraging each of the services to

establish more active assistance programs. For

example, DoD is providing a handbook and policy

manual on downsizing and base closures to be

distributed to its civilian personnel offices in fall

1991. Among the issues discussed is how to work

with State and local EDWAA service providers and

how to set up outplacement centers. DoD is also

preparing a pamphlet to answer questions frequently

raised by affected employees.

The only DoD-wide assistance program is TAP, a

3-day workshop providing soon-to-be-displaced civilian employees and separated members of the

armed services with training to assess their occupational skills, conduct job searches, develop resumes,

and prepare for interviews. TAP was designed for

departing military personnel, but DoD allows civilians to participate. TAP is described in chapter 5.

Use of labor-management committees to operate

transition services at DoD installations undergoing

a RIF varies considerably. While some have used the

committee structure and found it beneficial, others

have resisted the idea. Successful examples such as

the experience at Pueblo help overcome this resistance.

Army Assistance Programs

The Army is perhaps the furthest along of the

three services in establishing servicewide assistance

programs. In 1990, it established the Army Career

and Alumni Program (ACAP) to help both military

and civilians make the transition out of the Army.

The Army plans to set up 61 ACAP centers at its

larger bases around the world. ACAP is also

described in chapter 5.

In addition to ACAP, a number of installations

have established their own programs. For example,

at the urging of the Colorado Governor’s Office of

Job Training and the DoD civilian workers, two

installations in Colorado, Fort Carson and the

Pueblo Depot, developed aggressive outplacement

efforts in cooperation with the state EDWAA

program. These programs formed part of the model

for ACAP (see box 3-B).

Air Force Programs

The Air Force has been slower than the Army in

developing outplacement efforts and has decided not

to mandate a program from the ‘‘corporate” level

since there is so much variation among bases. The

Air Force Command sees its role as disseminating

information on what is going on at bases around the

Nation and how best to support transitions.

Toward that end the Air Force is examining

administrative and legislative changes that might

improve transition programs. For example, it is

considering rule changes to allow employees time

off work for job interviews, which is permitted and

encouraged by the Office of the Secretary of

Defense. The Air Force also recently put together a

guidebook and held training sessions for personnel

offices on how to manage large RIFs and base

closures. The guidebook makes little mention of the

possible need for an outplacement center.97 However, a Transition Assistance Plan that the Air Force

is distributing to its bases encourages the family

support centers at each base to conduct outplacement services, including job banks, resume writing,

and interviewing skills. Bases have also been given

authority to hire one specific person to do counseling

and be the outplacement project officer.

Even without a specific mandate from the Air

Force, some bases have developed their own displaced worker projects for civilians. For example,

Chanute Air Force Base in Illinois established its

outplacement effort, called Project Choice and

modeled after the Colorado base closure projects, for

the 2,000 civilians working there. In May 1990, base

officials met with the local SDA and the state Rapid

Response Team, and soon after established a labor-

%’~e g@e d~~ di~cu~~ bri~y tie ~e~d for some ~d of oup~c~ent effo~ when tie b~e is c]os~, but gives l.itfle guidance on w~t tids Of

efforts tight be helpful. (’‘Air Force Guide to Conducting a Reduction in Force or Transfer of Functiom’ prepared by Headquarters, USAF, Directorate

of Civilian Personnel, 1991.)
Chapter 3-Displaced Defense Workers ● 93

management committee with a lieutenant colonel

from the base as neutral chair. The committee

opened an outplacement center, staffed by the local

SDA, in November 1990; the center will remain

open until June 1994, 9 months after the closure. To

pay for the center, the State of Illinois is providing

some of its 40 percent EDWAA. funds and is also

applying for a DOL discretionary grant of $3.2

million for 2 years.

The center trained some employees who are to be

RIFed as Project Choice advisers; they do peer

counseling and make referrals to the center. All

employees can use the center as much as needed

during the work day, provided they get release time

from their supervisors. Clients first undergo a skills

assessment and receive a full course of job search

skills training. By mid-1991, 537 had enrolled in the

program and 232 had taken training courses.

Chanute is part of the Air Force’s Air Training

Command (ATC), which is promoting the Chanute

model to three other bases undergoing closure. The

Training Command has written and distributed a

guidebook and held a conference on how to set up

transition programs.98 The ATC has briefed other

Air Force Commands and Navy personnel staff on

their experiences. Mather Air Force Base in California has already developed a similar project and other

bases, such as Lowry in Denver and Williams in

Arizona, are following suit.99

Navy Programs

Of the three services, the Navy has perhaps done

the least to set up servicewide civilian assistance

programs. The Navy is encouraging its installations

to establish outplacement programs, but the decision

to do so is left up to the local commanding officer.

Guidance may be inadequate; one base personnel

officer told OTA that many bases are unsure how to

go about setting up transition centers.

Nevertheless, several Navy installations have set

up their own outplacement efforts. One of the

earliest was at Mare Island Naval Shipyard, in

Vallejo, CA. Because several ships due for overhaul

were decommissioned, Mare Island expected work

load dropped significantly. Employment at the

shipyard dropped from 10,000 in 1988 to 7,100 in

1991. Throughout, Mare Island base officials have

tried to cutback in ways that would avoid mandatory

RIFs, For example, when 200 engineering and

technician positions were eliminated in October

1988, the base held a job fair attended by 24

companies. Afterwards, enough people voluntarily

took outside jobs that the RIF was canceled.

Similarly, when 600 blue-collar jobs were slated for

abolition in summer 1989, another job fair, attended

by 40 companies and open to all shipyard employees, helped to avoid the RIF. However, many

workers with needed skills left during the 1989

effort, so in 1990 participation in job fairs and other

outplacement activities was limited to certain occupational groups. In both years, an outplacement

center supplemented the job fairs and trained workers in job search skills.

In 1990, Mare Island had to make much bigger

cuts, reducing employment by 2,000. The base again

organized job fairs, which 154 employers attended,

and 19 other employers were brought in to conduct

interviews. These efforts resulted in offers of jobs to

434 people, 350 of whom accepted. Besides the job

fairs and the outplacement center, the base organized

some 130 job clubs, in which 1,300 people participated. PPP was able to place 200 of the 800 who

enrolled, but many of the other 600 were not willing

to accept jobs outside the San Francisco Bay area.

The result of all these efforts was that only 459

people were laid off, while over 1,500 got outside

jobs and left voluntarily.

Because the local economy worsened in the

1990-91 recession, Mare Island developed more

aggressive efforts for its planned 1991 layoffs. Base

officials sent newsletters to employees’ homes to

inform them of base efforts, and they gave 25

employees training and release time both to lead job

clubs and to spend 4 hours a day calling companies

to turn up positions for Mare Island workers.

Mare Island, like other DoD installations, has a

problem of free riders-people who will not leave

voluntarily in the hope that others will leave and the

RIF will be canceled. One way service providers

have dealt with the problem is to conduct a mock

RIF, identifying those likely to be laid off. These

people are then informed them of available services.

Another problem encountered by Mare Island is

that the local EDWAA agencies declined to work

~Civiiian Training Assistance Program (CllV),MTrtig CO~d, Civilian Automated Training Office, Lackland AFB, TX, 1991.

99~ner t. OTA from E. JenC LiaCi, ~Tr-Comnd, Civilim Auto~t~Tr- Office, hcmd ~,&t. 9, 1991.
94 ● After the Cold War: Living With Lower Defense Spending

with employees until they were actually displaced.

(Under the law, EDWAA services maybe provided

to workers who have received notice of termin ation

but are not yet actually laid off; EDWAA does not

cover any services for active workers who have not

received notice of layoff.) One local SDA official

justified withholding services until workers are

actually ‘‘out on the street’ on grounds that the

RIFed employees might be recalled. The result,

however, is that laid-off workers who may want

training or other EDWAA services must wait weeks

or months to get them. Base officials also complained that because there were four SDAs in the

affected area, coordination was difficult. Each SDA

worked differently, and the result was a ‘‘pretty

unmanageable’ process. As noted above, the

Portsmouth Naval Shipyard also had trouble dealing

with multiple SDAs.

Links to EDWAA

DoD outplacement programs do not appear to

have strong links to EDWAA. Several DoD officials

involved in managing the downsizing (at both the

service and base levels) told OTA they were either

not aware of EDWAA or were not sure how to get

access to it. GAO reported similar findings: of 16

DoD installations GAO contacted, 11 were aware of

the services available under EDWAA, but only 5

used them.l00 Even when DoD installations provide

adjustment services, EDWAA is important as the

principal source for retraining funds. But institutional bonds between DoD and State displaced

worker units remain undeveloped. For example,

there appear to be no formal links between the

Army’s ACAP centers and EDWAA. Similarly, the

Air Force’s guide to conducting a RIF makes only

scant mention of public programs, suggesting that

‘‘visits from state employment offices, other federal

agencies, and so forth should be scheduled . . . .’ ’101

Informal relations are equally lacking. As mentioned, base personnel offices don’t really know

where to start in approaching EDWAA providers.102

DoD hopes to remedy the situation through its

downsizing handbook, which will discuss EDWAA

and provide State contacts. However, DoD does not

want to mandate that the programs link with

EDWAA; rather it is hoped that installation commanders will work voluntarily with State and local

officials.

Another reason for the lack of collaboration is that

until November 1991 Federal agencies were not

required to notify the State displaced worker unit of

impending layoffs. However, the new rule requires

such notification.

INDUSTRY EFFORTS

Some defense industry companies have active

programs to help their displaced workers get new

jobs or enter trainin g. From the company point of

view, adjustment programs enhance the company’s

reputation as a responsible employer. Companies

seen as simply throwing away their laid-off workers

might have a problem keeping existing workers or

attracting good ones when they hire again. Moreover, morale and productivity often improve if

workers see that the company is trying to help them.

Outplacement efforts can also reduce a company’s

UI and other separation costs.

From a public policy perspective, company participation is key to success. First, companies know

their plans for layoff, even before the WARN notice

is given, thus enabling them to plan for services

before the layoff is announced.103 Second, many

companies are able to put up some funds of their own

while waiting for EDWAA money to arrive, which

means that services can be provided much earlier.

Conversely, the fact that EDWAA funds will become available is often an important factor in getting

companies to contribute their own resources.

Not all companies go to the same lengths to help

their departing employees. According to a 1983-84

GAO survey, the benefit most often provided to

displaced employees by businesses experiencing a

closing or permanent layoff was severance pay; 45

percent of the firms offered it to at least some of their

workers. Thirty-one percent offered some placement

assistance, while 30 percent provided no assistance

l~Fr~ier and ungar, GAO testiInOny, Op. cit.

1OIU,$AF, Dfiectorate of Civilian personnel, Op. Cit.

10~D~ector, Shffing ad Cweer Development, office of the Deputy Assistant %cretary Of Defense, Civfian pe~onnel PolicY~~ @Po~w

10~Fe&au and B~fe fomd @t ~oqorate pl~ng for adjustment prog~s often begins shofly before the anno~cement of a downsizing. Fe&au and

Balfe, op. cit., pp. 138-149.
Chapter 3-Displaced Defense Workers ● 95

of any kind.l04 Because larger firms often have greater

financial resources, they are more likely to offer

services to their displaced workers than are smaller

ones. And companies are more inclined to provide

services to their salaried workers—managers, professionals, and white-collar employees—

than to their hourly workers. The GAO survey found

that for every kind of assistance companies offered

displaced workers—income maintenance, continuation of health insurance, job search assistance,

counseling, or a comprehensive benefits package—

considerably more went to white-collar workers than

to blue-collar workers.105

Most of the large defense contractors interviewed

by OTA provided at least some services to their

laid-off workers (see table 3-12). Like businesses in

general, defense firms are more likely to offer

services for salaried personnel, especially executives, than for hourly staff, although a few defense

companies made no such distinctions, providing

much the same services for all. GE Aerospace is a

leading example; its company-operated projects in

Pittsfield and Burlington, MA are open to all

employees, salaried and hourly alike.

Many large defense firms set up outplacement

centers; some go further and offer extensive benefits

and programs. Many companies provide severance

pay equal to 1 week’s pay for each year of

employment. A few provide training stipends. For

example, white-collar employees at General Electric

have $5,000 to use over 2 years for training.

Blue-collar workers get $2,000 per year to use over

5 years for either classroom or on-the-job training.

At Texas Instruments, defense workers with over 15

years’ experience may receive $6,000 for training,

additional severance pay, and relocation assistance,

including reimbursement of realtors’ commissions

and moving costs.

Some defense firms have provided a full menu of

outplacement services. For example, in moving from

Burbank, CA to Marietta, GA, Lockheed Aeronautical Systems laid off most of its 8,000 defense

employees in Burbank. Lockheed used its own funds

to hire Drake, Beam, Morin (DBM), a professional

outplacement firm, to set up a spacious and wellappointed on-site outplacement center for salaried

managers, engineers, and other white-collar workers. The center opened 6 months before the first

layoffs and provided a full range of services,

including resume preparation, interview skill training (with videotaped mock interviews), job development, and counseling. Before using the outplacement center, salaried personnel must take a companypaid 3-day course covering skills assessment, career

goals, resume writing, and job search skills. Each

worker is then assigned a case manager for individual counseling and advice. The center has a full

complement of facilities, including workstations,

free long-distance phone and fax service, wordprocessing, newspapers and other publications, and

various directories and other resource materials. The

center also employs a full-time job developer who

provides listings of job leads and makes monthly

mailings of resume books to employers nationwide.

In addition, the California Employment Development Department has a person on site, with access to

the State’s computerized job match program. This

center is heavily used. One year after it opened, it

had served about 1,300 clients, and was still

handling about 85 users per day.

For hourly workers, Lockheed established a

center run by DBM and funded by the local SDA.

Located about a mile from the plant in the local

International Association of Machinists offices, the

center did not open until 5 months after the initial

layoffs because of delays in EDWAA funding. It is

equipped with area newspapers, work tables, and

typewriters. In addition, workers can receive career

counseling. This center is much less used than the

one for salaried employees.

The GE Aerospace Division center in Pittsfield,

MA serves both hourly and salaried workers and is

run jointly by union and company officials. Initially,

GE planned to establish two separate centers but

decided to provide services for both in the same

building, although a wall was put up dividing hourly

from salaried workers. To the surprise of GE

management, the hourly and salaried workers enjoyed having services provided together, and now

use the services in any part of the center, regardless

of ‘ ‘what side of the wall they are on.

IWUS Genera] ~counting C) fflcc, P/un[ cforlf~gs,. LinlZf~d Ad\,unce Notice ~If]~ Assi,Tfance Provided Dislocated workers, GAO---87- 105

(Washington, DC: 1987), pp. L%, 82.

loSIbl(i., p. 48.
96 ● After the Cold War: Living With Lower Defense Spending

Table 3-12—Selected Defense Layoffs: Worker Services Provided

Salaried

out- and hourly

Size of Placement Firm EDWAA placement served

Firm layoff center Dollars Dollars firm together

General Dynamics (TX) . . . . . . 9,000

Lockheed (GA) . . . . . . . . . . . . . . 8,000

Lockheed (CA) . . . . . . . . . . . . . . 8,000

GE Aerospace (MA) . . . . . . . . . 5,500

GE Jet Engines (MA) . . . . . . . . 2,200

United Nuclear (CT) . . . . . . . . . 1,100

GE Aerospace (MA) . . . . . . . . . 600

Electric Boat (CT) . . . . . . . . . . . 582

Texas Instruments (TX) . . . . . . 1,600

Westinghouse (MD) . . . . . . . . . 1,232

McDonnell Douglas (MO) . . . . 7,900

Rockwell (CA) . . . . . . . . . . . . . . . 6,600

McDonnell Douglas (CA) ..,.. 5,000

Grumman (NY) . . . . . . . . . . . . . . 1,800

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

SOURCE: Office ofTechnology Assessmen~ 1991.

Firms organize and pay for their programs in

different ways (see table 3-12). Some, such as

Lockheed, hired a professional outplacement firm.

Others, such as Electric Boat and UNC of Connecticut, setup, managed, and paid for their own centers

but used EDWAA funds to pay for retraining

services. Several firms, including GE Aircraft Engines and two GE Aerospace facilities in Massachusetts, established centers jointly funded by the

company and EDWAA. Some companies, such as

McDonnell Douglas, provided staff support and

space for a center but relied primarily on EDWAA

to pay for and provide services to their laid-off

defense workers.

Many defense firms work closely with State and

local EDWAA programs to set up outplacement

centers on the plant premises; Rockwell’s North

American Aircraft plant in California and Lockheed

in Georgia are examples. This arrangement allows

workers to receive counseling, job search skills

training, and other assistance right in the plant before

layoff. The presence of career centers at the plants

can serve as a psychological cushion to workers who

have received notice of layoff and others who may

anticipate getting a pink slip.

Not all large defense firms have cooperated with

EDWAA providers. For example, on grounds of

protecting the privacy of its employees, an aerospace

contractor on Long Island, NY declined to give

EDWAA service providers either the names of its

laid-off workers or the job classifications of those

dismissed.l06 After laying off about 1,800 workers in

early 1989, the firm held a small job fair to which all

four local Employment Services were invited and

seated at one table. However, the company refused

to allow either the local or State EDWAA agencies

to hold briefings at the plant to describe available

services. According to a company official, the firm

regards offers of retraining and placement assistance

from the county governments as ‘solutions in search

of a problem. ’’107 The EDWAA project thus had

difficulty locating the laid-off workers eligible for

assistance. The SDA local ultimately asked the

company to mail to its former employees letters

containing information on the assistance available.

More than a year later, only about 260 of these

workers had received service from the Oyster Bay

and Suffolk County retraining program.

Smaller defense companies are less likely to have

the resources to fund outplacement efforts. For

workers laid off from these fins, top quality

EDWAA services become all the more important.

From the defense companies’ perspective, working with EDWAA service providers has been a

mixed experience. Most defense firms felt that State

and local service providers were helpful. Some had

high praise for EDWAA organizations. For example, GE officials at three separate defense plants in

1%ravitz, op. cit.

10~id.
Chapter 3-Displaced Defense Workers . 97

Massachusetts credited the State’s Industrial Services Program (the State EDWAA agency) with

providing critical financial and technical assistance

that enabled them to organize their centers. Following a 1988-89 layoff from Lockheed’s plant in

Marietta, GA, both Lockheed officials and a private

company that operated services for the displaced

workers (the Derson Group) were emphatic in their

support of the EDWAA program. They praised it for

helping the company conduct orderly layoffs while

filling production needs.

In other cases, firms were less positive. One

common complaint was that the process is too slow.

A number of firms waited long periods of time to

receive DOL discretionary grants. As noted above,

General Dynamics laid off 3,400 workers on January

8, 1991 following the A-12 cancellation. Although

some of these workers received limited services

from their local SDAs, a $6.9-million EDWAA

discretionary grant from the Secretary of Labor was

approved on February 8, but did not begin until May

because of delays at all levels. General Dynamics’

1990 experience with an anticipated layoff was not

much better. The company approached State and

local EDWAA officials in early 1990 to ask for help

in dealing with layoffs due to begin in June, but it

was not until 60 days after the WARN notices were

delivered that the State was able to provide services.

UNC (CT) reported similar frustrations in trying to

work with its local SDA. Because the SDA was quite

small and had little experience with plant closings,

it was ill-prepared for a 1,100-person plant closing.

This was why UNC requested that the company,

rather than the SDA, manage a $1 million DOL

discretionary grant for retraining UNC’s displaced

workers.

HOW ARE LAID-OFF DEFENSE

WORKERS LIKELY TO FARE’?

In some ways, defense workers displaced in the

1990s may be better off than displaced workers

generally were in the 1980s. In contrast to layoffs of

the early 1980s, which were predominantly blue-

-collar, defense layoffs encompass a broader spectrum of occupations and levels. Displaced defense

workers in professional and technical occupations

are in a better position than most to find satisfactory

new jobs, in part because they tend to be more

geographically mobile than production workers, and

in part because they are more educated and more

highly skilled than the work force as a whole.

Particular sub-groups, such as minorities, older

workers, and blue-collar workers with low skills,

may have a more difficult time. The fact that 57

percent of defense jobs are in manufacturing,

compared to 17 percent in the economy at large, adds

to their problems. Manufacturing workers, especially those in semi-skilled blue-collar jobs, have a

harder time than other displaced workers in finding

new jobs. The continuing decline in U.S. manufacturing employment diminishes the chances for less

skilled workers displaced from defense jobs. Also,

lower and midlevel managers could be caught in the

squeeze of streamlining production and automation

of many of their tasks.

On the positive side, public and private efforts to

assist displaced workers are more developed than in

the early 1980s. The WARN law will give many

displaced workers 60 days’ notice of layoff (though

loopholes in the law limit its coverage). Notwithstanding problems with EDWAA and the unwillingness or inability of some firms and defense installations to provide transition assistance to laid-off

workers, the majority of defense workers now have

outplacement services available to them. Many

fins, particularly larger ones, provide at least some

kinds of services themselves. Most DoD civilians

have a somewhat broader package of outplacement

services than defense industry workers. However,

workers in smaller defense firms usually have few if

any company services and must rely on publicly

provided services. And public services may not be

offered so promptly or reliably for small layoffs

from small companies as for large ones, since these

layoffs get less publicity and may not trigger WARN

notices.

Notwithstanding problems related to rapid response and quality of services, EDWAA has gained

from nearly a decade of experience and is helping

defense workers. The additional $150 million allocated to EDWAA for defense workers for fiscal

years 1991-93 could be very helpful, provided that

States and localities can get past the obstacles to

access to these DOL discretionary funds. These

extra funds could pay for services for approximately

75,000 defense workers,108 not enough for about

1080~ ~S~teS EDW~ ~oSw ~r ~~clpmt at approxfiately $2,000 ~ Proww yea 1990. me es~ate is based on spending in the program year

per new enrollee in that years.
98 ● After the Cold War: Living With Lower Defense Spending

Table 3-13-Workers’ Experience Following Selected Defense Layoffs, 1990-91

Percent Months

white since Employed Looking In

Site collar layoff Total Locally Moved for work Retired training

Texas Instruments (TX) . . . . . . . . . . . . . . . . . . . . . . 90% 9 59% 40% 19% 34% 3% 4%

UNC Nuclear (CT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 9 80 40 40 5 9 6

GE Aerospace (Pittsfield, MA). . . . . . . . . . . . . . . . 20 8.5 38 31 7 12 10 38

McDonnell Douglas (CA) . . . . . . . . . . . . . . . . . . . . . na 7 65 36 29 26 5 1

GE Aircraft Engines (MA) . . . . . . . . . . . . . . . . . . . . 90 6 23 7 16 54 20 3

Portsmouth Naval (NH) . . . . . . . . . . . . . . . . . . . . . . 76 2 35 20 15 26 20 18

GE Aerospace (Burlington, MA) . . . . . . . . . . . . . . 50 3.5 19 11 8 35 12 22

Pueblo Depot (CO) . . . . . . . . . . . . . . . . . . . . . . . . . . na na 72 36 36 0% 28% 0%

McDonnell Douglas (MO) . . . . . . . . . . . . . . . . . . . . 50 8 45 39 6

Westinghouse (MD) . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5 19 17 2 60 18 4

NOTES: ln some cases, Iayoffs occurred overa period of several months. In these cases, the average date of layoff was used to determine the number

ofmonthssince layoff.

SOURCE: Office ofTechnology Assessmen~ 1991.

12-13 percent of the 600,0000 or so defense workers

expected to be displaced in those 3 years. However,

not every displaced worker needs or seeks assistance. Currently, about 9 percent of eligible workers

receive EDWAA services.

Despite these positive factors, the nationwide

1990-91 recession and still tougher times in several

regional economies have interfered with the immediate job prospects of displaced defense workers.

Compared to the economic situation in some earlier

periods of defense cutbacks, conditions for displaced workers are worse today. In the most recent

of these periods, the late 1960s and early 1970s,

when defense spending for the Vietnam War was

declining, the labor market was strong, except for the

brief 1970-71 recession. Even though defense workers are now better situated in some ways, the state of

the economy could cancel out these advantages, at

least temporarily.

Even if the national economy were thriving,

displaced defense workers in unusually defensedependent communities could have a hard time

getting back on their feet. Unfortunately, the 1990-

91 recession hit exceptionally hard in some of the

regions that are most defense-dependent, in particular Los Angeles-Long Beach, where the unemployment rate was 9.4 percent in September 1991, and

Massachusetts, where unemployment rates varied

from 8.4 to 12 percent--compared to a national rate

of 6.9 percent.

Evidence, albeit scanty, does exist on how well

displaced defense workers are faring. It is difficult to

obtain complete and current data on the experiences

of dislocated defense workers, and generalizations

are risky because of variations in local conditions,

the state of the national economy, and the types of

workers laid off from various places. For data

collected by OTA on what is happening to defense

workers laid off at a number of sites around the

nation, see table 3-13.

The effect of poor economic conditions on

post-layoff experience can be seen in Massachusetts,

where after 6 months only 7 percent of the workers

laid off from GE Jet Engines in the Boston suburb of

Lynn were employed locally. To be sure, some (16

percent) have relocated, many to GE facilities

elsewhere, and a number have retired. However, the

poor job market in Boston (unemployment 8.0

percent in September 1991) makes finding a job

there difficult, even for highly skilled engineers who

have been given top quality outplacement services.

Former GE Aerospace workers in Pittsfield, MA

were in an even tougher situation, since unemployment there was 9.5 percent.

Where the local economy is stronger, there is

greater success. For example, over one-third of the

workers laid off from McDonnell Douglas in Long

Beach, CA in mid-1990 were reemployed locally 6

months later, in a labor market that was weakening

but still stronger that of Massachusetts. Similarly,

after 9 months, nearly 60 percent of workers laid off

from Texas Instruments in Dallas were reemployed.

Workers laid off from GE in Lyre, MA in 1988-89,

when the local economy was still strong, had a much

easier time finding jobs than those laid off in

1990-91.

Workers willing and able to relocate often have

better expectations than those staying put. For
Chapter 3-Displaced Defense Workers ● 99

example, 2 months after layoff, three-quarters of the

workers who had lost jobs at the Portsmouth (NH)

Naval Yard, and wanted new jobs, were employed.

But many were placed through the Priority Placement Program and moved to other areas. According

to outplacement officials at Electric Boat, which is

located in the highly defense-dependent area of

southeast Connecticut, about 90 percent of the

displaced white-collar workers who found jobs had

relocated. About 40 percent of workers laid off from

UNC (in the same area) relocated; only about 5

percent of all the workers losing jobs at UNC were

out of work in November 1990, 9 months after the

layoffs. Of those moving out of state, all were

professionals. In part because of the defense dependence and poor condition of the local economy, the

rate of reemployment for hourly workers is much

lower, and unless they enrolled in retraining, they

have tended to take pay cuts. It took an average of 4

months for laid-off UNC workers to find jobs,

assuming that they actively looked for work beforehand. 109

These data do not suggest that it is easy to come

through loss of a defense job unscathed. For example, a 34 percent unemployment rate for Texas

Instrument workers 9 months after layoff is not

exactly desirable. However, an example such as Fort

Carson, CO, where all but one of 289 displaced

defense workers had jobs by the time they were laid

off, shows what can be done with enough lead time

and with active, dedicated reemployment, relocation, and retraining services.

Overall, displaced defense workers are probably

better positioned than other displaced workers, both

in terms of skills and services provided to them,

However, the significantly uneven quality of EDWAA

services, unless remedied, will hinder adjustment

success. Finally, the health of the U.S. economy

and regional economies, will remain a critical factor

in determining the success of displaced defense

workers.

10~omtion ~rovlded by Holly Ellis, director of ~C’s outplacement effo~ November 1990.
Chapter 4

Engineers: A Special Case
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

PROSPECTS FOR DISPLACED DEFENSE ENGINEERS . . . . . . . . . . . . . . . . . . . . . . . . . 103

ENGINEERS’ EXPERIENCE AFTER THE VIETNAM WAR . . . . . . . . . . . . . . . . . . . . . 106

MOVING FROM DEFENSE TO CIVILIAN EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . 107

Inter-Industry Mobility: The Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Salary Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

CURRENT LAYOFF AND REEMPLOYMENT EXPERIENCE . . . . . . . . . . . . . . . . . . . . 109

Layoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

MOBILITY AND CAREER-LONG EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

REEMPLOYMENT AND RETRAINING ASSISTANCE FOR ENGINEERS . . . . . . . . 115

Engineers’ Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Responses From 1970 to 1973: The Worst of Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Responses Today: Professional Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Company Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Government Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Teacher Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Entrepreneurial Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 125

Boxes

Box Page

4-A. The National Technological University: A Partnership for Continuing

Engineering Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

4-B. Continuing Education for Engineers at Texas Instruments . . . . . . . . . . . . . . . . . . . . . . 115

4-C. Retraining of Engineers: Boeing’s Commercial Airplane Group . . . . . . . . . . . . . . . . 122

Figure

Figure Page

4-1. Bachelor’s Degrees Awarded in Engineering, 1945-90 . . . . . . . . . . . . . . . . . . . . . . . . . 105

Tables

Table Page

4-1. Engineering Occupations in Defense and the U.S. Economy . . . . . . . . . . . . . . . . . . . . 104

4-2. Median Annual Salaries of Engineers by Industry Group and Years

Since Bachelor’s Degree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

4-3. Total Mean Compensation of Engineers in Manufacturing, by Product Area . . . . . . 109

4-4. Involuntary Unemployment Rates for Electrical and Electronics Engineers,

Early 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

4-5. Benefits and Services Provided to Displaced Engineers . . . . . . . . . . . . . . . . . . . . . . . . . 119
Chapter 4

Engineers: A Special Case

INTRODUCTION

Among the many thousands of workers displaced

from defense jobs, one group of special concern is

engineers. Their skills and education make them a

national asset. An important public policy issue is

how to put displaced defense engineers to good use

on the civilian side of the economy.

Engineers are heavily represented in the defense

sector. Military purchases are concentrated in manufacturing, especially durable goods, and these are

engineering-intensive industries.1 Moreover, the defense side of durable goods manufacturing industries

(e.g., aircraft manufacture) is more engineeringintensive than the commercial side. Estimates of the

number of engineers engaged in defense work differ,

depending on definitions and method, but a reasonable estimate for 1990 (the latest year for which data

are available) is 342,000, or 18 percent, of the

Nation’s 1.86 million engineers, including 73,000

employed directly by the Department of Defense

(DoD) (table 4-l).

Recent layoffs reflect the concentration of engineers in defense industries and their vulnerability

during downsizing. Roughly 30 percent of the 6,500

layoffs at the McDonnell Douglas facility in Long

Beach, CA from July 1990 to June 1991 were

engineers. About 30 percent of the 3,000 workers

laid off at McDonnell Douglas in St. Louis in the

summer of 1990 were engineers. Of the 3,000

workers laid off from the same facility immediately

after the A-12 program was canceled in January

1991, nearly half were engineers, The General

Dynamics facility in Fort Worth, TX, laid off 9,000

employees from July 1990 to July 1991; of these,

2,500 (27 percent) were engineers.

Reports from several places affected by defense

cutbacks since 1988 indicate that many of the

laid-off workers have had some difficulty finding

new jobs, but engineers generally fared better than

blue-collar workers. Eventually, most defense engineers have found jobs in their fields at good salaries.

However, the job search is often long and arduous,

and not infrequently the new job is with another

defense firm and thus vulnerable to future layoff.

Certain subgroups, chiefly older engineers and

nondegree engineers, have had the most trouble

finding new employment. By the end of 1991,

defense layoffs were still accelerating.

PROSPECTS FOR DISPLACED

DEFENSE ENGINEERS

Total engineering employment grew during the

1980s, rising from 1.6 million in 1984 to 1.86

million in 1990.2 OTA’s estimate of 342,000 engineers, or 18 percent of the total, in the defense sector

is based on a National Science Foundation (NSF)

survey in which engineers reported whether their

jobs were funded by the Department of Defense

(DoD). The percentage replying in the affirmative

was then applied to total engineering employment,

as reported by the Bureau of Labor Statistics.3

OTA estimates that from 1990 to 1995 as many as

127,000 defense engineering jobs could disappear

with reductions in defense spending, the winding

down of established weapons programs, and a

scarcity of new programs.4 This estimate assumes

lsix~ ~rmn[ of alI en~n=fing jobs are in tie manufacturing sector, 53 percent in durable goods. National Science Foundation Science und

Engineering Personnel: A National Overview, Special Report, NSF 90-310 (Washington DC: The Foundation 1990), table B-18.

‘W.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings (various issues), amual averages.

JThls includes en@ncers cmployed as civilians by DoD, but not those whose jobs depended on non-DoD defense spending (see table 4-I fOr fticr

explanation).

4An ~ftcn cited and substantially lower esti~te is tie forecast by the Institute of Electrical ~d Electronics Engineers, Inc., (fEEE) of a loss of 55~ooo

defense engineering jobs from 1989 to 1995. (Engineering Manpower New.~le(ter, vol. 2, No. 10A, Oct. 15, 1990, p. 1.) However, this estimate assumed

a very modest decline in spending, smaller than is currently projected by DoD, and a base level of defense engineering employment of only 240,000.

IEEE’s base-level number for defense engineers rests on application of the DRIjNSF economic modeling system to the Bureau of Labor Statistics (BLS)

estimate of the total number of U.S. engineers (based in turn on the Current Population Surveys conducted by the Bureau of the Census). OTA has

concluded that tlus method produces an underestimate of defense engineers, because it assumes that defense manufacturing at the individual industry

level is no more engineering-intensive than commercial manufacturing in the same industry. The IEEE estimate also assumed a 3 percent annuat average

reduction in defense spending. However, DoD now projects an annual average reduction of 4.1 percent from 1988 to 1995, and if DoD spending

eventually declines to as low as $169 billion in 2001, the rate of reduction through 1995 would probably be slightly faster. In the case of the faster paced

reduction, OTA estimates elimination of 127,000 defense-related engineering positions from 1990 to 1995.

–lo3–
104 ● After the Cold War: Living With Lower Defense Spending

Table 4-l-Engineering Occupations in Defense and the U.S. Economy

Annual

Total Nondefense engineers Defense engineers Percent of employment

engineers total in growth

Specialty (thousands) (thousands) percent (thousands) percent defense 1987-1990

Aerospaoe . . . . . . . . . . . . 109 62 4% 47 14% 43.2% 1.6?40

Chemical . . . . . . . . . . . . . 71 67 4 4 1 5.3 4.1

civil . . . . . . . . . . . . . . . . . 234 210 14 24 7 10.1 3.7

Electrical . . . . . . . . . . . . 581 428 28 153 45 26.4 2.2

Industrial . . . . . . . . . . . . . 204 176 12 28 8 13.8 –2.6

Mechanical . . . . . . . . . . . 316 266 17 50 15 15.9 4.5

Subtotal . . . . . . . . . . . . . . 1,515 1,209 80 306 89 20.2 2.2

Other . . . . . . . . . . . . . . . . . 347 311 20 36 11 10.5 3.7

Total . . . . . . . . . . . . . . . . . 1,862 1,520 100 342 100 18.4 2.5

alnd~es defense in~st~ engin~rs and DoD miiitary and civilian engineers.

~ndudes electn!cal and electronics engineers.

SOURCE: Total U.S. engineering employment from the Bureau of Labor Statistics (BLS), Employment and Earnings, various issues. Defense industry

engineering basedon data from the National Sdence Foundation, U.S. Sc.#enMs and Engineers: 1986, NSF87-322 (Washington, DC: 1987). The

percentage of engineers in e=h occupational category reporting that their jabs were funded by DoD was applied to the total number of engineers

reported in that category by BLS. This method was adapted from Ann Markusen and Scott Campbell, ‘The Occupational, Industrial and Regional

Distribution of Defense-Related Economic Activitv,” draft DaPer for txesentation at the Annual North American Meetinas of the Reaional Science

tiation, Boston, MA, Nov. 8-9, 1990. “ ‘ .

that engineering positions would be reduced in

proportion to the overall reduction in defense

employment. On the other hand, if DoD decides in

the future to develop new systems without putting

them into production (one strategy proposed for an

era of smaller defense budgets), the reduction in the

defense engineering work force could be less than

would otherwise be expected.

The timing of layoffs for engineers is often

different from that of the defense work force

generally. Engineering reductions tend to be frontloaded, preceding layoffs from production lines.

This is because programs nearing the end of their

production runs are less engineering-intensive; the

engineers have completed their work and can be

released before shop floor workers. Many of the

biggest defense programs of the 1980s (e.g., General

Dynamics’s F-16 and McDonnell Douglas’s F-15

fighter aircraft for the Air Force, Grumman’s F-14

for the Navy, and General Dynamics’s M1A2 tank)

are coming to an end and few new programs are on

the horizon to replace them, which means engineers

can be let go while many production workers are still

needed. Also, engineers are more heavily affected by

the termination of new systems in their development

stage. For example, the cancellation of the Navy’s

next generation attack jet, the A-12, caused the

immediate dismissal of 7,000 workers, half of whom

were engineers. In this case, the engineers were laid

off before most of the production workers were even

assigned to the program.

This suggests that yearly employment loss for

defense engineers may have peaked. However, some

individuals could go through a second or even a third

wave of displacement, because considerable numbers of laid-off defense engineers have found new

jobs with other defense companies. This is an old

tradition among defense engineers, but it has new

meaning in a period of long-sustained cutbacks.

During the 1980s defense buildup, there was a

good deal of employment shuffling among defense

companies, as one started work on a new contract

and ramped up while another finished a program and

shrank. Sometimes, as in the enormous Plant 42

complex in Palmdale, CA, these companies were

next door to each other. Movement between firms

was fairly easy in an environment of increasing or

stable spending. But in 1990, when Lockheed closed

its aircraft manufacturing facility at Burbank with a

layoff of 9,500 employees, McDonnell Douglas in

Long Beach reduced employment by 5,000, and

other companies also cut back and laid off workers,

this previously open regional job market suddenly

shut down.

Early reports from outplacement centers that have

tracked laid-off defense engineers indicate that

many engineers (sometimes 40 percent or more) are

still finding work in the defense sector. Most of these

hirings are to replace workers lost to normal

attrition. But as the number of total defense engineering positions continues to decline, this high rate

of industry reemployment cannot be sustained.
Chapter 4-Engineers: A Special Case ● 105

While engineers as a group have been successful

thus far in avoiding overly long periods and high

costs of displacement, many are still at risk.

None of this means that defense engineers are in

a desperate position. For years, engineers have fared

better than the work force in general. Throughout the

1980s, the average annual unemployment rate for

engineers ranged from 1.4 to 3.0 percent while the

overall rate varied from 5.2 to 9.5 percent. Nevertheless, unemployment rates that look small on the

national scale can indicate hard times regionally for

engineers; the peak unemployment rate for engineers in the 1970-73 period was 2.9 percent, in 1971.

Yet unemployment among engineers was severe in

some areas, especially in and around Seattle. With

the current layoffs of engineers not only by defense

contractors but also by computer companies and

automobile manufacturers, the national unemployment rate for engineers rose from 1.4 percent in the

first quarter of 1989 to 2.6 percent in the first quarter

of 1991.5

Until recently, unemployment among engineers

was low even among older, typically less employable, engineers. The Institute of Electrical and

Electronics Engineers, Inc. (IEEE), which represents

nearly 250,000 engineers in these specialties, found

in early 1990 that only 1.9 percent of its members in

the 50 to 59 age category were “involuntarily

unemployed, compared with 1.4 percent for all

member engineers. However, an indication of weakening demand was the finding that 20 percent of the

engineers over 50 had been offered incentives to

retire early in the previous 2 years (up from 16

percent in IEEE’s 1989 survey) and 14 percent of the

engineers over 50 had retired before they intended to

(up from 6 percent in the 1989 survey).6

Forecasts from the late 1980s, before the end of

the Cold War changed the outlook for defense

Figure 4-l—Bachelor’s Degrees Awarded in

Engineering, 1945-90

‘or

4 0 -

2 0 -

0~rmrrr— r

I

T—T–H F1945 1950 1955 1960 1965 1970 1975 1980 1985 1990

Year

SOURCE: Engineering Manpower Commission, summer 1991.

employment, predicted a healthy market for engineers through the end of the century, with employment growth of 2 to 3 percent per year.7 Whether

those demand projections will prove out is open to

question, but there is firmer evidence of a diminishing supply of engineers. Demographic trends suggest that the number of engineering school graduates

will not increase. The source of potential students,

the number of young adults in the U.S. population,

peaked in 1982 and will decrease steadily until

1998.8 The percentage of college freshmen selecting

engineering over other majors might change direction and rise, but the recent trend has been down.9

Figure 4-1 shows the number of bachelor’s degrees

granted in U.S. engineering schools each year since

1945. Degrees awarded peaked at 78,178 in 1986

and have fallen steadily since, to 65,967 in 1990.10

To the extent that new engineering graduates are in

short supply, engineers affected by the defense

build-down could be a valuable resource to meet the

demand.

5Unpublish~ &ta from the BLS, U.S. Department of Labor. These quarterly rates are not seasonally adjusted. The unernpIoyrnent rate for engineers

dropped later in 1991, falling to 2.1 percent in the third quarteq the average unemployment rate for the year ending !kp~ 30, 1991 was 2.3 percent.

s~ti~te of )31ectrical and Electronics Engineers, rnc., IEEE Member Opim”on Survey, J990 (New York NY: 1990), pp. 2-11, 2-18, and 3-16.

TGwrge s~ves~ ad Jo~ L~i~c& c{~ojwtiom of occupatio~ Employment’ Month/y Lubor Review, November 1989, P. 45; U.S. Natio~

Science Board, Science andEngineenng Zndicafors4989, NSB-1 (Washingto% DC: U.S. Government printing Offlce, 1989), p.235; Gary Sti ‘From

Swords to Plowshares,’ IEEE Spectrum, November 1989, p. 45; U.S. Department of Energy, “Energy-Related Scientists and Engineers, 1988 to 1994,”

internal working paper, December 1989, pp. 3-5.

~estor E. Terlechyi, Employment of Natural Scientists and Engineers: Recent Trena3 and Prospects, Report No. 224 (Washington DC: National

Planning Associatio~ 1986).

90~ ~ Previouly dmwmt~ a d~l~e in interest of entering freshmen in natural science and engineering @Ors---fiom 27 Wrcen4 or about

286,000, in 1978, to 24 percent, or about 246,000, in 1986. U.S. Congress, Office of Technology Assessmen4 Educating Scientists and Engineers; Grade

School to Grcxi Schooi, 0121-SET-377 (Wa.shingto4 DC: U.S. Government printing OffIce, June 1988), p. 48.

lo~anpower comnt~, VO1. 27, No. 10, December l~o~ P. 26”
106 . After the Cold War: Living With Lower Defense Spending

ENGINEERS’ EXPERIENCE

AFTER THE VIETNAM WAR

Current decreases in the defense budget have

aroused interest in examining previous reductions

for indications of what to expect and lessons on how

to cope. However, the previous reductions differed

significantly from the present one. The sharp drop

after World War II did not result in much unemployment for engineers because pent-up demand for

automobiles and other consumer items supported a

rapid conversion of companies (and engineers) from

defense to commercial work. Layoffs at the end of

the Korean War were minimal because the Cold War

had begun. Defense spending (especially in aircraft)

remained high compared to the peacetime levels just

after World War II, including substantial spending

for research and development (R&D) on sophisticated weapon systems.

The concern today is to avoid repeating the

dislocations of the early 1970s, when the Vietnam

War build-down coincided with detente between the

United States and the Soviet Union. Inconstant 1991

dollars, defense outlays dropped from $342 to $235

billion from 1968 to 1973, with a further drop to

$213 billion in 1976. NASA and its contractors

watched their employment plummet from 410,000,

including 86,000 scientists and engineers, to 135,000

from 1965 to 1973.11 Civil aircraft sales fell sharply

in the 1968-71 period, from $5.0 to $3.8 billion.12

The result of these three simultaneous blows was a

steep drop in aerospace industry employment, from

1.5 million in 1968 to 920,000 in 1972, and a further

decline to 820,000 in 1977. Defense industry jobs

plunged 900,000 in the 2 years 1969-71. A Department of Labor (DOL) program begun in 1972 to

provide assistance to unemployed engineers, scientists, and technicians estimated that 75,000 to

100,000 of these professionals were out of work at

the time.13

Current economic and employment conditions

bear some resemblance to those in 1968. From 1968

to 1976, defense industry employment fell 47

percent; from 1987 to 1995, it could drop as much as

40 percent. In the early to mid-1970s, the U.S.

economy moved in and out of recession; unemployment climbed from 3.4 percent in 1969 to 5.8 percent

in 1971, and then, after a partial recovery in 1972-73,

up to 8.3 percent in 1975. In 1990, the economy

again moved into a recession, and unemployment

rose from 5.1 percent in June 1990 to 6.7 percent in

October 1991.

Other aspects of the economy and employment

are quite different now. In 1968 defense spending

was 9.2 percent of the gross national product (GNP);

it was 6.5 percent in 1987 and had dropped further

to 5.5 percent by 1991. Defense contracts are less

important to many local economies now than they

were in 1970.14 Importantly, the defense and commercial aerospace businesses both fell sharply at the

same time in 1970-73, while in the early 1990s

commercia1 aircraft production remained fairly

strong as military aircraft production declined. And

where total employment in the space program fell by

two-thirds between 1965 and 1973, it has been

relatively stable ever since. The aerospace industry

is more diverse now than in the past; in the 1960s,

government spending was responsible for approximately 80 percent of aerospace sales, but it currently

accounts for only about 55 percent.15

All in all, the stability of the nondefense segments

of the aerospace business (commercial aircraft and

space) has softened the impact of the engineering

layoffs in the defense segment. In 1970-73, defense

industry cutbacks and other layoffs resulted in a 13

percent reduction in total engineering employment.l6 From 1987 to 1990, while defense industry

employment was declining 6 percent, total engineering employment continued to increase. Even if there

were no overall growth in engineering employment

between 1990 and 1995, and 127,000 defense

1lTrudy Bell, ‘‘Back to the Future: A Perspective,’ IEEE Spectrum, November 1989, p. 44; Aerospace Industries Association Aerospace Facts and

Figures 1990-91 (WashingtorL DC: 1990), p. 152.

lzAero~a~ hdustri~ Association Aerospace Facts and Figures 1983-84 (WM@tom Dc: 1983), P.15.

lscomp~oller General of the United states, “Reemployment Assistance for Engineers, Scientists, and Technicians Unemployed Because of

Aerospace and Defense Cutbacks, ” Report to the Congress horn the General Accounting OffIce, Acaxsion Number 093372, Dec. 5, 1973, p. 1.

]dAs not~ ~ Ch. 1, tie defe~e pwc~es iII Cwofia dec~ed from 14.6 percent of gross Stite product in 1968 to approximately 7 percent kl 1990.

15&rospace ~du~~es Association “~mspau Employment Trends, 19G1-9&~e kpact of Defeme ~d commerci~ Spending ~d other

Factors,” March 1990.

16 Natioml ~ademy of En@~Mg, committee cm ~g~eering ~npower policy, Engineen”ng ad Scient.$c kfanpowc?raecovwe&ti@M for

the Seventies (Washingto~ DC: 1973), p. 8.
Chapter 4---Engineers: A Special Case ● 107

engineering positions were lost while no new jobs

were created elsewhere-not a likely prospect-less

than 7 percent of engineering positions would be

lost. To reach a 13 percent loss, an additional

117,000 nondefense positions would have to disappear. This seems beyond the bounds of reasonable

likelihood, given recent and long-term trends.

These comparisons indicate the employment situation for defense industry engineers as a group

should not be as difficult in the early 1990s as it was

20 years earlier. The larger, less defense-dependent

economy should more readily reabsorb the engineers. The lessons from the government programs of

the earlier era will be discussed later in this chapter.

MOVING FROM DEFENSE TO

CIVILIAN EMPLOYMENT

Defense engineers have several distinct demographic and professional characteristics that may

affect their prospects for finding jobs in the civilian

sector. First, they are somewhat older and have

higher levels of education.

17 While they may possess

educational advantages in seeking new jobs, the

pool of equivalent commercial engineering jobs may

be limited. It is possible that their extra education

may even be a handicap; they could be rejected as

overqualified.

Some people fear that the nature of defense work

makes engineers too rigid and specialized for work

in the commercial environment. Also, defense engineers are said to be slow to move to the civilian

sector because they are overpaid in the defense

sector and hold unreasonably high expectations for

their earnings potential in commercial enterprises.

The available evidence, discussed below, suggests

that these fears are exaggerated.

Finally, defense engineers have different specialties from the general run of engineers, and moving

to another specialty requires substantial retraining.

The principal engineering specialties are electrical

(including electronics), civil, mechanical, industrial,

aerospace, and chemical. As table 4-1 shows,

defense engineers are much more concentrated in

aerospace and electrical specialties than engineers

generally, and less in civil and chemical specialties.

Displaced defense engineers whose specialties have

a comparatively limited civilian market----especially

if that market is not growing-are likely to encounter more than the usual difficulties moving into

civilian jobs. But so far data on actual reemployment

experience by specialty is too limited to allow any

hard and fast conclusions.

Inter-Industry Mobility: The Record

Some civilian employers are predisposed against

the defense industry and its employees—sometimes

even when the employer and employee are in

different divisions of the same fro-on the grounds

that defense and civilian work environments differ

too much for defense engineers to make the move.18

Key differences are the time frames for product

development (long in defense, short to medium in

commercial); the balance between cost and performance (cost is often second to performance in defense,

cost and reliability are more important in commercial); and the need to satisfy one customer in

defense, versus many in commercial. In addition, the

critics say that defense engineers put so much of

their effort into pushing paper to meet burdensome

DoD documentation requirements that their technical skills become obsolete from under-use.

These opinions can be tested against recent

experience. Reports so far show that more than 60

percent of Lockheed’s white-collar outplacement

from its Burbank facility, 82 percent of Texas

Instruments’s white- and blue-collar outplacement

from its Dallas defense plants, and 83 percent of

laid-off McDonnell Douglas’s engineering outplacement have been with nondefense firms. How

many of the placements from Lockheed and Texas

Instruments were engineers moving to new engineering positions is not clear, but officials at both

companies believe it is a substantial number.19

17Joshua I.erner, ‘‘The Mobility of Corporate Scientists and Engineers Between Civil and Defense Activities: Evidence from the SSE Database,”

Science, Technology, and Public Policy Program, Harvard University, Science, Technology and Public Policy Program, Discussion Paper 9002, August

1990, p. 12.

lgAccording to Business Week (JulY 2, 1990, p. 67), “Even highty skilled engineers sometimes have trouble finding jobs, tainted by the defense

industry’s reputation as being bureaucratic, late to marke~ and frequently over-cost. ’ Seymour Melrnan+ an advocate of defense-to-civilian industry

conversions, states: “Engineers with long experience in the military industry are professionally incapacitated to various degrees from performing in the

civilian economy. ” (quoted in Stix, IEEE Specrrum, op. cit., p. 45.)

l~a~wn G~i~s, ~~eed @~bank) c~eercentm, personat communi~tio~ June 3, 191; DaII McM~, Texas Instruments Placement Center,

personal communication% May 16, 1991.
108 . After the Cold War: Living With Lower Defense Spending

Grumman reported that most of its engineers outplaced during 1989 ended up in engineering jobs,

with slightly less than half outside of defense.20

Many of the younger engineers left manufacturing

and were working in financial services and computer

systems. None of these company officials offered

examples of moves by defense engineers into

nondefense aerospace engineering. However, a representative of the engineers’ union at Boeing, the

Seattle Professional Engineering Employees Association, stated that the company frequently moves

engineers between the defense and commercial sides

of the company .21

The National Science Foundation’s (NSF) Survey

of Scientists and Engineers (SSE) shows more

mobility between the two sectors than might have

been expected. In a study for Harvard University’s

Science, Technology and Public Policy Program,

Lerner used the SSE data to examine mobility

between the defense and civilian sectors from 1982

to 1986, a time when employment in the defense

sector was increasing rapidly.22 He found that 24

percent of the scientists and engineers employed in

the defense industry in 1982 had transferred to

civilian industry jobs 4 years later. He also reported

that much of this mobility apparently took place

within firms.

Taken together, the SSE data and the more recent,

though incomplete, company outplacement data

show that many defense industry engineers do

successfully move into civilian industry jobs. Individual defense engineers may fail to maintain

up-to-date technical skills and thus limit their

reemployment possibilities, but this failing is not

unique to defense engineering. Many defense engineers are working on the leading edge of technology

in materials, electronics, and communications, and

are in a strong position to move into the civilian

sector.

Salary Levels

Another factor said to limit mobility between the

two sectors is differing pay levels; some employers

generalize that defense industry engineers are overpaid compared to their counterparts in the commercial sector. Two sets of figures, comparative salaries

in different industries and the salaries of engineers

moving from one sector to the other, cast some doubt

on this perception.

Table 4-2 shows median annual salaries in 1989

for engineers in six major industrial groups, by

number of years since the engineers received their

bachelor’s degrees. The first three industry groups

(aerospace; electrical machinery, electronics, and

computers; and electronic equipment) have a significant defense industry component. But salaries for

engineers in those groups trail those in two of the

three commercial sector groups (electric utilities and

chemicals, drugs, and plastics) and are only slightly

ahead of the third (automotive). Table 4-3 shows the

mean total compensation for all engineers in five

manufacturing areas in 1989, without regard for

years of experience. Defense industry engineers are

concentrated in the third of the five areas listed,

electronics and aerospace products. Engineers in this

category have an advantage over those in the

business equipment and wood products industries,

but not over those in chemicals and primary metals.

The 1982 SSE compared average salaries for large

numbers of defense and nondefense scientists and

engineers. It showed that salaries were somewhat

higher on the defense side: 32 percent of defense

industry scientists and engineers made over $40,000

in that year, compared to 26 percent on the nondefense side. The survey also indicated, however, that

the differences could be attributed to: 1) age

differences between the two groups (61 percent of

the defense scientists and engineers were over 40

years old vs. 45 percent of the nondefense); 2) the

higher education level of defense engineers (53

percent with 5 or more years of post-high-school

education vs. 48 percent of the nondefense); and 3)

the longer tenure of scientists and engineers in

defense companies with their current employers.23

Another indicator that defense industry engineers

are not overpaid is their ability to maintain salary

levels when they move into civilian jobs. In general,

mobility-hanging occupations, changing employ20Richard Opsaul, Grumman Corp., Bethpage, NY, pemonal communication Nov. 7, 1991.

2 1 Dan ~omy, presid~t, s~ttie ~fessio~ l@~x@ Em@oy&s ASSOChtiO~ ~rSO~ comm~~tio% ~. IQ lg~.

n~mr, op. ~it. ~terafigly, r~~h on ~ved defmw layoffs in the early 1960s, a time when defense wloyfnmt w~ ~so ~~~~, fo~d

that 35 percent of defense engineers transferred to nondefense work. (B. Curtis Eatom “Defense En@eers : Do They Have Special Reemployment

Problems?” Monthly Lubor Review, vol. 94, No. 7, July 1971.)

~~mer, ibid., p. 12.
Chapter 4-Engineers: A Special Case ● 109

Table 4-2—Median Annual Salaries of Engineers by

Industry Group and Years Since Bachelor’s Degree

(In 1989)

Years since baccalaureate

Industry o 9-11 18-20

Aerospace . . . . . . . . . . . . . . . . . . . . . . . $30,050 $41,500 $51,650

Electrical machinery, electronics,

and computers . . . . . . . . . . . . . . . . . 30,450 43,350 51,650

Electronic equipment . . . . . . . . . . . . . 30,450 43,500 51,800

Chemicals, drugs, and plastics . . . . 31,700 49,100 59,800

Automotive . . . . . . . . . . . . . . . . . . . . . . . 30,150 40,950 46,300

Electric utilities . . . . . . . . . . . . . . . . . . . 31,600 47,100 56,750

SOURCE: Sa/arkwof ScienMs, Engineers, and TAniuans, compiled by

Commission on Professionals in Scienee and Technology, 14th

cd., February 1990, adapted from table 126; data originally

accumulated by Engineering Manpower Commission, American

Association of Engineering societies, 1989.

Table 4-3-Total Mean Compensation of Engineers

in Manufacturing, by Product Area (in 1989)

Total

Type of product compensation

Chemicals, pharmaceuticals, plastics,

and rubber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,388

Primary metal products . . . . . . . . . . . . . . . . . . . . . . . . . 39,411

Electrical, electronics, aerospace, and

aircraft products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,106

Business equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,299

Furniture and wood products . . . . . . . . . . . . . . . . . . . . 33,257

SOURCE: Sa/ariesofScientists, Engineers, and T~nidans, compiled by

Commission on Professionals In Seienee and Technology, 14th

cd., February 1990, adapted from table 156. Data originally

accumulated by Abbott Langer and Associates, Compensation

in Manufacturing, April 1989.

ers, or moving into a field that does not match the

field of highest degree-has negative effects on an

engineer’s salary.

24 However, several defense indus--

try outplacement officers reported to OTA that

displaced engineers who had found new engineering

jobs did not take salary cuts; a 1991 survey of

defense workers displaced from McDonnell

Douglas made a similar finding.25 SSE data showed

that scientists and engineers who moved from

defense to nondefense jobs between 1982 and 1986

fared better in salary changes than those who moved

in the opposite direction; 20 percent of the first

group had salary increases of $15,000 or more

during the 4-year period, against 14 percent of the

second group.26

In short, experience before the current defense

cutbacks provides little indication that the salaries of

defense engineers were inflated compared to those

of nondefense engineers or that their expectations of

maintaining salary levels when they moved into

nondefense jobs were unrealistic. However, finding

a new job after layoff is a different proposition from

a voluntary move, which was probably the situation

in most of the moves between defense and nondefense jobs tracked by NSF in the period 1982-86.

Even if they were laid off, displaced professionals

had a far easier time finding new jobs without

sacrificing pay levels than most blue-collar and less

skilled white-collar workers in the prosperous midand late 1980s. This may no longer be the case. The

stagnant or recessionary economy of the early 1990s

makes this a less propitious time for finding a

replacement job at equal pay, even for engineers.

Moreover, as the discussion below suggests, engineers who have moved into management positions

and have not kept up their technical skills, or who

have become overspecialized or inflexible, or who

do not have an engineering degree but are nevertheless classified by their company as engineers, may

indeed have difficulty in moving to another job

without a significant cut in salary.

CURRENT LAYOFF AND

REEMPLOYMENT EXPERIENCE

Although no accurate count is available, it is clear

that tens of thousands of engineers had been laid off

from defense jobs since defense spending started to

decline, with the biggest layoffs occurring in 1990

and 1991. Because sizable layoffs began so recently,

few studies on engineers’ experience have been

completed. Most of the following discussion is

based on interviews with company human resource

staffs, State and local government personnel, and the

engineers themselves, supplemented by reports in

newspapers and magazines. This evidence indicates

that engineers are by no means as distressed by

displacement as they were in the cutback following

the Vietnam War, but that the job search can be long

and frustrating, and that older engineers and those

without up-to-date skills face genuine difficulties.

~Ro~rt C. Da~enbach ‘‘Quali~ and Qualiilcations in the Market for Scientists ~d E@ecM, ” Final Report to National Science FoundatiorL

NSF-SRS-851 1331, 1990, p. 56. Changes in responsibility are an exception.

~Fifty-seven percent of the engineers laid off from McDonnell Douglas’s defense facilities in St. Louis in 1990 and 1991 received the same salary

at their new jobs as at their old, while 20 percent went up and 23 percent went down. E. Terrence Jones, “The Layoffs at McDonnell Douglas: A Survey

Analysis, ” mimeo, September 1991.

?li~mer, Op. cit., pp. 20 ‘d 25.
110 ● After the Cold War: Living With Lower Defense Spending

Layoffs

Some plant closures or contract cancellations

result in layoffs of all engineers, regardless of age,

experience, or performance. For example, at UNC

Nuclear in Montville, CT, termination of the plant’s

contract to build nuclear reactor powerplants for

Navy submarines means that all of the facility’s 300

engineers will have lost their jobs by the end of 1992.

Similarly, Lockheed’s decision to end its aircraft

construction program at its Burbank, CA facility has

meant layoffs for most of its engineers, regardless of

their skills or experience.

In other cases, companies are picking and choosing. McDonnell Douglas’s vice-president of human

resources said of the company’s 1990 elimination of

17,000 positions, primarily white-collar jobs, ‘Generally, we thought, okay, what are the things we can

eliminate and what are the things we must do? After

we decided that, we asked, who are the people best

suited to do the work that’s left?”27 Genera l

Dynamics, United Technologies Corp.’s Pratt and

Whitney Division, and General Electric’s Aerospace

Division are among the major defense contractors

who are selectively downsizing to reduce costs and

increase efficiency and competitiveness. In addition

to layoffs of engineers in technical positions, economic pressures are leading companies to thin out

management layers and reduce the size of their

central staffs.

State and local reemployment assistance agencies

report that, in some companies that are laying off

selectively, older engineers are being replaced with

lower-salaried young engineers. Confirmation of

these reports is difficult to come by. However, the

IEEE survey noted previously indicates that more

older engineers are being ‘‘encouraged” to retire

early than were in the recent past.28

Reemployment

Engineers’ prospects of finding a satisfactory new

job depend on a combination of factors, chiefly: 1)

their age; 2) their credentials and special skills; 3)

their willingness to relocate; and 4) the health of the

local and national economies. The health of the

national economy is an overriding deterrninant of

employment opportunities, but each of the other

Table 4-4-involuntary Unemployment Rates for

Electrical and Electronics Engineers, Early 1990

All other

Region ages Over 55

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8% 1 .7%

East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.7

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 3.0

Central . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 3.7

Southwest . . . . . . . . . . . . . . . . . . . . . . . . 1.8 1.7

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 3.1

United States . . . . . . . . . . . . . . . . . . . . . . 1.5 2.4

SOURCE: Institute of Electrical and Electronics Engineers, Inc., “IEEE

Member Opinion Survey, 1990” (New York, NY: 1990), pp. D-15

and D*7. Table is adapted from data on these two pages, with

all retired respondents, voluntary and involuntary, excluded.

factors has considerable impact on how engineers

fare.

Engineers under 35 combine relatively low salaries, high mobility, and well-developed computer

skills. Most young engineers with some experience

are having little difficulty finding new jobs. In

contrast, most outplacement and employment offices interviewed reported that older (over 50)

engineers are having more trouble. The IEEE survey

of electrical and electronics engineers in late 1989

indicated an involuntary unemployment rate of 2.4

percent for those over 55 years of age compared to

a rate of 1.5 percent for those of all other ages

combined.29 Table 4-4 shows comparable unemployment rates in the two categories for six U.S.

geographic regions. Since 40 percent of the respondents aged 55 or over were retired, and since 14

percent of those indicated they had been forced to

retire prematurely, the actual involuntary unemployment rates among over-55 electrical and electronics

engineers is likely to be 5 percent or more.

Outplacement officers reported that many midlevel engineering managers (aged 40 to 55) are

having a hard time finding reemployment after the

1990-91 layoffs. Their difficulties often involve one

or more of these factors: 1) high salary expectations;

2) unwillingness or inability to relocate; 3) technical

obsolescence; and 4) corporate restructurings, which

have reduced the number of management levels in

many companies. Engineers who have been promoted into mid-level management positions may

have let technical skills atrophy; they find reemployment as an engineer after layoff difficult.

Z~B~iness Month, October 1990, p. 78.

2S=, op. cit., pp. 2-18.

%id., pp. D-15 and D-67.
Chapter 4-Engineers: A Special Case ● 111

Engineers without bachelor’s degrees are also

having a hard time getting new jobs. Many defense

contractors have, over the years, promoted or hired

non-degreed people for jobs classified as engineering, and now report them as having trouble finding

new jobs. The 1982 SSE showed that 5.7 percent of

people employed as engineers at that time lacked

bachelor’s degrees. Seventy-five percent of those

classified as ‘‘aeronautical engineers’ possessed

aeronautical or other engineering degrees, but 13

percent either lacked a degree in science or engineering or had no bachelor’s degree at a11,30 When

members of these groups are laid off, they often

suffer from the lack of broad-based technical skills

developed in engineering degree programs. Personnel offices may add to the problem by being

unwilling to take a chance on applicants without the

proper paper credentials. During the hard times for

engineers in the early 1970s, there were similar

difficulties for non-degreed engineers: in mid-1971,

the unemployment rate for engineers without a

bachelor’s degree stood at 4.4 percent, compared to

2.8 percent for those with the degree.31

Several outplacement centers report exceptional

reemployment difficulties for engineers who have

become very specialized, especially those engaged

for years in engineering activities peculiar to defense

contracting, e.g., reliability, documentation, and

defense software. Staff members at the outplacement

center for the General Electric Aerospace Division

plant in Burlington, MA say that 15 to 20 percent of

the engineers laid off there are niched in very

narrow, defense-oriented fields and are having

considerable difficulty finding new jobs.32

On the other hand, many outplacement offices

reported little trouble in placing engineers who were

in nonmanagerial jobs in high technology fields.

UNC Naval Products, in Montville, CT, for example, reported few problems in placing its electrical

and mechanical engineers, many of whom were

actively involved with robotics. Engineers with

sophisticated processing and manufacturing expertise often make employment transitions easily.

Engineers at the M-1 tank production facility at

General Dynamics Land Systems Division north of

Detroit, for example, are frequently drawn away by

the area’s automobile manufacturers.

Finally, the willingness and ability to relocate can

be important. With the New England economy

having hard times, the UNC Naval Products plant

reported that half of its engineers laid off in 1990

found new jobs outside of Connecticut. Earlier, exit

interviews with 70 engineers laid off from Grumman’s Aircraft Systems Division at Bethpage, Long

Island, in 1989 indicated that almost all had stayed

in engineering jobs but 53 percent had had to move

out of New York State.33 Some engineers, particularly those in two-career families, may be less

willing to relocate, and hence may have a harder

time getting reemployed.

Although aggregate data on engineers’ reemployment experience are mostly lacking, a few companies have at least partial records, At Lockheed’s

company-operated outplacement service for whitecollar workers in Burbank, CA, half of the people

served were engineers, and about 70 percent of the

total were in technically oriented professions. The

office reported on 299 placements through May 10,

1991: 39 percent found jobs with other defense

contractors and subcontractors; 12 percent with

other commercial aerospace companies; and 49

percent with other commercial sector employers

including some in computer services, entertainment,

environmental services, health, insurance, and manufacturing. 34 The high percentage reemployed in

other defense fins-a finding confirmed in less

quantitative reports from some other companies—

raises the concern that these engineers may go

through additional rounds of displacement as defense spending continues to decline.

~r)afienbach Op. cit.

sl~~leen Naughton, “Characteristics of Jobless Engineers,” Monthly bbor Review, October 1972, pp. 16-21.

Szsuch difficulties me not new. A major study of the transferability of defense engineers by Stanford Research Institute in the mid-1960s (C.H.

Rittenhouse, The Tran$erability and Retraining of Defense Engineers, Report No. ACDA/E-l 10, prepared for U.S. Arms Control and Disarmament

Agency, November 1967) pointed out there were a substantially greater number of engineers in the defense industry engaged in documentation activities,

e.g.! in fiting specifications> ~dboo~, ~d ~n~s, and in systems atiysis and design+ than there were in civilian industry. wthough systems

approaches are now widely used in commercial and nondefense government programs, in the mid- 1960s many of the engineers laid off from all of the

aforementioned job areas had major problems because of the shortage of comparable jobs outside the defense industry.

qqfic~d Opsaul, Grumman Corp. representative to the American Institute of Aeronautics and Astronautics (AIAA), personal communication Jan.

2, 1991.

W@-Griffiths, Lockheed (Burbank) Career Center, personal communication June 3, 1991.
112 . After the Cold War: Living With Lower Defense Spending

An April 1991 survey of 1,000 salaried and hourly

workers laid off by Texas Instruments in 1990

showed greater mobility from the defense to the

commercial sector—possibly a characteristic of the

electronics sector. Ninety percent of the respondents

were from the company’s defense sector, and

roughly two-thirds were salaried, with a substantial

(but unreported) number being engineers. Eightytwo percent of the reemployed workers found their

new jobs in commercial sector firms, 16 percent

were rehired by Texas Instruments, and only 3

percent went to other defense fins. The data also

indicate the value of early warning. In this layoff, all

the workers received 60 days’ advance notice; 44

percent had found new jobs within 6 weeks, well

before the actual layoff occured.35

MOBILITY AND

CAREER-LONG EDUCATION

Adaptability is the key to mobility of engineers

from defense to civilian jobs. Too many years in too

narrow a specialty is the greatest handicap to an

engineer seeking to move into the civilian sector.

More broadly, flexibility is increasingly important

to all engineers and their employers in a time of rapid

technology change, intense global competition, and

shifting national priorities.36

Companies, the government, engineering colleges and universities, and individual engineers all

have responsibilities in maintaining a versatile

engineering work force. Engineers need a lifelong

commitment to continuing education to avoid technical obsolescence. Universities can offer courses, at

convenient times and places, that meet a midcareer

engineer’s professional needs. Companies can structure engineers’ careers to help them avoid obsolescence by providing both internal mobility and

continuing education opportunities. Government

has a part to play both in providing scholarship aid

directly to engineers for continuing education, and in

giving companies information, technical assistance,

and incentives to provide their engineers with

lifelong training.

As layoffs of longtime employees are increasingly

a fact of life in many U.S. companies, engineers are

having to look at their jobs as renewable, short-term

contracts rather than lifetime positions. It is becoming common practice, for example, for companies to

reduce engineering staff to a core group and hire

contract engineers for one project at a time.37 IEEE

recently advised its members to become ‘‘mature

realists’ and not to ‘assume that your employer will

take care of you or that your job has tenure. ” It

emphasized the importance of taking responsibility

for one’s career, and advised engineers to “recognize the need for lifelong learning to stay current and

competent in your profession. ’38 The case of

obsolescence may sometimes be overstated.39 Nevertheless, engineers who continuously refresh their

professional skills increase their value to their

employers (and to society) and are less vulnerable to

replacement by recent graduates who have less

experience and cost less, but are trained in up-to-date

skills.

Career-long learning for engineers includes on-thejob experience, professional development, and formal course work. Several surveys indicated that

most engineers had taken part in formal training at

some time in their careers; that in the early 1980s

about half of all engineers were participating in

some kind of continuing education every year; and

that participation tended to decline with age.40 The

inconvenience of course offerings, especially long

travel times and distances, and excessive time taken

from family and personal life were the primary

sSDan McMurtry, Tew Instruments Placement Center, personal COmInUniUtiO~ My 16, 1991.

36Nati~~ Re~em~h Council ~c), committ~ on tie Eduction and Utitition of the _&r, Mnel on continuing &hlCatiO@ Continuing

Education o~Engineers (Washingto% DC: National Academy Press, 1985).

37u.s. con=ess, offlCe of T~hno]ogy ~ssmen~ Higher Ed~ation for scie~e and Engineefln& llack~round Paper, OTA-BP-SET-52

(Springfield, VA: National Technical Information Service, March 1989), p. 220, note 69.

3SIEEE, “fiofessio~ practices for Engineers, Scientists, and Their Employers,” Entity Position Statexnen4 IEEE United States Activities Boa@

Aug. 13, 1990.

WS=, for ~~ple, H.G.~b“continuing Professional Development at Mid-Career,” Proceedings, 1982 College-Industry-Education

Conference of the Amem”can Society forEngineering Education (Washington DC: 1982), P. 12S. Kaufman said: “It may be thatj at least until midcareer,

professional obsolescence may decrease with age, mostly as a result of accumulated experience and selMearning. Obsolescence may be used by

employers as a convenient excuse for hiring younger and less-experienced professionals at salaries considerably lower than those which older

professionals have attained.”

‘@NRC, op. cit., pp. 19-27.
Chapter 4-Engineers: A Special Case ● 113

reasons engineers gave for not taking training

courses.

41

Help in overcoming these barriers might come

from both universities and companies. Most universities, however, have other priorities. A few major

ones (e.g., Stanford) have long taken an interest in

continuing education to engineers and provide it in

well-organized extension programs. But the large

majority give it little attention, concentrating instead

on what they see as their central tasks of undergraduate schooling, traditional graduate education, and

research.42 In its 1988 report on continuing education for engineers, a National Research Council

(NRC) panel suggested that since industry has a

direct interest in continuing education for engineers

that accommodates diverse students, extends the

boundaries of classes, responds to rapidly changing

technology, and controls costs, industry itself should

take on the primary responsibility .43 There are ways,

however, of combining industry and university

responsibilities. An example is the National Technological University, described in box 4-A, which

brings high-quality engineering courses from 40

universities to thousands of engineers and scientists

in private industry. Several States have also supported the formation of regional technology networks of a similar kind.

Companies have much more to offer in careerlong training of engineers than support of formal

courses offered by university engineering faculty.

Possibilities include rotations within the company to

avoid over-specialization; short courses (possibly

computer-based and self-paced) on specific topics;

and long-term guidance by supervisors on training

44 Some U.S. companies needs and opportunities.

an excellent job of devising training programs that

will keep their engineers versatile, flexible, and

up-to-date. (See box 4-B for an example.) However,

Japanese companies generally take this obligation

more seriously. One study found that large Japanese

firms are far more likely than U.S. companies to

broaden engineers’ experience by moving them

around within the company .45 Another described the

Japanese employer’s obligation to train the employee as “a corollary of the traditional long-range

outlook in Japan” and a complement to “the

employee’s sense of duty to the company. ‘ ’46 Young

engineers are introduced to the company with a

combination of formal classes at a company institute, assignment to a specific but off-line engineering project, rotation within the company, and most

important, long-term guidance by a mentor who is

responsible for the engineer’s well-being and education. For older engineers, there are corporate technical schools, engineering seminars, internal l-year

‘‘engineering cramming“ programs, Company -

funded studies at Japanese or foreign universities,

and for many mature engineers, a job as production

manager, which draws on the engineer’s years of

on-the-job training and job rotation experience.

The Federal Government has not taken a very

active part in supporting or encouraging continuing

education for engineers. The National Science

Foundation offers fellowships for graduate engineering study, but the grants are targeted to conventional graduate students who have recently completed BS degrees, not to midcareer engineers

looking for support of continuing education. Federal

tax law does provide some encouragement for

engineers to use employer-provided tuition assistance, since employees do not have to treat this

assistance as taxable income (if employers provide

it in a manner that meets Federal requirements).

dlIbid., p. 16.

az~id., pp. 49.55. me NRC ~epfl noted that nei~m the ~titutions nor tie eWin~@ fa~lty tive much incentive to develop and take pti h

continuing education for engineers.

‘%id.

44At tie -etie titit advi~ e@&rs to tie c~ge of their c~eer development, ME ~SO ~Ornmexld~ tit employers establish policies

for the continuing personal and professional growth of their employees. Top managers were advised to ‘encourage internal job transfers to broaden career

experience and minimim obsolescence as a result of over-specialization” through measures such as ‘‘job posting, skills inventory, internal recruiting,

counseling, internships, rotational assignments, support for personal risk and liberal relocation benefits.’ IEEE, ‘Professional Practices for Engineers,

Scientists, and Their Employers,’ op. cit.

as~-d H. L~ Hew R. Piehler, ~d W. ~~ -y, ‘‘En@eefig ~ad~tes iII the Utited s~tes and J~MI: A Comparison Of Their Numb~s

and an Empirical Study of the Careers and Methods of Information Transfer, ’ Carnegie-Mellon University, Pittsbur~ PA, 1989. The study found that

62 pemxmt of Japanese engineers had at least one job rotation assignment, 35 percent were assigned to production at some point, and 50 percent had one

outside assignment in R&D. The comparable f@res for American engineers were 35 percent with a job rotation assignment, 14 percent assigned to

production and 14 percent with an outside assignment to R&D.

46Jeffrey Frey and WuF~ ‘ cE@&fig~u~tion tiJ~~: ACUm-lO~ pf’OCeSS,’ EngineeringEducation, July/August 1991, pp.466-472.

The authors were describing major Japanese companies that subscribe to the practim of career-long employment.
114 . After the Cold War: Living With Lower Defense Spending

Box 4-A—The National Technological University: A Partnership for

Continuing Engineering Education

The National Technological University (NTU) is a private nonprofit institution, governed by a board made up

primarily of industry executives, that brings television courses via satellite network to engineers,

ing engineerin g

schools, including 27 State universities and land grant colleges and several highly regarded private institutions (e.g.,

Cornell, Rensselaer Polytechnic Institute). Most of the clients are private firms, among them such industry leaders

as AT&T, Du Pent, General Electric, Hewlett-Packard, IBM, Motorola, and Xerox. Clients also include universities,

U.S. Government agencies, and several of the Department of Energy’s contractor-operated national laboratories.

All students are employees of client organizations.

Founded in 1984, NTU had 260 faculty members in the 1990-91 school year, delivering 370 courses to 4,155

students enrolled for graduate credit and 386 noncredit courses in advanced technology and management to about

85,000 participants. By 1990, 150 students had graduated from NTU with the M.S. degree.

The NTU network uses an advanced telecommunications system, operating day and night on the GSTAR-1

communications satellite, and providing four channels of instructional television. Many courses are broadcast live,

and students can communicate with instructors in realtime by telephone or fax. However, most students view the

programs on tape at times of their choosing, and get in touch with instructors by telephone, electronic mail, or fax

during the instructors’ office hours. These adult students seem to fare well enough without the instant two-way

communication that children need for distance learning.

2 Students are encouraged to view the programs in groups,

to gain from immediate face-to-face interaction and mutual reinforcement.

NTU is an outgrowth of the Association for Media-Based Continuing Education for Engineers (AMCEE), a

consortium of a dozen colleges founded in 1976 to produce and distribute video programs for practicing engineers.

From AMCEE’s Board of Directors came the idea of a national degree-granting engineering college that would

deliver its programs via satellite. The National Science Foundation gave startup support to AMCEE, and the

Department of Defense put up seed money for NTU, but operations are now funded mostly by fees from clients.

However, the Defense Advanced ResearchProjects Agency recently awarded NTU a $l.5-million grant in matching

funds for installation of a state-of-the-art digital compressed video transmission system. Investments by NTU, its

industrial customers, and its member schools, will bring the total funding for the new system to about $5 million.

Chief advantages of the system will be improved video and audio quality and a many-fold increase in channel

capacity.

IMost of & ~t~ On NTU is dmWXI from Lionel V. Baldw@ ‘6 Higher-13dueation Partnerships in lhgb=mg“ snd Science,” The

Anna/s of the American Am&my of Political andlhcial Science, March 1991, pp. 76-92; and National Technical University, Annual Report

1990-91,700 Cenfrc /kfeQuc, Fort Collins, CO 80526.

2A detailed exambtm“ of distance learning is inU.S. Congress, Offke of Technology Assessm en$ b“nk”ngforLearni”ng:A New Course

for Education, OTA-SET-430 (WsshingtoQ DC: U.S. Government Rinfing O&km, November 1989).

However, Congress has never made this tax exemp- training on their own. Moreover, the U.S. Governtion a permanent part of the law, but has repeatedly ment offers little in the way of technical assistance

extended it for limited periods. to employers or professional societies that might

The U.S. Government does little to spur or help wish to develop training programs for their employemployers to provide training to their employees ees or members.47 Because of the public interest in

making use of the skills of all the Nation’s engineers, generally, including continuing education for engineers. Several other countries use a payroll-based especially since there are indications that the supply

levy to encourage employers to train workers; the may shrink in the next few years, there is reason for

levy can be forgiven if employers do sufficient the government to give special attention to policies

47F~r de~led e~tion of worker training issues in general, see U.S. Congrtxs, Offiw of Technology Assessment, Worker Traim”ng: Competirw

in the New International Economy, OTA-IT’W157 (WSshingtoq DC: U.S. Government Printing Ofilce, September 1990).
Chapter 4----Engineers: A Special Case ● 115

Box 4-B--Continuing Education for Engineers at Texas Instruments

Several large defense contractors are strongly committed to continuing education of their engineers and other

employees. An example comes from the Defense Systems and Electronics Group of Texas Instruments (TI). 1

The TI program requires new employees to work with their supervisors to develop a personal 3- to 5-year

training education plan, and then to update it regularly for the rest of their career with the company. TI has developed

training profiles by job titles; the profiles list mandatory, recommended, and optional courses that serve as the

starting point for each employee’s personal training and education plan.

TI provides its engineers with opportunities both inside and outside the company to meet their training goals.

The Group’s Human Resources Development Department offers some 125 2-to 5-day courses, a few of which are

computer-based and self-paced. Among the subjects covered are computer systems, including computer languages,

operating systems, microprocessors, and software engineering; electrical, mechanical, and other engineering; and

leadership and quality development.

For longer term educational courses, TI provides help with tuition through its Educational Assistance program,

which is dedicated to helping individual employees better their job performance through career-long education. For

employees taking an approved course, TI pays all the costs of tuition, books, and fees for the first $100 per semester

hour, and 80 percent of all charges above that. Engineers are encouraged to pursue graduate degrees, especially in

technical areas but also in business administration. Course work is generally done on the employee’s own time.

The TAGER Television Network offers TI employees another way to receive advanced courses in engineering,

computer science, mathematics, and management. Developed by a consortium of North Texas colleges and

universities, TAGER uses one-way television and two-way telephone hookups to present credit and noncredit

courses to 15 companies at 30 sites in the Dallas-Fort Worth area. Courses are offered primarily during working

hours but also on week night evenings. M.S. degree programs in the TAGER network include electrical, mechanical,

and computer engineering, computer science, operations research, and engineering management. TI also provides

satellite-delivered courses in engineering and management from the National Technological University.

IRou@y one-r of Texas Instruments’ business is in defense.

.

that would make career-long education and training tion workers are often interested mainly in local

for engineers more readily accessible. jobs.

REEMPLOYMENT AND

RETRAINING ASSISTANCE

FOR ENGINEERS

Engineers’ Needs

Engineers laid off by defense industry employers

typically need a range of outplacement services,

many of them identical to the services that are useful

to all displaced workers. These common services

include skills assessment and job counseling, personal counseling, job search skills training, and job

development, including company-sponsored job fairs.

Engineers’ needs do differ in some respects, however. For example, job banks and job fairs for the

engineers are more useful if the potential employers

come from all over the United States, while producRetraining needs can also be rather different.

Many blue- and pink-collar workers can gain a good

deal from relatively short-term skills courses, particularly those designed by local community colleges

to meet the needs of displaced workers. Engineers

who require retraining may need courses that are

considerably longer and more expensive.

Moreover, engineers may need access to employment and training services for a relatively long time.

Job searches for engineers average longer than those

of blue-collar workers. A personnel officer for

McDonnell-Douglas says, “For every $10,000 per

year a person makes, it takes 4 to 6 weeks more to

find a position.”48 At a General Electric plant in

hard-hit Massachusetts, a personnel officer points

out, “Even in good times, the average placement

time for engineers was 3 to 6 months. ’ ’49 Outplace4Spcmomel offl~r, McDonnell Douglas, pXsOMl CO~~~tiOQ Oct. 19> 1~

dgFr~e~ck T ~dersom ~%er, ~rofessio~ s~ng, GE Aerospace, Lynn, MA, prsonal communication, Mar. 11, 1991.
116 . After the Cold War: Living With Lower Defense Spending

ment offices say that the 1990-91 recession has

typically added another 1 to 2 months to the length

of job searches for engineers.

Responses From 1970 to 1973:

The Worst of Times

The employment situation for engineers was

much worse in the early 1970s than in the early

1990s: total engineering employment then was

considerably less (1.2 million in 1970 vs. 1.8 million

in 1990); the defense aircraft, space, and commercial

aircraft industries had all contracted signicantly at

the same time; and the economy was much more

defense-dependent. A national program for assistance to displaced workers did not exist in the 1970s,

and in its absence several government and other

reemployment and retraining efforts targeted to

engineers were established. These may be applicable--

and perhaps more effective-in an era when the

engineers’ situation is not so difficult.

The Federal Government’s principal response

was expansion of a small, trial assistance effort into

a national program, the Technology Mobilization

and Reemployment Program (TMRP). TMRP provided funds for job development, travel for job

searches, relocation, and training for specific jobs.

An estimated 75,000 to 100,000 engineers, scientists, and technicians were unemployed when the

program began. 50 When the 2-year program ended in

June 1973, some $28 million had been spent and

34,000 participants were known to be reemployed.51

A 1973 General Accounting Office (GAO) report52

criticized the program for falling short of its

estimates of the number of people it would serve (35

percent of the goal) and the amount of financial aid

it would disburse (19 percent), but otherwise regarded the program as reasonably successful.

One aspect of TMRP was a skills conversion

study. Under a contract from the Department of

Labor (DOL), the National Society of Professional

Engineers (NSPE) organized research teams of

unemployed aerospace/defense engineers in 14 cities with the highest unemployment rates for technical professionals. The teams examined potential

employers’ needs in 21 fields such as medical

services, criminal justice, food products, and transportation, and identified some 55,000 job opportunities. 53

Following the skills conversion study, DOL

awarded NSPE a second contract, the Technology

Utilization Project (TUP), to retrain aerospace/

defense workers. Engineers and scientists were

retrained for jobs in 11 industries with good job

opportunities: food products, health care, transportation, wood products, power resources, pollution

control, criminal justice, banking and finance, solid

waste, educational technology, and occupational

safety. Of 329 persons enrolled in the course, 302

found employment by early January 1973, and most

in the occupations for which they had been trained.

GAO recommended that skill conversion studies be

given high priority for early implementation in

future employment crises for technical professionals. 54

The TUP’s successes provided a counter to

employer attitudes common in the early 1970s (and

still prevalent in 1991). The attitude was that

aerospace engineers were not good prospects for

nonaerospace employment because they were overpaid, too specialized, and too old, and would return

to aerospace as soon as they could. After the project

ended, DOL reported the following:

Employers mistakenly thought defense aerospace engineer salaries averaged $25,000; for

those who participated in the training the

average was $16,000.

The technological spinoff from aerospace specialization convinced many employers that

experience in defense aerospace was more an

advantage than a disadvantage.

The average age of the participants in training

was 45.4, but these retrained engineers apX)compmoller ~~ Of the unit~ ‘Mes! “Reemployment Assistance for Engineers, Scientists, and Technicians Unemployed Because of

Aerospace and Defense Cutbacks,” op. cit., p. 1.

sl~~ident’s fiono~c Adj~&ment committ~ and (XfIce of Economic Adjustment (DoD), Econom”c AdjustmentlConver.sion, ~~y, 1985.

S~ornptroller ~ne~ of the United s~tes$ “Reemployment Assistance for Engineers, Scientists, and Technicians Unemployed Because of

Aerospace and Defense Cutbacks,” op. cit., p. 14.

3sNau@toq op. Cit., p. 2~, “Aerospace/Defense Job Skills Conversion Project Develops Action Responses to Engineering Employment”

Professional Engineer This Month, vol. 42, No. 6, June 1972, p. 17.

~Comp~oller General, “Reemployment Assistance for Engineers, Scientists, and Technicians Unemployed Because of Aerospace and Defense

Cutbacks,” op. cit.
Chapter 4--Engineers: A Special Case ● 117

peared to take less time to become productive

than new college graduates.

● Only one-third of the unemployed engineers

returned to aerospace; many preferred the

security of another industry .55

The Aerospace Employment Project was a smallscale, federally funded program, carried out by the

National League of Cities and the U.S. Conference

of Mayors, that retrained former aerospace and

defense industry professionals for local government

jobs. A total of 376 professionals were selected from

some 7,000 applicants in the 10 highest unemployment areas in the United States. After attending

30-day courses at Massachusetts Institute of Technology (MIT) or the University of California at

Berkeley, and after being organized into supportive

self-help groups, the participants were made available to prospective employers. The program proved

effective in giving the engineers new skills, and most

participants found new jobs, but the job search was

lengthy and most of the engineers took salary cuts.

Roughly 8 of 10 participants were placed within 7

months of course completion, 65 percent in local

government and the balance in private industry.

Most participants reported that the new jobs did

require substantially different skills from those

involved in their old jobs so that retraining was

appropriate.56

Professional societies (IEEE and the American

Institute of Aeronautics and Astronautics (AIMA))

set up other programs to help engineers in the

1970-73 period. Both organizations worked with

DOL to use both volunteers and paid, previously

laid-off engineers in job and personal counseling

programs and in self-help groups in areas where

unemployment was high.57 AIAA, for example,

eventually provided 175 workshops in 43 cities, and

served 14,600 out-of-work professionals.58 Assistance from peers proved to be a key to success in

these programs.59

Responses Today: Professional Associations

During the 1970-73 employment slump-the

worst period for engineers since World War II-the

professional associations were very active in helping

their displaced members get back into the work

force. During the current cutbacks, perhaps because

of stronger outplacement efforts by many defense

firms and the presence of the Economic Dislocation

and Worker Adjustment Assistance (EDWAA) government programs, and because the slump for

engineers is not as severe as that of two decades ago,

the associations are not as heavily involved. They

do, however, provide some services.

IEEE regularly tracks employment trends for its

members, holds biennial Career Conferences, and

has been actively promoting continuing education.

(Electrical engineers represented 44 percent of

defense-related engineering employment in 1990.)

IEEE has taken a lead role in maintaining resume

data banks for professional association members;

developed and published a two-volume “employment guide” for scientists and engineers; helped

build local consultant networks, which can support

entrepreneurial efforts by displaced engineers; encouraged recruiting at IEEE conferences; and contracted with a private firm to present job fairs and job

search seminars for local IEEE sections around the

country.

AIAA (aeronautical and astronautical engineers

represented 15 percent of defense-related engineering employment in 1990) has taken a very low-key

role in the reemployment effort. It has revised and

reprinted a popular 1970s job hunting guide and has

provided free insertions of “Available for Employment” ads in the organization’s monthly magazine.

Engineers are not heavily unionized, but those

unions that exist have made some efforts at promoting conversion from defense to commercial production. One of the more creative union efforts was the

Wichita Engineering Association’s negotiations with

Boeing, which resulted in the cross-training program

described later in this chapter.

ss~~fi E. Bernd4 ‘‘Government Efforts TO Utilize En@&@ M~wer, “ in S.S. Dubti H. Sheltou and 1. McCorme~ (eds.), Maintaining

Professional and Technical Competence of the Older Engineer+ngineering and Psychological Concepts, op. cit.

56H.G. ~~qprofe~siomlsinsearch of Work: coping ~“th thesmess ofJob~ss and Unemployment (New YorL NY: Job Wiley & SOYM, 1982),

p. 207.

57stix, Op. cit., p. 47; Berndq op. cit., p. 140.

58=* op. cit., p. 212.

‘%id., p. 138.
118 ● After the Cold War: Living With Lower Defense Spending

On Long Island, a group of engineers formed

“The Center for Practical Solutions” in early 1990

to help each other with employment problems and

opportunities and to develop jobs in the area. The

group is trying to create new jobs through infusion

of technology into existing companies and support

of entrepreneurial efforts. The center includes people with expertise in marketing, sales, law, and

accounting, to support development of businesses

for the manufacture of commercial, environmental,

transportation, and medical products.

Company Responses

A qualitative review of reemployment programs

for engineers around the country indicates that many

of the better ones are built around active company

participation. When company programs are in place,

government programs can be very effective complements, providing additional readjustment/reemployment services and staff. Partnerships between

local EDWAA agencies and the companies can draw

on the strengths of both and produce effective

programs.

In the current downsizing, most large defense

industry employers are providing engineers and

other white-collar employees with a wide variety of 60 Companies may have more outplacement services.

than one reason for taking on this responsibility.

Besides feeling a duty to longtime employees, some

are also concerned about maintaining morale among

both the workers who have been given advance

notice of layoff and those who will remain with the

company.

Company outplacement services are a relatively

new benefit. Before 1970, most defense industry

firms took no responsibility for helping laid-off

engineers find new jobs. In the San Francisco area

during major defense industry layoffs in 1964-65,

for example, only a quarter of the scientists and

engineers laid off by 62 defense industry firms

received outplacement services. The average time

between layoff notice and end of employment for all

62 firms was only 7 days.61

Company outplacement services may be provided

directly by the employer’s human resources office or

by an outplacement firm hired by the employer, and

are often supplemented by some services provided

by local and State EDWAA agencies. Although

cooperation between companies and government

dislocated worker assistance programs can work

well, companies sometimes lose patience with the

delays or inadequacies of government programs.

Several companies reported that they sought help

from the federally funded, State and locally operated

EDWAA program when facing layoffs, but decided

to provide the primary services themselves because

the government agencies could not get projects set

up quickly enough, did not have funds available, or

declined to fund certain services (such as workshops

by outside consultants).

Table 4-5 summarizes the services provided to

engineers at 13 plants of large defense contractors

after layoffs announced during 1990 or early 1991.

Most of the large defense contractors make substantial efforts, with or without government assistance,

to provide basic services (the second through

seventh categories of “Benefits and Services Provided’ in table 4-5). The aim is to help the employee

find a new job as rapidly as possible, and to

minimize the stress on employees from the time the

layoff is announced until they find new jobs. Survey

responses from 11 aerospace firms that had laid off

scientists and engineers and provided outplacement

services during 1989-90 indicated the average cost

of the services provided ranged from $100 to almost

$6,000 per employee; the median amount was

$l,000. 62

Reemployment programs for engineers and other

white-collar workers typically start with a 2- or

3-day orientation, which includes topics such as

skills assessment, resume preparation, interview

techniques, importance of networking, and potential

personal stresses. Such basic information may not

seem necessary, especially in areas such as southern

California where many aerospace workers have

changed employers frequently and kept job-hunting

skills honed. However, the layoffs of the 1990s are

@Some-ii~ also provide swims t. ~e~ blue<olhworkers but tend to rely more on State and local gover~ent employment ad ~~ng Progr~s.

Engineers and other white-collar workers frequently receive outplacement services at one office or locatiou blue-collar workers at another.

See ch. 3.

61R.p ~mb% *‘A Smdy of tie R~Employment and Unemplowent Experiences of Scientists and Engineers Laid Off From 62 Aerospace ~d

Electronics Firms in the San Francisco Bay Area During 1963-65,” San Jose State College, San Jose, CA, Feb. 15, 1967.

szAerospace Industries Association Swey, ‘‘Company Policies for Dealing with Economic Adjustment and Its Impact on Aerospace Workers, ” 1990.
Table 4-5—Benefits and Services Provided to Displaced Engineers

Benefits and services provided

Funding

Number of Job-search On-site for

engineers Severance skills Office Job Personal Job Job retraining off-site

Company Location laid-off Dates pay training space counseling counseling banks a

fairs courses training

Lockheed Burbank, CA c c c C+G C — —

McDonnell-Douglas Long Beach, CA 1,990 7-90/6-91 — C+G C+G C+G C+G G+G C+G — G

Northrop Los Angeles, CA 1 ,200b 1-90/12-90 — C+G c c G C+G C — G

(multiple sites)

Rockwell-North American

Aircraft Los Angeles, CA 160 10-89/12-90 C c c c c c G

GD Electric Boatc Groton, CT 75 10-90/1-91 — c c c c G : = G

UNC Naval Products Montville, CT 240 2-90/12-90 C CG c CG c G CG — C+G

Boeing Wichita, KS 60 1-90/12-90 — c c c C

d —

GE Aerospace

— —

Burlington, MA

—

150 1-91/12-91 c c c C+G C+G C+G c C+G C+G

GE Aircraft Engines Lynn, MA 350 10-90/2-91 C c c c c c c c c

McDonnell-Douglas St. Louis, MO 1,900 7-90/6-91 — C/G’ C/G C/G C/G C/G

Grumman

c G

Long Island, NY 230 1-90/12-90 c c — c — — c : G

Texas Instruments Dallas, TX 700 1 -90/ 5-91 c c c c c c c c C+G

GD Fort Worthc

Fort Worth, TX 2,500 6-90/ 6-91 — c c c c c C+G — G

KEY: C--company operated and funded.

G~government operated and funded.

C+ G-joint operation.

C/G-company operated, government funded.

— —not provided.

aEvery State has an Employment Servke that maintains a jobbank;displac~ engineers may, however, rely primarily on job listings developed at the company outplacement Center.

blnclud~ engineers and other white-collar job holders.

cElectric Boat and Fort Worth are subsidiaries of General Dyf’IaI’IIiC$ (G D).

dcompany provid~ Crwstraining for 176 engineers to change jobs within BOO@

eprograms deslgnat~ C/G were ~mpany provid~ until November 1990, then turn~ over to government agency.

SOURCE: Office of Technology Assessment, 1991.
120 . After the Cold War: Living With Lower Defense Spending

also displacing engineers who have been with the

same employer for 15 or 20 years and have not had

to look for a new position since they graduated from

college.

After the orientation many of the engineers are

ready to begin their job searches, while others take

time to evaluate future career directions. Peers are

often effective job counselors for engineers, and job

clubs (peer support groups in which job-hunting

experiences and job leads can be shared) are also

popular and useful. Many companies provide laidoff engineers with office space for job search

activities; this often includes a desk, photocopying

and long-distance telephone privileges, and access

to word-processing equipment or secretarial assistance.

Companies also assist their engineers by putting

them in contact with potential employers through

job fairs and job banks. In St. Louis, for example,

McDonnell Douglas brought in more than 115

companies to job fairs for employees it laid off in

mid-1990. Most outplacement offices maintain job

banks (listings of available jobs), although these

range widely in size and quality. Lockheed’s Burbank, CA center for displaced salaried workers

gathers job listings from some 800 potential employers and also distributes to employers a weekly

newsletter describing the talents of specific Lockheed employees being laid off. Some companies,

such as General Electric, maintain listings of professional opportunities available at the company’s

other locations.63

Personal counseling, usually in the form of group

instruction on potential psychological, family, and

financial problems, is an important service provided

by many companies. Individual counseling on the

same issues is frequently made available, sometimes

through existing company employee assistance programs. Because unemployment periods for engineers are often relatively long, stresses can build up

and the personal counseling programs become

critical.

Although most large defense companies offer

their laid-off employees substantial reemployment

help, either by themselves or cooperatively with

State and local agencies, others do less. After a large

layoff in early 1989, one Long Island aerospace firm

provided severance pay, job fairs, and informal

counseling, but also: 1) informed most workers of

layoffs on the day they were laid off, in some cases

giving them less than 30 minutes to leave; 2) refused

to permit local and State reemployment assistance

programs to hold briefings at the affected plant to

describe available services; and 3) refused to provide

the assistance programs with the names of the

laid-off workers.64

In addition to the tasks of finding a new job and

managing the stresses of unemployment, laid-off

engineers sometimes need training to fit the new job

or to make them more appealing to potential

employers. Interviews with laid-off engineers, outplacement office staff, and government employment

agency directors indicate that retraining has not been

a high priority for displaced engineers during the

current cutbacks. Like blue-collar workers, many

unemployed professionals are unwilling to risk

retraining unless they are provided financial assistance and the promise of a job upon completion.65

The responses of the companies (and government

agencies) to retraining needs at the 13 plants are

shown in the last two columns of table 4-5.

Retraining assistance is not provided by nearly as

many companies as the more basic outplacement

services. Training is expensive, and the companies

have generally relied on government programs for

this service. A few companies make tuition grants

for training courses as part of severance packages.

For example, General Electric’s Aerospace Division

will reimburse tuition costs up to $5,000 for each of

the 2 years following an engineer’s layoff. Hughes

Aircraft reimburses each laid-off employee up to

$5,000 for tuition for continuing education, improving technical skills, or completely changing profession.66 Texas Instruments provides any worker who

has been with the company for 15 years up to $6,000

Gs~e ~ven lq~t aerospace employers in California joined the State in 1988 in forming the Aerospace Human Resources Network with an office

in Manhattan Beacb to help engineers and othex white-collar employees transfer from one company to another as defense contracts ebbed and flowed.

By late 1990, however, no one was doing much hiring. The network had essentially become an outplacement service for all of the employers. The

members decided to end their joint effort and return to local (company- and State-run) employment offkes.

‘Linda Kravitz, “Wages of Peace: Community and Industxy Experience with Military Cutbacks,” contractor report prepared for the Office of

Technology Assessment July 1990.

6.5=- op. cit., p. 205.

‘John Voelcker, “Reemployment Assistance Limited,” IEEE Spectrum, November 1989, p, 54.
Chapter 4--Engineers: A Special Case . 121

in tuition assistance during the 2 years following

layoff. Other companies complete payment for any

courses in which engineers are enrolled at the time

of the layoff announcement.

When training needs are fairly narrow and shared

by a number of clients, outplacement projects

sometimes offer their own short courses. Typical

subjects include computer-aided design and manufacturing (CAD/CAM) and specific computer programming languages. Classes in how to start a small

business are popular offerings. These courses may

be paid for either by the company or out of EDWAA

funds.

Mass retraining of engineers for other jobs within

the company is less common. An effort by Boeing’s

Wichita Division to retrain its defense engineers

(described in box 4-C) is a successful but unusual

example. In contrast, a company retrainin g program

launched in a southern California aerospace plant

was terminated when more than 60 percent of the

class members dropped out. The keys to success in

group retraining efforts appear to be careful selection of candidates and availability of jobs that will

require engineering rather than technician or blue-

-collar skills.

Defense industry employers use several strategies

to minimize layoffs. Normal attrition due to retirement or voluntary quits can reduce employment

levels without layoffs. Some companies offer voluntary early retirement, although it appears that some

recent early retirements have not been truly voluntary. An approach used in the past in single-fro

cutbacks but less available now is the loan of

engineers to other companies. In 1978-80, for

example, Rockwell’s North American Aircraft Division loaned engineers to Boeing and McDonnell

Douglas with an option to call them back at any time

with 30 days notice; Rockwell did so when B-lB

bomber production began in the early 1980s.67

Because the spending cutbacks have hit virtually all

defense contractors, few are in a position to borrow

engineers today. In the 1970s, several companies

used shortened work weeks or work sharing, in

which two employees alternate in a single job slot,

to avoid dismissals;68 they have not been used

significantly in the current cutbacks, at least not by

the large companies.

Government Programs

Federal programs of immediate importance to

engineers facing layoffs because of defense retrenchments are the mandate for early notification of

layoffs, under the Worker Adjustment and Retraining Act (WARN), and the EDWAA program as a

source of funding or provider of retraining and

reemployment services. These programs are discussed generally in chapter 3. The discussion here

focuses on their effectiveness.

The early notification that WARN requires has

proven very useful to local and State government

agencies in getting programs into place for displaced

engineers-in those cases where WARN has applied. 69 Like other workers, professionals who start

their job search before they are laid off are likely to

have a shorter period of unemployment than those

who start looking after layoff.70

Federally funded EDWAA services are a major

source of reemployment assistance for dislocated

engineers. As described in chapter 3, EDWAA funds

can be used for retraining, job search skills training,

placement services, relocation assistance, and other

specific support services for dislocated workers.

Although most large defense contractors are currently providing readjustment and reemployment

services other than retraining to their laid-off engineers, the EDWAA program still plays a very

necessary role. State and local EDWAA agencies

can provide reemployment services to engineers

when companies are too small to afford them, when

larger companies decline to provide them, and when

companies that provide the services initially later

want to turn the task over to someone else. EDWAA

agencies can also provide technical assistance to

6? David Rowley, vlcb~esident, HumaII Reso~es, Rockwell hlternatiotlld, Aircraft Divisio% El Segudo, CA p~so~ comm~~tio% ‘eb. 1,

1991.

6EKa~mam Op. cit., P. 259,

6~e WW le~s~tion rwuhes e~ly notification whenever layoffs in a 30-day period involve either one-third Or more of a comP~Y’s emPloY~

(minimum of 50) or 500 or more employees. The law also provides numerous exemptions, e.g., when a plant closing oi layoff is the result of the ending

of a project for which employment was understood to bc limited to the project’s duratiow or when it is the result of business circumstances that were

not foreseeable. McDonnell Douglas and General Dynamics both took exemptions for large layoffs when the Navy abruptly canceled the A-12 program

in January 1991.

%aufman, op. cit., p. 149.
122 . After the Cold War: Living With Lower Defense Spending

Box 4-C—Retraining of Engineers: Boeing’s Commercial Airplane Group

A model effort in retraining defense industry engineers for commercial engineering jobs within the company

is in the Wichita (KS) Division of Boeing’s Commercial Airplane Group. After a company reorganization in 1989,

Boeing began to phase out military aircraft work at the Wichita facility, moving the work to other Boeing plants

in Seattle and Philadelphia. At the same time, the Commercial Airplane Group at Wichita had a big backlog of work

and faced a serious shortage of structural design engineers.

Expecting sizable layoffs from the cutback in military work the engineers’ union, the Wichita Engineering

Association, worked out a retraining agreement with the company in December 1989. Association members who

were candidates for layoffs would be offered a chance at retrainingfor structural engineering positions.

Over the next 13 months, 176 engineers--mostly mechanical, civil, and aeronautical-entered the Cross

Training Program. Their previous experience varied widely, and their ages ranged from 24 to 60. To be eligible,

they must have completed basic engineering mechanics courses in statics, dynamics, and strength of materials. And

they had to be committed to careers in airframe structural design.

The training course was on paid time and was taught in the plant by Boeing engineers. It included 6 weeks of

classroom training, followed by 6 weeks of engineering liaison work on the plant floor. All but 8 of the original 176

engineers completed the 12-week program.

Afterwards, the trainees were assigned to structural engineering jobs as “apprentice engineers,” a special

cross-training category they are allowed to keep for 18 months, with no cut in salary from their previous positions.

As apprentices, their progress is reviewed every 90 days. Additional training, such as advanced structural design

courses, is available from Wichita State University. At the end of the apprentice period, the engineers become

qualified structural engineers and move into the pool with others in the same category.

With most of the trainees still in the apprentice designer category at this writing, it is too soon to say whether

the program has fully succeeded. If it does, the company and the engineers will both emerge as winners.

company projects, and they can provide services the took over operation of the company-established

company does not sponsor.

EDWAA agencies that are in partnership with

companies often contribute by training company

outplacement staff, conducting parts of workshops,

preparing discretionary grant proposals, and providing specific services such as personal counseling to

employees or operation of State job banks. At the

General Electric Aerospace Division plant at Burlington, MA, for example, the State’s EDWAA-funded

contractor provided a job developer, a training

coordinator, and a peer counselor, as well as training

funds, to complement the staff, services, and facilities the company provided. It also counseled company officials on how best to set up an outplacement

program. In St. Louis, McDonnell Douglas provided

the basic outplacement services to engineers at

company centers while the EDWAA agencies

helped the company establish the centers, provided

advanced CAD/CAM training to a group of engineers and funded individual courses for others,

supported new business development by offering

entrepreneurship training and incubator space, and

centers several months after the initial large layoff.

Sometimes, it is possible for the defense company

itself to become the EDWAA-funded service provider. At its Montville, CT plant (slated to close

completely by the end of 1992), UNC Naval

Products administers an EDWAA-funded contract

to provide a full range of outplacement services to

the dislocated employees.

In cases where companies do not provide outplacement help or have closed down their outplacement centers, engineers may turn to EDWAAfunded and operated centers. Some EDWAA projects are tailored to respond to a particular plant

layoff, but many are open to all of a community’s

dislocated workers. Some of the centers are effective, giving individual attention to all workers,

providing a range of readjustment and reemployment assistance services, and fitting retraining to

each individual’s background and abilities. In others, the EDWAA service providers are accustomed

to working primarily with blue-collar workers and

are not committed to serving dislocated white-collar
Chapter 4--Engineers: A Special Case ● 123

workers and professionals.71 Moreover, during the

recession and stagnant economic conditions of 1991,

some EDWAA programs became so overstretched

with demands for services that they provided only

minimal help to those they considered most able to

fend for themselves. This included most engineers.

Earlier, before demands for services became so

insistent, some States had set up centers that were

targeted specifically to professional employees. For

example, the Commonwealth Career Center, located

in Boston’s southwest suburbs, was intended primarily to serve engineers and other professionals

laid off by computer, defense, and financial fins.

This center concentrated on job development and

intensive, individual case management. In Texas,

EDWAA agencies have contracted with the Center

for Applied Technology, part of the University of

Houston, to operate Career Resource Centers for

professional and technical staff laid off in the Dallas,

Austin, and Houston areas. The centers provide a

range of readjustment and reemployment services as

well as a considerable number of training courses.

California’s Employment Development Department

is helping job-seeking engineers and other professional, managerial, and technical workers by supporting Experience Unlimited (EU) job clubs in its

local offices. The EU clubs are voluntary self-help

groups of the unemployed or underemployed, mostly

mid- to upper-level executives. Members use the

clubs to network and develop job search skills. They

are expected to spend at least 4 hours per week in

club activities designed to help them or fellow club

members find jobs.

The costs of retrainin g usually fall on government

sources, if not on the engineers themselves. Retraining or continuing education at the professional level

is expensive. Some local service providers have

virtually no EDWAA funds available for individualized courses for engineers; others consider advanced

training for engineers an expensive luxury, and give

priority to shorter term retraining of blue-collar

workers without transferable job skills. Some are

willing to support engineers’ training but restrict

their choices.

The Federal law that established EDWAA places

few restrictions on training choices, but DOL’s

EDWAA regulations state: “Retraining services . . .

should be limited to those individuals who can most

benefit from and are in need of such services.’ ’72

Many State and local agencies interpret this regulation to exclude dislocated workers with college

degrees from EDWAA training. Most do not allow

the use of EDWAA funds for pursuit of a full degree

program, although they may fund a limited number

of courses to complete a degree program already

well underway. One agency (not atypically) interpreted the regulation to bar a laid-off defense

industry mathematician from receiving EDWAA

funds for retraining to become a high school

mathematics teacher. The agency would not fund the

retraining because the young woman ‘‘already had

a marketable degree in mathematics. As discussed

in chapter 3, the same DOL regulation and policy

usually disallows EDWAA training funds for skill

upgrading. This could present a particular problem

for engineers otherwise eligible for EDWAA retraining; jobs may be available in their specialty but

only to those with the most up-to-date skills.

In principle, publicly financed training might

appropriately be given to any displaced workers,

including engineers, who need it to improve transferable skills. However, considering that training for

engineers is expensive, and that EDWAA funds are

limited--especially when recession is aggravating

displacement and escalating demands for service

service providers will face tough choices over how

to spend their scarce resources. They may have to

limit their help to engineers to outplacement services, which are relatively cheap, and save training for

those who can benefit from shorter term, less costly

courses. However, if a particular center serving

engineers focuses too much on outplacement services, it runs the risk of coming up against the law’s

requirement that each EDWAA project must spend

half its funds on training (unless the Governor

reduces the portion to 30 percent). As noted in

chapter 3, this requirement removes flexibility from

projects primarily serving engineers, managers, and

other professionals who may be job-ready and need

no training. Considering the value to society of

preserving and upgrading the skills of its engineers,

there is good reason to consider options other than

the EDWAA program for keeping midcareer engi71sOme smiu D~liv~ &~, con~n~q On -ices to Iow.income ~d di~dvan~ged worke~, hve lime experience or evc?ll interest in se~~

displaced workers in gemml, whether engineers, technicians, operatives, or clerical workecs. See the discussion in ch. 3.

7220 ~ 631.41(d)

305-199 - 92 - 5
124 ● After the Cold War: Living With Lower Defense Spending

neers in the profession. Chapter 2 discusses policy

options for encouragement and support of continuing education of engineers-thus helping to avoid

displacement and waste of this human resource. Two

other options that seem particularly appropriate for

engineers are described below.

Teacher Training

One creative approach to the reemployment of

retired or unemployed engineers is to train them as

certified math and science teachers for junior and

senior high schools. Under one such program,

started in September 1990 and funded jointly by

Rockwell International and the State of California,

17 Los Angeles area Rockwell retirees aged 55 to 65

enrolled in a 9-month alternative credentials program. (Rockwell, like many defense industry firms,

allows retirement as early as age 55 with 30 years

company experience.) The engineers’ practical experience was expected to add an extra dimension to

their teaching. The company expected to see the

program expanded to a number of other Los Angeles

firms in 1991-92.73 Several large nondefense companies, including Polaroid, IBM, and Kodak, have

also established teaching as a second career programs.

Although the Rockwell project was not designed

for laid-off employees, similar programs in other

areas have been expanded to include both retired and

laid-off engineers and scientists.74 Such programs

may be a good alternative for older engineers who

often have the toughest time finding new jobs; at the

same time, school systems would have a new supply

of badly needed math and science teachers. In many

districts, salaries for public school teachers are so

low that the choice is not feasible for midcareer

engineers with large financial responsibilities, although it can be attractive for retirees who are able

to collect both a pension and a teacher’s salary.

However, in some school districts, where respectable salary increases were adopted during the 1980s,

secondary and middle school teaching has become a

viable alternative for laid-off engineers, especially

perhaps for younger engineers and scientists with

employed spouses.

The National Executive Service Corps (NESC), a

New York City-based nonprofit group that provides

retired businesspeople as consultants to other nonprofit organizations, has used Carnegie Foundation

aid to train retired engineers (and other holders of

relevant degrees) as high school math and science

teachers. NESC works with businesses to recruit

retirees and with local colleges to establish alternative pathways to teaching credentials. NESC has

found that many engineers and scientists had

thought seriously of teaching while they were in

college, but decided not to because of the low

salaries; the higher salary levels in some districts

have allowed them to reconsider.75 The program

established 12 demonstration projects in 10 States

from 1987 to 1990.

The NESC program is too new to allow full

evaluation of its results, but it has chalked up some

successes. For example, in a NESC-sponsored

program at Texas Christian University (TCU) in Fort

Worth, TX, retired, laid-off, and other individuals

with undergraduate math or science degrees can

receive interim teaching credentials after completing two courses at TCU and full credentials after

finishing two more courses and 1 year as a paid,

full-time, intern teacher in the Fort Worth system.

Nineteen of the 20 men and women who completed

the TCU training in the first 2 years of the program

were teaching in the Fort Worth schools as of

January 1991, and another 15 were enrolled in the

current course program. Both TCU and the school

district subsidize the second career teachers with

tuition rebates.

State government agencies play an important role

in such projects because they establish the requirements for certification for the prospective teachers;

the route to credentials varies considerably from

State to State. The New Jersey Board of Education’s

Provisional Teacher Program, established in 1985, is

among the oldest alternative credentials programs.

Although it is not limited to developing math and

TsTim Violette, Manager, H~ Resources Planning, Rockwell International, Corporate Office, El Segundo, CA, personal communication Jan. 24,

1991.

74~ 1988 o~ ~ew~~ tie ~fistenu of an es~ted 26 such progr~ across tie united sQtes. us. Corlgress, office Of TechnoIo~ Assessment,

Elementaq and Seconahy School Education for Science and Engineering@ Technical Memorandum, OTA-TM-SET-41 (WashingtorL DC: U.S.

Government Printing Office, Deeernber 1988), p. 61.

T5Doro@ w~dhors~ vi~~prmident for ~thematics ad Science Educatiom National ExWutive Service COrpS, personal communicatio~ Apr. 19,

1991.
Chapter 4-Engineers: A Special Case ● 125

science teachers, it is answering some basic questions about the effectiveness of teaching as a second

career for engineers and others. Candidates for the

program must have a college degree in the field they

are going to teach and a passing grade in that field on

the National Teacher Examination. After 200 clock

hours of training during a year of “provisional”

teaching, the candidate goes rapidly from observation, to practice teaching, to periodically observed,

but otherwise unsupervised, teaching. At the end of

the year, the new teachers are eligible for the State’s

standard formal certification. While some school

districts give the new teachers credit for previous

work experience, others do not.

The New Jersey program has found that: 1)

alternative credentials teachers of mathematics and

sciences know their subject matter significantly

better than traditional credentials teachers; 2) the

attrition rate during the frost year of teaching is much

lower (5 percent in 1989-90) for alternative credentials teachers than for those with traditional credentials; 3) principals have been very satisfied with the

performance of the “provisional teachers”-

despite initial reluctance to accept them; and 4)

minority participation is a side benefit of the

program-23 percent of the teachers from the

alternative credentials program are from ethnic/

racial minority groups, versus 11 percent from

traditional credentials programs.76

Entrepreneurial Assistance

Helping small businesses get started is a standard

feature of economic development efforts by State

and local government agencies; it is being widely

employed in efforts to respond to defense spending

cuts (see ch. 6). Several agencies providing help to

displaced workers have made entrepreneurial assistance one of their approaches to finding new employment for laid-off workers, including engineers.

For example, the St. Louis (MO) County Economic Council is helping displaced McDonnell

Douglas engineers and other employees start their

own businesses. Typically, after a major blue- and

white-collar layoff, 10 percent of the displaced

employees will at least initially be interested in

going into business for themselves. In the wake of

the July 1990 McDonnell Douglas layoff, the

County Economic Council obtained a $123,000

EDWAA grant to offer the laid-off workers short

courses on starting small businesses. Some 500

people showed up at a l-day entrepreneurial training

seminar, and 275 of them, mostly engineers, signed

up for a lo-session course. Participants got instruction in how to start and operate a small business and

were required to prepare a business plan for their

proposed enterprises. The council also helped the

prospective entrepreneurs get startup loans from the

Small Business Administration and from a special,

low-interest State fired. McDonnell Douglas donated building space for an incubator for some of the

new enterprises.

There is no accurate count yet of how many

participants in the entrepreneurial training program

started up businesses or what fields they entered, but

at least a few firms based on engineering skills did

result from the entrepreneurial training program. Six

months afterward, the McDonnell Douglas incubator housed three firms operated by the company’s

former employees, and a fourth was expected; the

three firms specialized in computer repair and

service, software and personal computer system

installation, and contract management. A meeting of

alumni of the program disclosed that seven more

new businesses had started up, in such areas as

desktop publishing, church sound system installation, and video production. However, it appears that

most of those who took part in the entrepreneurial

training program after the McDonnell Douglas

layoff went into a service or retail business based on

a personal hobby, not on technologies related to their

former jobs.77

The DOL is supporting business startups by

dislocated workers (not necessarily from defense

industries) with demonstration projects in Washington State and Massachusetts. Patterned on large

programs in France and Great Britain, the U.S.

projects provide financial assistance or income

support during business startups. In Washington

State, workers who decide to start their own

businesses may be granted lump-sum payments

equal to the total amounts remainin g in their

unemployment insurance (UI) accounts to help with

76El]en Schwhter, Dfiwt~r~f T~~h~~u@i~U New Je~y s~te~p~~t of~uc~io~prso~comm~catio~ My 22, 1991. S= New Jersey

State Department of Education of the Provisional Teacher Program: “AProfdeof Applicants to New Jersey’s Alternate Route to Certification’ “Second

Year Report” (1986); “Third Year Report” (1987); and “Sixth Year Report” (1991).

7’7&ne BOSC~ Director, St. Louis Technology Center, personal communication June 1991.
126 . After the Cold War: Living With Lower Defense Spending

startup expenses. In Massachusetts the prospective

entrepreneurs are allowed to draw their regular UI

benefits while devoting full time to starting their

businesses; standard UI job-search requirements are

waived. In both States the participants receive a wide

range of business development services, e.g., seminars and counseling on planning, marketing, and

management.

In Washington State, 451 of 754 dislocated

workers who showed strong interest in starting their

own businesses were selected for the demonstration

project. A surprising 14 percent of the resulting new

businesses were small-scale manufacturing. In Massachusetts, 62 of 105 workers were selected for the

demonstration project, and of these 42 reportedly

established businesses; 62 percent of the participants

were from professional, managerial, and technical

occupations .78

Small business support programs apparently do

provide some job opportunities, but the smattering

of evidence so far suggests that few of the engineers

being laid off from defense jobs have started spinoff

high technology companies. According to one St.

Louis service provider, those who want to start a

high technology firm do so on their own, irrespective

of layoff announcements.79 Of the 32 businesses in

the St. Louis Technology Center, a thriving hightech incubator, none was organized by laid-off

McDonnell Douglas employees; only one laid-off

employee had approached the director. However,

most of the center’s entrepreneurs had at one time

been engineers or scientists for McDonnell Douglas,

Monsanto Chemical, Emerson Electric, or similar

companies .80

It is possible that not many defense engineers

have the combination of technical and managerial

skills and entrepreneurial drive needed to succeed in

starting up a high technology business. The temperament to work successfully as a member of a large

defense industry team may differ from that required

to start a new small business. Those that do have the

requisite interest and drive to start a business may

simply leave on their own, without being laid off.

Tsstephen A. Wandner and Jon C. Messenger, ‘‘The SeK-Employment Experience in the United States: Demonstration projects in Washington State

and Massachusetts,’ paper submitted to the Organization for Economic Cooperation and Developmen~ April 1991.

%osc& op. cit.

%id. Catherine Renault, Director of the Entrepreneurship Center at George Mason University in suburban Washington DC, says the same holds

true for her high-tech incubator: only one or two people laid off from other jobs have become involved in the 60 companies that have developed in the

incubator.
Chapter 5

Veterans’ Adjustment
Contents

Page

INTRODUCTION *.. .**. ..*. .*. .**. .**. ..*. ..** ... **. . . . . . . . . . . . . . . . . . . . . . . . . .

THE MILITARY SERVICES: NUMBERS AND COMPOSITION . . . . . . . . . . . . . . . . . .

CHARACTERISTICS OF ENLISTED SERVICE MEN AND WOMEN . . . . . . . . . . . . .

Education and Aptitude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Skills and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Employer Perceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE NUMBERS AND COMPOSITION OF THE CUT . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How the Forces Are Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cuts in Each of the Services *.. ... *.e. ... .*. .*. *.. ... *e*. ..*. ... e*.*.*......*. *

Minorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Differential Effects ... *.. .*. ... ... .*. ... ... **. .**. .*. . * . . . 6 * . . * . *......**

VETERANS IN THE CIVILIAN ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Skill Transfer .e*. ... ... ... ... .*. ... .**. .*. *.. .e. *.. *.** ..*. .**. ... ..*. **. ... *

How Recent Veterans Are Faring . ...*....*..*...***.*..*....**......**.......*..

PROGRAMS TO AID ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic Separation Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transition Assistance .*. ..** ***. ... **. .*. ..*. ..** ... **. .**. . . . . . . . . . . . . . . . . . . . . .

Educational Benefits: The Montgomery GI Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Soldiers as Teachers .**. *.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IN CONCLUSION . *.. .**. ... ... ..** ... .*. . *. . . e * . . . . . * . .**..*...

Boxes

129

129

131

131

133

133

133

134

136

137

139

139

141

141

142

142

143

147

149

149

Box Page

5-A. Replacing the Opportunity of Military Service: Isa Civilian Service

the Solution? .*. **. ..*o. ..*. .o***. .e. ... *.. ... *.. ... .*. *.. .*. ... *o. ... e*.... * 140

5-B. Transition Assistance at Fort Dix, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Figures

Figure Page

5-1. Distribution of AFQT Scores, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

5-2. Distribution of Military Occupations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

5-3. Civilian Employers’ Perceptions of Soldiers’ Education Levels . . . . . . . . . . . . . . . . . 133

5-4. Active Duty Military Personnel, 1974 to 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

5-5. Reduction in End Strength and Involuntary Separations . . . . . . . . . . . . . . . . . . . . . . . . . 135

5-6. Accessions, Separations and Changes in End Strength . . . . . . . . . . . . . . . . . . . . . . . . . . 136

5-7. Military Personnel Drawdown by Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Tables

Table Page

5-1. Geographical Distribution of Active Duty Personnel in the United States, 1989 . . . 131

5-2. Geographical Distribution of Recruits, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

5-3. Characteristics of Enlisted Troops by Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

5-4. Percentage of 1989 Accessions in Each Armed Forces Qualification T@

Category by Race *.*. ... .*. ... *.. ..e. *.. o.*. ..** *.*. o.**. ..*. *.. ..*. ***. .. *o * 139
Chapter 5

Veterans’ Adjustment

INTRODUCTION

Active duty personnel unwillingly discharged

from the military are a significant group of workers

displaced in the post-Cold War defense spending

cutbacks. There is a strong argument on equity

grounds for helping ex-service men and women

adjust to the civilian economy. Moreover, if there are

serious difficulties in transition, the armed forces

might find it hard to recruit young people of the

caliber needed to maintain the smaller, more technology-intensive force of the future.

Many of the factors affecting the ability of civilian

displaced workers to find new jobs also apply to

veterans. This chapter focuses on the particular

problems military separates are likely to face and

the programs available to help them adjust to their

new circumstances. It also compares the situation of

separates in the early 1990s with that of veterans in

previous build-downs.

For the most part, today’s veterans are better

prepared to face the civilian labor market than their

Vietnam era counterparts were. The abilities an d

education levels of military enlistees are considerably higher in 1990 than they were in 1970. 1 Today’s

soldiers receive more training in skills with civilian

applications and are more likely to have selected

their own fields of specialization.2 Although it is too

soon to know for certain, opinion surveys indicate

that the success of Operations Desert Shield and

Desert Storm have changed for the better the way

Americans look at their soldiers. 3 Lingering (if

inaccurate) images of drug abuse and low levels of

aptitude and education seem to have faded. This

change in perception, as much as anything else,

could ease the transition of military personnel into

the civilian economy. Considering the caliber of

people currently in the services, the relatively

modest number of involuntary separations expected,

and the decreasing number of young people entering

the U.S. labor force, many of those let go by the

armed forces over the next 5 years have a good

chance of making a smooth transition to the civilian

economy. Many will have a better chance if given

effective assistance.

Nevertheless, involuntary separations of men and

women from the armed services create some problems that private sector layoffs do not, and the

impact of displacement of soldiers could be greater

than the numbers suggest. Since the All Volunteer

Force (AVF) was established, the services have

pushed job security as a benefit; they imply that as

a long as you do your job well you can stay on and

move up. Layoffs will involve going back on this

implicit promise. That is regrettable in itself; it could

also hurt future recruitment and the morale of those

who remain.

THE MILITARY SERVICES:

NUMBERS AND COMPOSITION

Since 1973, the United States has relied solely on

volunteers to fill the ranks of the armed forces.

During those years, the size of the active duty

military force has varied from a low of 2.032 million

in 1979 to a peak of 2.224 million in 1987.4 At the

end of fiscal year 1990, the total number of active

duty service members was 2,069,357.5 The largest

service is the Army with 732,403 members, followed by the Navy with 579,417, the Air Force with

535,233, and the Marines with 196,652.6 The active

IBruce Pahner, “A Careful Imok at Defense Manpower, ” Military Review, vol. 56, September 1976; and Department of Defense, Office of the

Assistant Secretary (Force Management and Personnel), Populufion Representation in the Military Services: Fiscal Year 1989 (WashingtoniDepartment

of Defense, 1990)

z~e term soldier is used generically to mean soldier, SailOr, ban or @e.

3~FebmWof1991, over 70 ~ment of ~espndents t. ~ New yor~ Ti~~/CBS J/ews po~ fe]t tit vs. fomes performed better iII the Gti War thMI

~&ey had expected. Over 90 percent of respondents to the same poll rated the performance of the Gulf War soldiers as ‘‘excellent and over 70 percent

reported having gained respect for U.S. armed forces.

d~tive duty sewim mem~rs me tie f~us of ~s chapter bemuse, tie members of tie re~~es, hey rely solely On the Illititary fOr ~plOylnent.

While return of reservists called up for duty in the Persian Gulf War to their civilian careers is an important issue, it is not within the scope of this report.

All calculations of reductions in end-strength exclude these reservists.

ffI’hisficludes 25,652 reservists who had been called to active duty as part of Operation Desert sto~.

bDep~ment of Defense, Office of tie Assistant Secretary, Force Management and pe~onnel, spfig 1991.

–129–
130 ● After the Cold War: Living With Lower Defense Spending

duty military comprised 1.7 percent of all employment in the United States in 1990; this compares

with defense industry employment at 2.6 percent,

and civilian Department of Defense (DoD) employment amounting to 0.9 percent.7 Among certain

subpopulations, dependence on the military for

employment is considerably higher. The group most

dependent on the active duty military for employment are young black males. Military service

accounts for 10.6 percent of employment of black

males between the ages of 18 and 29, compared to

5.4 percent for white males of the same age.

Employment in the armed services is spread

throughout the United States and the world. In fiscal

year 1990, 1.1 million (55 percent) of the 2.1 million

service men and women on active duty were

stationed at bases in the United States. The next

largest group, 227,000 troops (11 percent), was in

West Germany. Another 175,000 were listed as

‘‘afloat’ (at sea). The remaining troops were distributed in other foreign lands, predominantly in Europe

and Asia. Of the troops stationed in the United

States, the Southeast has much more than its

proportionate share and the Northeast and North

Central regions much less (table 5-l).

New recruits are drawn more from the South and

Mountain regions than elsewhere in the country, and

less from the Northeast (table 5-2). The State with

the highest level of accession (Montana) has twice

the national average, while the one with lowest rate

of accession (Massachusetts) has slightly less than

half the national average.8

The military’s two major categories are commissioned officers and enlisted personnel. By and large,

enlisted personnel are recruited directly out of high

school. Commissioned officers are brought in

through the service academies, Officer Candidate

Schools, and Reserve Officer Training Corps (ROTC).

Almost all are college graduates.

The 296,589 commissioned officers on active

duty at the end of fiscal year 1990 are about 14

percent of the total active duty force. Under current

DoD projections, the total reduction in the officer

ranks will be about 54,408 (17.7 percent) from 1990

to 1995.9 Officers are far more likely than enlisted

personnel to serve until they are eligible for retirement; roughly 40 percent of all officers retire from

the military having served at least 20 years.10

Because the officer ranks experience low rates of

turnover, about half of the reductions in officer ranks

will probably be carried out through involuntary

separations, with the remainder occurring through

reductions in new entrants, early retirement options,

and normal attrition.ll With their college educations,

they should have wider opportunities and less

difficulty adjusting to the civilian economy than the

rank-and-file enlisted personnel.12 For this reason,

commissioned officers are not the principal focus in

this chapter. However, transition programs that

apply to enlisted personnel are also available to

officers.

Most of the military is composed of enlisted

personnel. Under current DoD projections, the total

reduction in enlisted ranks from 1990 to 1995 will be

337,123 (20 percent) .13 Enlisted personnel are the

foot soldiers, the support providers, and the technicians. Recruited fresh out of high school, they are

younger than commissioned officers and tend to

serve shorter periods of time. Their median age is

19.6 years at accession and 26.4 years overall,

whereas officers have a median age of 25.4 years at

accession and 33.4 years overall.14 In fiscal year

1990, 49 percent of enlistees completing their first

term of service (2 to 5 years) did not choose to

7~e 1.7 p~ntfi~ includesmili~ members not serving in the United States. These soldiers are not considered in the Census Bureaus @buhtiOn

of U.S. employment or labor force data. The estimate of employment in defense industry and data on DoD civilian employment are from the Department

of Defense, Office of the Comptroller, Budget Estimates for FY 1992 (Washington DC: March 1991).

~partment of Defense, Population Representation in the Military Services: Fiscal Year 1989, op. cit., p. 38.

%oD, Office of the Assistant Secretary, Force Management and Personnel, unpublished projections as of April 1991,

l%id.

1 IDa@ on fivolu~ sq~tiom ~m DoD, ~Uof ~~sis~nts~eq, Force mge~nt ~d pe~nnel, projections ~ of May 1991, N(w/

provisions of the Defense AuthorizationAct of 1991 allow the services to offer cash incentives to some soldiers if they willingly separate. ‘l%us the overall

number of “involuntary” separations will probably be lower than those shown in the May 1991 projections.

12For diw~c~ ~orkem in g~~, hose wi~ ~@er levels of ~u~tion f~e &tter in getfig rep~wrnmt jobs @thow witi feWer y- Of

schooling. Michael Pogursky and Paul Swairn, ‘‘Do More-Educated Workers Fare Better Following Job Displacement?” Month/y Lubor Review, vol.

112, August 1989.

lsDoD, Offlce of tie ~s~~ts~re~, Force -ge~nt ~d Pemonnel, proj~tions SS Of my 1991,

IADep~ent of D~ense, Population Representafi”on in the Military Services: Fiscal year 1989, oP. cit.
Chapter 5--Veterans’ Adjustment . 131

Table 5-l-Geographical Distribution of Active Duty

Personnel in the United States, 1989

Table 5-2--Geographical Distribution of

Recruits, 1989

Active duty Employed

personnel persons

Region (percent) (percent)

Civilians

Recruits 16 to 24 years’ old

Region (percent) (percent)

Northeast . . . . . . . . . . . . . . . . 6.1 %

North central . . . . . . . . . . . . . . 10.2

South atlantic . . . . . . . . . . . . . 31.8

East south central . . . . . . . . . 6.3

West south central . . . . . . . . . 14.1

Mountain . . . . . . . . . . . . . . . . 8.3

Pacific . . . , . . . . . . . . . . . . . . . 23.3

Total . . . . . . . . . . . . . . . . . . . . 100.0’?40

20.80/.

24.8

17.5

5.7

10.3

5.2

15.5

1OO.OO/O

Northeast . . . . . . . . . . . . . . . . 14.20/o

North central. . . . . . . . . . . . . . 25.9

South atlantic . . . . . . . . . . . . . 18,8

East south central . . . . . . . . . 7.5

West south central . . . . . . . . . 14.1

Mountain . . . . . . . . . . . . . . . . 6.5

Pacific . . . . . . . . . . . . . . . . . . . 13.1

Total . . . . . . . . . . . . . . . . . . 100.0%

20.8%

25.0

16.4

6.4

10.8

5.1

15.5

1 00.0%0

SOURCES: Department of Defense, Directorate for Information, Operations and Reports, Selected Manpower Statistics, FY 1989,

MO1 (Washington, DC: 1990); and Bureau of Labor Statistics,

Employment and Earnings, annual averages, 1990.

continue with another. Only about 12 percent of

enlisted personnel leave the military having served

the retirement minimum of 20 years,15 Because of

this higher rate of turnover, the services will not have

to rely very heavily on involuntary separations to

trim the enlisted ranks. Under recent plans, less than

15 percent of enlisted reductions will be from

involuntary separations. l6 However, greater numbers of enlisted personnel will be most affected by

the drawdown of forces, they may have fewer

options in civilian life than college educated officers, and they are of most public concern in veterans’

adjustment policies,

CHARACTERISTICS OF

ENLISTED SERVICE MEN

AND WOMEN

Today’s volunteer force is no underclass army.

While various measures of socioeconomic status are

lower on average for military personnel than for the

overall population, the differences are very small

and are due largely to underrepresentation of the

highest status levels in the military.17 In a 1989

report, DoD concluded:

The contention that the enlisted ranks are recruited from the lower socio-economic strata of

society is not supported by the evidence. In the last

SOURCE: Department of Defense, Office of thel!.ssistant Secretary, Force

Management and Personnel, Population Representation in the

Military Services: Fiscal Y~r 1989 (Washington, DC: 1990).

half of fiscal year 1989, the period for which data are

available, the great majority of the parents of recruits

had a high school education or better, were married,

and owned their own homes.18

Enlisted military personnel do not trail their

civilian counterparts in educational attainment, aptitude, or training. The All Volunteer Force is not

America’s employer of last resort. Moreover, as

discussed below, many of the skills and occupations

prevalent in the military are transferable to the

civilian economy.

Education and Aptitude

The military forces have a greater share of people

with average to above average aptitude than American society as a whole. The Armed Forces Qualification Test (AFQT) is administered to every potential

recruit. The scores are calculated on a percentile

basis. Each service has its own minimum requirement for enlistment; in general the services admit

people with lower AFQT scores if they have a high

school diploma. Scores on the AFQT are often

reported in five categories, with the middle category

further split to separate those above and below the

mean value, as follows: I (93 to 99 percentile), II (65

to 92 percentile), IIIA (50 to 64 percentile), IIIB (3 1

to 49 Percentile), IV (10 to 30 Percentile), and V (1

to 10 percentile). As figure 5-1 indicates, the

15Lt. Col, David Moo~, Offim of tie Assis~nt Secre- of Defe~e, For~ M~gement and personnel, WrWnal cOInmUUi(X3tiO~ NOV. 13, 1991.

16Dati on ~volm~ ~ep~atiom from DOD, Offlce of tie Assis~t Secm-, Force -gement and Personnel, projections as of May 1991. AS

noted, new provisions of the Defense Authorization Act of 1991 allow the services to offer cash incentives to some soldiers if they willingly separate.

Thus the overall number of “involuntary” separations will probably be lower than those shown in the May 1991 projections.

li’Robefi me, Congessioti Budget office, testimony at hefigs before tie House Sukommittee on Educatioq Trtig, ~d ElllplOyInen~

Committee on Veterans’ Affairs, Oct. 17, 1991, Congressional Budget Office.

18Dep~ment of Defe~e, Population Representation in the Military Services: Fiscal year 1989, op. cit., p. 55.
132 ● After the Cold War: Living With Lower Defense Spending

Figure 5-l—Distribution of AFQT Scores, 1989

II II

34%

I

4%

I v

6%

I

4%

v

7’%

56% 24’%

DoD enlisted Civilian youth

personnel population

SOURCE: Department of Defense, Office of the Assistant Secretary, Force Management and Personnel, Popuhtion

Representation in the Military Services, Fisca/ Year 1989 (Washington, DC: July 1990), p. 27.

Figure 5-2-Distribution of Military Occupations

Electronic equip. repair

Commun

17

Other techni ‘ Combat arms

41 \ 298

Support and admin. \

\

273 \

L

\/

Health careK A

98

II I{A&B)

32%

~ Service a n d

157

v

,- .

Craftsworkers

6 9

Supply

Electrical/mechanical repair

355

Thousands of active duty troops DoD-wide

SOURCE: Janice Laurence, Human Resources Research Organization, “Crew Cuts: The Effects of Drawdown on

Minorities,” paper given at Department of Education, Office of Educational Research conference:

Education’s Role in the Restructuring of the Defense and Other Industries, May 16, 1991, p.17.

military has about the same representation in Cate- soldiers who did not have high school credentials

gories I and II as the population at large, but has when they entered the services have earned graduate

many fewer Category IVs and no Category VS.

19 equivalency degrees (GEDs) while on active duty

Almost all enlisted personnel have a high school (10,240 in fiscal year 1989).21 DoD reports that its

diploma; the percentage rose from around 65 percent recruits read, on average, slightly above the 1lth

in 1973 to over 90 percent in 1989.20 Many older grade level, while the average reading level of the

l~e~i~is ~ro~bited from ~cw~s~ myCategow Vs, ad cm o~y accept c~egq IVS who me high school graduates, Because of miSnOIDl@

of the AQFI’ test in the late 1970s, a number of category Vs were accidentally allowed to enlist. Fewer than 350 of these enhstees are still on active

duty.

mDeP~ent of D&e~e, Population Representation in the Military Services: Fiscal year 1989, oP. cit.

ZIClinton Lee Anderson, “Educational Resources Available for Transition of Sewicemembers,” presented at the Department of Educatiou C)fflce

of Educational Research and Improvement Conference, May 16, 1991, p. 18.
Chapter S-Veterans’ Adjustment . 133

young adult population at large is just above the 9th

grade level.22

Skills and Training

The armed forces are the single largest trainer in

the United States.23 Most military training is carried

out in the first 12 to 18 months of service. After basic

training, soldiers are assigned to a specialty training

school, are then placed in the field, and continue to

learn on the job. They may train further in the same

specialty or in management to prepare for a more

senior position.

As figure 5-2 illustrates, relatively few military

personnel-about 18 percent—are in combat positions. The largest skill/specialty category is electrical maintenance, a highly transferable skill.24 Many

transferable but lower skill jobs are found in the

service and supply category, including food service

workers, office and store managers, and truck

drivers. Those in service and supply areas may not

have the same earnings potential as those in technical areas but they should have good chance of

finding employment in their fields of training. Even

some combat occupations offer crosswalks to civilian occupations. For example, some combat engineers are hoist operators, survey technicians, or

laborers; all these positions require skills that could

translate into civilian jobs. Senior combat personnel

who supervise repair of equipment in the field have

skills that might be used in managing civilian

mechanics and repairers.25

Employer Perceptions

Two months before the air war in the Persian Gulf

began, the Army Research Institute released a report

on the attitudes of employers toward recent veterans.

The primary conclusion was the following:

Results indicate that this lack of [employer]

awareness may deter an employer from hiring a

veteran because of inaccurate perceptions about the

education level, the skills and abilities possessed by

Figure 5-3-Civilian Employers’ Perceptions of

Soldiers’ Education Levels

Percent of firms

30 ~

25

{

1 0 ;

Actual

50%

rate over 90%

1

—r. I I

60% 70% 80% 90% 100%

What percentage of Army personnel graduated from high school?

SOURCE: Sehroyer, Hanson, Lerro, and Benedict, Amdysis of the AR/

Survey of Ernp/oyers (Washington, DC: Army Research institute, 1990).

veterans, and in general, the experience, opportunities, and credentials of veterans. 26

While the study demonstrated that in general

employers felt veterans possessed positive intangible characteristics, such as honesty and leadership

(at least as much as nonveterans), they were misinformed about veterans’ skills and education (figure

5-3).27 Although it appears that Operations Desert

Shield and Desert Storm have significantly altered

these perceptions, misinformation about the caliber

of people exiting the armed forces could still be

something of a barrier to a smooth transition.

THE NUMBERS AND

COMPOSITION OF THE CUT

Under current projections, a total of 390,726

active duty personnel, both enlisted and officers,

would be cut from the armed forces from fiscal year

1990 to fiscal year 1995; that is 19 percent of the

fiscal year 1990 force level. The largest reduction in

zzDep~ment of Defense, Population Representahon in the Militaq Services: Fiscal Year 1989, op. cit., p. 28.

mFor ~ f~l di~cus~ion of worker ~ng ~ tie United s~tes, see U.S. con~ess, Offiw of Technology Assessment, Worker Training.’ Competing

in the New lnternafionul Economy, OTA-ITE-457 (Washington DC: U.S. Government Printing Office, September 1990),

XMan@m and BW rep~ ~mfer rates for electrical maintenance at 53 percent as compared to 28 pe~ent for combat ~s. Stephen ~n~ad

David Ball, “Military Skill Training: Some Evidence of Transferability, ” Armed Forces and Society, vol. 13, No. 3, spring 1987, p. 428.

~The ~i/tran Guide t. Career Oppormnlhes: Army Edition Wayne, PA: Milmaq ~c,, ~ch 1991). IIcJD is attmptig to expand and refine a

crosswalk pioneered by Miltran+ a private firm that offers transition services to military personnel.

26cofic J. Scbyer, Linda A. Ha~U pmquale A. ~rro, ~d Michael E. Benedict, Analysis of the 1990wSurvey of Employers (Washingto~

DC: Army Research Institute for the Behavioral and Social Sciences, 1990), p. 10.

z71bid, pp. 11, 20.
134 . After the Cold War: Living With Lower Defense Spending

Figure 5-4-Active Duty Military Personnel,

1974 to 1997

Thousands

2,500 ~– 1

2,000

1,500

1,000

500

0

1975

4

Projected

1980 1985 1990 1995

m Enlisted = Officer

SOURCE: Department of Defense, office of the Comptroller, Natiorral

Defense Budget Estimate for FY 1992 (Washington, DC: 1991)

and projections from the Office of the Assistant Seeretary of

Defense, Force Management and Personnel, unpublished data,

May 1991.

a single year, 106,000 troops, is currently planned to

occur in fiscal year 1992 (figure 5-4). originally,

Congress required the Secretary of Defense to

reduce active duty end strength (the number of active

duty personnel at the end of the fiscal year) by at

least 80,000 from 1990 to 1991. After Desert Storm,

Congress removed the mandated reduction in 1991

military end strength.28 The Secretary has stated,

however, that forces will be reduced by 45,477 in

1991. Thus, while personnel cuts have been somewhat delayed, they will occur and they will be deep.

Beyond 1995 the course is unclear. However, if

present trends in security needs continue, deeper

cuts in active duty forces may occur. Kauffman and

Steinbruner suggest that an active duty force of 1.34

million is possible by 2001, given current trends.29

Achieving an end strength this low would require

continued reductions of about 50,000 per year after

1995.

While the overall reductions will be large, the

proportion of involuntary separations will be relatively small, especially in the enlisted ranks. Even

before Congress provided incentives to encourage

more voluntary separations, involuntary separations

were expected to amount to no more than about 20

percent of the overall reduction. In fact, fewer than

1,000 involuntary separations took place in fiscal

year 1990, and fewer than 5,000 were anticipated for

fiscal year 1991. The largest number of involuntary

separations, roughly 27,000, was expected to take

place in fiscal year 1995 and the total number over

fiscal years 1990 to 1995 was to be almost 100,000

(see figure 5-5), comprising some 30,000 officers

and 70,000 enlisted personnel.30

How the Forces Are Cut

Reductions in forces can be accomplished by two

means—attrition and involuntary separation -

(layoff). Attrition is exceptionally effective as a means

of downsizing in the armed forces (see figure 5-6).

In an average recent year, roughly 290,000-members

left the ranks of the armed forces (a turnover rate of

about 15 percent) .31 Most of those voluntarily

leaving are young enlisted personnel who did not

plan a career in the military. With this rate of

attrition, it might seem that the reduction of forces

could be accomplished simply by massively curtailing accessions (new entrants). While this approach

might avoid displacement, it is not a viable option

from the perspective of force structure management

or long-term security.

The military services hire only entry-level employees; advancement through the ranks is closely

related to tenure. If recruitment of new soldiers were

radically curtailed, there would be too many senior

personnel for the number of lower level enlistees in

the short run and, in the long run, there would be too

few senior personnel. The military services need to

maintain a balance between the number of senior and

junior personnel, which can only be done by

. . thinning the ranks evenly and continuing to recruit

new entrants.32 The lowest ranks will be reduced

through normal attrition and increases in the standards for reenlistment, while the highest ranks will be

thinned through early retirement.

The vesting of retirement benefits complicates

military force reductions. Currently, full vesting

takes place at 20 years; no benefit is paid to soldiers

2Spa~ia Gfi Coflct Su~Plem~@ A~~o~tion and PersoMel Benefi~ At of 1991, Public hW 102-25, SCC. 201.

%Villiarn Kauffman and John Steinbruner, Decisionsfor Defense: Prospectsfor a New World Order (Washington DC: The Brookings Inst.itutio%

1991).

3oData on involuntary separations from the DoD, Offke of the Assistant Secretary, Force Management and Personnel. Estimates as of May 1991.

Jl~e average for the years 1980 to 1~.

32u.s. conges~, con~sslo~ Budget Offlce (~o), &funoging the Reduction in ~ilitu~ Personnel, @O Paper (W@kgto@ ~:July 1990).
Chapter 5-Veterans’ Adjustment ● 135

Figure 5-5-Reduction in End Strength and Involuntary Separations

Total reduction in end strength

Thousands

120 ~

8 0

n I t-1

6 0

4 0

20

0

1990 1991 1992 1993 1994 1995 1996 1997

= Involuntary m Other

Reduction in officer end strength

Thousands

16 ::~

Il---

8

6

4

2

0

1990 1991 1992 1993 1994 1995 1996 1997

= Involuntary ~ Other

Reduction in enlisted end strength

Thousands

100

8 0 - “

60

4 0

2 0 -

0

I

,

1990 1991 1992 1993 1994 1995 1996 1997

= Involuntary ~ Other

NOTE: Projections of involuntary separations were made before the new voluntary separation incentive was enacted; This number may overstate the actual

number of involuntary separations that will take place.

SOURCE: Office of the Assistant Secretary of Defense, Force Management and Personnel, unpublished data, May 1991.

leaving active duty with fewer than 20 years of

service. This all-or-nothing system creates an incentive for midlevel soldiers to continue their careers.

When the size of the armed forces remains stable

over a number of years, maintaining the balance

between tenure groups is not a problem. However,

during downsizing, those with 10 to 15 years’

experience present a dilemma for military planners.

These soldiers are unlikely to leave the military

voluntarily when they are so close to retirement, yet

forcing them out could lessen the attractiveness of a

military career. Young people might decide it is not

worth taking the risk of serving 15 years only to be

separated and receive no pension. Nevertheless, to

allocate military personnel efficiently, the number of

soldiers in the 10- to 15-years of service category

must be reduced.

Recognizing the vulnerable position of midlevel

career service people, Congress has granted those

with more than 10 years but less than 20 years of

service some protection from involuntary separation. Under the Defense Authorization Act of 1990,

all other tenure groups (first-term reenlistments,

accessions, and forced early retirements) must be

tapped to meet the required reductions in manpower

levels before any of those in the 10- to 19-year

groups can be involuntarily separated. Moreover,

under the 1991 Defense Authorization, the Defense

Secretary is permitted to increase end strength by as

much as 2 percent to avoid involuntarily separating

soldiers in the 6- to 20-year category.

To further avoid large-scale involuntary separations and minimize RIFs (reductions in force, i.e.

involuntary separations based solely on meeting end

strength without regard to job performance), Congress recently authorized DoD midcareer soldiers to

offer monetary incentives to leave the military
136 ● After the Cold War: Living With Lower Defense Spending

Figure 5-6-Accessions, Separations and Changes in End Strength

300

200

100

0

-10 0

-20 0

-30 0

Thousands

i-rm’ml

—

I I

I

- — u 1 J

I 1 I I I I I I

1986 1987 1988 1989 1990 1991 1992 1993

m Accessions U Involuntary separations

m Normal separations = Change in manpower

from previous year

NOTE: Projections of involuntary separations were made before the newvoluntarv separation Incentive was enacted,

thus number may over s~ate”the actual number of involuntary separatio& which will take place.

SOURCE: Office of the Assistant Seeretary of Defense, Force Management and Personnel, unpublished data, May

1991.

before retirement.33 These payments have the potential to greatly reduce the number of required layoffs.

The estimates of involuntary separations in this

chapter do not reflect this early-out option and may

well overstate the number of involuntary separations

that will be required in the coming years.

One of the first options the services have examined in reducing force levels is stricter enforcement

of existing regulations. Personnel who commit

disciplinary offenses that in the past would have led

to rehabilitation may now be discharged. Other

longstanding but loosely enforced policies are now

being more strictly enforced. For example, Army

personnel, under newly developed regulations, will

be discharged if they are overweight and fail to slim

down after a 6-month fitness program. 34 People in

this category will receive a reduced package of the

special benefits available to involuntary separates.

Cuts in Each of the Services

The Army, and to a lesser the extent the Air Force,

will bear the brunt of the reductions in military

forces. The Army and the Air Force shouldered the

burden of the European defense, and with the Soviet

threat disappearing, their missions are radically

reduced. The historical missions of the Marine

Corps and the Navy are thought to be a better match

for the kinds of regional conflict that the United

States may encounter in the future. Assuming a

DoD-wide cut of 19 percent of FY 1990 end

strength, the Army would lose 26.9 percent of its

troops, the Air Force 18.3 percent, the Marine Corp

13.2 percent, and the Navy 12 percent (figure 5-7).35

Involuntary separations will vary by service, with

the Army and Air Force planning to use them more

heavily than the Marine Corps, and the Navy

planning none at the enlisted level (figure 5-7).36

Jsundm tie Defe~e Authorization Ad of 1991.

~B~nt Mitchell, ’It’s Shape Up or Ship out h -y Now,’ Washington Post, June 18, 1991, p. A19.

35DOD, Offlce of tie Msistit Secretary, Force Management and Personnel.

~Ibid.
Chapter S-Veterans’ Adjustment . 137

Figure 5-7-Military Personnel Drawdown by Service

Reduction in end strength

Percent of FY 1990 end strength

30 ~

2 5 -

20-

1 5 -

10 “

5 -

o — 1 Army

—

7

Air Force Marine

-l-L

Navy

Corps

Involuntary separations

Percent of total reduction

30

25

20

15

10

5

0

Army Air Force Marine

L

Navy

Corps

m Total = Enlisted

NOTE: Projections of involuntary separations were made before the new voluntary separation incentive was enacted; This number may overstate the actual

number of involuntary separations that vdll take place.

SOURCE: office of the Assistant Secretary of Defense, Force Management and Personnel, unpublished data, May 1991.

Army reductions will account for one-half of all

armed services cuts. Of the estimated 100,000

DoD-wide all-services involuntary separations, from

fiscal years 1990 through 1995, two-thirds will come

from the Army.37 Because the Army is the service

with the smallest percentage of skilled jobs, the

lowest levels of aptitude, and the highest concentration of minorities, the transition problems faced by

its separates may be somewhat greater than is

implied by the aggregate levels of skills, aptitude,

and minority participation in all the services (table

5-3). The Army has a larger share of combat and

service and supply positions than either the Air

Force or the Navy. Skills in combat occupations are

generally the least transferable, and service and

supply jobs tend to be rather low-skilled.

Minorities

Because minorities are overrepresented in the

military as a whole and the Army in particular, they

stand to be disproportionately affected by the

downsizing of the military. Also, African Americans

in the military have relatively lower AFQT (table

5-4) and overall ASVAB (Armed Services Vocational Aptitude Battery) test scores. To the extent

that test scores predict inservice performance, and to

the extent that inservice performance is the basis for

deciding which soldiers shall be involuntarily separated, minority service members could be disproportionately affected. African Americans currently

represent 23 percent of all members of the armed

forces and 31 percent of Army personnel, but they

could account for a larger percentage of those denied

reenlistment. 38 However, the new system of incentives for voluntary separation may limit this effect if

white soldiers, perceiving more favorable civilian

job opportunities, disproportionately opt to accept

the incentive.

More broadly, diminished access to military

careers represents a significant loss of economic

opportunity for black men. The military’s reputation

as the most “color-blind” large employer in the

United States is well-founded. Integrated in 1948,

the military currently has a higher proportion of

J71bid.

NIJa~Ce ~mence, Human Resources R=-h Org anizatiorL ‘‘Crew Cuts: Effects of Defense Drawdowns on Minorities, ’ paper presented at

Department of Education, Office of Educational Research and Improvement Conference, May 16, 1991, p. 22.
138 ● After the Cold War: Living With Lower Defense Spending

Table 5-3-Characteristics of Enlisted Troops by Service

Percent Percent

accessions occupations

Percent category I and II combat or

Percent high school minus percent service and

Service black graduate category IV Supplya

Army . . . . . . . . . . . . . . . . . . . . 31 .9% 98.4% 29% 36.O%

Navy . . . . . . . . . . . . . . . . . . . . 17.4 94.3 24 14.1

Air Force . . . . . . . . . . . . . . . . . 17.6 99.3 53 15.9

Marine Corps . . . . . . . . . . . . . 20.7 99.9 37 38.2

Total . . . . . . . . . . . . . . . . . . 23.0% 97.6% 32% 25.7%

~mbat and Service and Supply occupations are Military Occupational Specialty codes O and 8.

SOURCE: Data from Department of Defense, Office of the Assistant Secretary, Force Management and Personnel,

Population Representations, IV 1989 (Washington, DC: 1990).

minorities in management positions than any other

large U.S. organization.39 Altogether, the military is

a very important employer of African Americans. Of

all African Americans between the ages of 18 and

29,4.1 percent are serving in the military, compared

to 2.4 percent of whites. Of all jobs held by African

Americans aged 18 to 29, 7.1 percent are in the

military, compared to 2.4 percent of whites. Among

black men aged 18 to 29, 7.2 percent are serving in

the military, accounting for 10.6 percent of the total

employment of that group (table 5-4). The figures

are still more striking if only those African Americans who qualify for military service are considered.

In 1980, it was estimated that only 43 percent of

young black men would qualify for the military as

compared to 85 percent of whites.40 New evidence

suggests that, if anything the percentage has decreased since 1981,41 but using the estimate of 43

percent, about one-quarter of the qualified employed

black male population between the ages of 18 and 29

is serving in the military.

The drawdown could have a significant adverse

effect on the employment prospects of African

Americans. If the overall level of accession decreases 20 percent and the proportion of African

Americans in accessions declines by about 20

percent, 42 the number of African Americans serving

in the military could fall from the current level of

about 410,000 to 260,000-36 percent in the long

run. Moreover, without the benefit of military

training or experience, many young black men will

find it harder to get a civilian job. Although

accurately measuring the value of military training

and experience is difficult, many studies indicate

greater increases in post-service civilian job status

for black veterans that are greater than those found

for white veterans.43

Some areas of the country will be disproportionately affected by reductions in the military forces,

and minorities tend to be concentrated in those areas.

The South, which has a high rate of minority

enlistment and relatively low average AFQT scores,

will probably be most affected.44

Although limiting access of African Americans to

the services could be economically damaging, many

black community leaders believe that too much of

the burden of national defense has been placed on the

shoulders of African Americans. In this respect, a

more racially representative military force might be

desirable. On the other hand, the sequence of

fighting a war with a disproportionately black force

and then disproportionately separating African Americans after the war might seem callous or unjust.

Secretary Richard Cheney has testified that attempts

will be made to limit disproportionate cuts of

minority service men and women, but exactly how

that pledge might be carried out remains to be seen.

Army officials have stated that minority composisg~les Moskos, “HOW DO They DO It” The New Republic, vol. 205, No. 6, Aug. 5, 1991, p. 20.

4oMwk J. E1tel~~, Dep~entof DefeE, Offlw of ~eAssis~nt Secre-, Force M~~entand personnel, ManpowerforMi/itary Occupations

(Washington DC: 1990), pp. 169-172.

‘flJanice ~Wenm, HWNUI Resources Research Organization pIXSOtMI communicatio~ octob~ 1991.

dzDefivedfiom David Boesel, Dep~mentof ~ucatiou ‘ ‘~eNewly uq~fl~, ’ pa~ pr~cnt~ at~p~cnt Of mllcatio~ Office Of EdUMtiOn

Research Conference, Education Role in the Restructuring of the Defense and Other Industries, May 16, 1989.

asFor ex~ple, see Dennis De Tray, ‘‘Veteran Status as a Screening Device, ” The American Economic Review, March 1982, pp. 139-140.

44DOD, Population Representation in the Military, FY 1989, op. cit.
Chapter 5-Veterans’ Adjustment . 139

Table 5-4-Percentage of 1989 Accessions in

Each Armed Forces Qualification Test (AFQT)

Category by Race

AFQT

category White Black Other

I 5 1 2

II “. ‘. “. “. “. : ‘. : : : : : : : : : : : 41 16 25

IIIA . . . . . . . . . . . . . . . . 27 25 26

IIIB . . . . . . . . . . . . . . . . 23 46 37

Iv . . . . . . . . . . . . . . . . . 4 14 10

v — — —

Toial “ .“ : ; : .’ : : : : : : : 100 100 100

SOURCE: Data from Department of Defense, Office of the Assistant

Seeretary, Force Management and Personnel, Population Rep

reserrtations, )7 7989 (Washington, DC: 1990), p. 29.

tion will not be a factor in reducing forces .45 Box 5-A

discusses another option that some have proposed

for enlarging opportunities for noncollege-bound

youth-a civilian service.

Other Differential Effects

Women involuntarily separated from the military

will be relatively few, and those few probably will

not face particular difficulty in transition. Women

compose 11 percent of the active duty force. In the

civilian youth population, women do not have

significantly higher or lower AFQT scores than men.

Within the military, however, women score higher

on the AFQT than men. Because they are currently

not allowed to fill combat positions, women in the

services are more heavily concentrated in service,

administrative, and health care positions. These may

not necessarily be high skill jobs but should be

reasonably transferable to the civilian economy.

Finally, it seems unlikely that any particular kind

of military job will be singled out for elimination. It

is difficult to cut disproportionately any particular

types of activities in the highly structured military;

all are related in more or less fixed ratios. A certain

number of combat troops requires a certain number

of supply and support troops. Each fighter plane

requires a pilot and a given number of technicians.

The military may try to get by with fewer support

personnel for each combat or technical soldier, but

in the main military jobs seem likely to be cut in

proportion to the overall reduction.

VETERANS IN THE

CIVILIAN ECONOMY

Reports on veterans’ civilian labor market experiences have focused on the degree to which military

service affects civilian earnings. Many analyses of

World War II veterans showed that they earned

considerably more than non-veterans, even when

factoring in demographic characteristics; however,

some recent studies of veterans of that era refute

these findings. Studies of Korea and Vietnam

veterans showed either no difference or lower

earnings for veterans. Considering that those wartime forces tended to have shorter terms of training

and service than peacetime forces and were composed more of draftees rather than of volunteers, the

relevance of the earlier studies to current conditions

may be limited.

Few studies of the outcome of the All Volunteer

Force (AVF) veteran transition have been undertaken. One study, which showed no benefit from

military service, is not very relevant because it was

based on veterans who had been recruited into the

military when their AFQT scores were inflated

through miscalculation. 46 The conclusion of that

report was not that military training has no civilian

reward but rather that the lot of people with low

aptitude is not improved through military service.

The experience of the service men and women

facing layoff in the near future should be different.

The few studies that used a more representative

sample of AVF service men and women found

positive earnings differentials for veterans.47

Several factors may account for earnings differences—positive and negative--between veterans

and nonveterans.48 Factors leading to higher earnings include: occupational training provided by

military service; education assistance; greater mo45Grant Willis, “Some Fear Drawdovtq Opportunity Won’t Mix, ” Army Times, July 8, 1991, p. 6.

6Ja~ce ~wenm, peter -~rger, ~d Mofica Grib&q Effects ofMilitaryExpen”ence on the Post-Serviceh”ves ofhw-AptittieRec~its: project

100,000 and ASVAB Misnorm”ng (Washington, DC: Human Resources Research OrganiM.io% 1989).

dTFor ex~ples, see Stephen Mangum and David Ball, ‘‘The Transferability of Military-Provided Occupational Training in the Post-Draft I@”

Industn”al and Labor Relations Review, vol. 42, No. 2, January 1989; Joshua Angrist Harvard University, “The Effeds of Veterans’ Benefits on

Veterans’ Education and Earnings,’ paper presented at Department of Educatio~ Office of Educational Research and Improvement Conference, May

16, 1991.

‘David B. Kassing, “Military Experience as a Deterrninan t of Veterans’ Earnings, ‘‘ in Studies Prepared for the President’s Commission on an

A1l-Vo/unteer Force, vol. 2, part 3, No. 8, 1970.
140 . After the Cold War: Living With Lower Defense Spending

Box 5-A-Replacing the Opprtunity of Military Service: Is a Civilian Service the Solution?

Besides displacing some current members of the armed forces, the military drawdown will also deny the

economic opportunity provided by military service and training to some 290,000 people from 1990 to 1995.

Roughly 120,000 (41 perent) of those will probably be African Americans.

1 David Boesel calls the young people

who would have been eligible to serve undercurrent enlistment standards but who will be denied enlistment under

higher standards the “Newly Unqualified.” Because they are at the low end of the military’s current aptitude distribution, they are not very likely to be college-bound and their nonmilitary and training options are relatively few.2

One way to restore lost economic opportunity to these young people might be a national civilian service,

offering post-service education or training benefits as well as on-the-job training to participants in return for work

on projects of national interest Among recent proposals to create a National Service Corps, Sen. Sam Nunn’s in

the 101st Congress gained considerable attention.3 It sought to phase out many federally funded educational loan

and grant programs, and replace them with a national service education benefit. Debate on the proposal emphasized

promoting community service work by tying national service to education benefits.

alternative to military service for non-college bound young people got less attention. A problem in relation to this

goal is that if good educational benefits are offered to national service members, and espesially if other government

educational programs are cut back better educated applicants could crowd out the newly unqualified. Unless

national service were made universal, middle class college-bound youth could fill most of the available spots.

The pilot National and Community Service Act that eventually became law,4 Sponsored by Sen Edward

Kennedy, contained many of the basic elements found in Sen. Nunn’s bill, but it did not phase out other educational

benefits. The act created two programs for 16- to 24-year-old high school graduates, the American Conservation

Corps and the Human Services Corps. The conservation corps will carry out projects to improve Federal lands

(reforestation, wildlife habitat maintenance, road, trail and bridge maintenance, etc.). The Human Services Corps

will provide otherwise unavailable social services in fields such as health care and education. AU of these positions

will have a training element imparting skills that can be transfixed to jobs in the private sector. Participants will

receive a subsistence stipend while in the service and afterward will receive a lump sum benefit applicable to

education costs or first home purchase.

A drawback to program of this sort as a substitute for military service is that they lack the tradition of respect

and prestige that comes with a military career. Most public service programs lack this special cachet for

non-college-bound youth. For example, joining the Peace Corps or VISTA is socially acceptable for children of

privilege, but the rate of enrollment in the Peace Corps for minorities and people of lower economic status indicates

that it does not have the same appeal in those communities. To win respect, participation m any national service

program must be seen as important to society. If it looks like “make work,” national service will not attract the

newly unqualified nor is it likely to help them find post-service employment It may be hard to create a program

with significant social worth that is not in a field already occupied (even if”inadequately) by another government

program or the private sector. The emergence of environmental goals as almost universally acceptable may offer

the best opportunity for national service work Cleaning, protecting, or improving the environment is anew priority,

and is not seen as adquately handled by existing programs.

Even if a national civilian service were able to attract many of the newly unqualified to participate, there is no

guarantee that it would offer as much or as good post-service employment as the military. If national service is

administered at the State or local level, as the National Community and Service Act will be, it probably will not

provide the same increase in post-service geographic mobility provided by military service. The propensity of

veterans to move away from their home towns is a key factor in the increased earnings experienced by minority

veterans over comparable non-veterans.

Thus, while a system of civilian national service maybe desirable, it probably would not adequately replace

military service for the newly unqualified,

1 “ Esbma@s duivodfmm David Mc@, “Cutting Itecndts: A Profle ofti Newly Um@itl@” pmmted at Dcpammm ofEduca?i~

Omcc Ofwumional mtmlcllaul hnprovamaltconferenm: UCdOn ‘s MO m tlM Remmar@ afDdaMc aid C41M bdustria, May 16,

1991 andpanomdcommmkadon, Nov~ 1991. ‘IhcbasicLis that loo,oooolftbcpositions lost in * military win occur tiKough

involuntary sqmatiou b~m@ly 290j0(Xl, must occur by reducing -ens (i.e., not rep- @tions lost by mmal attrition). ~

projocdorl that 41 pofcont of this group will be AIHcan Amedcan is based dhuctly on Boo8cl’8 work

m.

3101~ CO-, Senate BiU 3.

4p~. lol~lo.
Chapter 5-Veterans’ Adjustment ● 141

bility (especially for minority veterans); a credentials effect; and preference in government hiring.

The negative factors include the limited transferability of military training and loss of labor force

experience and educational attainment compared

with those who did not take time out to serve in the

military .49

Some of the factors listed here, such as educational assistance and preferential hiring, reflect

public policies to smooth the transition. Some of the

negative factors, such as lost years of civilian work

experience, are only temporary, and become less

significant with each year of civilian work. The

results of these studies tend to vary depending on

how long the veteran cohort surveyed has been in the

civilian workplace.

Skill Transfer

Skill transfer is both a strong positive factor in

postservice adjustment and a good predictor of

postservice earnings.so Skill transfer, moreover,

benefits society as well as the individual veteran.

The exodus of skilled people from the services into

the civilian economy could prove to be a genuine

“peace dividend” at a time when skilled young

workers are in short supply.

The question is, what proportion of veterans are

able to transfer their skills to the civilian workplace?

Various studies offer estimates ranging from 33 to

50 percent.51 All of the evidence indicates that skill

transfer rates are higher for AVF veterans than for

earlier era veterans .52 One explanation for this is that

in the AVF, a soldier’s field of training is much more

likely to be in his or her field of interest and therefore

is more likely to be pursued after military service.

Also, earlier wartime veterans were more likely to

have served in nontransferable combat roles.

It is probably too optimistic to assume that as

many as one-half of military separates will be able

to find civilian jobs in the fields for which the

military trained them. Since a disproportionate

number of separates will come from the Army, with

its lower rate of transferable skills, the rate of

transfer will probably be lower than one-half. Many

separated personnel could benefit from retraining or

further education. However, for the majority, fulltime education may not be feasible because of the

need to earn a living.

How Recent Veterans Are Faring

OTA interviews with providers of transition and

employment assistance to veterans indicate that

employment prospects depend largely on tenure,

skills, and region. While opinions of the overall

value of military training and experience varied,

most agreed that the group facing the greatest

difficulty are young enlisted separatees--especially

those having served in posts such as the infantry.

These veterans find they have few skills they can list

on a civilian resume. What the military has mainly

taught them are attributes such as discipline and

leadership, not job skills.53 To find meaningful jobs,

veterans in this category must sell employers on the

idea that they are trainable and hard workers. Many

local service providers said they were successful in

getting veterans into apprenticeship programs, training provided by the EDWAA (Economic Dislocation and Worker Adjustment Assistance program) or

on-the-job training. Overall, however, these young,

less-skilled separates seem not to fare very well.

Informal tracking of separates from Fort Dix, NJ,

reveals that while most have found employment,

their jobs are at low wages and provide little job

satisfaction. OTA’s interviews took place during the

1990-91 recession; job opportunities for these veterans may improve with economic revival.

Middle-range soldiers, those with 5 to 12 years

service (especially officers), are in a relatively good

position to make a transition to the civilian labor

market. These are the people in whom private

industry is showing the greatest interest.54 The most

senior ranks may have a harder time. Generally,

more senior people go through longer job searches,

dqIbid.

~Ric~d V.L Cwwr, Mi/itaVRefiree~’ Po~~.Se~,ice Earnings a~E~p/oy~nt (SaIIt~ Mofic~ CA: R~d CO~., 198]). hi MS s~dy, Veterm able

to transfer their military skills to the civilian economy are earning over $2,000 per year more than veterans who could not.

51 ManWm and B~l, op. ~it., ~t~bute tie difference to me~odology. In thefi s~dy, Maqm and B~ ~~te he rate Of &allSfer fOr Vet~afls Of tie

all volunteer force at 47.1 pereent.

S%id.

53This ~o~t was raised by Cbles Adimaro, Director of Army Continuing Edueatiou Fort Dix (NJ), pno~ co~spondencet Nov~~ 1991”

54 Janet NovA, “Back to Ciwy Sh=t, ’ Forbes, vol. 147, No. 8, Apr. 15, 1991, pp. 130-131; and Lt. Gen. Edgar Chevarrie (USAF ret.), Chaiman

of Miltmn Inc., personal communication June 5, 1991.
142 ● After the Cold War: Living With Lower Defense Spending

though they may in the end find satisfactory jobs. An

oft-used rule of thumb is one additional month of

search for each additional $l0,000-per-year in salary. Many senior people may not be able to enter

civilian employment at the level they would like;

they may have to take lesser paying, lower responsibility jobs than they had in the military.ss

Regional differences are also apparent. In areas

where the economy was relatively strong in 1991,

such as northern California, providers of transition

assistance are more positive about employment

prospects than those in areas hit harder by the

recession, such as Louisiana or New Jersey.

PROGRAMS TO AID

ADJUSTMENT

Adjustment from military to civilian life is more

than a change of job; it is a change in lifestyle. For

this reason, programs to aid the transition of military

personnel deal with issues that are not considered in

most industry transition programs. For some time

the military has made spiritual, family, and continuingeducation counseling available to separates. Only

recently have the services begun to provide the sort

of labor market assistance that many private industry

employers offer their laid-off employees. Such

programs were just beginning to be fully implemented by the end of 1991. Though it is too early to

evaluate the quality of these programs, some preliminary observations are in order.

Basic Separation Benefits

Basic separation benefits fall into two categories:

those available to all veterans when they leave the

services, and those specific to soldiers involuntarily

separated due to downsizing. The general benefits

include unemployment compensation, preferential

treatment in government hiring, eligibility for certain government-sponsored work and training programs, home mortgage guarantees, and treatment in

Veterans Administration health care facilities for

health problems resulting from military service. The

programs for which only involuntary separates are

eligible include: separation pay, transitional health

care benefits, and access to military commissaries

and exchanges after separation.

Unemployment insurance (UI) is available to all

separating nonretiring personnel. Military UI

(dubbed UCX) is somewhat different from private

sector UI in that veterans can receive the benefit

regardless of whether they were involuntarily separated or chose to leave. Like private industry UI,

UCX is administered through State Employment

Services. UCX is available for 13 weeks anywhere

in the country after a 2-week wait. It pays an average

of $170 per week (compared with an average of $148

per week in private industry UI).s6 Proposals have

been made in Congress to make UCX commensurate

with civilian sector UI for members who are

separated involuntarily (i.e., 26 weeks of benefit

after a l-week wait).

Many existing benefits for involuntarily separated

members have been enhanced and expanded for an

era of downsizing. Separation pay is now available

to active duty enlisted personnel and officers with at

least 6 years of service who are not eligible for

retirement pay. After extensive delay, the services

finally agreed on rules to implement the new law on

separation pay. The payment is calculated as 10

percent of final base salary multiplied by the number

of years of service. The maximum payout under this

formula is $86,936 for officers and $53,402 for

enlisted personnel.57 On average, members separated in their third term of service will receive a

separation benefit that is more than their yearly base

salary.

Because almost all involuntary separations will

involve either higher performance standards or

application of existing but unenforced rules, the

services have struggled to develop eligibility rules

for transition benefits. For example, a soldier who is

court-martialed and subsequently discharged is, in a

sense, involuntarily separated but clearly should not

be eligible for transition benefits. Eligibility for

those discharged because of more rigorous enforcement of rules on physical fitness and sexual orientation is less clearcut. The solution developed for these

gray area cases is to give separates one-half of the

full benefit. Full benefits will be paid to those

separated under tighter standards of performance,

such as maximum time in grade.

ssLt. Gent Edgar Chavarrie (USAF ret.), Chairman of Miltran Inc., personal cO~U.UicatiO% J~e 5, 1991.

56Dep~ent of Comtice, Survey of Current Business (WAhgtow ~: octo~r l~l)! P. S-13.

57Jim Tice, “Service Sets Separation Pay Rules,” The Army Times, Aug. 5, 1991, p. 3.
Chapter 5--Veterans’ Adjustment . 143

Separation pay is in part compensation to service

members for the loss of retirement benefits they

would have received had they been able to serve 20

years. Generous severance pay is one benefit that

most private sector employees, especially blue-

-collar workers, do not have. Severance pay, combined with UCX, may allow veterans to participate

in longer term training than is usually feasible for

private sector displaced workers.

Under the Defense Authorization Act of 1990,

DoD is providing transitional health care to involuntary separates and their dependents. The insurance

provides coverage of 60 days for service persons

with less than 6 years’ service, and 120 days for

those with more than 6 years’ service. Veterans can

purchase an additional term at the group rate for up

to 1 year from time of separation. The policy

excludes most preexisting conditions at the time of

separation, although conditions resulting from military service are covered by health care system of the

Department of Veterans Affairs. While DoD found

a private insurer to provide the extended health care

benefit in fiscal year 1991, the insurer does not plan

to continue the contract and it is unclear how the

health insurance will be provided in fiscal year

1992. 58 DoD may be forced to provide the service

through the already strapped Civilian Health and

Medical program of the Uniformed Services (CHAMPUS) program.

Loss of access to subsidized food and consumer

goods through the commissary and exchange is one

obvious cost of separation from the military. In the

past the armed forces did not allow separates

continued use of the commissary and exchange, but

the new law allows involuntarily separated veterans

to remain eligible for 2 years. For a nominal rent,

they may also stay in government housing up to 90

days after separation at the discretion of the base

comrnander. 59 Relocation to place of choice will be

paid for those involuntarily separated with more

than 8 years’ service. For those with less than 8

years’ service, relocation compensation is limited to

the place of enlistment or home-of-record.

Transition Assistance

DoD-Wide Programs

Early notice will be a major benefit to separating

military personnel. All involuntarily separating service members will know the exact date of their

separation at least 90 days before it occurs. Advance

notice to workers laid off from private industry is

highly variable, but usually briefer. The WARN

(Worker Adjustment and Retraining Notification)

law requires 60 days’ notice of large layoffs, but

there are many exceptions and loopholes in the law

(see ch. 3). Most military personnel have never held

a fill-time job in the private sector and probably

need more help with job search than laid-off industry

workers, so 90 days’ notice is especially helpful.

Because military transition is different from

private sector transition, the Armed Services have

set up their own programs, separate from the

EDWAA program available to all displaced workers. For example, these programs will provide more

information about non-local labor markets than

EDWAA usually provides, since the majority of

service members will move away from area where

they are stationed.

DoD and the individual uniform military services

have developed their own programs in conjunction

with the Department of Labor (DOL) and the

Department of Veterans Affairs (DVA). The main

provider of basic job search skills training for

military personnel is the Transition Assistance

Program (TAP) run by DOL and available to all the

military services. TAP is a 3-day seminar on job

search skills, offered up to 180 days before separation and providing information on labor markets, job

search skills, and career opportunities. The seminars

are conducted on base by local State Employment

Services (ES) personnel, usually local veterans

employment representatives (LVERS) or disabled

veterans outreach program (DVOP) staffers. Often

DoD civilian personnel supplement these ES efforts;

recently private contractors have also been called on.

In fiscal year 1991, 169 ES personnel and 74 DoD

civilians completed the TAP trainer’s course. DoD

and DOL have been slowly expanding the program,

frost targeting States whose ES offices have substantial resources and interest. By August 1991, DOL

~gu s ConWess, Conference Report on the Defense Authorization Act for Fiscal Years 1992 ami 1993, Repofi 1~-311, P. 5@. . .

sgDefense Au~ofization Mt of 190, Public Law 101-510, Sm. 1147 (a).
144 ● After the Cold War: Living With Lower Defense Spending

had enlisted the ES in over 40 States, hypothetically

covering 97 percent of the military forces (though

participation rates by separates are significantly

lower). DOL has budgeted $4 million to administer

the TAP program. However, this does not include

the salaries of the service providers (which come

from various sources, mainly the Employment

Service and DoD).

TAP is modeled after a California program called

the Career Awareness Program (CAP). CAP began

in 1978 as a 4-hour seminar on job search skills for

service members about to leave the military; the

program ultimately grew to 3 days. Studies of CAP’s

effectiveness have shown that participants had

shorter periods of unemployment following separation and earned higher starting wages than nonparticipants. 60 In 1991, the CAP program merged with

TAP. California currently operates 17 of the 125

TAP sites nationwide.

The long experience of the California programs

allows for some conclusions about problems that

persist over time. The biggest issue is lack of human

and financial resources. TAP providers believe they

are reaching only about 20 percent of separates in

California.6l If the classes are made mandatory in all

armed services, as they already have been in the

Marine Corps, demands for TAP courses could far

outstrip available resources.62 Even in California,

where LVERS and DVOP staffers are fairly plentiful, providers expressed doubt that ES personnel

could meet the demand for TAP courses. One

solution is greater collaboration between DoD

civilian and State ES providers, as is already

occurring in some parts of the country where the ES

instructors teach part of each course and the DoD

civilians another.

Another kind of transition service available to all

the armed services will be skill certification. Beginning in early 1992, DoD plans to offer certifications

to departing personnel that document the trade

training the soldiers have received in the military,

with a detailed transcript of all training and work

experience. The certificate will indicate equivalent

civilian job titles for all military occupational

specialties (MOS) listed. While the system should

help describe exactly what a military person of a

certain MOS is trained to do, and will prove to

potential employers that veterans have had the

training they claim, it is not a substitute for civilian

certification or licensing requirements.

DoD has also developed a labor exchange called

the Defense Outplacement Referral System (DORS)

that began operating in November 1991. Separating

service members fill out an information card, or

“mini-resume,’ listing the type and location of job

they are seeking and giving data on education and

work experience. The information is pooled in the

central office of the Defense Manpower Data Center,

where potential employers can register and request

mini-resumes of up to 25 separates. The resumes

are selected in the order they are received, sent to the

requesting employer, and then placed at the end of

the list. The system costs soldiers nothing, but

employers are charged for telephone calls to a

“900” telephone number. Possibly the charge to

employers may limit the program’s appeal; however, DoD officials say it was designed to pay for

itself and might not otherwise exist. One operational

snag is that some commercial phone systems do not

allow access to “900” telephone numbers, making

use of the system difficult for some employers.

Although most firms do not recruit employees by

long-distance phone, the DORS system may help

employers become more familiar with the kind of

training the military provides.

Service-Run Transition Programs

The TAP program offers only one-time job search

skills training, not the one-on-one counseling and

continued access to job search materials and information that full-service displaced worker programs

offer. These supplements and followup to TAP will

be provided by the individual military services. The

Defense Authorization Act of 1990 requires the

Secretary of Defense to establish job search centers

on military bases.63 It appears that the quality and

extent of offering at these centers may vary considerably among the branches of the armed forces. As of

late 1991, the Army, facing the largest cut, had the

me California Employment Development Department reports tbat duration of employment following separation for participants averages 30.5 days

as opposed to 42.2 days for non-participants; starting wages average $9.53 for participants and $7.98 for non-participants (California Employment

Development Departmen4 “Career Awareness PrograrQ” leaflet Sacramento, CA, 1991).

61 Joseph D. Filardo, State TAP Coordinator, personal Commtimtiou Dec. 3.1991.

bz~e Mfie Corps has made TM classes mandatory for all separating personnel in gde E-5 or bdOW.

bsDefense Au~o~tion Act of 1990, Public IAW 101-510, SW. 502(a).
—

Chapter 5--Veterans’ Adjustment ● 145

most sophisticated job search centers, while the

Navy, facing the smallest cut, seemed to be further

behind.

The Army Career and Alumni Program (ACAP)

has general transition and continuing job search

assistance components. General transition counseling is carried out by Army civilian personnel. This

includes counseling on personal finances and relocation as well as referral to other on-base Army

services, such as the Army continuing education

centers and legal counseling. The job search assistance is being handled by an outside contractor at

on-base centers. In addition to job search skills

classes and counseling, the centers provide information on local labor markets, help in resume writing,

and access to databases of employers who are not

necessarily hiring but have expressed a willingness

to hire veterans. The centers also offer a “crosswalk’ between Army job classification (MOS) and

civilian occupational titles, helping separates to

find civilian jobs that use their military skills,

Although the contractor-run centers do not offer full

job placement services, they have information about

job fairs and some private sector job listings, as well

as access to Federal job openings and information on

veterans’ preferences in Federal hiring.

The Army plans to have a total of 61 ACAP

centers, including 55 with job assistance centers,

running by 1992. They will be located at major

Army installations; smaller installations will use the

nearest ACAP center or mobile services.64 In base

closures, the ACAP centers will be available to

civilian as well as military personnel through the

duration of the closure.

There have been a few institutional problems in

the implementation of ACAP at the base level. For

example, there has been some duplication in services

provided by the job assistance centers and those

provided by the TAP program. A recent agreement

between DOL and the Army may straighten out the

duplication. In other cases the contractor-run assistance centers have had problems in cooperating with

the Army-run transition assistance offices, resulting

in both gaps and overlaps in services. The Army is

aware of these difficulties and is working to clarify

the relationship between the ACAP’s components,

One Army base, Fort Dix, NJ, has instituted a set

of transition services in addition to ACAP, At Fort

Dix, transition planning actually begins at the time

of enlistment with a day-long seminar on continuing

education and veterans benefits. Fort Dix has also

developed a system of apprenticeships that allows

separating personnel to work under civilian journeymen from the base’s directorate for engineering and

housing (see box 5-B). The program allows service

people to gain some skills and to try out a job to see

if they might like it in the civilian world.

The other military services are handling job

search centers with in-house civilian personnel

expanding on their existing family service centers.

In the past, family service centers have focused their

placement efforts on finding jobs for the spouses of

service men and women. The Navy and the Air Force

believe that this experience, combined with additional training, will enable family service center

personnel to counsel separates effectively. The

basic DOL-run TAP program is the same for all

military services, and all will be using the DoD

DORS database.

Problems in Delivering Services

Overall, the transition programs were slowed by

the Gulf War. Transition policy went on hold for

about 6 months while most separations, voluntary or

involuntary, were halted altogether. Since the ‘‘stop

loss’ policy of holding personnel beyond the end of

their service contracts was ended in June 1991, many

service people have chosen to separate immediately.

Thus, the TAP and other military-provided transition programs have been counseling separates

much closer to their dates of separation than

expected. This problem should dissipate as the pace

and timing of separations return to normal levels.

One flaw that may persist is a lack of uniform

practice in granting some of the transition benefits

Congress has recently enacted. One such benefit is

leave from duty to use transition assistance, a benefit

that is expected to raise participation rates. While the

Defense Authorization Act of 1990 provided a

generous leave policy for those near their date of

separation,65 the policy is not applied consistently at

the base and sub-base levels. program operators

report that some of the service members who use

transition services are expected to make up time

&Dep~ment of tie -y, ACAP: Army career and Alumni Program, brochure ~ash@o& DC: 1~1).

bsDcfensc Au~ori~tion Act of 1990, Public Law 101-51O, StX. 502(a).
146 ● After the Cold War: Living With Lower Defense Spending

Box 5-B—Transition Assistance at Fort Dix, NJ

Besides the basic Army Career and Alumni Program and Transition Assistance Program transition services

available at all major Army facilities, Fort Dix, NJ has established several other programs to meet the needs of its

separatees. 1 Charles Adimaro, director of Army Continuing Education Services on the base, has led the effort to

make smooth transition a priority at Fort Dix. Believing that soldiers need to start thinking about their futures well

before they separate-in fact, at the onset of their military service--Adimaro setup a program known as “dough

boy” orientation. New recruits are given information about education and career choices within weeks of their

arrival at Fort Dix. This program helps soldiers plan their military careers, training, and education with an eye

towards their eventual return to the civilian world

The dough boy program is only part of what makes Fort Dix’s transition services unique. Besides being a major

military training post, Fort Dix is also one of the main points of separation for soldiers returning from European

stations. Many those returning from Europe are young soldiers seining in infantry or other lower skill positions.

Informal tracking of the experience of these separates in the civilian job market showed that many were earning

leas than $10,000 a year and most were dissatisfied with their employment situation To improve the separtees'

chances of getting good civilian jobs, Adimaro invited local community colleges to teach courses on base in fields

such as welding and carpentry to soldiers within 6 months of separation. While these courses were popular and did

provide training separates could use in civilian jobs, they were offered only at fixed intervals. That meant that

separating soldiers who arrived after a cycle of courses had started were not eligible to participate.

Seeking an alternative to the fixed-schedule courses, Adimaro found a simple solution-apprenticeship on

base.2 The program dubbed “On Duty Job-Skills” allows soldiers who express an interest in a particular skill or

trade to apprentice with civilian journeymen on the staff of the base’s directorate for engineering and housing

(DEH). By all accounts this training enables the separating soldier to learn about a trade, provides a useful service

to the military during the soldiers last months of service, and allows the DEH to maintain a large work load despite

declining budgets. Although the program is new, several success stories have already been report@ including one

of a soldier who was hired by the DEH after he separated.

In most cases, the skills learned in a short apprenticeship probably are not enough for landing a good civilian

job. However, the experience may help soldiers choose career goals to pursue with further training and at least gives

them a civilian-type work experience to put on their resume.

hfOHIMtiOII for this box waa provided w ~= ~, Director AIIIly Condming BducadoQ Fort M NJ$ pasolml

mmmkatioxq November 1991; and Kixnbdy J. McLadq “Suddcdy, they’re Civilhns: Wbro Does a (3unwr bok for Work?,” The

%iladelphiahqdrer, Nwembor 15, 1991, p. A-1.

2A~while onactive~was tricdduringtkVic?namora bulkkhm “ Asptmof Projtxx’rransitiomtuly aolldicrsparticipatcd

in @iltC industrypb tmining during offhoars. (Darwin W. Daicoff, “The M~tmcnt of DoD Civilian ad Mlitary Pusoxmc 1“ in Bmmrd

Ud& da., The&onomic Consequences ofReducedD#emse Spen&”ng (Lcxingtcq MA: Lexington Books), p. 175.)

spent in the centers while others are given uncondi- point of contact between newly separated veterans

tional time off. Other recently provided transition

benefits, such as reimbursement for relocation to

places other than home-of-record and continued use

of the commissary and exchange, are not fully

understood or implemented at the base level.66

Other Employment Programs

Available to Veterans

Veterans who have not found jobs by the time

they are discharged can use the DOL’s programs of

employment assistance. At ES offices throughout

the United States, LVER and DVOP offer job

counseling and related services. They serve as the

and other ES and DOL programs. Because they also

serve as the main counselors in the TAP program,

many of them will be familiar with job search skills

training that service men and women received while

still on active duty. Their presence in ES offices

across the country allows veterans who have moved

away from the area where they served to continue

getting labor market assistance from a provider who

“speaks the same language” they learned in the

TAP program.

Veterans involuntarily separated from the military should also be eligible for reemployment and

retraining services from the Economic Dislocation

-t White, “Lack of Regs Snags Separation Benefits,” The Navy Times, July 8, 1991, p. 3.
Chapter 5-Veterans’ Adjustment ● 147

and Worker Adjustment Assistance (EDWAA) program, which serves displaced workers generally (see

ch. 3). At this writing, DOL had not yet worked out

with DoD a practical definition of “involuntarily

separated’ ex-service members who will be eligible

for services, but intended to do so. There were

reports, in fact, that some ex-service members were

already being served in some local EDWAA projects. 67

A number of private sector non-profit organizations are aiding in the transition of ex-service

members. These include the various military alumni

groups such as the Non-Commissioned Officers

Association, the Association of the United States

Army, the Air Force Association, and the Veterans’

of Foreign Wars, as well as nonmilitary organizations such as the American Association of Retired

People. These organizations sponsor job fairs, offer

access to job banks, and provide a potentially rich

source of informal employment contacts. Some of

them offer transition and benefit counseling. Another veterans’ organization, Disabled American

Veterans, has written a series of three guides to

finding civilian employment.

One private sector for-profit firm provides a

mini-resume service, similar to the DORS system. It

is free to service members and available to employers who subscribe to the Human Resources Information Network online database. The same firm also

publishes job information targeted to service members in The Miltran Guide to Career Opportunities,

available in many commissary and post exchanges

for $10 per issue. Copies are also available free to

clients at some of the service-run job centers. The

magazine reprints help wanted ads from newspapers

nationwide, organizing the ads by occupational code

and indexing them to MOS codes. Even though the

ads are almost 3 weeks old by the time the magazine

comes out, the publisher reports that over 70 percent

of the positions are still open at the time of

publication. Although answering help wanted ads is

often an unrewarding way to apply for a job, at least

it does collect information on the kinds of jobs

available in various parts of the country.

Educational Beneftis:

The Montgomery GI Bill

For veterans without transferable skills, or for

those who want to improve their skills, education,

and training opportunities, the Montgomery GI Bill

can contribute to civilian economic success. Although, the Montgomery GI bill is less generous

than its World War II predecessor, it nevertheless

offers a real educational opportunity not available to

civilians. The present version of the GI Bill is

optional and requires a contribution from the soldier’s pay. Over 70 percent of recruits opted to

participate in the GI bill program in 1989 and an

open season has been declared for all service

members who are to be involuntarily separated and

did not sign up at the time of their enlistment.

The GI Bill was originally conceived in 1943 by

President Roosevelt’s Osborne Commission on veterans’ readjustment. The Commission’s report led to

the Serviceman’s Readjustment Act of 1944-the

GI Bill of Rights. After World War I, veterans had

been given only a lump-sum cash bonus; the GI Bill

undertook to make a real difference in the life

chances of returning soldiers. It paid for all tuition,

fees, books, and included a monthly stipend for 4 full

years of schooling. In all 7.8 million veterans—just

over half of those eligible--participated, receiving

benefits that totaled about $85 billion (1991 dollars). 68

Since the original GI Bill, various educational

benefit schemes for veterans have been employed.

The post-Korean Conflict GI Bill provided benefits

worth about $20 billion (1991 dollars) to 2.4 million

veterans (43 percent of eligible veterans). The

Vietnam era GI Bill served 8.2 million veterans (61

percent of those eligible) at a cost of about $6 billion

(1991 dollars). Less generous than the World War II

GI Bill, both plans generally required veterans to pay

for part of their training or education. While the level

of benefit declined from the original GI Bill to the

Vietnam version, the level of participation actually

increased.

When the AVF was established, planners recognized that educational benefits would be a good way

to attract recruits. Under the Veterans’ Educational

cT~omtion pmvid~ by (lffke of Work-Based Learning, Department of ~bor.

6S&~e~ of ~m~nt dollm ~~ on the GI Bfll pro- given irl this report mate to~ c~nt do~ sWnt over the life of each prOgr~

as if it were all spent in the middle year of each program.
148 ● After the Cold War: Living With Lower Defense Spending

Assistance Program (VEAP), established in the

early 1970s, the military offered to match $2 for each

$1 the soldier invested in an education account,

which could grow to a total value of $8,100. In

addition to the two-for-one matching, the services

could also make additional contributions (“kickers”) to attract people with specific skills into the

military. The account could be paid out over a

maximum of 36 months of training ($240 per month,

assuming the maximum contribution of $2,700 by

the service member). This benefit, far less generous

than any of the previous educational assistance

programs, was not widely used. Only 20 percent of

those eligible to sign up for the VEAP received

training under the program.

Spearheaded by Rep. G.V. Montgomery, anew GI

Bill passed the Congress in 1984. The Montgomery

GI Bill (MGIB) requires participant contribution;

enlistees must pay in $100 per month for the first 12

months of a 3-year term of service. Far more

generous than the VEAP, the MGIB provides an

eight-to-one match of the participant’s contribution.

In return for the $1,200 investment in the MGIB, a

serviceperson receives $10,800 in educational benefit ($300 per month spread over 36 months). A

$1,200 investment in the VEAP would have yielded

only $3,600 ($100 per month). As in the VEAP, the

services are allowed to add kickers to the monthly

benefit to aid in recruiting or retention of soldiers

possessing hard-to-find skills. The most generous

kicker is the Army College Fund, which can bring

the total MGIB benefit up to $25,000. An additional

package of veterans’ benefits, recently enacted in

response to the Gulf War, further sweetens the Bill.

The monthly benefit for veterans who served during

the Gulf War was increased from $300 per month to

$350 per month. This adjustment raises the total

base benefit to $12,600 or 10.5 to 1 matching by the

services. 69 New law also established an open season

that allows service men and women who are

involuntarily separated a second chance to join the

MGIB program. Their $1,200 would be withheld

over the remaining period of their service.

A great majority of service men and women sign

up for the MGIB program. The current sign-up rate

is even higher than the 71 percent the program

averaged from 1985 through the end of fiscal year

1989. 70 Because soldiers must serve 3 years on

active duty to be eligible for MGIB benefits, data on

how veterans are using the benefit are only beginning to come in. Of the 101,781 people receiving

MGIB benefits in fiscal year 1990, 93,630 (92

percent) were enrolled in institutions of higher

learning, 5,920 (5.8 percent) were enrolled in

resident schools other than college, 745 (0.7 percent)

were enrolled in on-the-job training programs, and

the remaining 1,486 were enrolled in unspecified

programs.

Not all of the people receiving MGIB benefits

were veterans; 26,488 (26 percent) were still on

active duty. In some of these cases the MGIB benefit

may be furthering a military career as opposed to

facilitating a new civilian career. This could be an

advantage to individuals as well as the military. If

the acquired skill or education has value in the

civilian labor market, the veteran could move

directly into the work force with no time out for

training. However, if the skill is not in demand

outside the military, then the veteran has no postservice job advantage, and no postservice education

benefit either. It is a hopeful sign that 92 percent of

MGIB benefit recipients are enrolled in college,

since college education generally makes people

more marketable for civilian jobs.71 It is discouraging that despite the overwhelming sign-up rate for

the GI Bill, only about 12 percent of those eligible

to receive benefits under the program have yet done

so. As one official put it, ‘‘If a program that pays out

as much as $12 dollars on every dollar paid in is

making money for the government something is

wrong.” While no one is sure why so few veterans

have used their GI Bill benefits, two factors are often

noted. First, most departing soldiers (including

young separates) leave the military with a spouse,

and many have children. Having to provide for the

immediate needs of their families may preclude

full-time training or education. Second, many soldiers do not get adequate counseling about how their

@PMSim Gulf Cofict supplernen~ Authorization and Personnel Benefits Act of 1991, public Lfiw 102-25, SW. 337(@(3).

‘Mary F. !hi~ Library of Congress, Congressional Research Service, “Veteran’ Educational Assistance Programs,” Feb. 2, 1990.

Tl~le n. &ti we av~able on the use of veter~ benefits and the dumtion of displacement following separatio% k a recent study of Vietnam and

early AVF soldiers, Angrist found that the use of veterans’ education benefits increased their earnings by an average of about 6 percent and that most

of the increase was attributable to veterans who used their benefit to attend college or graduate school. (Joshua Angrisg “TheEffect of Veterans’ Benefits

on Veterans’ Education and Earnings, ’ unpublished discussion paper No. 1520, Harvard University, Cambridge, MA, October 1990.)
Chapter 5--Veterans’ Adjustment ● 149

benefit can be used. Transition services should

alleviate this problem.

Soldiers as Teachers

A special educational option is the New Careers

in Teaching initiative, started in 1986 and planned

for expansion during the next few years as part of

DoD’s overall transition assistance program. The

idea is to train service people for teaching careers

when they leave the military. So far the program has

been modest. One of the larger programs is currently

operated by the Navy in Washington, DC. By 1990,

48 service members had started training and 28 were

teaching. 72 Because a college degree is a requirement for entering the program, officers are most

likely to qualify, although some senior enlisted

personnel have participated. Because the starting

salaries for teachers are low and the duration of the

training is fairly long, this maybe a better option for

retirees than for separated officers and senior enlisted personnel.

IN CONCLUSION

Military personnel are in a better position to make

the transition into the civilian economy than they

have been in previous build-downs. The current

large peacetime military has more billets with

civilian job counterparts than any wartime force

since World War II. In general, the troops are above

the median in educational attainment and aptitude.

Another advantage for separating military personnel

is an array of transition programs, which if fully

implemented are richer than those available to

dislocated defense industry employees. Military

personnel also have more notice of separation,

which gives them more time to plan for their

transition and adequate opportunity to use transition

services before they leave the military. The variety

of education, retraining, jobs search instruction, and

post-service government assistance programs, combined with severance payments and unemployment

benefits, should allow most separates a reasonably

good chance of a smooth transition to the civilian

economy—assuming the economy pulls out of the

1990-91 recession soon. Another caveat is that these

programs are not yet in full operation. What remains

to be seen is if the quality of staffing and commitment at the base level will carry out the potential of

these programs. Assuming commitment on the part

of the services to make transition programs work,

dislocation of involuntarily separated military personnel should be small compared to dislocation in

defense industries.

The greatest social costs of the military drawdown

may not be to those who are involuntarily separated

but to those who will never be eligible to serve under

more restrictive enlistment standards. While policies

to aid the roughly 100,000 service members who

will be involuntarily separated through 1995 are

well developed, programs to replace the lost opportunity of military service to roughly 290,000 young

men and women who will not be able to enlist are

lacking. Box 5-A discusses a program that might

serve that purpose. Obviously, the armed services

should not be maintained at their current size simply

to provide a vehicle for social integration, but the

fact remains that it has been just that for many people

over the last 20 years.

72RO&~ MaCDO~d and Martha BrO~e* “Career Transition Into Trainin g: A Model Alternative Teacher Trainin g Program,’ in Technical Talent

From the Military and Industry (Washington, DC: National Executive Service Corps, May 1990).
Chapter 6

Adjustment for States

and Communities
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

THE BASIS FOR CONCERN ABOUT COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 153

THE LOCATION OF DEFENSE SPENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Defense-Dependent Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Urban Versus Rural Defense Dependency . . . . . . * . . * . . . . . . . . . * * . . * * * . . . * ..*..*.** 157

Defense Dependency by State .,*. .*** ..*. ... ... ... ... ... ... ... .. *.. *.*. 157

Defense-Dependent Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

FACTORS AFFECTING ECONOMIC DISTRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Compensating Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Speed of Cuts and Advance Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Local Economic Conditions *e. *.. **. .6*. .**. *.. * e * * . . * . * . . . . * * * . * * . . . . . . . . . . . . . 160

MILITARY BASE CLOSINGS AND REALIGNMENTS ● . . . . . . * . * . * . . . . * * *......** 164

MITIGATING THE COMMUNITY IMPACTS OF REDUCED

DEFENSE SPENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

The New Economic Development Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Federal Programs To Assist Defense-Dependent Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

State and Local Programs To Assist Defense-Dependent Areas . . . . . . . . . . . . . . . . . . . 176

What Communities and States Can Do To Stimulate Economic Development . . . . . . 178

EFFECTIVENESS OF ECONOMIC DEVELOPMENT EFFORTS . . . . . . . . . . . . . . . . . . 184

The Local Economic Response to Base Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Communities Recovering From Economic Distress: Jackson County, Michigan . . . . 187

How Well Do Economic Development Policies Wink? . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Boxes

Box Page

6-A. Lockheed Maintenance of Boeing 747s at Norton Air Force Base . . . . . . . . . . . . . . . 160

6-B. Selected Types of Economic Development programs . . . . . . . . . . . . . . . . . . . . . . . . . . 171

6-C. Case Study: Closure of the Kincheloe Air Force Base in Chippewa County, MI . . 186

Tables

Table Page

6-1. Geographic Concentration of DoD Prime Contracts: Top Seven Metropolitan

Areas, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157

6-2. The 15 Most Defense-Dependent States, 1991 ● O . . . . . . . . . * * * * . . . . . . . . . . . . . . . . . 158

6-3. Defense Dependency by Size of County, 1989 ... . *.. . ... 159

6-4. Economic Conditions of the Most Defense-Dependent States, 1991 . . . . . . . . . . . . 162

6-5. Economic Conditions of Metropolitan Areas Receiving the Most

Prime Contract Awards e*. ..o. o.. ... o.. o.. ... o*. ***Q...**.**....*@..*..***. . 163

6-6. Metropolitan Areas Receiving Most Prime Contract Awards Per

Employed Worker, 1989 .. . . . . . . . . . . . . . * * . . . . . * . . . . . * . . * . + * * * * * * . . ..*.*...* 164

6-7. Military Base Closures and Realignments With the Greatest Economic

Impacts .*. ... ... **. ... ... ... ... .*** ... .*. *.. ... .*** ..** ..$$. ... *@** ..*. "**$ 167

6-8. Military Bases Scheduled for Closure on the EPA National Priorities List . . . . . . . 168

6-9. Factors in Community Economic Impacts From Defense Cuts . . . . . . . . . . . . . . . . . 170

6-10. Federal Funding for Economic Development, 1978 to 1990 . . . . . . . . . . . . . . . . . . . . 173

6-11. Selected State and Local Incentive Package . . * . . . . . . . . . * * * . . * . . . . . . . . . . . . . . . . . 181
Chapter 6

Adjustment for States and Communities

INTRODUCTION

National defense money is spent in all 50 States

and thousands of American communities, but its

importance to local economies varies greatly. Many

States and communities benefited from the last

defense buildup that began in the late 1970s, And

many of these will feel most keenly the effects of

cuts in defense spending.

Fortunately, the number of areas seriously distressed is not likely to be great. A small number of

local communities are highly dependent upon defense expenditures for their economic vitality, while

a larger, but still relatively small, number are

moderately dependent. Not all defense-dependent

communities will suffer economic distress because

they possess other sources of economic strength.

However, even as defense spending declines, the

fate of all communities that lean on defense for their

economic vitality will depend to a large degree upon

how well the U.S. economy as a whole performs in

this decade. Well funded and designed economic

development programs can help many affected

communities avoid community distress from defense cuts, assuming a relatively prosperous national

economy.

THE BASIS FOR CONCERN

ABOUT COMMUNITIES

Before examining the community impacts of

defense cuts, it is appropriate to ask first why

policymakers at the national level should be concerned with the economic well-being of particular

localities. There are at least two reasons for concern,

one related to the overall efficiency of the national

economy and the other to economic, social, and

psychological hardships experienced by people living in declining local economies.

Local economic decline can be a drag on the

national economy, particularly when some places

are declining and have excess capacity for growth,

while others are growing and paying to add new

capacity. When a community suffers dislocation and

decline, some factors of production are moved and

can be used elsewhere. Some firms may relocate,

taking their capital, expertise, and even their machinery with them; some workers may do the same

even though, for many, moving means great hardship. However, firms cannot move their buildings

nor can workers move their homes. Public infrastructure, such as hospitals, schools, roads, sewers,

and bridges, are likewise immobile. As a result,

when communities undergo sudden and severe

economic dislocation leading to outmigration, many

houses, factories and offices may stand vacant and

public infrastructure is under-used. Workers staying

behind are likely to be unemployed or to take

low-pay dead-end jobs. Area banks and savings and

loans institutions may suffer or fail as investments

go bad. Moreover, local spending on services

usually increases, and because of a smaller tax base,

tax rates often increase. This less-than-full use of

public and private resources reduces the efficiency

not only of the declining community itself but also

of the U.S. economy as a whole.

If the departing industries or workers move to

areas that are growing, there are further costs as the

growing community has to pay for new infrastructure (e.g., bigger hospitals, widened roads) or else

put further strains on already overextended resources, causing such things as transportation snarls,

overcrowded schools, and other delays and inadequacies in public services. Private resources are

strained as well, resulting in increasing land, housing, and office prices. 1 Businesses competing in

international markets bear at least some of these

increased costs.

In sum, a national growth pattern of regional

booms and busts is inefficient and costly. In some

places resources sit idle and under-used, while in

others there is a mad scramble to build more. This

does not mean that stasis and immobility are

desirable; geographic reallocation of resources can

lone study of 103 ~sachuse~ communities found that local per-capita expenditures wexe highest in both rapidly declining cities md mpiay

growing cities. One reason local public expenditures increase with growth is that cost of providing services for new households is often higher than the

revenues they provide. (Helen Ladd, ‘‘Municipal Expenditures and the Rate of Population Change, ‘‘ in R. Burchell and D. Listokin (eds.), Cifi”es Under

Sfress (Rutgers, NJ: Center for Urban Policy Research 1981), pp. 351-68, cited in Peter Eisinger, The Rise of the Entrepreneurial State(Madison, WI:

University of Wisconsin Press, 1988).

–153–
154 . After the Cold War: Living With Lower Defense Spending

result in a stronger U.S. economy. For example, the

century-long shift away from rural communities that

accompanied mechanization and rising productivity

of agriculture delivered economic benefits to society

in the form of cheap, efficiently produced food.

Nevertheless, there were costs in this massive shift

that are often overlooked. Many rural communities

contracted and others ceased to grow. Many displaced southern farm workers, poorly educated and

lacking in marketable work skills, exchanged rural

poverty for an urban ghetto.2

Community economic decline imposes social,

psychological, and physical distress as well as

economic costs. Not only does family stress increase, but the community sense of well-being can

be damaged by sudden and severe economic dislocation. Such stress can weaken the community political fabric so that redevelopment becomes more

difficult. 3 There can also be a human toll to

community economic decline in the form of ill

health, alcoholism, family violence, and other social

disturbances. 4

Granted that community economic decline costs

the Nation and the people involved, will the market

automatically respond to produce economic turnaround? Neoclassical economic theory implies that

regional economic decline is self-correcting, that as

labor, land, and other factor prices decline, firms will

either move to or expand in the area.

For two reasons however, market adjustments

alone do not reliably produce economic recovery in

all places. First, it can take a long time for prices to

fall far enough to put adjustment into motion.

Moreover, unlike consumers who may rather easily

shift to lower priced items, most firms do not

necessarily move to take advantage of lower costs,

because the costs of relocating are substantial. In

addition, workers have noneconomic ties to localities that make it hard for them to move when local

economies decline. The rise of the two-wage-earner

family makes mobility even more difficult.

Second, economic decline may never be selfcorrecting. When it is sustained and significant it can

create a vicious circle that makes the community

progressively less competitive.5 As financial, human,

and civic resources shrink, investment in public and

private infrastructure falls. Reduced spending on

education and training, transportation, and other

public infrastructure makes the region less attractive

to new investment, in turn causing further economic

decline. Caught in a downward spiral, it may be

impossible for a community ever to regain former

levels of prosperity and quality of life unless it

receives economic development assistance. Such

acute problems are more likely to arise in areas that

were never very prosperous, while thriving communities have a greater margin, making them less likely

to fall into such a self-reinforcing decline.

Thus, communities vary in their ability to respond

independently to economic distress. In some, particularly those that have been growing and are diversified, market forces and price adjustments alone can

bring about a relatively speedy and complete recovery. While displaced workers in these areas may

need help in finding new jobs, the community itself

is not likely to need much in the way of economic

development efforts. At the other extreme, market

forces are so stacked against some communities that

even with substantial help they probably cannot

recover (abandoned, isolated mining communities

are an example). However, many communities fall

somewhere between the two extremes. Here, market

forces alone probably cannot produce a swift and

robust recovery. Economic development efforts can

help to catalyze market forces and prevent the

community from sliding into decline.

THE LOCATION OF

DEFENSE SPENDING

To understand how defense spending cuts are

likely to affect States and communities, it is

important to know where defense-related jobs are

W.S. National Commission on Technology, Automation and Economic Progress, Technology and the American Economy (Washir@orL DC: U.S.

Government Printing ma% 1966), p. 20.

3M,ic&lM-‘$~a he &@ C& lbugh: ECOnOmiC Reality snd the Cultural Myth of Small ‘l&m Ameriq” Journcd of the American

Planning Association, vol. 52, No. 4, 1986; also Roger BoltorL “ ‘Place Prosperity vs. People Prosperity’ Revisit@” unpublished manuscrip~

Department of Economics, Williams College, Williamstoq N@ May 1991.

4For a mom &~~ d-don of SOCti ill eff~ts horn rapid economic dech of communities See U.S. CO~SS, ~ce of TeCblOSY

Assessment, Technology and fwuctural Unemployment: Reemploying Displaced Workers (Washin@orL DC: U.S. Government

1986), pp. 125-127.

-~ce, February

The thmy of cumulative causau.OL first proposed by Gunnar Mm suggests that economic decline is not always self-correcting Rich Lands and

Poor (NCW York NY: Harper and Row, 1957).
Chapter 6--Adjustment for States and Communities ● 155

located. Are they mostly in large cities, in a few

States, in economically healthy communities, or in

marginal areas? The degree of local economic

distress from the build-down will depend in large

part on the answers to these questions. Moreover,

this knowledge can help the Federal Government,

States, and communities determine how vulnerable

particular places are to defense cuts and develop

plans for responding to possible cuts.

The Department of Defense (DoD) publishes

detailed statistics on the location of military personnel, DoD civilian jobs, and the location of prime

contract awards to private industry and other institutions. However, because a substantial portion of

defense industry work is subcontracted, perhaps as

much as half, it is not possible to determine the

location of all private sector defense-related jobs.6

Thus, predicting the community impacts from weapons systems cuts is harder than predicting the

impacts from the base closures that have been

announced.

To estimate defense employment by State and

local areas, some analysts rely on prime contract

award (PCA) information. However, much of the

prime contractors’ subcontract work is done by firms

in other States. Because PCA figures do not measure

this, they overestimate employment in some States

and underestimate it in others.7 In an attempt to

reflect more accurately subcontracting and supplier

employment by State, the Defense Economic Impact

Modeling System (DEIMS), an input-output model,

is often used, but it too has problems that lead to

overestimates of defense employment in some

places and underestimates in others.8 Without surveybased data on subcontractors, it is impossible to

make precise estimates of the spatial location of

defense employment.9 Moreover, given the uncertainty about the extent and nature of future defense

spending cuts, it is impossible to predict in advance

which communities will be hit by defense industry

cuts and by how much. However, the PCA and

DEIMS data can be used to roughly identify the

places at most risk. It is also possible to identify the

factors that make places most vulnerable to economic distress from defense cuts.

An important factor determining community impact is the size of the spending cut relative to the size

of the community. As discussed in chapter 1, defense

spending is less important now in relation to the

national economy than it was in the 1970s after the

Vietnam War. While many State and local economies are still quite dependent on defense, most are

less dependent and more diversified than they were

20 years ago.

Defense spending is highly concentrated, however. Slightly over half of all prime contract awards

go to just 7 States comprising one-third of the U.S.

workforce. For example, while California has 11.7

percent of the U.S. work force, it receives over 19

percent of DoD spending on prime contracts. Defense spending is still more concentrated in substate

areas. In 1988, seven metropolitan areas, comprising

13 percent of the Nation’s labor force, received over

30 percent of all prime contract awards (see table

6From 1981 t. 1990 ~bout~~~ “~~~ of pfie conmct aw~ds wx subconmc~. ~-~ti tifu betweerl W tO 55 percent. (DoD,

Washin@on Hea@uarters Smice, Directorate for InformatiorL Operations and Reports, Ofllce of the Secretary, Department of D&ense Prime Contract

Awards, FiscaZ Year )990, DIOR/F03-90. Washingto~ DC: U.S. Government Printing office.

~or example, McDonnell Douglas Air Division received appro xirnately $5.2 billion in prime DoD awards in 1989. Nearly one-third of the funds

were subcontract and less than 3 percent of the subcontracted funds stayed in Missouri; California received 41 percent of the subcontracted work and

New York IOpercent. McDonnell DoughM Air does little subcontracting work forotherf-. Thus, reliance on PCA figures would lead to the conclusion

that Missouri is actually more defense dependent than it is (by as much as 13 pexcent) and that California is less. (Data supplied by McDonnell Aircraft

Colp., 1991).

s’DErMs tries to measure employment ffom both prime and subcontract awards. On the basis of input-output tables, the DEIMS model calculates

the pementage of each industry’s output that goes to r@onal defense. It assumes, for a given industry, that the percentage of workers employed in defense

work is much the same in every State. For example, it assumes that defense work is the same proportion of total work in Los Angeles machine shops

as in Detroit machine shops. As a result the model probably systematI“ally derrepmsents employment in places with large agglomerations of defense

industries (e.g., CaliforniiL ComecticuL Massachusetts) and systematically overstates employment m plmxs that have diverse industry but have

relatively little defense demand (e.g., many industrial states in the Midwest).

%X4’s estimates of defense-related employment by State are based on the following sources: The number of military and civilian positions by State

is horn Selected Manpower Statistics, FY90 (DoD, Directorate for Information Operations, and Reports, 1991) and indushy employment is from

Projected Defense Purchases: Detail by Industry and State, Calendar Years 1991 through 1996, DoD, Directorate for hforrnatiom Operations, and

Rqxmts, 1991, draft (the DEIMS model). DEIMS calculates defense- related industry expenditures for each State. The OTA estimates of industq

expenditures for each state comprise directDoD expenditures (minus direct Federal pay, since military and civilian DoD positions are counted separately)

plus indirect expenditures (subcontracts and spending by contractors and subcontractors for supplies). Each State’s share of the national total of defense

industry spending was calculated and this percentage was multiplied by the total number of industry jobs in the nation (2.9 million in 1991) to calculate

the number of indusby jobs in each State.

305-199 - 92 - 6
156 . After the Cold War: Living With Lower Defense Spending

6-l). At the county level, only 9 percent (271) of the

3,137 counties in the United States exceed the

national average (per worker) for prime contract

awards; 93 received over three times the national

average.

10 DoD research and development (R&D)

spending is even more concentrated, with over

two-thirds of R&D expenditures going to nine

metropolitan areas with only 13.8 percent of the

nation’s population.11

Thus, while most cities and counties do not

depend significantly on defense spending, a few do.

For example, Sagadahoc County, ME, where the

Bath Iron Works is located, receives 11 times more

defense prime contract funds per capita than the

national average. New London County, CT, home to

General Dynamics’ Electric Boat submarine facility,

receives 18 times the national average. One-half of

New York State’s prime contract awards go to Long

Island contractors; most of Georgia’s are in the

Atlanta area.

Some argue that because of the high degree of

subcontracting, defense spending is less concentrated than a simple examination of prime awards

would suggest. In fact, this does not appear to be

true. The few studies examining the issue suggest

that subcontracting is more concentrated spatially

than prime contracting. 12 A possible reason for this

is that although prime awards maybe geographically

dispersed, in part for political reasons, much of this

work is subcontracted back to a few areas with high

concentrations of firms and people who specialize in

defense work, such as Boston, Long Island, and

southern California.

In assessing the defense dependence of local

communities, the secondary impacts of defense

spending should not be overlooked. Calculations of

defense-related employment underestimate dependence when they do not include the local jobs

dependent upon spending by employees of defense

firms and military bases. Varying by the nature and

size of the local economy and the type of job

(military vs. private industry), every defense job

creates approximately another 0.2 to 1.6 jobs in the

13 For example, in rest of the local economy.

southeastern Connecticut employment by defense

prime contractors makes up approximately onequarter of total area employment; regional planners

estimate that altogether one-half of all jobs in the

region are directly or indirectly dependent upon

defense spending.14

Defense-Dependent Regions

Since World War II, defense procurement has

focused less and less on traditional military products

(e.g., trucks, tanks, rifles) and more on aerospace and

electronic-based products. The locus of defense

production has correspondingly shifted from the

industrial Midwest to other areas of the Nation,

particularly California and New England.15 The

lmata supplied by the offiu Of Economic Adjustmen~ DoD. In 1989, the national average was $1,121 in Prime COn~Ct awards pa member Of the

labor force.

1 l~e= ~, in order Of DOD research and development per member of the labor force, Denver-Boulder, BOsto% San Jose, ~S An@eS-h% Be=h

Seattle-Everett, Nassau-Suffolk Counties (NY), Anaheti Washington (DC), Dallas Fort-Wo@ and San Diego. (Data for 1988 from Donald Hicks,

Bruton Center for Development Studies, University of Texas at Dallas.)

IZ’~wwd J. ~Wki and~is M. stark ‘Regional and Industrial Variation in Defence Spending: Some American Evidence, ’ in Michael J. Breheny,

Defence Expenditure andRegional Development (London: ManSell Publishing Ltd., 1988); John Rees, ‘‘The Impact of Defense Spending on Regional

Industrial Change in the United States, “ in G. Hofflnan (cd.), Federalism and Regional Development (Aust@ TX: University of Texas Press, 1981);

Charles H. Anderton and Walter Isard, ‘‘The Geography of Arms Manufacture, “ in The Geography of Peace and War, edited by David Pepper and Alan

Jenkins, London: Basil BlackWell, 1985, pp. 90-103; and Breandain O’hUallachain, Regional and Technological Implications of the Recent Buildup

in American Defense Spending, Annals of the Association of American Geographers, vol. 77, no 2. June 1987. Similar findings were reported in the

1960s. Roger F, Riefler and Paul Downing, “Regional Effect of Defense Effort on Employment, ” Monthly Lzbor Review, July 1968.

13M~tipliers & sm~ler lo~ities and for ~li~ bases we smaller than for linger ~eas and defense indushial f-. Some researchers have

retrospectively examined employment and income changes after major job losses and have concluded that because the changes are smaller than

anticipated, commonly accepted employment and income multipliers are too high, However, these analyses do not take into account the growth of other

economic activities in the region to compensate for the losses. The calculations of the multiplier effects assume that all sources of demand other than

the one being analyzed remain constant. They are hypothetical calculations. The calculated effects overestimate actual changes in employment if other

sources of demand rise to compensate for part of the defense reductio% or underestimate them if other sources of demand fall to aggravate the defense

reduction. For a discussion of military spending multipliers, see Joseph Carhvright and Richard Beemiller, The Regional Econom”c Impact of Military

Base Spending (WashingtorL DC: Bureau of Economic Analysis, U.S. Department of Commerce, November 1980); also Rodney A. Erickson, “Sub

Regional Impact Multipliers: Income Spread Effects From a Major Defense Installation% “ Economic Geography, vol 53. pp. 283-294.

IARic~d B, Erickson, Executive Director, Southemtern Connecticut Regional Planning Agency, personal COm.mUniCatiOU November 1990.

IS~w~dJ. ~ecki and~is M. stark ‘ ‘Regio~ and~dus~al Vfition in Defence Spending: Some American Evidence, Op. Cit.; Rogti F. Riefk

and Paul B. Downing, “Regional Effect of Defense Effort on Employment, ” op. cit.; and Ann Markusen, Peter Hall, Scott Campbell, and Sabina

Dietrick, The Rise of the Gunbelt; The Military Remapping of Industrial America (New York NY: Oxford University Press, 1991).
Chapter 6-Adjustment for States and Communities ● 157

Table 6-l-Geographic Concentration of DoD Prime

Contracts: Top Seven Metropolitan Areas, 1966

Percent of total Percent of U.S.

DoD expeditures labor force

Area (cumulative) (cumulative)

Los Angeles-Long BeachAnaheima 

. . . . . . . . . . . . . . 9.4% 4.7%

Washington, DC . . . . . . . . . . . 14.0 6.6

Dallas-Fort Worth . . . . . . . . . . 18.3 8.3

St. Louis . . . . . . . . . . . . . . . . . 21.9 9.4

Boston . . . . . . . . . . . . . . . . . . 25.2 10.7

Nassau-Suffolk Counties. . . . 28.0 11.8

San Jose . . . . . . . . . . . . . . . . . 30.8 12.5

%s Angeles-lmng Beach and Anaheim, et al. are considered as one area

here.

SOURCES: Bruton Center for Development Studies, University of Texas at

Dallas; Department of Labor, Bureau of Labor Statistics,

Employment and Earnings, June 1990.

defense buildup of the 1980s accelerated this trend.

Per capita defense expenditures in the Pacific and

New England census divisions increased significantly faster than in the rest of the Nation.l6 By 1989,

New England and the Pacific census divisions

received 2.2 and 1.5 times, respectively, the amount

of spending per capita for the Nation as a whole.

Because 85 percent of military prime awards in

the Pacific region are in California, impacts there are

considered at the State level (see discussion below).

New England however, can be considered as a

regional unit because most New England States are

dependent upon defense spending, making it the

most defense-oriented census region in the Nation.17

By 1991, substantial defense cuts had already

occurred and were aggravating a severe regional

recession. New England unemployment was at 8.3

percent compared to a nationwide average of 6.5

percent. 18 New England has suffered through defense cuts before. When defense awards declined by

almost one-half between 1%8 and 1973, and a

number of military bases were closed in the early

1970s, the impact on the region’s economy was

significant.19 A soaring unemployment rate (over 12

percent in 1975) led many to refer to the area as the

New Appalachia. But the economy recovered, due to

a combination of the rise of high-tech manufacturing, financial services, and, not least, defense

spending. The positive impact of $150 billion in

DoD purchases in the 1980s in the region should not

be underestimated. Even though current cuts will

occur over a longer period of time than in the

post-Vietnam era, no increase in defense spending

can be expected to give the region a boost.20

Urban Versus Rural Defense Dependency

Large cities benefit more than rural areas from

defense spending. Metropolitan and nonmetropolitan counties get about the same amount of Federal

funds per capita when defense and space are

excluded, but metropolitan counties get three times

more in defense and space spending .21 Thus, rural

areas should be less affected by the defense builddown, particularly if cuts are across the board.

Steeper cuts in DoD operations (especially in

military bases) may affect rural areas more than cuts

made across the board, concentrated in procurement,

or focused in R&D, especially since the latter is

heavily concentrated in a few larger metropolitan

areas. Given the economic difficulties rural areas

have experienced in the 1980s, this is fortunate. The

strong growth of metropolitan economies in the

1980s and their superior prospects for the future put

them in a better position to absorb defense spending

cuts.

Defense Dependency by State

For most States, projected cuts in defense are not

large in relation to the size of their economies.

Twenty-nine States have defense-related shares of

IsFrom 1980 to 1986, defense expenditures increased by $221 per pmonin New England and $342 per person in California. In comparison spcmhg

increased by $146 nationally and by only $68 in the heavily industrial East North Central region. In 1986, the United States spent $1,100 per capita on

defense. l’homas Muller, “The Impact of Reagan Adrmma “ “ tration Policies on Regional tie and Employmem” (Washin@ow DC: -Urban

Institute, May 1986), p. 11.

17Lynne E. Browne, “Defense Spending and High Technology Development: National and State Issues,” New England Econom”c Review,

Septanber/October, 1988, pp. 3-22.

IllFm Fe- 1991. Calculated ~U.S. @artrmmt of Labor, Bureau of Labor Statistics, Ernpbyment and Eurnings (WsshingtorL DC: April

1991).

1%OH K. Hendersou “Defense Cutbacks dt.k New @bd EkOIiOmy,” New England Economic Review, JulyfAugust 1990.

%ichard Barff, “Living by the Sword and Dying by the Sword: Defense Spending and New England’s Economy in Retrospect and prospect”

unpublished paper, Department of Geography, Dartmouth College, 1990.

zlNo_~~~ ~omti= ~ive $303 ~ ~pi~ vs. $1,011 ~~i~ for rnetro~li~ co~~. U,s. ~~mof @~hKc, ~IIOmiC

Research Sewice, Agriculture and Rural Bconomy Divisioq Rural Economic Development Policy in the 1980’s: Preparing for the Future (WashingtcnL

~: U.S.~~t of ~~~e> J~Y 1987)s PP. 11-17.
158 ● After the Cold War: Living With Lower Defense Spending

employment at or below the national average of 4.2

percent. If defense spending were reduced at a

relatively rapid pace, to about $218 billion in 1995

(see ch. 3), no more than 0.18 percent of the work

force (or an average of approximately 4,100 jobs per

State) in these 29 below-average States would be

vulnerable to job loss each year.22 However, in some

States, such as Alaska, Hawaii, Virginia, and to a

lesser extent Connecticut, Maryland, and California,

defense spending is large enough that cuts could

have a greater impact on the economy. Only 10

States have more than 5.5 percent of their jobs in

defense (table 6-2). In these States, the faster paced

cuts could put around 0.3 to 0.6 percent of the States’

jobs at risk in a given year. This loss may not appear

overwhelming, but it could slow growth, particularly if other segments of the State economy are

weak.

Defense-Dependent Communities

While regional and State impacts of reduced

defense spending promise to be manageable overall,

particularly if the build-down occurs gradually, the

impact on certain communities could be more

troublesome. A small but significant number of

areas have benefited substantially from the Cold

War economy. Some have specialized in the production of ships and submarines (e.g., Bath, ME;

Groton, CT; Newport News, VA), some in tanks

(Lima, OH), and others in aircraft and missiles (St.

Louis, Wichita, Seattle, Los Angeles), electronics

(San Jose, Boston, Fort Worth, Okaloosa County,

FL), and defense services (Washington, DC).

For example, the western Massachusetts town of

Pittsfield is home to a GE Aerospace facility that

makes defense-related electronics equipment. In

1986, GE employed 7,800 of the region’s 41,000

workers. Pittsfield’s economy has struggled as GE’s

employment dropped to fewer than 3,000 in 1991.

Unemployment reached almost 13 percent in 1991.23

The number of employed workers declined by 3,000

from 1990 to 1991.

Southeastern Connecticut is similarly defensedependent. Located on Long Island Sound at the

border of Rhode Island, the region is the home of

Table 6-2-The 15 Most Defense-Dependent

States,1991

Defense share Total

of employment defense

State (percent) lobs

Alaska . . . . . . . . . . . . . . . .

Hawaii . . . . . . . . . . . . . . . .

Virginia . . . . . . . . . . . . . . .

Connecticut. . . . . . . . . . . .

Maryland . . . . . . . . . . . . . .

Utah . . . . . . . . . . . . . . . . . .

New Mexico . . . . . . . . . . .

California . . . . . . . . . . . . .

Washington . . . . . . . . . . . .

Colorado . . . . . . . . . . . . . .

Massachusetts . . . . . . . . .

Arizona . . . . . . . . . . . . . . .

Mississippi . . . . . . . . . . . .

Oklahoma . . . . . . . . . . . . .

Missouri . . . . . . . . . . . . . . .

13.1

12.1

10.4

6.5

6.2

5.9

5.9

5.9

5.7

5.6

5.3

5.2

5.1

4.9

4.8

34,000

68,000

328,000

110,000

152,000

45,000

40,000

829,000

137,000

96,000

157,000

86,000

56,000

73,000

121,000

U.S. total . . . . . . . . . . 4.2 5,016,000

SOURCES: Employment data from Department of Labor, Bureau of Labor

Statistics, Ernployrnerrtand Ekrnings, June 1991. Total U.S.

defense employment from Department of Defense, Office of

the (hrnptroiler, National Budget Estimate for FY 1992

(Washington, DC: 1990). Allocations of defense employment

by State by the Office of Technology Assessment, based on

the Defense Impact Economic Modeling System (DiEMS).

Totai defense jobs refers to jobs within the United States and

excludes DoD military personnel stationed overseas.

General Dynamic’s Electric Boat, other defense

fins, and military installations. In 1990, some

120,000 people were employed overall in the region.

Electric Boat’s Groton facility employed approximately 17,000, while an additional 2,208 civilians

and 13,950 military personnel were at the Navy’s

Submarine base and the Naval Underwater Systems

Command (NUSC). NUSC is losing 900 positions

through realignment, and Electric Boat could eliminate as many as half its positions, depending on

future submarine contracts. United Nuclear Corp.

(UNC), which made nuclear reactors for submarines,

employed 1,200 people. UNC will close by 1992,

Though it is not possible to pinpoint which or

even how many communities are at serious risk in

the defense build-down, data on DoD mime contract

.

awards by county provide some rough approximations. In 1989,271 of the Nation’s 3,137 counties got

awards worth more than the national average, per

employed person, while 142 received awards worth

more than two times the national average. (See table

~ata from OTA calculations of defense employment. Based on William Kauffman’s (Glasnost, Perestroiku, and U.S. Defense Spending,

Washington, DC: Brookings Institution 1990) estimates of the decline in employment through 1995, percentage job losses were calculated for military,

civilian, and private industry positions. These estimates assume defense cuts evenly affect each State’s share of defense employment. In fact depending

on the weapons systems cut and the bases closed, the employment impact will probably be uneven.

~U.S. Bureau of Labor Statistics, Employment and Earnings (Washington DC: Miiy 1991).
Chapter 6--Adjustment for States and Communities . 159

Table 6-3-Defense Dependency by Size of Count y, 1989

County employment

Prime contract Under 50,000 to Over

defense dependency 50,000 250,000 250,000 Total

Low Number of counties . . . . . . . . . . . . . . . . 2,526 220 59 2,805

Millions of workers. . . . . . . . . . . . . . . . . . 24,4 22.7 31.4 78.5

Medium Number of counties . . . . . . . . . . . . . . . . 84 30 15 129

Millions of workers . . . . . . . . . . . . . . . . . . 1.1 3.6 12.8 17.6

High Number of counties . . . . . . . . . . . . . . . . 97 26 19 142

Millions of workers . . . . . . . . . . . . . . . . . . 1.3 3.1 10.1 14.5

aLowcounties have fWer prime ~ntract awards per employed worker than the national average; medium have more than the national averge and less than

twice the national average; and high have more than twice the national average.

SOURCE: Unpublished data supplied by Department of Defense, Office of Economic Adjustment, 1990. The total number of counties is less than the actual

U.S. total because of missing data.

6-3.) The 271 above-average counties had 32.1

million workers, or 27 percent of the employed U.S.

labor force, while the 142 most dependent counties

encompassed 14.5 million workers, or 12.5 percent

of the employed labor force.

The extent and speed of the build-down will affect

the extent of community distress. If the build-down

proceeds at 4 to 5 percent per year, the number of

seriously affected communities will likely remain

manageable, if the national economy recovers and

begins to grow. A steeper build-down of 6 to 7

percent per year would affect more communities. A

rapid build-down at, say 10 percent for one or two

peak years, could affect still more.

FACTORS AFFECTING

ECONOMIC DISTRESS

Compensating Economic Growth

In the short run, cutting the defense budget will

eliminate jobs. However, in the moderate and long

term, some compensating job growth will occur,

assuming that either public or private investment

takes up the slack. 24 For illustration, Leontief

estimated in 1965 that after a 20-percent reduction in

defense spending, about half the States would gain

employment because compensating economic

growth would more than offset any defense losses,

while compensating growth would reduce the severity of defense job losses in the remaining 25 States.25

To the extent compensating growth occurs in the

national economy, States affected by defense cuts,

and to a lesser extent, communities, will be helped.

Speed of Cuts and Advance Notice

The effects of defense cutbacks will be eased if the

cuts occur over a number of years. Gradual cutbacks

make it easier for laid-off workers and idled

resources to be absorbed through local economic

growth. In fact, employment is often phased down

gradually as contracts for military systems are

completed. For example, the layoffs at United

Nuclear Corp. in Connecticut are occurring in

stages, with 500 employees laid off in 1990, 400 in

1991 and the final 300 in 1992. As a result, the

impact on the local economy is moderated and UNC

has time to try to develop new, nondefense business

at the plant.26

When military bases close, soldiers are transferred and civilian positions are eliminated in stages,

so that by the time of closure many positions have

already disappeared. Advance notice of 2 to 5 years

UBnm W. Cmhell, ‘Defense Swnding Cuts: Implications for Deficit Reduction and the finOmy, ‘‘ Congressional Res@rch Semice, U.S. Congress,

Jan. 5, 1990; Michell R. Garfirdcel, “The Economic Consequences of Reducing Military Spending,” Fe&raZ Reserve Bank of St. Louis Economic

Review, vol. 72, November/December 1990, pp. 47-59; C. Alan Garner, ‘‘The Effect of U.S. Defense Cuts on the Standard of Living, ” FederaJ Reserve

Bank of Kansas City Econom”c Review, vol. 76, January/February 1991, pp. 33-47; and IA Taylor, “Reduced Defense Purchasing: Anticipating the

Impact on State and Indushy Employment” Federal Reserve Bank of Dallas Econonu”c Review, November 1990, pp. 17-27.

~W~sily~ontief, et al., ‘‘The Economic Impact-Industrial and Regional-of an Arms CU6’ The Review of Econon”cs and Statistics, vol. XLw

No. 3. August 1965, pp. 217-241; see also John H. Cumberland, ‘‘Dimensions of the Impact of Reduced Military Expenditures on Industries, Regions

and Communities, “ in The Econonu”c Consequences of Reduced Military Spending, Bernard Udis (wt.), (Lexington: Lexington Books, 1973); Imn

Taylor, op. ci~ and Roger H. Bezdelq “The 1980 lkonomic Impact-Regional and Occupational-of Compensated Shifts in Defense Spending,”

Journal of Regionai Science, vol. 15, No. 2.1975, pp. 183-198.

~~c~~tched ~d~ it rmelv~ from the State of conn~ticut to tie a ~~~t to identify alte~tive businesses bt the company might

conduct at the facility.
160 . After the Cold War: Living With Lower Defense Spending

29 For example, Long before closure makes it easier for people to get assistance may be necessary.

replacement jobs and communities to get a head start

on their economic development and base reuse

efforts. For example, in San Bernardino, CA, where

Norton Air Force Base is scheduled to close in 1994,

Lockheed Corp. operates a commercial aircraft

maintenance service that by October 1991 employed

200 people.27 (See Box 6-A.) Virtually all of the

communities affected by the first round of base

closures have begun to plan for base reuse and local

economic development.28

Local Economic Conditions

The health of a State or local economy greatly

affects the extent of distress caused by defense cuts.

If cutbacks occur in an urban area with a healthy

nondefense sector, little economic development

Island, home to Grumman Corp. and a number of

other defense contractors, has experienced defense

cuts, but its relatively strong and prosperous economy has helped absorb some of the impacts.30 While

smooth adjustment to reduced defense spending is

not assured, the overall health and diversity of the

Long Island economy will go a long way toward

easing the problems. Similarly, because the economy of Antelope Valley, CA (70 miles north of Los

Angeles) was relatively healthy, it was able to

absorb the 1986 loss of 6,000 Rockwell jobs upon

completion of the B 1-B bomber program. Since the

area has become in part a bedroom community for

Los Angeles, the impacts of the layoffs were

minimal. . . 31 In fact, LoS Angeles County as a whole

grew faster than any other California county in the

%avid Fondler, “Lockheed Attracts First Norton Cli@” Inland Vir&yDailyBukn”n, Sept. 12, 1990, p. C7.

~Da@ provided by the Office of Economic Adjustmen4 DoD.

~.S. Dqmlmat of Defense, Office of Economic Adjustmen4 Economic Adjustment/Converm”on (Washington DC: Office of Economic

Adjustmq July 1985), app. K.

-W Island grew faster in the last decade than any othcz area in New York State and its personal income per capita is in the top 1 -t Of W

communities inthe United Statea. Employment in 1989 was at a historic ~ although due in part to cutbacks indefauwfhms and the national recessioq

it had shnmk 5 percent (60,000 jobs) by 1991. Howmq it still exceeded 1986 employment levels. Unemployment in June 1991 was 6.2 percen4 slightly

below the national avaage. See Martin Melkoniaq “Cutbacks in Defense Spending: Outlook and Options for The Imng Island Economy,” Business

Research Institute, Hofstra University, February 1989, p. 1; also Bureau of Labor Statistics, Employment andlkrru”ngs @khingtoQ DC: 1991).

slHo~ever, ~me workers did have to commute up to 70 miles fOr their mw JObS fi ~s AWeles ~d r-o~
Chapter 6--Adjustment for States and Communities ● 161

Agency on cleanup. The soil was removed and is being cleaned on another part of the base. This entire process

delayed the project by about 1 year.

By October 1991 Lockheed had hired 200 workers and had begun work on the first 747. IVDA officials expect

that Lockheed will have hired a total of 1,500 workers by the end of 1992. The company has indicated that it would

like to hire locally as much as possible, giving special preference to people losing jobs on the base. However,

because of company requirements that many of the workers have commercial aircraft repair experience and FAA

certification, the IVDA officials expect that only about one-third of the workers can be hired locally, most of them

for less technical jobs. Lockheed also expected to draw subcontractors to the area. A variety of firms doing avionics

repair, aircraft refurbishing, and engine repair have shown interest in 1ocating on or near the base.

The Lockheed reuse project is only one part of the overall expected reuse activity for Norton. The IVDA plans

to obtain the airport itself at no cost (through the public benefit clause that governs the disposal of Federal property)

and operate it as a civilian operation for air cargo. In addition, it is proposing to develop the balance of the Norton

base acreage (400 acres) and 1,500 acres around the base with manufacturing and office space, and hopes to create

20,000 jobs. This would be more than double the 10,000 civilian and military positions that were on the base before

closure.

The preparation is going more slowly than the IVDA would like. The Air Force has refused to discuss the sale

price of the base until the environmental impact studies are completed in September 1992. Moreover, it is not clear

when the Air Force will vacate different parts of the base. Without this information, efforts to do interim leasing,

find a developer, and begin reuse have been delayed At least one major developer has cut off negotiations because

of the uncertainty about the date of land availability, price, liability, and environmental cleanup. If a sale is finally

agreed upon, IVDA will issue bonds to finance the purchase of the base.

l~~miew WMI JO~ D~q, MWXOr of Public Relations, Lo&&+xI -tS*= CO., JUIY 1~.

1980s, with growth in Antelope Valley faltering Some of the more defense-dependent States today

only in the 1990-91 recession, which hit construction hard.

In contrast, when a number of demand shocks

including defense cuts occur simultaneously in the

local economy, significant decline can occur. Such

a scenario describes the decline of the Seattle

economy following the Vietnam War. Not only did

defense aircraft spending decline, but the space

program shrank, and the commercial aerospace

market also collapsed in a cyclical downturn.32 This

triple whammy caused massive layoffs, the effects

of which rippled through the area economy. New

England today is in a similar if less severe situation,

where defense cuts have further depressed a regional

economy already weakened by declines in computers, traditional manufacturing, financial services,

and real estate.33 When the direction of the local

economy is down, defense cuts deepen and lengthen

the decline.

have relatively strong economies to cushion the

blow from reduced defense spending. Unemployment rates in 7 of the 13 most defense-dependent

States were below the national average in 1991, even

after most of these States suffered some defense

cuts. Some of these State economies were growing;

from 1986 to 1990, 7 of the 13 had growth rates

equal to or greater than the national average (table

6-4).34 Defense cuts may lower the rates of growth

in these States, but they are in a better position to

weather cuts than defense-dependent States with a

record of slower growth.

The economies of many defense-dependent metropolitan areas are also relatively strong. Twelve of

the top 15 metropolitan areas in defense contracts

per employed worker had lower unemployment rates

than the national average in 1990. Six had faster than

average labor force growth from 1986 to 1991. (See

table 6-5.) Of the 14.5 million workers living in

counties highly dependent upon defense in 1989, 68

SZU.S, Dep~ment of Defe~, ~fice of Economic Adjustmen~ Economic Adju$rment/Conversion, Op. Cit.

~sR1c~d B~f, ~ ‘Living by tie Swoti ~d DyiW by tie Sword: Defe~e Spendtig and New England’s fionomy in Re&ospect ad ~OSpWt, ‘ Op.

cit.

~Some of ~s Wow may ~ve tin due t. tieMu of defe~ do]l~s; however, to~ defense spending has been declining since 1988.
162 ● After the Cold War: Living With Lower Defense Spending

Table 6-4.-Economic Conditions of the Most Defense-Dependent States, 1991

Defense-related

jobs as share of Unemployment Annual

total State rate employment

employment July 1991 growth 1986-1990

(percent) (percent) (percent)

Alaska . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 7.3 1.0

Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 2.8 2.9

Virginia . . . . . . . . . . . . . . . . . . . . , . . 10.4 6.0 2.7

Connecticut. . . . . . . . . . . . . . . . . . . . 6.5 6.8 0.4

Maryland . . . . . . . . . . . . . . . . . . . . . . . 6.2 5.5 1.8

Utah . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 5.2 1.7

New Mexlco . . . . . . . . . . . . . . . . . . . . 5.9 7.3 1.6

California . . . . . . . . . . . . . . . . . . . . . . 5.9 8.0 2.7

Washington . . . . . . . . . . . . . . . . . . . . 5.7 5.9 4.2

Colorado . . . . . . . . . . . . . . . . . . . . . . . 5.6 4.5 1.5

Massachusetts . . . . . . . . . . . . . . . . . 5.3 9.4 0.3

Arizona . . . . . . . . . . . . . . . . . . . . . . . . 5.2 5.5 2.8

Mississippi . . . . . . . . . . . . . . . . . . . . . 5.1 9.5 1.8

U.S. average . . . . . . . . . . . . . . . 4.2 6.8 1.8

SOURCES: Employrnentdata from DepartmentofLabo~ Sureauof LaborStatistica, Em@oyrnentandEarn@,

~twkrlWl.T~alU.S.~f~em@o~MtfmrnD+atiWtofD~eme,~~eoft~~ptrol~c

Natkmal El@et E?thnate h ~ W92(Washington, DC: 1991). Allocat}ona of defense employment by

State by the Office of Technology Assessment. -

percent lived in counties with low unemployment

rates .35

The loss of defense industries in small communities with little economic diversity could be traumatic. A remote location can compound the difficulties. For example, after Glasgow and Lewiston Air

Force Bases (AFB) in rural Montana and Edgemont

Army Depot in rural South Dakota closed in the late

1960s and early 1970s, few of the lost jobs were

regained because there were few other functions the

towns could serve. Communities such as Oscoda, MI

(Wurtsmith AFB), Leesville, LA (Fort Polk), and

Limestone, ME (Loring AFB), all slated for base

closings, are the kinds of small towns that are most

vulnerable.

However, most defense spending occurs in large

metropolitan areas, many of them with highland and

housing costs, excessive pollution, heavy traffic

congestion, and lack of open space. Boston, Long

Island, San Jose, Washington, DC, and southern

California typify such development patterns.36 For

example, southern California utility rates are as

much as 50 percent higher than those in other States.

Land prices are among the highest in the Nation. The

1990 average price for a single family home in the

State was $210,000, more than double the national

average.

37 Because of the high cost of living, labor

costs are one-third more than in parts of Texas,

Colorado, and Oklahoma.38 Likewise, traffiic congestion, water shortages, and air pollution not only

lower the quality of life, but increase business costs,

slow growth, and make it hard to attract skilled

workers when they are needed (see table 6-6).

When defense spending is cut in such congested

metropolitan areas, demands on strained resources

lighten, which, over time, makes it easier for

compensating economic growth to occur. Regional

firms that produce for national and international

markets find it easier to grow and export as labor and

land costs stabilize or decline, putting overall costs

~“~Y&f-e~~” co~~~ ~= w’i~m= tin twice tie ~o~ av-gcpcTc@oyed worker in prime conmict awards in 1989. Low unemployment rates were those below 4.5 percent (at a time when the national rate was 5.4 percent). Data on defeme spending were provided by

the Office of Economic Adjustment.

~FOI LOW Island, see Martin Melkoniaq ‘‘CutbackS in Defense Spending: Outlook and Options for The Long Island Economy, ” op. Cic also Arm

~ et. al., The Rise of the Gunbelt, op. cit.

S%ckd L. St- and JoluI H. Thylor, ‘‘Is the Golden State Losing It?”

Forbes, (M. 29, 1990, p. 87.

~lbid. III 1991, average hourly earnings of workers in Los Angeles were $11.17 while in San Antonio, TX they were $8.19. In the nonmetro areas

of Texas, the wage rates are even lower, Bureau of Labor Statistics, Employment and Earm”ngs, (TVasbmgtq . DC: May 1991).
Chapter 6--Adjustment for States and Communities ● 163

Table 6-5-Economic Conditions of Metropolitan Areas Receiving the

Most Prime Contract Awards

Prime contract Annual

$ per employed Unemployment employment growth

Metro area worker, 1988 rate July 1991 1986-90 (percent)

San Jose . . . . . . . . . . . . . . . . . . . . . .

St. Louis . . . . . . . . . . . . . . . . . . . . . .

Washington, DC . . . . . . . . . . . . . . . .

Boston . . . . . . . . . . . . . . . . . . . . . . . .

Cincinnati . . . . . . . . . . . . . . . . . . . . . .

Dallas-Fort Worth ., . . . . . . . . . . . . .

Nassau-Suffolk Counties . . . . . . . . .

Hartford . . . . . . . . . . . . . . . . . . . . . . .

Los Angeles-Long Beach . . . . . . . . .

Anaheim . . . . . . . . . . . . . . . . . . . . . . .

Seattle-Everett . . . . . . . . . . . . . . . . .

San Diego . . . . . . . . . . . . . . . . . . . . .

Denver-Boulder . . . ., , ., . . . . . . . . .

Baltimore . . . . . . . . . . . . . . . . . . . . . .

Minneapolis-St. Paul . . . . . . . . . . . . .

U.S. average . . . . . . . . . . . . . . .

$4,590

3,850

2,863

2,863

2,778

2,776

2,691

2,666

2,234

2,164

2,127

1,950

1,949

1,701

1,441

$1,060

6.20/!

6.7

4.4

8.2

5.1

6.6

6.1

6.3

8.6

5.3

4.7

7.0

4.3

6.2

4.1

6.8%

1 .0%

0.6

2.0

0.0

2.6

0.7

0.1

0.7

2.2

2.3

4.8

4.0

0.5

1.5

1.7

1.8%

SOURCES: Prime contract data from the Bruton Center for Development Studies, University of Texas at Dallas.

Employment data from the Department of Labor, Bureau of Labor Statistics, Emp/oymenf and Earnings,

September 1991.

more in line with those of competitors elsewhere.39

Keep in mind, however, that compensating growth

takes time, and that some segments of the population

will suffer reduced incomes during the period of

adjustment. Also, defense cuts could cause another

kind of loss in some local economies. For example,

in Los Angeles, the cutbacks could aggravate the

growing income inequality in the region. In the

1980s high-and low-paying jobs have grown in

number while those in the middle have decreased.

Because the majority of defense jobs in Los Angeles

pay middle wages, defense cuts could worsen this

income and opportunity inequality. Los Angeles is

home to a large and rising number of immigrants,

many possessing low-level skills. Without the good

manufacturing jobs provided by defense (or other

industries), opportunities for the poor and immigrants will become scarcer. The pattern of increasing

disparity in pay may create a community polarized

into haves and have-nets.a

In depressed or less congested metropolitan areas,

defense cuts could have serious effects on the local

economy as a whole. Cities like Baltimore, Buffalo,

Cincinnati, and St. Louis already have labor surpluses, relatively low-cost housing, and less traffic

congestion. Defense spending cuts could simply

enlarge the supply of resources that are already

under-used.

Many of these older industrial areas may face the

additional drawback of layoffs that disproportionately affect blue-collar workers, who generally have

a harder time than more highly educated workers in

finding replacement jobs. For example, a study of

defense cuts in Maryland estimated that Baltimore

would have a harder time adjusting to defense cuts

than the Washington, DC suburbs because the

former’s work force is heavily blue-collar.41 The

higher concentration of engineers and other whitecollar workers in suburban Montgomery County,

MD would ease community adjustment.

Considering the high cost of doing business in

areas such as Long Island, Los Angeles, and

Washington, DC, why have defense firms not

already moved to lower cost locations? Indeed, some

have. Lockheed Aerospace Division recently moved

to Marietta, GA from its birthplace in Burbank, CA.

Hughes and several other aerospace companies in

Los Angeles have moved some small production

s~c~d B~f, ‘cLiving by tie sword ~d D@g by tie Sword: Defense Svnding and New England’s Uonomy ill Retrospect ~d fiOSptX$” Op.

cit., p. 24.

%s Angeles Economic Roundtable, Attachment 8: Employment and Wage Trends in bsAngeles County, Feb. 22, 1991.

41~e Howland, ‘ ‘me Costs of Job ~ss for Stable Workers: @lications for Defense ~tbacks in ~~Couties of lklaryhln~’ in The D@ense

Budget and the MarylandEconomy, Bureau of Governmental ResearcE School of Public Affairs, University of Maryland, (College Parlq MD: 1990).
164 ● After the Cold War: Living With Lower Defense Spending

Table &6-Metropolitan Areas Receiving Most Prime Contract Awards

Per Employed Worker, 1989

Prime contracts Annual crest of Median

per employed traffic congestion housing prices

Metro area worker per capita, 1988 (thousands)

San Jose . . . . . . . . . . . . . . . . . . . . . .

Washington, DC . . . . . . . . . . . . . . . .

St. Louis . . . . . . . . . . . . . . . . . . . . . .

Boston . . . . . . . . . . . . . . . . . . . . . . . .

Cincinnati . . . . . . . . . . . . . . . . . . . . . .

Dallas-Fort Worth . . . . . . . . . . . . . . .

Nassau-Suffolk Counties . . . . . . . . .

Hartford, et al. . . . . . . . . . . . . . . . . . .

Los Angeles-Long Beach . . . . . . . . .

Anaheim, et al. . . . . . . . . . . . . . . . . .

Seattle-Everett . . . . . . . . . . . . . . . . .

San Diego . . . . . . . . . . . . . . . . . . . . .

Denver-Boulder . . . . . . . . . . . . . . . . .

Baltimore . . . . . . . . . . . . . . . . . . . . . .

Minneapolis-St. Paul . . . . . . . . . . . . .

U.S. average . . . . . . . . . . . . . . .

$4,590

3,863

3,850

2,863

2,778

2,776

2,691

2,666

2,234

2,164

2,127

1,950

1,949

1,701

1,441

$1,060

$650

570

180

440

150

410

370

620

620

490

260

260

270

180

$290

77

174

80

89

161

157

213

242

142

183

86

106

89

$ 9 5

SOURCES: Prime contract data from the Bruton Center for Development Studies, University of Texas at Dallas.

Employment data from Department of Labor, Bureau of Labor Statlsties, Emp&yn?entandfarn/ngs, June

1990. Data oncostoftrafflceongeetion from TexasTransportation Institute, RoachvayCongestbn in Majcw

Urbanized Areas 1982-1988 (College Station, TX: Texas A&M University, 1990). Data on housing prbes

from the National Assoeiatbn of Realtors, Washington, DC. All data are based on natbnal averaoes for

1990 and refleot median home prlees.

facilities to smaller cities, generally in the South and

West.

Yet, despite the occasional relocations, southern

California and other high-cost areas remain attractive, especially for defense R&D, management

functions, and high value-added and skilled production. Los Angeles in particular is a vast regional

complex oriented to defense production where the

major contractors, suppliers, consultants, universities, skilled technical workers, research centers, and

government installations provide a rich interdependent environment that makes it difficult for any one

firm to leave.42 The same considerations apply in

Boston, Long Island, and Washington, DC.43

These areas possess strong agglomeration economies (savings that firms experience from locating

near a concentration of activities related to the firm)

and are likely to possess an advantage in weathering

defense cuts.44 For example, Scott and Gauthier

found that when defense and space expenditures

(missiles and aerospace) were increasing, other areas

gained more employment than southern California. 45 But in times of decline, southern California’s

defense missile and aerospace industry did better.

MILITARY BASE CLOSINGS AND

REALIGNMENTS

From 1991 to 1997, 173 military installations are

slated for closure or realignment (reduction in

personnel). On December 29, 1988 the first Commission on Base Closures and Realignments released its list of 86 domestic military installations

that DoD will close from 1991 to 1995; the

commission recommended reducing personnel at 5

additional bases.46 The 1991 Defense Base Closure

and Realignment Commission recommended closdz~lcn J. Scott ~d Dodd J. GSUthi~,‘The US Missile and Space Industry: -c&, Growth dI.mcational ShU_, with SpeCidR~~ to

Southern California” Departrnent of Geography, University of California -1.m Angeles, 1991; sl.w Ralph VsrtabediaQ “Aerospace Moves: Hidda

Costs Often Negate Gains,” LosAngeles Times, Mar. 3, 1991, p. X21,

43* ~~e~ cx al., The Rise of the Gud)elt, Op. d.

44EMwiIIs. MUS, Ur&n Economics (Glenview, IL: Scott Foreman and Co., 1980); also Nsney Ettlinger, “Development Theory and the Military

Industrial Firxq” in The Pentagon and the Cities, Urban A&airs Annual Reviews, A.M. Kirby (cd.), vol. 40, fall 1991.

45~en J. Scott ~d ~~d J. Gauthi~, ct~ Us Missile and spa~ rndustry: ~~is, Gro~ Wb)wtiod Structure, with SpeCid Reference tO

Southern California” op. cit.

46u.s. ~feme sa~~s Cod=ion on B-R~_nt ad clo~, Base Redigmnts and closures: Repon of the Defense Secretary’s

Commission (Washington DC: 1988).
Chapter &Adjustment for States and Communities ● 165

ing an additional 34 bases and realigning 48 more.

When Congress did not adopt a joint resolution in

opposition to either commissions’ recommendations, the Secretary of Defense was required to take

action. In 1993 and 1995, future commissions will

make additional, but probably fewer, recommendations for base closures.

The impacts from military base closings should be

relatively mild. First, the 173 installations scheduled

to be closed represent less than 4.5 percent of the

3,800 DoD installations in the United States. Second, the local multiplier effect from base closures is

usually lower than for defense industry cutbacks.47

Third, because most military personnel, many base

civilian workers, and their family members and

dependents are normally transferred to other bases,

the impact on local unemployment rates is less than

from contractor cutbacks (i.e., they do not swell the

numbers of the local jobless).% Fourth, compared

with defense industry cutbacks, communities usually have greater lead time to plan for base reuse and

other economic development activities. With the

exception of Pease AFB in New Hampshire, which

closed in February 1991, all Round One closures

were announced at least 4 years in advance. Lead

time for Round Two closures is generally less, with

nine facilities scheduled to close in September 1993,

2 years after announcement. But eight will not close

until 1994, and 16 will remain open until 1995 or

after.

Finally, communities are often left with valuable

real estate (e.g., land, buildings, air strips, housing)

or open space, the use of which can help ease

economic adjustment.

49 Cameron Station in Alexandria, VA, Fort Sheridan in Chicago, the Presidio in

San Francisco, and Fort Meade in Maryland are all

examples of installations on the closure list that can

provide the host communities with open space or

developable land. According to Henry Howard,

deputy city manager of Alexandria, VA, the city has

been hoping for years that Cameron Station would

be closed, even though 4,700 jobs will be lost.50 The

city is anxious to use the land for housing and

commercial development and to get the land back on

the city tax rolls, from which the base is exempt.

Valued at $140 million, the land has strong development potential.

Because it is still early in the process, few civilian

reuse agreements have been signed. However, successful reuse can mitigate the impacts of closure.

One advantage to closing bases through commissions, with Congress confining itself to one yes-orno vote on all the commissions’ recommendations,

is that decisions to close bases are final. Most

communities do not spend valuable time and energy

fighting the actions, as they did in earlier closures.

Now they get on with the hard work of economic

development. 51 All of these factors make base

closures less traumatic than defense contractor cuts

that, on the face of it, affect the same number of job

holders.

Few of the base closures will have significant

employment impacts on the local communities. Of

the 91 facilities selected for closure in the frost round,

52 are stand-alone housing units with virtually no

employment impacts, and another 16 will displace

fewer than 10 jobs each. The second round closures

are more significant, but many are in large cities

where the impacts are likely to be less than in small

towns. For example, while approximately 4,000

positions will be eliminated at the Naval Air Station

.i7Defm= ~onmactors no~y pay M@= wages than mili~ bases, where most of the personnel ase active duty semice metirs. s~ond, mili@Y

pemomel purchase much of their goods and semices on the base, and the employment generated is of militmy and civilian personnel who are more likely

to leave the area when the base is closing. Third, defense contractors often support a web of subcontractors within the region. Donald Hicks, Leveraging

the Nation’s R&D andD@ense Investments in the Metroplex Regional Economy, (Da@ TX: Regional Technology ProgrturL North Texas Commissio~

July 1988.) These factors mean that the number of additional jobs created by defense spending is higher for industrial contractors than for bases. Edward

J. Malecki and Lois M. Sta.dq “Regional and Industrial Variation in Defense Spending: Some American Evidence,” in Michael J. Breheny, D@ense

Expeti”turesandRegional Development(New York NY: ManSell Publishing Ltd., 1988); John Rees, Bernard L. Weinstein and Harold Gross, Regional

Patterns o~Mi/itary Procurement and Their Implications (Washingto% DC: The Sunbelt Institute, 1988).

48~D fo~d tit on avmWe 20 ~c~t of civfi~ workers disp~~ from mili~ ~sEti, ~ pe~ent relocate and ordy 20 PWXnt enteI the

local labor market. Commission on State Finance, Defense Spending in California: Impact on California (Sacramento, CA: California State bgislature,

1990), p. 43. See also Darwin W. Daicoff, “The Community Impact of Military Installations, “ in The Econonu”c Consequences of Reduced Military

Spending, Bernard Udis (cd.) (bxingto% MA: Lexington Books, 1973).

4~e Natio~ As=~tion of ~~tion ~velope~, composed of orxtions tit ~ve ~en OVa C1 O.W XI military baSeS, holds an ~~

conference and provides information on how best to reuse closed military bases.

SO~y of hew ~sitiom we being ~nsfe~ to Fofi Belvo~, located about 20 miles away in northern Virgti

SIU.S. Dep@ment of Defe~, ~lce of &onomic Ad@~en4 Economic Adjustment/Converm”on, Op. Cit.
166 . After the Cold War: Living With Lower Defense Spending

at Moffett Field south of Sari Francisco, the closure

will eliminate no more than 0.5 percent of the total

jobs in the area because the local economy is so

large. Cities such as Chicago, Denver, New York,

Sacramento, Seattle, and Washington are all large

enough that base closures will probably have little

impact on the local economy (see table 6-7).52

In some communities, however, the impacts are

potentially large. Bases constitute a significant part

of the local economy in places such as Oscoda, MI

(Wurtsmith AFB); Leesville, LA (Fort Polk); Blytheville, AR (Eaker AFB); Aroostook County, ME

(Loring AFB53); and Monterey, CA (Fort Oral).%

More than 11 percent of Monterey County’s employment is dependent on Fort Oral, while

Wurtsmith AFB supports over 20 percent of the jobs

in Michigan’s Iosco County, the base closing area

that is at the top of the list in defense dependence.

The impacts in some particular towns maybe higher.

In Champaign County (IL), population decline

resulting from the closure of Chanute AFB may

reach 9 percent, while the decline in the village of

Rantoul, where the base is located, could be greater

than 50 percent.ss The effects on local businesses

and the city government could be disastrous.

To minimize the impacts, prompt disposal and

reuse of base property are critical. If title to the base

is transferred to new owners at least 1 year before the

actual closure, development can be set to begin

immediately tier closure. However, this process

often does not work smoothly. Signs of delay are

already visible in Round One of the current base

closures. This is not a new problem. When the

General Services Administration (GSA) was responsible for base disposal in the 1960s and 1970s, many

communities criticized the agency for delays and

unrealistic demands in negotiated sales.56 DoD is

now responsible for transfer of the bases to be

closed. But, except for DoD’s office of Economic

Adjustment (which is responsible for helping communities facing base closures), DoD personnel are

perhaps not fully aware of the importance of prompt

disposal to community economic health.

Several factors suggest there are still serious

obstacles in the way of rapid transfer of property at

a reasonable price. First, before offering the property

to State and local governments, DoD must offer the

property to other Federal agencies and have it

screened for possible use by the homeless. The entire

process can take considerable time. It is further

slowed by a Department of Housing and Urban

Development (HUD) policy that prohibits screening

of property for use as homeless shelters until 18

months or less before vacancy and requires 3 months

for review. The result is that DoD is often unable

even to approach State and local governments until

about 1 year before closure.

Second, and more serious, are the environmental

problems at some bases, which threaten to delay

civilian reuse and make it more costly. Most DoD

facilities have environmental problems; some may

be beyond remediation. Sources of pollution include

hazardous wastes from machinery use and the

handling of fuel, solvents, and explosives. Of 61

major bases to be closed in the first two rounds, 15

are on the Environmental Protection Agency (EPA)

Superfund list of hazardous waste sites most in need

of cleanup. At least 52 bases have some contaminated areas, totaling over 935 sites.57

For bases due to be closed, the problems of

environmental degradation are especially urgent.

These problems can greatly limit the options available; they pose health hazards to people who might

work in new facilities on the closed base, and they

scare off companies that might otherwise set up new

operations there. Companies are worried not only by

52A study by the Arms Control and Disarmament Agency in the 1960s found that metropolitan areas made the transition following base closure with

relative ease.

53For more ~omtion on UE impac~ of the C1OSUR of hxing, see Daryl A. Hellrnan ~d @gory H. W=sdl, ‘‘ESIkWhlg * fionotic rmpaCt

of Military Bases and Base Closings: ldngAir Force Base, Maine, ’ The New EnglandJournal of Business and Economics, vol. 8, No. 2, spring 1982,

pp. 5-24.

flit is imw~t to now that the p~se of the analysis is not to identify particulm communities that are likely tO hfe more difkdty in responding

to the closure of bases. More detailed information would be needed to do this. However, the information hem does allow an estimation of the numk.r

of bases that will experience more significant impacts.

55( *fiom~C ~ctReWfi of ~~o~ ~o~ of mute~ on & v- of ~to~,” D~ Spie@ Department of Urban and Regiomd

Planning, and Geof&ey Hcwings, Department of Geography, University of Illinois, Urbana-ChampaigrL May 1, 1991.

56Roger Boltom “~ac~ of ~fa Spending onur~-,” in The Urhn Zwcts ofFederalPolicies, N. J. Glic_ (~.) @~-Om:Jo~

Hopkins University Press, 1980, pp. 151-174.

flmf= wvironmenM Restoration Plan Annual Report to ~ngres.$, D@, IW.
Chapter 6--Adjustment for States and Communities ● 167

Table 6-7—Military Base Closures and Realignments With the Greatest Economic Impacts

County or

metropolitan Unemployment Job Total Loss as a

statistic/ rate growth civilian percentage of

Base area State 1990 1986-90 job lossa

local employmentb

Wurtsmith AFB. . . . . . . . . . . . . . . Iosco

Grissom AFB . . . . . . . . . . . . . . . . Miami

NAS Chase Field . . . . . . . . . . . . . Bee

Fort Polk . . . . . . . . . . . . . . . . . . . Vernon

Eaker AFB . . . . . . . . . . . . . . . . . . Mississippi

Fort Ord . . . . . . . . . . . . . . . . . . . . Salinas

Loring AFB , . . . . . . . . . . . . . . . . . Aroostook

Castle AFB . . . . . . . . . . . . . . . . . Merced

Myrtle Beach AFB . . . . . . . . . . . . Horry

England AFB . . . . . . . . . . . . . . . . Alexandria

Fort Chaffee . . . . . . . . . . . . . . . . . Fort Smith

Chanute AFB . . . . . . . . . . . . . . . . Champaign

Fort Devens . . . . . . . . . . . . . . . . . Worchester

Pueblo Depot . . . . . . . . . . . . . . . . Pueblo

Pease AFB . . . . . . . . . . . . . . . . . . Portsmouth

NUSCD New London . . . . . . . . . New London

Sacramento . . . . . . . . . . . . . . . . .

Army Depot . . . . . . . . . . . . . . . Sacramento

Mather AFB . . . . . . . . . . . . . . . Sacramento

Philadelphia . . . . . . . . . . . . . . . . .

NSY Philadelphia . . . . . . . . . . . . Philadelphia

NADC Warminister . . . . . . . . . Philadelphia

NAVSTA Philadelphia . . . . . . . Philadelphia

Fort Dix . . . . . . . . . . . . . . . . . . Philadelphia

Philadelphia Hospital. . . . . . . . Philadelphia

San Francisco . . . . . . . . . . . . . . .

Presidio SF. . . . . . . . . . . . . . . . San Francisco

Hunters Point NS. . . . . . . . . . . San Francisco

Hunters Point Annex . . . . . . . . San Francisco

Hamilton AAF. . . . . . . . . . . . . . San Francisco

Lexington Depot . . . . . . . . . . . . . Lexington

Riverside. . . . . . . . . . . . . . . . . . . .

Norton AFB . . . . . . . . . . . . . . . Riverside

George AFB . . . . . . . . . . . . . . . Riverside

Bergstrom AFB . . . . . . . . . . . . . . Austin

Lowry AFB . . . . . . . . . . . . . . . . . . Denver

U.S. average . . . . . . . . . . . .

Ml

IN

TX

LA

AR

CA

ME

CA

SC

LA

AR

IL

MA

c o

NH

CT

CA

CA

PA

PA

PA

NJ

PA

CA

CA

CA

CA

KY

CA

CA

TX

c o

8.8

5.9

9.1

7.4

13.1

8.8

6.5

11.0

6.5

6.4

7.5

3.9

6.3

8.2

4.2

3.7

4.8

4.6

3.3

3.0

6.6

4.6

4.6

5.5

4.9

-1.0

0.0

2.0

1.2

2.2

1.8

1.0

2.4

-0.1

1.5

1.9

0.4

3.5

2.9

-0.2

3.9

1.0

1.0

3.1

6.0

1.1

0.4

1.8

2,127

2,306

1,573

1,989

2,173

15,998

2,985

4,982

3,966

2,916

3,377

3,039

5,250

869

2,150

1,784

9,870

6,653

3,217

29,750

19,928

4,202

3,899

1,185

536

10,400

7,584

2,665

129

22

2,284

10,901

6,978

3,923

4,248

8,602

20.9

15.9

15.3

11.4

11.2

10.9

8.1

7.7

5.7

5.4

3.9

3.4

2.6

1.7

1.6

1.5

1.4

0.9

0.5

1.3

0.9

0.2

0.2

0.1

0.0

1.2

0.9

0.3

0.0

0.0

1.2

1.1

0.7

0.4

1.0

1.0

%ivilian job loss is the number of civilian jobs lost directly at the be plus the indirect loss of jobs generated by military and dvilian pay. Multipliers used for

calculating indirect job loss were obtained from the Office of Economic Adjustment, DoD. Direct military job loss was not counted since these individuals are

normally transferred to other locations and hence do not add to the local unemployment rolls.

%ecause counties do not always include the total population in the local labor market, these figures may overstate the degree of defense dependency,

particularly for the counties with small populations. However, the figures give a sense of relative defense dependency.

SOURCES: Unemployment data from Department of Labor, Bureau of Labor Statktics, Emp/oymer)tand Earnk?gs May 1987 and May 1991. Base closure

data by the Defense Base Closure and Realignment Commission and by the Base Closure Office, Office of the Secretary of Defense, DoD; also

Base Rea//gmnenfs and C/osurss: Report o/the L?efense Secretary’s Commkdon(Washington DC: December 1988) and Defense Base Closure

and Realignment Cornrrkslon: Report to the President, 1991 (Washington, DC: 1991).

the danger to their employees, but also by the

financial risk of taking on liability for future cleanup

costs.

Equally significant are the delays in reuse from

environmental cleanup. When a toxic chemical is

widely dispersed in small quantities, collecting the

contaminated material and extracting it is a laborious job. For groundwater, the prevalent method of

treatment is to pump the water to the surface and

treat it to destroy or extract the pollutants. This can

take decades. In some cases the rate of extraction

from complex aquifers is slow and in others, the

pollutants cannot readily be extracted because they

don’t flow with the pumped water.

In addition to technological obstacles are institutional ones. DoD is still in the early stages of

assessing environmental problems at bases on” the

closure list. At the current rate of cleanup, few bases

will be cleaned before they close. For example, of

the 15 closing bases on the EPA national priorities
I68 ● After the Cold War: Living With Lower Defense Spending

Table 6-8-Military Bases Scheduled for Closure on the EPA National Priorities List

Begin remedial Complete remedial Estimated date for

investigation and investigation and completion of

Facility feasibility y study feasibility study remedial action

Fort Devens . . . . . . . . . . . . . . . . . . . . . . . . .

Loring AFB . . . . . . . . . . . . . . . . . . . . . . . . . .

Pease AFB . . . . . . . . . . . . . . . . . . . . . . . . . .

NCBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aberdeen/Nike Facility . . . . . . . . . . . . . . . . .

Alabama Ammunition Plant. . . . . . . . . . . . .

Castle AFB . . . . . . . . . . . . . . . . . . . . . . . . . .

Fort Ord . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

George AFB . . . . . . . . . . . . . . . . . . . . . . . . .

Hunters Point . . . . . . . . . . . . . . . . . . . . . . . .

Mather AFB . . . . . . . . . . . . . . . . . . . . . . . . . .

Moffett NAS . . . . . . . . . . . . . . . . . . . . . . . . .

Norton AFB . . . . . . . . . . . . . . . . . . . . . . . . . .

Sacramento Army . . . . . . . . . . . . . . . . . . . .

Willams AFB . . . . . . . . . . . . . . . . . . . . . . . . .

5/91

1/91

12/90

4/91

3/90

5/90

7189

7/90

9/90

9/90

7/89

8189

6/89

12/88

9/90

1996

1997

1994

Negotiating

1995

1994

1995

1997

1994

1994

1994

1997

1993

1996

1994

3/96

6/99

3/97

11/99

N/A

Late1996

2005

2003

2004

2000

2004

2008

2003

1998

11/96

SOURCE: StephentJpmann, bkground analysisfortheoffke ofTeehnobgyAseesement, Oeeans anct Environment Program, November1991.

“Superfund’’ list, none are scheduled to be cleaned

up before late 1996 and many not until early in the

next century, years after the date of closure (table

6-8).

Adequacy of funds for cleanup is still another

problem. Local community representatives at the

closing bases are concerned about this matter. At

Chanute AFB in Illinois, for example, 800 buildings,

many of which are important to redevelopment

plans, must be checked and treated for asbestos all

at once-an expensive proposition.58 The government of the nearby town of Rantoul is pleased with

the Air Force’s speed in tackling this problem and

also in identifying, and in most cases removing, the

underground storage tanks that pepper the base. But

they are not reassured to know that the work will

proceed only as uncertain funds allow.

In 1984, Congress established the Defense Environmental Restoration Program (DERP) to cleanup

the mess at military bases.59 A separate appropriation, the Defense Environmental Restoration Account (DERA), is the source of funds for cleanup.

The account spent $601.3 million in fiscal year

1990, and is funded at $1.1 billion in fiscal year

1991. DoD estimates of the total costs of DERP have

risen from $9 to $14 billion in early 199@ to $30

billion, 6l and other estimates range much higher.62

DERA funds can be used for bases closed during the

second round, but a separate Base Closure Account

(BCA) is the exclusive source of funds for environmental restoration projects at bases closed in the

1988 round. BCA funds, for which Congress authorized $100 million in fiscal year 1991, can also be

used for Round Two closures.

The major environmental laws that regulate the

disposal and cleanup of dangerous material were in

place and DERA established before the possibility

of wide-scale military base closures had arisen.

Neither deals explicitly with the implications of the

base closures. In consequence, the goals of ensuring

the prompt reuse of a base sometimes clash with the

priorities dictated by environmental laws.63

One of the most important issues is whether DoD

can dispose of part of a base while retaining for

further environmental work other parts that are still

contaminated. Without this dispensation DoD will

be hard pressed to sell many of the facilities it is

closing, as most have waste sites within their often

extensive boundaries that are unlikely to be cleaned

up before closure.

~~e Li~e, hwyer for tie Village of Rantoul, IL, pCrSOXld COIXUIllMlkiltiOU JW ~, 1~1.

%fenseEnvironrnental Restoration Program, ArmuuJReporr to CongressforFiscul Yeur1990 (Wsshingtoq DC: Department of Defense, February

1991), p. iv.

-id., p. 30.

GIC~fic ~mnup SW T~er of Military Sites,” New York Times, June 30, 1991, p. 1.

G~ei~ Scheider, “~~& New S~@C God h Cl-up of V~t lbtic W=te, ” New York Times, Aug. 5, 1991, p. Al.

fiBob ~,EpA ~or~ent Divisioq personal COIlllllUKdC~OIL JdY 13, 1991.
Chapter 6--Adjustment for States and Communities . 169

Section 120h of CERCLA/SARA, the relevant

passage of the Superfund law, is unclear on this point

of ‘parceling” land.64 EPA claims that to read it as

forbidding any division of the property into clean

and unclean for transfer may be overly strict, but the

military services are wary of running the risk of

being taken to court by anyone wishing to hold up

the closure and transfer of bases on these grounds.65

Environmental problems are in fact obstructing

the process of base closure and transfer at a number

of bases.66 Pease AFB in New Hampshire has

attracted particular attention because it is the frost of

the bases on the closure list actually to be closed and

the reuse process has gone further than elsewhere. A

State body, the Pease Development Authority, has

been set up to act as the agent of transfer and has

been negotiating with Deutsche Airbus, a German

aircraft company and partner in Airbus Industrie,

which wants to use Pease AFB for aircraft maintenance operations, the same purpose for which the

military used it. The base is contaminated with

solvents, pesticides, paint strippers, and fuel on

about 100 of its 4,400 acres.67

Deutsche Airbus wants a parcel of 50 acres that

provides access to the runway and contains a large

hangar crucial for its plans. Some of the land in this

parcel is known to be contaminated and some is

thought to be clean, although this is not certain.68

The deal has been held up by uncertainty over the

legal propriety of transferring contaminated ground.

Originally the expectation was that the property

would be sold, but this was deemed impossible with

the environmental investigation still underway. The

next approach, a ‘‘parcel within a parcel, ’ with the

transfer only of uncontaminated parts of the 50

acres, including the area of the hangar, and lease of

the rest, ran into problems when the Air Force

discovered contamination near the hangar. The latest

approach is just to transfer the hangar building and

to lease the land, including that under the hangar,

until the cleanup is done. (Box 6-A describes a

similar solution for Norton AFB in California.) An

agreement was under negotiation in late 1991, and

there were signs that it would succeed. However, if

the Air Force cannot allow reuse of Pease AFB until

cleanup, the reuse will very likely be delayed until

the next century.69

Many factors determine the economic impact

on particular localities of cuts in defense spending.

The size of city, the speed and extent of spending

cuts, the nature of the military spending, and the

health and structure of the local economy all

combine to make the impacts of the defense builddown highly variable from place to place. Table 6-9

outlines best and worst-case scenarios for communities affected by defense spending cuts; particular

places may be weak in some factors but these

drawbacks may be offset by strengths in other

factors. For example, Los Angeles is at a disadvantage because it is more highly defense dependent

than many areas. However, the regional concentration of skills, experiences, and brain power—

agglomeration economies--could work to offset the

disadvantages.

MITIGATING THE COMMUNITY

IMPACTS OF REDUCED

DEFENSE SPENDING

Economic development efforts have the potential

to lessen adverse impacts of defense cuts on

communities. Because reductions in defense spending affect communities in much the same way as

cutbacks or closures of any industrial activity, it is

useful to examine how economic development

programs established for more general purposes

have worked.

Governments use a wide range of policy tools to

promote economic development (box 6-B). Some

focus directly on business development, with policy

64Compmhensive Env~onmen~ Response, CompcnsatioU and Liability Act (CERCLA) ~d Su-d ~endmen~ ~d Rcw~fi~tion At

(SAlL4) require that any deed for the transfer of property owned by the United States to any other person or entity conti “a covenant vvarran@ @

all remedial action necessary to protect human health and the environment with respect to any such substance remaining on the property has been taken

before the date of such transfer. ’ lle covenant must also warran t that the United States will take “any additional remedial action found to be necessary

after the date of such transfer.” Superfund Amendments of 1986 Sec. 120 (Federal Facilities, (h)(3)(B)(i)).

ti~omtion Pmvidcd by EPA Enforcement Divisiou JuIY’ and August 191.

~ongress has established an Environmental Response Task Force to make recommendations by October 5, 1991 concerning ways to improve

interagency coordination of environmental response actions at military installations.

S7DERP, Report to Congress 1991.

6SWA Enfo~ement Divisioq Op. Cit.

@Information provided by OEA, July 1991.
170 . After the Cold War: Living With Lower Defense Spending

Table 6-9-Factors in Community Economic Impacts From Defense Cuts

Best-case community Worst-case community

Size of the out is small relative to the local economy Size of the cut is large relative to the local economy

Cuts occur slowly Cuts occur quickly

Community has ample notice Community has no notice

Cuts occur in military bases Cuts occur in private defense industry

Cuts occur in plants where defense is a small share of production Cuts occur in plants with no civilian production

Growing national and regional economies Stable or declining national and regional economies

Growing local economy Stable or declining local economy

Cuts occur in large, metro areas Cuts occur in smaller places

The local economy was congested The local economy was not congested

SOURCE: Office of Technology Assessment, 1991.

tools that include business financial assistance,

small business incubators, technology transfer, technical assistance, manufacturing extension services,

and export assistance. Other policy tools support

infrastructure and other public improvements that

will lead to economic development, including industrial and research parks, site conversion, and tourism

development. Still other efforts focus on increasing

the skills of the work force, including technical and

on-the-job training. Finally, economic development

agencies can market their communities, using such

means as industrial recruitment and trade missions,

to bring in new businesses or expand the markets of

area firms.

The New Economic

Development Environment

Because the last major round of defense cuts

occurred in the 1970s, many look to the experiences

of communities affected then to draw lessons for

today. However, major changes in the environment

for economic development have intervened so that

lessons should not be applied uncritically.

Since the early 1970s, the U.S. economic environment has become harsher, making it more difficult

for many communities to replace lost jobs. Formerly, economic development problems were usually isolated, affecting particular towns or poor

areas. But in the past two decades, the U.S. economy

has increasingly faced tough international competition, lower levels of economic growth, declining

manufacturing employment, structural decline of

many industries, and large trade and budget deficits.

All these combine to make the current economic

environment much less forgiving than it was before

the first oil shock in 1973.70 For example, the

average unemployment rate from 1%5 to 1972 was

4.75 percent; during the economic growth period of

1984 to 1990, unemployment averaged 6.2 percent.71 Manufacturing employment increased throughout the 1970s, reaching its peak in 1979 but falling

9.4 percent since then.

Changing fortunes of regional economies also

influence the effects of the defense build-down.

Recent difficulties of particular industries have had

significant regional economic consequences. For

example, the fall in oil and gas prices contributed to

a regional recession in the West South Central area.

The earlier decline in lumber and wood products had

serious consequences for the Pacific Northwest. The

difficulties in steel, autos, tires, and other durable

goods industries slowed growth in the Midwest and

Middle Atlantic States (although this region is likely

to fare better in the defense build-down than others

because it is less defense-dependent). Currently, the

regional recession in computers, microelectronics,

finance, and banking in the Northeast is compounding the difficulties of adjusting to defense cuts there.

These extra strains in the national and regional

economic environments may make successful adjustment to reduced military spending more difficult

than it was in the 1960s or 1970s.72 Regional strains

mean that more communities now compete for new

W-J.S. Congress, Office of Technology Assessment, Paying the Bill: Manufacturing andAmerica’s TradeDejicit (Wasbingtou DC: U.S. Government

Printing CM31ce, June 1988).

71c~w~tiom made ~m ~m in U.S. DW~~t of ~~r, B~u of ~~r s~fitics Emp/oyunt and Earnings, v~OUS hi=.

72Floyd and Ro&~on fo~d~tie s~ng ~onomy of tie ComM H* re@on ~ & sou~~tem Unitti states greatiy facilitiited the adjustment

to losses of large numbers of military personnel in the region from 1967 to 1972. Charles F. Floyd and Terry D. RobertsoQ “The Impact of Military

Force Reductions on the Coastal Plains Regioq” Growth and Change, vol. 6, No. 2, 1975, pp. 3-8.
Chapter 6--Adjustment for States and Communities ● 171

Box 6-B-Selected Types of Economic Development Programs

Capital Management

Industrial revenue bonds Community and site profiles

Direct loans Entrepreneurial training

Loan guarantees Management assistance

Interest subsidy programs Procurement assistance

Pension fund investments One-stop business center

Venture and Seed capital Plant visitation programs

Foreign trade zones Labor management committees

Enterprise zones Quick response teams

Tax credits and deductions Employee buyout assistance

Grants and incentives Business councils

Export financing Ombudsperson

Tax abatements and concessions

Tax increment financing Land

Land write-downs

Technology Industrial parks

Research centers Research parks

University research grants Speculative buildings

Business research grants Incubators

Technology transfix programs Physical infrastructure improvements

Industrial extension services Land banking

Industrial network support Building rehabilitation

Flexible manufacturing centers Site conversion

Manufacturing service centers

Marketing

Labor Advertising and marketing

Employee training/retraining Recruitment missions and offices

Technical training Trade missions

On-the-job training

Primary/secondary school reforms

Tourism promotion

Export assistance

Math/Science high schools Export trading companies

Dislocated worker centers Procurement outreach programs

business and new jobs.

73 The intense competition less on economic development than it did 15 years

makes it that much harder for any given community ago. States and cities have taken the lead in the

to attract new economic activity .74 1980s, but budget difficulties are reducing their

capacity to act in the early 1990s.

Finally, communities that in the 1970s could

depend on the Federal Government for significant The experience of four defense-dependent comeconomic development support must now rely much munities studied by DoD’s Office of Economic

more on themselves and their State governments. Adjustment illustrates the differences between the

The Federal Government now spends significantly two periods.75 Federal efforts played a large role in

73~m ~~~-m Co~PctitiV~ Afi~~t~~~: Fra~”ng a ~~a~ea To ~~~p~rf High Growth Fi~, (w&s~o~ m: Nfiod cOUnCd for UrblUl

Economic Development 1984); see also Robert Guskin& “Games Cities Play, “ National Journal, March 18, 1989, pp. 634-640.

74For ezle, fi 1988, ~ ~s~~ ~&~ds of tie S@&s devot~ over 25 p~ent Of ~eir ~nom.ic development efforts @ industrial attraCtiO~

while one-third devoted over 50 percent to it. 1988 State Economic Development Expenditure Survey, (Washington DC: National Association of State

Development Agencies, 1989); see also Roger WilsorL State Business Incentives and Econonu”c Growth: Are They Effective? A Review of the Literature

(Lexington, KY: The Council of State Governments, 1989).

75~1Ce of ~M~C Ad@tmen~ MD, L7c0~~”c Aa’jwtmenf/conVer~orl (wmhiI@o~ DC: July 1985), app. K.
172 . After the Cold War: Living With Lower Defense Spending

helping three of the communities adjust to defense

cuts in the early 1970s. One of these was Wichita

KS, where, in response to defense cutbacks at the

Boeing aircraft company, a Federal Interagency

Economic Adjustment Committee team of 22 professionals traveled to the site and wrote a report

detailing 48 development actions that could improve

the local economy. The Federal Government then

spent $20 million between 1971 and 1975 to

implement the recommendations. That translates

into $53 million in 1991 dollars-more than the

extra $50 million that Congress provided in 1990 for

all economic development assistance to defenseaffected communities over the next 3 years.76 The

main recommendations for Wichita in the 1970s

were to develop the Kansas Coliseum, implement a

drainage improvement project, and put in place

sewer and water improvements. Wichita’s unemployment rate fell from 14 to 6.5 percent the year

following the layoff, but in the process approximately 20,000 people, including 7,000 technical

workers, moved to other areas.77

In contrast, when the 1,000-employee Fairchild

facility closed in 1984 in Hagerstown, MD, the

Federal Government’s role was minimal. Beyond a

small planning grant from the Federal Economic

Development Administration (EDA), the community and the State were responsible for economic

development. The effort was successful. One of the

two Fairchild facilities was bought by Rohr Industries, which currently employs approximately 500

people in bonding of composites for use in military

aircraft. Fairchild donated the second facility to the

State, which sold it to a private developer. The

building is now a multipurpose air/industrial park

that employs about 350 people. The State played a

critical part in attracting Citicorp to Hagerstown,

where the company now employs 1,500. Maryland’s

large and successful role in this community reflects

the increased importance of State economic development in the 1980s. The Hagerstown story is quite

typical of the time; it illustrates the contrast between

the dominant Federal role of the 1970s (as in

Wichita) and the stronger State and local roles of the

1980s after the dramatic decline in Federal funding

for economic development. (See table 6-10.)

Economic development funding was only part of

the Federal contribution toward helping communities respond to defense cuts in the 1970s. Many

communities relied on Federal grants for highways,

sewer and water systems, airports, municipal construction, and other infrastructure. These funds have

become scarce today as Federal grants in aid to State

and local governments declined from $133 billion in

1978 (in 1988 dollars) to $92.5 billion in 1988.78 As

John Lynch, a former OEA official, argues: “Today,

there are few remaining community adjustment

tools at the Federal level for dealing with major

economic dislocations-even for reinforcing State

plant closure adjustment efforts.”79

Federal Programs To Assist

Defense-Dependent Areas

Some Federal programs that States and cities can

turn to for economic development support remain,

although most are poorly funded. Also, as noted,

Congress authorized an extra $50 million for defenserelated community adjustment efforts to be spent by

EDA through the Title IX Sudden and Severe

Economic Dislocation Program in fiscal years 1991-

93. As of November 1991, however, the funds were

not yet available for EDA to spend.

DoD’s Office of Economic Adjustment

The Federal agency most responsible for organizing a Federal response to community disruption

brought about by military cutbacks is DoD’s Office

of Economic Adjustment (OEA). OEA was created

in 1961 “to assist in meeting those unemployment

and other economic problems of communities affected by the termination of military bases. Currently, it helps communities develop plans for

adjusting to defense industry cutbacks as well as

military base closures. It also staffs the President’s

Economic Adjustment Committee (EAC). The EAC,

formed in 1970, is an interagency organization of 18

Federal departments and agencies that is chaired by

the Secretary of Defense and staffed by OEA. EAC

Ts~f~ Autho~tion Act of 1990, Public Law 101-51O, SCC. 4103.

mofflce of Economic ~justrnen~ Econom”c ~justmenticonversion, Op. tit.

~significant Fea~es of Fiscal Federalism, 1989 Eal”tion, VOhUW II (w@@oU Dc: Adv~9’ Commis sion on Intergov ernmental Relations,

August 1989), p. 18; also Peter K. Eisinger, The Rise of the Entrepreneurz”al State (h4ad.isorL WI: The University of Wkconsin -S, 1988), j). 68.

79Jo~ E. Lpch (~.), plant C1osWes ad comnwu”~ Recove~ (Washington, ~: National Council for UrtXm Economic ~veloPmen~ J~~

1990), p. 3.
..

Chapter 6--Adjustment for States and Communities ● 173

Table 6-10-Federal Funding for Economic Development, 1978 to 1990

(millions of 1990 dollars)

Funding Percent

Program 1978 1990 reduction

Economic Development Administration . . . . . . . . . $ 957 $ 216 79%

Economic Adjustment Program (Title IX) . . . . . . 137 24a 82

Department of Housing and Urban Development

Community Development Block Grants. . . . . . . 6,373 2,914 54

Urban Development Action Grants. . . . . . . . . . . 728 0 100

Total Community and Regional Development ,.. $14,800 $6,398 57

Small Business Administration . . . . . . . . . . . . . . . . 6,327 928 85

al%e r@ar appropriation for the Title IX program in 1990 was $24 million and for the Sudden ati %Vere Emom~

Dislocation program within Title IX, $12 million. These amounts were augmented by a special appropriation of $24

million to help communities damaged by Hurricane Hugo.

%otal indudes other economic development programs not listed above. It excludes disaster relief and insurance.

SOURCE: office of Management and Budget, Executive Office of the President, Buc&et of the United States,

(Washington, DC: 1979, 1991).

meets intermittently to discuss problems related to

community impacts of defense spending changes

and to coordinate Federal responses to these, when

appropriate.

During the 1980s much of OEA’s work was

helping communities adjust to expansions of DoD

activity. Its role in the 1990s will be the opposite,

helping communities cope with economic disruptions caused by base closings or major DoD procurement reductions. During the late 1980s, OEA had a

small annual budget of about $4 million. Its budget

in the 1990s has been increased to deal with

increased defense cuts. It received $7.4 million in

fiscal year 1991 and $6 million has been allotted for

fiscal year 1992, of which about $4.7 million will be

granted to communities.80

Communities become eligible for OEA services

in cases of a base closure or major realignment or

when a reduction in DoD spending will result in the

loss of 1,000 or more frill-tirne DoD and contractor

employee positions over a 5-year period. OEA funds

planning studies (its grants average about $70,000),

provides technical assistance, and acts as a liaison

with the 18 member agencies of EAC (chiefly, the

Departments of Labor and Commerce) and with

State agencies. Because the planning grants are

relatively small, OEA is able to provide at least

minimal assistance to most communities affected by

defense cuts.

OEA is staffed by competent professionals who

appear to understand local and regional economic

development, and it generally operates with enough

flexibility to get the job done. For example, when

Secretary Cheney announced the cancellation of the

A-12 fighter program on a Thursday, on the following Monday an OEA representative was in Fort

Worth (where a division of General Dynamics is

located) meeting with the mayor and other local

leaders to discuss the problems and see how OEA

could help. If the agency were mired in red tape it

could not have been so responsive.

Nevertheless, it is not clear that OEA’s location

within DoD is helpful. Some communities have

complained that instead of serving as an advocate for

their interests within DoD, OEA represents DoD’s

interests. Another complaint is that OEA tends to put

the process of base closures in an overly optimistic

light. In addition, because of its low profile within

DoD, OEA has a hard time obtaining its share of the

Department’s resources. As more bases close, this

issue may become more troublesome.

OEA’s role vis-a-vis the White House Economic

Adjustment Committee is unclear. Because it comes

to the meetings as a representative of one among

several Federal agencies, OEA has little authority to

get other agencies to toe the line. It must rely on

persuasion to get agencies to come forth with

resources. In some cases, this has proven difficult.

Finally, OEA limits its assistance to planning

efforts only. In a few cases where it has attempted to

do innovative small-scale demonstration projects,

DoD’s legal counsel has limited its efforts. While

OEA planning assistance is important, many communities have a critical need for funds to implement

~~lce of Economic Adjustment DoD, December, 1991.
174 . After the Cold War: Living With Lower Defense Spending

plans. Indeed, planning money is sometimes overabundant while implementation goes unfunded. For

example, Rantoul, IL received funds from OEA and

private sources to fund three separate reuse and

economic development plans for the closing Chanute AFB. Community officials say they know what

is needed and would rather have been able to spend

some of this money on efforts to create jobs.

Economic Development Administration,

Department of Commerce

Communities seeking economic development assistance to compensate for the loss of the military

market may draw on the resources of the Economic

Development Administration (EDA), especially the

Title IX Sudden and Severe Economic Dislocation

(SSED) program. Areas that have had economic

dislocations due to plant closings, layoffs, or base

closings are eligible for grants to develop and

implement an adjustment strategy, if the economic

dislocation exceeds certain job loss thresholds for

the area. Other EDA programs fund public works,

technical assistance, and economic research. While

funding is limited, these programs can be useful to

defense-dependent communities.

EDA awards about 20 SSED strategy grants and

an equal number of SSED implementation grants

each year. SSED funds have supported a variety of

efforts including economic development strategies,

access roads for industrial plants, industrial parks,

business revolving loan funds, and business incubators. In recent years, strategy grants have ranged

from $25,000 to $200,000 and averaged $65,000;

implementation grants have ranged from $25,000 to

$2 million and averaged slightly more than $630,000.

A minimum of 25-percent local share, cash or

in-kind, is required. Funding for the program in

fiscal years 1990 and 1991 was $12.3 million each

year.

81

In the Defense Authorization Act for fiscal year

1991 (enacted in October 1990), Congress authorized an additional $50 million for defense-related

community adjustment efforts for the SSED program, to be made available over the next 3 years.

However, as of November 1991, more than 1 year

after the authorization, DoD had not transferred the

money to EDA.82 Once transferred, the money will

remain available for obligation until September 30,

1993. Eligible communities are those experiencing

an actual or threatened DoD-related work force

reduction that meet regular SSED eligibility standards.83

To determine how well the SSED program is

working and is likely to work for defense-affected

communities, OTA interviewed a number of economic development and EDA officials and called

officials of seven communities that had received

SSED grants in the last 5 years. Their comments

indicate that, as currently structured, the EDA

program has some problems that threaten to reduce

its usefulness.

Distressed communities often wait along time for

EDA funds. Because prompt response is a critical

factor in community recovery to economic dislocation, delays can pose a significant problem.84 EDA

is not oriented to prompt response. In 1990, the

median time between a community’s proposing a

project and EDA approval of the grant was 198

days. 85 However, the mean time was 292 days,

indicating that some proposals took much longer.

Five of the seven communities experienced delays

of over 18 months between the time of application to

EDA and funding. The worst delay involved a small

city that experienced a series of plant closings in the

early and mid-1980s. Because the city was not at

frost aware of the Title IX program, officials did not

contact the regional EDA office until 3 years after

the frost layoffs. Thus, after waiting for over 1 year

sl~ Tifle IX pro- also receiv~ a special l-year augmentation of $23.9 million to respond to Hurrici_tM Hugo in 1990.

U-D fi~y @gdi~ f~t in -erring this money. More recently, differences of opinion between DoD and Department of COmLnmCe le&d

counsels on technicalities have held up the transfer of funds. Department of Commeme lawyers argued that EDA did not have explicit legal authority

to accept funds from DoD. The Defense Authorization Act for f~cal years 1992 and 1993 explicitly confers this authority.

ssFor communities not in Me@o~~ !jtatistic.al Areas, the dislocation must amount to the kXX of 2 -nt Of the work force Or 500 jobs if the

unemployment m~ ex~ tie I@O~ avqe.-~unemployment m~ is below tie mtio~ average, tie thresholds are higher, at 4 percent

or 1,000 jobs. For communities in Metropolitan Statistical Areas, the dislocation must amount to the lesser of 0.5 percent of the work force or 4,000

jobs if the unemployment rate exceeds the national average and 1 percent or 8,0tXl jobs where the unemployment rate is below the national average.

‘Paul Dempsey, ‘‘EDA Title IX Community Adjustment Experience, ‘‘ in John Lync& (cd.), Plant Closures and Community Recovery (Washingto~

DC: National Council for Urban Economic Development, 1990).

ss~e ~Pme tie for projects rel~ed to Hurricane Hugo was somewhat shorter, witb the median time of 148 &yS. (Dati frOm the Economic

Development Administration U.S. Department of Commerce.)
Chapter 6--Adjustment for States and Communities ● 175

for a response to its proposal, the city had to wait

another 20 months to receive a small strategy grant.

The EDA regional office then took another 11

months to approve the community’s plan. The city

then applied for the follow-on EDA implementation

grant, but after waiting 14 months was turned down,

in part because it was unable to target the funds to the

workers dislocated nearly 5 years earlier, and in part

because economic conditions had improved somewhat. The entire process took almost 8 years from

the initial layoffs.

SSED funding delays have several causes. First,

the approval process is cumbersome. Communities

must first contact their State EDA representative and

then their regional EDA office. The performance of

regional offices appears to vary significantly. While

some are staffed with experienced people, others

have had staffing problems that delay responses.

Moreover, communities complained that some regional offices saw their role as simply reviewing

proposals rather than facilitating and streamlining

the application process. Not only does this cause

delays and elicit rounds of rejections and resubmittals, it leaves communities without needed technical

assistance. For example, one small city has used its

SSED grant to establish a revolving loan fund for

local businesses needing capital to expand. However, city officials are unsure how best to operate the

fund. While EDA has given them extensive “guidance’ on the rules, they have been left to fend for

themselves on determiningg how to make sure the

fund benefits the local economy.

The approval process in the national office is

usually better than at the regional level, but still

encounters delays. According to one EDA official,

regional offices formerly had greater authority over

project selection, and the process was then less

cumbersome. Over time, the Washington EDA

office has become more involved in approvals and

delays have become more common. According to

one EDA official, the Inspector General’s office in

Commerce has sometimes sent back applications

three and four times over small details.

EDA’s requirement that communities develop an

adjustment strategy before receiving an implementation grant can also delay the process. Communities

come to EDA in crisis and need to get things

underway quickly. While the community officials

interviewed by OTA agreed that the process of

developing strategies is helpful, some have already

developed their strategies before coming to EDA.

Moreover, in some cases the Office of Economic

Adjustment has already provided funds for strategy

development. If EDA is not flexible in its requirement to develop EDA-funded plans first before

proceeding to implementation, funds will be wasted

and needless delays will occur.86

EDA has demonstrated the capacity to respond

quickly. In a pilot project, the agency once used a

strike team approach similar to OEA’s to respond to

a plant closure in Arkansas. EDA officials flew to

the town and within 3 days approved a grant.

However, because EDA as an organization is not

attuned to rapid response, the pilot-project approach

has not been implemented in everyday practice.

EDA officials concede that some particular regional offices have problems in responding to

communities, which they are working to correct.

However, they also argue that the SSED program is

not a quick response program and that therefore

funding delays are not a serious problem. They

suggest that SSED is not intended to help dislocated

workers get jobs in the area they live in, nor is it

intended to help distressed communities maintain

former levels of economic activity. Rather, its

purpose is to ease communities’ problems of adjustment to economic distress.

When EDA assistance does arrive, communities

are sometimes hindered from undertaking innovative economic development approaches. EDA appears more comfortable with traditional projects

such as industrial parks. This may help explain the

fact that the most delays occurred in projects that

were least traditional (e.g., science parks, tourism

strategy, plant modernization). EDA’s roots are in

the 1960s and 1970s, when it was formed to help the

long-term development of lagging rural regions by

use of traditional tools such as infrastructure development and industrial attraction. As the focus of

economic development has shifted to distressed

communities, EDA has been slow to integrate newer

approaches, including ‘‘best practice” efforts such

as technology centers, entrepreneurial development,

and manufacturing modernization.

s6~ tie one defense.re~ted ~mt S. fw, EDA IMS provided a small $37,000 grant to the Southern Mksissippi P-~d ~veloPment ‘~~ct

to begin implementing an OEA-funded strategy to deal with cutbacks at the Army Ammunition Plant in Piccuine. The grant will pay for the collection

of information related to marketing property in the area to outside fins.
176 ● After the Cold War: Living With Lower Defense Spending

Finally, repeated threats by the Reagan administration through the 1980s to eliminate EDA clearly

aggravated the agency’s problems. The uncertain

and politically difficult environment contributed to

reduced morale, lower staff quality, inadequate

staffing levels, poor operation and administration of

the program; and it led to the pursuit of low-risk

policies.

Even if EDA were to improve its response time

and acquaint itself more thoroughly with modem

economic development efforts, its limited funding

means that it can help only a fraction of the

communities in need. EDA funds only 20 communities a year. Given the much larger number of

distressed communities (some related to defense

cutbacks, many others not), it appears that the

demand for EDA funds could rise significantly.

Even with the additional $50 million Congress

provided to help defense-affected communities, the

demand for funds is likely to exceed supply,

particularly if the defense build-down proceeds

more rapidly and economic growth continues to be

sluggish.

Within present budget limits, one way to mitigate

the mismatch of need and supply is to limit the

number of communities applying. In effect, EDA

does this. The agency has not used the plant closing

information generated by the WARN legislation to

market its programs to communities in need. Furthermore, by making it known that funds are

unavailable, EDA officials discourage communities

from applying in the first place. A more helpful way

to ration EDA services would be to raise eligibility

requirements so that only the neediest communities

receive funds. Current threshold requirements of job

loss still enable a large number of communities to

qualify for assistance. Even communities with

strong economies that might recover without public

intervention often qualify .87 Many communities that

are more truly in need go without assistance due to

lack of funds.

Despite the problems, EDA funds do help communities recover. All the community officials interviewed by OTA stressed how important EDA

funding was to their recovery efforts. However, this

appreciation was tempered with the desire for EDA

to be run more efficiently.

Other Federal Programs

Another source of funds for community economic

development is Community Development Block

Grants, administered by the Department of Housing

and Urban Development (HUD). The program

allocates grants to entitlement communities (cities

with more than 50,000 population) and to States for

distribution to nonentitlement communities. Funds

($2.9 billion in fiscal year 1990) can be used for a

variety of purposes including housing rehabilitation,

energy conservation, public services and facilities,

business financing, and commercial revitalization.

Many communities have used the funds to set up

revolving loan funds for businesses. However, new

rules mandating that 60 percent of the beneficiaries

must be low and moderate income (increased from

50 percent) limit its usefulness as an economic

development tool.88

Several other Federal programs can provide some

assistance. Services provided by the Department of

Commerce to businesses include Export Promotion

Services, the Small Business Administration’s (SBA)

financing programs, and Small Business Development Centers, mostly located on college campuses,

which provide counseling on particular management

problems. 89 The Farmers Home Administration

(Department of Agriculture) also provides Business

and Industrial Development Loans and Grants to

assist economic development in rural areas.

State and Local Programs To Assist

Defense-Dependent Areas

While the Federal Government’s role in subnational economic development has declined significantly, State and local efforts have dramatically

expanded in both scope and sophistication. Until the

late 1970s, most States and cities equated economic

development solely with industrial recruitment. In

the 1980s, State and local governments added a wide

87n ~~fi, * dislocation must ~t a minimum threshold requirements in terms of jobs lost. Thresholds are double in communities with

unemployment rates below the national average.

ss~e ~le ~~= tit over a 3-Y= perio~ a total of at least 60 percent of the beneficiaries must be low and moderate income individuals. HUD

is proposing increasing this to 70 percent.

sWhese centers can provide adequate advice to novice entrepreneurs attempting to start “mom and pop” small businesses, but often lack the

know-how to provide more sophisticated advice to entrepreneurs attempting to start manufacturing or technology-based service f-. As a result their

usefulness as an economic development tool is limited.
Chapter 6--Adjustment for States and Communities ● 177

range of economic development tools that go

beyond recruitment to include new business development, industrial expansion and modernization,

and technology development.

One indication of the increased State commitment

to economic development is the rise of department

of commerce budgets in the States. From 1982 to

1990 they increased almost fivefold, from an average per State of $6.7 million in 1982 to $32.5 million

in 1990 (in 1990 constant dollars).90 State incentive

programs (tax, capital, and land subsidies, and

technical assistance) increased in number from 840

in 1966, to 1,213 in 1976, to 1,633 in 1985.91 In

addition to expanding in scope, the sophistication of

the new State and local efforts far exceeds those of

the 1970s. For example, in 1983, OTA found that 22

States had developed 38 technology programs.92 By

1988,45 States had developed over 250 programs.93

Local economic development efforts have also

increased significantly in the 1980s. Today almost

half of 322 large and small American cities surveyed

have revolving loan funds for business, over onethird provide entrepreneurial assistance to new

business, and over one-half advertise for new

industry .94 Larger cities (above 200,000 population)

and economically distressed cities employ economic

development tools more extensively .95

This expansion has led some to conclude that

State and local efforts are sufficient to deal with

defense dislocations, even with reduced Federal

efforts. This is dubious. First, while accurate figures

on State and local spending for economic development do not exist, it appears that this spending has

not filled the gap left by the withdrawal of Federal

support--especially since much of the increased

spending by State and local government was in

response to higher levels of need.96

Second, many of the Federal efforts were devoted

to community development; they provided distressed communities with funds to develop industrial parks, renovate buildings, and build infrastructure. The States have limited funds for these

activities. They are more interested in business

expansion and development.97

Third, capacities and efforts vary significantly

among States and cities. Some spend generously on

highly sophisticated economic development programs. Others spend much less. In the absence of

accurate data on State spending for economic

development, expenditures by State economic development agencies are a proxy measure of the

variance among States, For example, per capita State

spending on economic development is $28.00 in

Alaska and only $2.50 in Mississippi.98

The current fiscal crises of many States have made

matters much worse. One reason for the expansion

of State economic development budgets in the 1980s

was that State revenues were growing. According to

the National Association of State Budget Officers, at

least 28 States face revenue shortfalls in 1991,99 and

many are having to sharply curtail spending on

economic development programs.

Nevertheless, several States have recently begun

tentative efforts to respond to the build-down.

Because the location of defense spending is not well

understood, a number of States are conducting

studies to assess the importance of defense spending

9Q]9w state Deve/op~ntAgenq @e~”~es ad Sala~ Survey (Washingto~ DC: National Association of State DevelOpfnent Agmci=, 1~).

glpe~r E~inger, The Rjse ~~the Erttreprenew”al State (Midisou WI: University of Wiscomin -s, 1988), P. 19.

%Cenw of Stite Gover_nt Im”~fies for High. Te~h~logy I~s~l Develop~~ (w-on DC: U.S. con-s, Of&Z Of TLXhIK)lOW

Assessment, May 1983).

93Ro&~ D. A-U state Progr~for Technology DOe/op~nt (_W-o~~:Natio~ Association of State IMvelOpmtW Agencies, 1988).

W- O’M Bo_~ Tools ad T~get~: The Mec~nics of Cify EcoTw~”c Develop~nt(ww~w:wNtio~ bglle Of Citit%, &lobtx

1987).

Wbid.

%DoD’s ~pofi on CXOnOmiC adjustment to defense CUtS std=: “ ‘ . . . It does not appear, however, that State resources and responsibilities have

increased sufficiently to compensate for a reduced Federal role in response to defense-related dislocations. [not only for eeonomic developmen~ but for

related activities such as sewez, water, transpo~tio% pubIic facilities ].” Office of Economic Ad@stment, DoD, Economic Adjustment/Conversion

(W-OXL DC: July 1985, app. K.)

97~~miW ~~ ~=W-D&tor, Natio~ Assoc~tion of S@te Envelopment Ag~ies, February 1991.

%s~~ ~xW~~~mN~o~ ~s~~tionof Sme ~velopentAgencies, ~9~StateEcono~”c Deve/op~mlQpen.dimre SWV~ (wMh@O~

DC: 1988). There are some problexna with comparing economic development budgeta since some States include some expenditures as economic

development while othexs do not. However, the range of these figures is indicative of how much expenditures can vary.

99David Broder, “Is This the Year States Finally Get the Hill’s Attention?” The Washington Post, Jan. 6, 1991, p. C7.
178 ● After the Cold War: Living With Lower Defense Spending

in their economies and the needs of defense contractors in converting to civilian production.l00 States

hope they can then target development programs to

defense firms and defense dependent communities.

In particular, many States are interested in using

existing programs to help small and medium-size

defense contractors gain civilian markets.l0l However, not all States have made efforts. In fact, several

of the most defense-dependent States have done

little to respond to the build-down.

What Communities and States Can Do To

Stimulate Economic Development

Organizing and Planning for

Economic Development

Economic development is more than simply

putting particular programs in place. Communities

do not always easily or directly speak with one

voice. In many communities the proliferation of

actors, interests, and personalities with “turf” and

ego concerns outweigh the ‘‘common weal."102

Without the critical preparatory work of developing

leadership and encouraging groups to work together,

conflicts often undermine productive activity.103

Bringing the key players together into a coalition

is easier in some communities than in others. For

example, in Salt Lake City, a community task force

was set up the day the closure of Fort Douglas was

announced, and the task force agreed that the

University of Utah should receive the land. In other

cases, attaining community consensus is more difficult. For example, there is considerable disagreement over the future use of George Air Force Base,

in San Bernardino County, CA, and this has slowed

reuse efforts.

In some areas community economic development

organizations already exist, making the job easier.

For example, the pre-existing St. Louis Regional

Growth Association has taken primary responsibility for coordinating economic development efforts

in St. Louis. In other cases, such as southeastern

Connecticut, economic development organizations

had to be created from scratch.

Virtually all communities affected by defense

cuts, either base closures or defense industry cutbacks, are able to get at least some technical and

financial assistance from OEA to organize and plan.

An important aspect of OEA’s assistance is that the

agency works to build a coalition of key players

before providing a community with a planning grant.

Planning is the next step. It is essential in dealing

with base closures, since communities must develop

a reuse plan for the vacant property and buildings.

Many of the bases to be closed in the first round have

developed base plans with the help of OEA. Possible

uses cover a wide range. For example, options for a

portion of the 55,000-acre Jefferson Proving Ground

in Madison, IN include a golf course and surrounding housing cluster, a shopping mall, and a foreign

trade zone. Depending on the size of the impact,

communities may also develop an overall economic

development plan. For example, Rantoul, IL, home

to closing Chanute APB, developed both a base

reuse plan and an overall economic development

plan using grants totaling $234,700. More often than

before, OEA now also provides planning grants in

response to defense industry cutbacks. The St. Louis

Regional Growth Association received $100,000

from OEA for planning in response to the loss of

9,000 jobs at McDonnell Douglas.

The next step after organization and planning is

implementation. Among the several ways to do it are

recruiting new businesses to the area; encouraging

the expansion of existing businesses in the area

(including, when feasible, the conversion of defense

contractors); and promoting the formation of new

businesses.

l%lud~ ~ Colorado, COnn@iCU~ Floridq Kentucky, Maine, Maryland, Mirmeso@ New Yor& Ohio, Pennsylvmi% Rhode Isl~d, T-SWW,

and Washington.

lol~~~tion t. ~vid~ Swe efforts, the National Governors’ Association has established a Defense Ad@tment ‘Ihsk Force made Up of h S@tCX,

DoD, and other Federal agencies. ‘k task force will identi@ successful State initiatives and industry conversion efforts for detailed investigation. It

will also help four States desi~ implement and evaluate economic conversion policies and programs. ‘he National -e of Cities is conducting a

similar project for cities.

10’Z~~e~ ~~~~wolff, ~m~sfor~plo~nt and ~nofic ~VelOprnent, ~SAngel~, ~rsod communiCiitiO~ Septtier 1991; ~

also Terry F. Buss and F. Stevens Redbum, Skt&wn at Youngstown (Albany, NY: State University of New York Press, 1983) for a discussion of the

problems that arise when conflicting org “ amzations and individuals are engaged in economic development.

103~AW,~.,pl=nm”ng Civilian ReWeofFomrMilitaQBases, prcp~d for~cofflce Of fionofic Adjustment, ~1~ of the sme~of Defense

(Washington DC: June 1990).
Chapter 6--Adjustment for States and Communities ● 179

Attracting New Industry:

Industrial Recruitment

When faced with the loss of a major employer,

one solution is to convince new companies to move

in. Industrial recruitment efforts have long been the

main recourse for State and local economic development agencies. Often these agencies organize an

industrial attraction group to go out and beat the

bushes for new business-traditionally manufacturing facilities, but now also corporate headquarters

and service industries. To make their communities

or States more attractive, economic development

agencies often provide a variety of subsidies and

incentives, including lower business taxes, tax

abatements, low-cost financing, free trainin g, free

land and buildings, and other schemes to reduce

business costs.

On the face of it, industrial attraction may seem a

ready-made solution to the problems of defenserelated job loss. For some areas, especially those

with little other existing industry to build on or

without much potential for self-reliant growth (such

as from tourism or small business development),

recruitment may in fact be the best strategy. A

well-conceived and executed marketing plan can

pay off. This is especially true in the case of certain

base closings where large amounts of developed

land, buildings, and facilities are available at low

cost. Examples include Norton Air Force Base,

which will be home to a Lockheed operation to

repair and maintain planes, and Pease Air Force

Base, which Deutsche Airbus is negotiating to use

for a similar operation.

Despite the popularity of ‘smokestack chasing,”

it has serious drawbacks. First, relocations and

openings are far fewer than the communities pursuing them. While data are sketchy, it appears that

between 1969 and 1975 there were approximately

1,100 manufacturing relocations per year, on average. Some 630 relocated outside their immediate

area, and of these, about 200 relocated to another

State.l04 In 1984 there were approximately 1,200

major manufacturing sitings in the United States.105

The supply of footloose firms is more than

matched by the large number of desirous communities and States, among which the competition is

fierce. l06 An estimated 7,500 economic development organizations are competing for new business.

107 For example, Illinois was up against 82

other proposals in its unsuccessful efforts to attract

a major United Airlines maintenance facility to

Chanute Air Force Base in Rantoul.108

Economically distressed areas are not the only

ones bidding for firm relocations. Places that are

quite well off also compete. For example, Fairfax

County, VA, a prosperous middle-class suburb of

Washington, DC, launched an aggressive recruitment drive in the late 1970s even though the area

was growing steadily.109 These efforts succeeded.

The number of firms relocating to the area rose and

the population increased.l10 However, the Nation

benefited little since economic activity was simply

transferred to an area that was already strong

economically. Locally, the growth brought with it

such familiar problems as high housing prices and

transportation congestion. Fairfax County is not

alone in this practice. Other well-off communities

around the Nation have also joined in the recruitment game. For example, Indianapolis beat out

prosperous Fairfax county, as well as a host of other

communities, in its bid for the new United Airlines

maintenance facility.

Because so many locales have joined this “buffalo hunt,” the chance of landing a firm are even

lower for communities that are truly in need (for

example, small towns where a military base that is

the major employer is closing). Aggressive recruitment by well-off communities aggravates the imball~J~eS Miller, ‘‘~~aCbRelocations in tie United states, 1%9-1975,’ in Richard B. McKenzie, Plant Closings: pub/ic Orp~”v@e Choices?

~*0% ~: Cato mti~te), p. 27. while the tih@in this Study may not provide a fully accurate representation of relocations, it does provide

a rough estimate of the numbers.

105No* CarOlina Department of Economic Development, ‘‘North Carolina’s Blueprint for Economic Development: A Strategic Business Plan for

@@’ ~oti” 1988.

106s= Roger Wllwm s~te BW”~SS [ncentives a&&onom”c Growth: Are They Effective? A Review of the ~“tera~re, oP. cit.

107Alan Gregerman, Competitive Advantage: Fram”ng a Strategy to Support High Growth Firms, op. cit.

108U~t~ fil~e5 (j~id~ t. locate the f~cility in ~di~po~. ~~ of A@ofl AfffiS, united Akh=, Au~t 1991.

lwGreg~ op. cit. p. 64.

1 IOMost ~entiy, the ~ow~ ad the Stite convinc~ &ner~ _cs to move theh co~mte hmdqtims from St. blis tO X101thf311 Vir@iii, AS

part of the inducement to locate there, Virginia provided GD with $400,000 in subsidized tdn.ing.
180 . After the Cold War: Living With Lower Defense Spending

ance between supply (firms willing to establish new

facilities) and demand (places doing the recruiting).

As expected, when demand outstrips supply, the

price that communities must now pay in the bidding

wars to attract firms has risen.111 An example of

high-priced incentives is the package Illinois offered

to United Airlines to get the company to locate its

maintenance facility in Rantoul. It was worth over

$150 million. Indiana and the city of Indianapolis

came up with more, $294 million, to win the United

facility. Moreover, communities are often led to

believe that if they do not come up with expensive

inducements even firms already established in their

area will leave.112

The problem of incentives is particularly onerous

when they benefit foreign industrial competitors.

While exact figures are not available, it is estimated

that between 1978 and 1988 U.S. States and cities

gave foreign automobile firms close to $1 billion in

inducements.

113 (See table 6-11.) These large incentives did not induce the firms to locate in the United

States, since that decision had already been made.l14

Nor did they benefit seriously economically depressed communities since Japanese auto plants

generally located in relatively prosperous areas.115

These subsidies did provide a windfall to foreign

competitors at the expense of U.S. firms and they did

erode local tax bases that might have been used for

education or public infrastructure.llc

Note that in Japan, the Ministry of International

Trade and Industry (MITI) and the Ministry of

Finance use their finance and approval powers to

coordinate and limit local prefecture subsidies to

foreign firms.117 Of course, one reason national

government ministries are able to do this is that they

have greater authority over local decisions than the

U.S. Government has. With the coming of EC92, the

European Community intends increasingly to limit

and coordinate subsidies given to non-EC fins.

The U.S. Government not only does little to

remedy the problem of runaway incentives, but in

some ways encourages it. Supposedly, Federal

economic development funds cannot be used directly to recruit industry from one location to

another, but it happens in practice. Firms often

relocate to EDA-funded, below-market-rate industrial parks, or receive training for their new workers

financed by the Job Training Partnership Act (JTPA).

Federal policy also encourages local competition

over the location of Federal facilities, especially

science and technology projects.118

Most studies of location factors find that incentives are not important in determiningg the location of

firms. 119 More important factors are access to

II IRo&fi Guskind, “Games Cities Play,” National Journal, Mar. 18, 1989, pp. 634-64Q Larry C. Ledebur and William Hamilto% “The Great

‘Ihx-Break Sweepstakes,’ State Legislatures, September 1986, pp. 12-15; Paul Perez “The Market for Incentives: Where Angels Fear to Tread?”

Policy Studies Journal, 5, Febrwuy 1986, pp. 624-33.

1 lzFor e-le, ~ respme to a -t to l~ve fllinois, the State and local government gave SearS Roebuck over $110 million in concessions in 1990

to relocate from downtown Chicago to the suburbs. It may be doubted that Sears would actually have left the Chicago area since that is home to its large

work force, but the threat was enough to convince State and local government to pay. Ibid.

113No-n GliC&n ~d ~uglm woodw~d, ~~e New competiro~s @Jew York ~: B~iC BOOkS, 19*9), pp. 230-231. The cost of these klc~tiVtX

has increased signitlcantly over time. Researchers at the University of Kentucky found that the dollar amount of subsidy per worker rose from $20,000

at Nissam to $50,000 at Fuji-Isuzu, to as high as $108,000 at l’byota.

l14~i&

115For emple, tie MitSubi~@Sler plant loc~~ in Bloomington IL, w~ch at me ~hd OM of the lowest unemployment mk% in the SW.

The State then proceeded to designate the area an enterprise zone. Other Japanese car companies located in less affluent but still relatively healthy

communities. For example, in 1980 the unemployment rates for Rutherford County (Nissan) was 74 percent of Temessee’s, Union County’s (Honda)

was 71 percent of Ohio’s, and Scott County’s (Toyota) was 64 percent of Kentucky’s rate.

I lsh H. Elder and Nancy S. Lind, “The Implications of Uncertainty in Economic Development” Econom”c Development Quarterly, vol 1., No.

1, Februaq 1987, pp. 3040.

llTclyde ~atowiti, Trading places (New York NY: Basic BOOkS, 1989), p. 369.

118For ewple,21 s~tes prep~de~~, Cosfly s~dies for ~eh bids to ~d~e su~rconduc~ Supmcollida. Grti Jones, fiecutive Director,

New York State Science and Technology Foundation remarks made at the 16th Annual AAAS Colloquium on Science and Technology Policy, “State

Science and Technology Initiatives in a Time of Fiscal Crisis,” Washington DC, Apr. 12, 1991.

119Blfiand~emus ~gg=~ ‘‘~~eis li~e evidence ~taregionor community c~a~ctindustryfrom other regions by offer@ locational subsidies

since comparable bundles of industrial incentives are now available in most States and regions.’ (John P. Blair and Robert Premus, Industrial htio%

Economic Development Quarterly, February 1987, p. 84.); see also Roger W. Schmenrm, Making Location Decisions (Englewood Cliffs, NJ: Prentice

Hall, 1982); also Michael Kieschnick, Taxes and Growth: Business lncentivesandEconomic Development (Washingto% DC: Council of State Planning

Agencies, 1981); M. Wasylenko, ‘‘The Location of Firms: The Role of Taxes and Fiscal Incentives. ‘‘ in Roy Bahl (cd.), Urban Government Finance:

Emerging Trends (Beverly Hills, CA: Sage Publication@ 1981) pp. 155-190; William wheato~ “Interstate Differences in the Level of Business

Taxatiou” National TaJournal, 36, 1983, pp. 83-94.
—..

Chapter 6-Adjustment for States and Communities ● 181

Table 6-n-Selected State and Local Incentive Packages

Incentives

Firm State/city ($ millions)

Foreign car companies:

Toyota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mazda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

lsuzu/Fuji . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Volkswagen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nissan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Honda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-manufacturing Industries

United Airlines Maintenance Facility . . . . . . . . . . .

Chase Manhattan Bank . . . . . . . . . . . . . . . . . . . . .

Sears . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Broadcasting Co . . . . . . . . . . . . . . . . . . . .

Citicorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Drexel Burnham Lambent .....,... . . . . . . . . . . .

Shearson LehmanHutton . . . . . . . . . . . . . . . . . . . .

Burlington Air Express . . . . . . . . . . . . . . . . . . . . . . .

Presbyterian Church USA . . . . . . . . . . . . . . . . . . . .

Burlington Air Express . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kentucky

Illinois

Michigan

Indiana

Pennsylvania

Tennessee

Ohio

Indiana/Indianapolis

NewYorkCity

Illinois

New York City

New York City

New York City

NewYorkCity

Toledo, OH

Louisville, KY

Fort Wayne, lN

$ 373”

170b

120’

86c

86c

66c

16c

$ 917

$ 294

235’

1 1 0

9 8

a

9 7

a

85a

74a

50a

30a

15a

$1,088

SOURCES:

aRobertGuskind, “GamesCitiesP lay:’ Nationa/JoumalMar. 18, 1989, PP. 834-840.

bMnH.EHerandNanqS.Und, ‘ThelmplicationsofUncertaintyinEconomic Develomen~” E@nmkDeveloPnt

Quarter/~voll.No. l, Feb. 1987,pp.3040.

Worman Glickman and Douglas Woodward, The New Competitors (New York, NY: Basic Books, 1989).

markets, skilled workers, and low labor costs. If a

community lacks these key attributes, its chances of

recruiting fins, regardless of the incentives it

provides, are small. At best, incentives are tiebreakers that may influence a firm to choose

between two equal communities in the same region.

l20

In short, the competition for investment attraction

makes it harder for defense-dependent communities

to succeed in economic development. When

everyone is offering the same subsidies, communities truly in need of new industry have a harder time.

When such places do get a new industry, it is

sometimes at an exorbitant cost that they can ill

afford and that undermines the provision of public

services and infrastructure.

Assistance for Existing and New Businesses

Another option for States and localities losing

defense jobs is to support the expansion of existing

businesses and the creation of new ones. Most new

State and local economic development initiatives in

the 1980s have been directed toward this growth-fromwithin strategy.121

The programs are many and varied. Business

financing programs help firms obtain start-up and

expansion capital. Tax break and regulatory reduction programs try to lower costs. Business assistance

programs help entrepreneurs and managers do a

better job of managing their fins. Technology

centers and grant programs increase firms’ access to

new technologies. Industrial extension services help

companies adopt “best practice’ technologies, and

worker training programs teach skills needed to use

the technologies effectively. Export assistance helps

businesses obtain new export markets. Small business incubators, industrial parks, and research parks

provide space for companies to develop and expand.

Education and training programs upgrade the knowledge and skills of the work force so that businesses

can grow and expand.

Defense dependent communities can use these

programs not only to generate new economic

activity but also to help defense contractors and

l~omn J. Gli~~ ad ~ugl~ p. w~w~d, The NW competitors, op. cit., p. 228.

lzl~~r Eis@~, The Rise of the Enrrepreneurid Sfute, op. ci~
182 . After the Cold War: Living With Lower Defense Spending

subcontractors move into commercial markets, retool production facilities, and develop new products.

Such proactive efforts to help contractors convert

can, if they succeed, lessen the ill effects of defense

cuts on communities and workers. (See ch. 7 for

further discussion.)

The growth-from-within strategy is probably best

suited for medium-size and large cities with a

diversified economic base. The competitive advantage of most metropolitan areas affected by defense

spending cuts, such as Boston, Los Angeles, Long

Island, Philadelphia, San Jose, and Washington, DC,

lies not in their ability to attract new industry but in

developing and expanding those in place.l22 However, Federal economic development programs do

not distinguish among different types of economies,

and are as likely to make a grant for a new industrial

park to Los Angeles as to a small community in rural

Mississippi.

While the growth-from-within strategy has many

advantages over recruitment, it also has its limitations, especially as currently designed and operated.123 Often, the programs are very small relative

to the scale of the problems. For example, in

response to substantial defense cuts in southeastern

Connecticut, organizers in the area are developing

SEATECH, a 10,000-square-foot small business

incubator that is expected to house 10 startup

businesses in marine-related and environmental

protection businesses. However, the area has lost

at least 2,000 defense jobs in the past 5 years, and

is likely to lose thousands more in the next 5 years.

While it is a step in the right direction, an incubator that produces 20 to 100 jobs in 5 years is not

enough.

More generous funding for economic development would help, but existing funds could go farther

if they were better targeted to activities that lead to

economic growth. Most economic development

programs serve any kind of industry, rather than

targeting those that bring money into the community. Areas losing defense dollars need to generate

economic activity that either sell goods or services

outside the local economy (bringing in new dollars)

or replace goods or services flowing from elsewhere

into the local area.l24 The businesses that bring

money into a community are often referred to as the

basic or export sector, while firms that rely on local

spending (e.g., retail) are referred to as non-basic.

Basic sector firms, meaning ones that sell to

regional or even larger markets, are valuable replacements for declining or closing defense activities. 125 These are usually goods-producing industries (agriculture, forestry, mining, and particularly

manufacturing) and some kinds of business services.

Employment in non-basic sectors generally will

increase only if overall community income increases; economic development assistance to nonbasic firms may do nothing more than displace other

locally owned firms. Retail and other local service

firms do sometimes ‘export’ their services from the

region, mostly by selling to customers from elsewhere who come to community to make their

purchases, and thus bring in new dollars; for

example, where tourism is important, this may be

true. However, by and large, the impact of these

firms on local economic development is small.

Many economic development programs make no

distinction between basic and nonbasic firms, and

provide assistance to all kinds of businesses, including restaurants, retail stores, repair shops, and a host

of other non-basic industries. In 1990 only 13

percent of the 700 SBA Small Business Development Centers’ counseling cases were manufacturing

firms.126 Some of the largest recipients of federally

tax-exempt industrial revenue bonds in the early

1980s were large nationally owned fast-food restau122N~rt~~~dR~ ~~~ tit ~ge citi~ ~ve lit~e competitive adv~~ge in ~~cting b~~mdac-pbw. Rather, their tldVilIlttl& iS tithe

development of new industries and R&D-based activities. RD. Norton and John Rees, ‘‘The I%oduct Cycle and the Spatial Decentrakationof American

Manufacturing,” Regional Stuales, vol. 13, 1979, pp. 141-151).

l~For Cqle, s= mug Ro~~ ~Ro~ E. M-‘‘~ Em-~ Wave: NCW ~nomic Devdopmat Smtegics in thc 90’S,’” The

Entrepreneurial Economy Review, vol. 9, No. 1, Autumn 1990.

124~~~dpe~ &@&Ono~”CD~elOpmenr: what Worhatthehcalhe2 ~m~o~ ~: National LAxwIIeof Citim, We*r, 1988);

Glen Pulver, Commun@ Economic Development Strategies (MadisoQ WI: University of Wisconsin-Extension); Eva ~s, iUakz”ng Sense out of

Dollars: Econom’cAnalysis for Local Government (Washin@orL DC: National League of Cities, November, 1978); and Avrom Bendavid-Vw Regional

and L.ocal Economic Analysis for Practitioners (New York NY: Prager Publishers, 1983).

l~~w~d Morriso~ ‘Csti Business: A s~tegic perspective,’ ‘ Economic Development Commentary, Spring 1985.

ImSxna.11 Busin@s Administration 1991.
Chapter 6-Adjustment for States and Communities ● 183

rants and discount department stores. 127 Nearly 40

percent of the firms receiving SBA 503 loans

through Certified Development Companies (CDCs)

are wholesale or retail firms.128

Some economic development planners argue that

all firms help a local economy in one way or another

and that it is inappropriate for government to pick

particular industries for development assistance.129

Even granting this point, it is clear that the impact on

a local economy of, say, a computer manufacturer,

is greater than that of a grocery store. A hard and fast

rule cannot be applied, but a greater awareness of the

importance of basic or export firms and of knowledgeintensive firms would improve the effectiveness of

local economic development programs.130

A third point is that economic development

programs are not always organized to meet the needs

of business. In the rush to create programs addressing a broad range of business needs (e.g., financing,

technology, management, export assistance), governments have set up separate programs for each of

these goals. While they often provide valuable

services, they could be made more easily accessible

to business users.

The average firm has to be highly adept at locating

the right agency at the right level to find the help it

needs. Knowing where to look and how to apply can

be a challenge for all but the most intrepid businessperson. When firms need assistance in more than one

area (e.g., financing, exporting, and worker training), the maze becomes even more complex. Public

programs rarely operate as locally based, full-service

one-stop shops.

When firms do find the right kind of assistance, it

is often provided by business generalists rather than

by specialists who know the problems of a particular

industry. When sectoral specialization is lacking,

service providers are unable to develop in-depth,

comprehensive knowledge about particular industries’ market structure, technology needs, and worker

skill requirements. The generalist approach may

serve novice entrepreneurs attempting to open retail

stores, but it falls short when it comes to working

with manufacturing or technology-based service

firms operating in intensively competitive markets.

Finally, the main content of many economic

development programs misses the mark, failing to

address the problems that keep firms from expanding. Often, they are oriented more to giving firms

money than helping them solve problems that would

lead to increased competitiveness. Most public

economic development programs provide incentives

to firms to relocate or expand; they include property

and inventory tax breaks, low interest loans, zoning

waivers, subsidized training costs, free or low-cost

land, and free infrastructure. These subsidy programs remain more pervasive than others that

provide direct services to manufacturing industries. 131 These costly business subsidies are not

aimed at improving business efficiency, innovativeness, or competitiveness.

The outline of a new model for economic development is emerging in some States and cities, partly in

response to the limitations discussed above. This

model has much in common with some European

efforts.132 An example is the Technological Institute

near Copenhagen (one of 31 technology services

centers in Denmark), that assists small and mediumsize industrial firms in using advanced technologies.l33 The Institute not only conducts applied R&D

relevant to particular industries but also provides a

wide range of services to its clients. These include

market research into new industrial markets, assess127~.~x~~pt~~v~~u~ bonds ~ow~ a company to ob~ financing at lower rates since bondholders interest was federally tax exempt. COngreSS has

since limited industrial development bonds (IDBs) to manufacturing fins.

128u,s. SW Business Adminis~ation.

12~ore-le, s= Rog~ Vau@m Robert Pollard, and B~bara Dyer, The wea/fh of~fates (Washington, DC: COunCil Of State Pohcy and planning

Agencies, 1985).

l~oFor&scussion of the v~ue of~owledg~in~nsive issues to ~enatio~~onomy, see U.S. Cowess, Hlceof Technology AsSeSSInC134 COl?lPedng

Econon”es: America, Europe, and the Pacific Rim, OTA-ITE-498 (WashingtOIL DC: U.S. Government Printing OffIce, October 1991).

131 Tfio~y J. B~~ who Benefitsfiom State andhcal Econonu”c Develop~nt policiesv@ arnazoo, MI: W.E. Upjohn Institute for Employment

Researc& 1991); also Ann O’M. Bowrnani op. cit.

132 See Jo~ph co~ght, ‘ ‘old world, New Id=: Business Assisnnce klSOIIS hOIIl Europe, ’ Report to the Joint Legislative Committee on Tmde

and Economic Development State of Oregou April 199Q also Stuart Rosenfeld, “Technology Innovation and Rural Development: IA%sons from Italy

and Denmarh’ A Report of the Rural Economic Policy Progrq Aspen Institute for Humani stic Studies/Ford Foundation/Wye Institute, Washington

DC, December 1990.

lsqDiane ptitem ~ovation Associat~, ~c. Best Practices in European ~nn~vation D~e/~pment (wash.illgto~ DC: U.S. Department Of

Commerce, Economic Development Administration% December 1989).
184 ● After the Cold War: Living With Lower Defense Spending

ment and consultancy on technical and management

problems, demonstration of new technologies, financial consulting, and referral. Most of the services

that a manufacturing firm needs are thus integrated

in one place. Because a quasi-independent nonprofit

organization runs the Institute, problems of competition among government agencies and bureaucratic

inflexibility are lessened. The Institute’s strategic

focus on small and medium-size manufacturing

firms and its development of deep and specialized

knowledge about specific sectors are extremely

useful to its clients. Because over two-thirds of the

Institute’s budget comes from the firms it serves, the

program is three times larger than it would be

without private funds. This industry involvement

reflects both the high quality of Institute services and

the interest off- in using the services.

The lesson of the Danish Technological Institute

and other programs like it is that industry needs drive

program design. The most effective programs target

basic sector industries, in most cases, goodsproducing industries. They provide services in

integrated, one-stop ‘‘industrial service centers. ’

When possible, services are organized along sectoral

lines (e.g., focusing on auto suppliers, wood products firms, metal working shops, aerospace companies, textile fins). They are most effective when run

by intermediary, nongovernment organizations. In

most cases the centers are located independent of

universities and close to the businesses they serve.

A few programs based in part on this model have

been put in place in the United States. For example,

Oregon recently established and partly funded the

Wood Products Competitiveness Corp., which will

be governed by a board of industry officials. It is

expected to provide a wide range of services to

Oregon’s secondary wood products producers, including marketing, training of workers and managers, manufacturing modernization, R&D, financing,

and promotion of cooperative industrial networks.

Service providers certified by the Corporation work

with individual firms and groups of firms. Industry

controls the program and shares the costs. The State

hopes to extend this model to other key basic sector

industries. Oregon will help firms in each of the key

industries to cooperate in research consortia, joint

training programs, market development activities,

and the like.

Another example is the Florida Technology Coast

Manufacturing and Engineering Network, which

focuses directly on defense producers. It was organized to help defense producers cooperate to gain new

contracts, develop new products, and share information. Located in Fort Walton Beach in the Florida

Panhandle, the area is home not only to the largest

air base in the world, Eglin AFB, but also to a

number of defense producers. Most of the defense

companies have been laying off people in small

numbers gradually over the last few years.

In 1990, in response to the expected defense

build-down, defense producers showed increasing

interest not only in bidding more successfully for

fewer defense contracts, but also in getting more

commercial work. At the instigation of the Economic Development Council of Okaloosa County

and the Okaloosa Community College, a network of

over 32 firms, most of them defense-dependent

electronics firms, was formed.134 One of the keys to

the network is team bidding for both DoD and

non-DoD contracts. The companies bid on products

that none can produce on its own but several can

handle as a group. Although the network is too new

to show measurable results, organizers hope the

teams will win several defense and commercial

contracts. They also anticipate that the network will

help firms develop new products and transfer

technology among themselves.

EFFECTIVENESS OF ECONOMIC

DEVELOPMENT EFFORTS

It is clear that a wide range of programs exist at the

local, State, and Federal level to help stimulate

economic development in the face of defense cuts.

What is not so clear is how effectively these

programs can respond to economic dislocation in a

reasonable period of time. Empirical research on the

effectiveness of economic development efforts is

spotty at best.135 To be sure there is plenty of

anecdotal evidence, but individual successes cannot

IXECO~C Develowent counciI of okaloosa County, FL, “Tt@IwIogy Cwt Mamlfacturing and E@mxmng“ Network.”

lsSTieboug in a 1966 ~cle discussing the possible impacts of defense CULS on CWOM d the state of knowledge then: “When the

proverbial chips are dow the red question is: What does one do to soften the blow or shifts on a cmmmnity? What steps ean be taken by the local

~the Sbte, tithe wed government? Here the eomfo~ble world or resemch must in pam give way to some speculation and value judgments.

And of course no easy or simple answers pop out. Charles M. TiebouL ‘‘The Regional Impact of Defense Expenditures,” in Roger Boltow Defense and

Disarmamenf, The Econonu”cs of Transition (Fh@ewood Cliffs, NJ, Prentice Hall, 1966). The situation is much the ~ today,
Chapter 6--Adjustment for States and Communities . 185

necessarily be generalized. The evidence on community economic development policies in response

to plant closings is even slimmer. While the Office

of Economic Adjustment has studied the economic

recovery from base closures, there is little comprehensive information on how communities have

responded to plant closures or layoffs.136 Nevertheless, 20 years of experience have something to teach

us. Informed opinion and the experience of some

communities that have suffered significant economic blows and made strong attempts at recovery

offer useful guidance. The following sections draw

upon two main sources of information: first, empirical data on community responses to base closure and

second, the experience of one community (Jackson,

MI) that went through severe economic dislocation

in the early 1980s.

The Local Economic Response

to Base Closings

In contrast to the paucity of empirical findings on

community adjustment to defense contractor cutbacks, there is considerable information on what

happens when communities experience military

base closures. For over 10 years, DoD’s Office of

Economic Adjustment has studied the impacts on

communities of military base closings. Although

OEA’s findings understate the level of economic

distress caused by base closures, the record on base

reuse is nonetheless generally positive. Communities have used bases as economic development

resources, and in most cases their efforts have paid

off in net gains in employment.

OEA concludes that from 1961 to 1990, new jobs

(158, 104) at 98 bases more than replaced the loss of

DoD civilian jobs (93,424) at the former bases. The

bases have been put to a wide variety of uses: 42

bases are being used as municipal or general aviation

airports, 75 are home to industrial and office parks,

and more than 73,000 students are enrolled at

post-secondary educational institutions located on

former bases.

However, OEA underestimates the negative impacts of closures. First, when calculating the loss of

employment in communities, it looks only at lost

civilian DoD jobs. OEA omits DoD contract employees and the impact on the community of

purchases by military personnel and by the base

itself. Some 137,000 military personnel were relocated in the 98 base closings. 137 While it is

appropriate not to count military jobs when calculating direct job loss (the people involved were

transferred to other bases), the loss of spending

ripples through the local economy causing secondary economic impacts and lost jobs. If these effects

are added, using a conservative multiplier of 1.4 for

base procurement and military personnel expenditures, the figures for lost jobs in communities

experiencing bases closures in the last 30 years rise

by more than 54,000, from about 93,000 (OEA’s

estimate) to 148,000.138 Given that 158,104 jobs

were created there was still a net gain, but a much

smaller one.

These average increases in employment also

obscure the fact that there was great variance in

results. While the Benicia Arsenal (CA) recovered

over 2.5 times the 2,300 lost civilian jobs, Brookly

AFB and Mobile Air Material Area in Alabama

recovered only one-quarter of the 12,000 lost

civilian jobs. The Truman Annex in Key West, FL

gained back about 10 percent of its 568 lost jobs.

Moreover, it took a long time for new uses of the

bases to generate enough jobs to make up for the lost

employment. Of the 98 bases examined by OEA, the

13fJohU E. Lynch, Plant Closures and community Recovery, op. cit. p. 1.

~370EA states: ‘ ‘In many instances, the 10ss of military personnel (up to 5,600 rnilitafy in tieUof~‘ o, Texas) may have significantly affected

the commuxuty’s regional economy, Military persomel, however, are not recorded in the local employment or work force statistics. The relocation of

military personnel (136,823 positions in nearly 100 community projects) represents a regional income loss but not as direct employment loss to the area.

For this reason, successful transition should in large part be measured against whether the DoD civilian job loss in the community has been replaced

by new jobs and economic activity on the former base facility.’ Civilian Reuse of Former Military Bases: 1961-1990, Department of Defense, OffIce

of Economic Adjustment, p. 2. But, while military jobs cannot be considered a direct job loss, they do represent an indkect job loss,

138 Thlsmult1p11er is dmw from Joseph C-ghtand Rictid M, Beemiller, The Regiona/Econo~”cImpacr of Mi/;taryBase Spending ~aShhlgtO~

DC: The President’s Economic Adjustment Committee, Department of Defense, Office of Economic Adjustment, November 1980) and from the

multipliers used by OEA in their analysis of Round Two base closures. Note also thal multipliers vary depending on the activity on the base. In additiou

several factors make the employment multiplier associated with base closings smaller than with contractor cutbacks. Ln order not to exaggerate the impact

of reductiom of military personnel, a more comet-vative multiplier of 1.4 was used here. (A multiplier of 1.4 means that each DoD jobs support 0.4

additional jobs. )
186 . After the Cold War: Living With Lower Defense Spending

mean year of closure was 1970.139 By 1981, there Another caveat; it is risky to extrapolate the

were not yet enough jobs on the bases to replace experience of communities that suffered closures in

those that had been lost.l40 In other words, it took the 1960s and 1970s to closures in the 1990s. As

more than 11 years, on average, for the bases noted above, and as the experience of Chippewa

themselves to generate replacement jobs. Some of County illustrates (box 6-C), in the past communithe communities did generate other new jobs ties could rely on a large infusion of Federal dollars.

through general local economic growth not related Between 1975 and 1980 the Economic Development

Administration provided $57.5 million to 31 base to base reuse. redevelopment projects. 141 In 1991 dollars this

amounts to about $110 million. Over the past 20

13~s~~*~~~ u.s. DcpartmcntofDcfalsc, mceofmOXlOnw“ A@stmcn~Civi1ianReuseofFormerMilitaryBases,1961 -1990,1990.

‘W mean year was calculated using a weighted average of year of closure and number of civilian jobs lost.

l~mfmIw1 w=wond~ in-mtof Defense, Of&c of Economic Adjus~ Civilian Reuse ofFormerMilitary Bases, 1961-1990,

op. cit.

141’’Rcport of the lhak Force on Military Base Rc-USC,” Business Executives for National SCCUTI‘ty &hC@OIl Fux@ Inc., Jan. 5, 1989.
——

Chapter 6--Adjustment for States and Communities ● 187

Commission provided $2.4 million to convert the airport to civilian use. Total State and Federal funding to the area

for redevelopment exceeded $14.6 million (1991 dollars). In addition, the Air Force donated the base to the county.

It was a large gift. The total real property value of the 3,600 acres, 175 commercial and industrial buildings, and

1,383 living units on the base was estimated at approximately $105 million.4

The EDC, which now owns and manages the industrial park and airport, organized land, buildings, labor,

capital, training, and other incentives into a single package and marketed it to firms they wanted to attract, including

cold weather testing facilities, small divisions of big companies, and companies receiving defense contracts (which

were growing during the defense buildup). Firms could go to one place, the EDC, for information about sites and

facilities, training programs, and financing assistance available from other agencies, EDC marketed the area using

direct mailings and selective advertising, and gave special attention to generating nationwide media articles.

This energetic effort yielded only modest success. EDC was able to recruit 28 small manufacturing facilities,

but by 1991 all but 10 of the facilities had closed or moved away. Thereremaining 10 firms employ 320 people. A

much bigger contribution to the county’s economy came from Michigan’s $800-million prison expansion program,

under which five medium or mixed-security prisons were located in Chippewa County. These prisons now provide

1,400 jobs.

With the help of the new prison and manufacturing jobs, the county’s unemployment rate dropped from 15.7

percent in 1980 to 6.4 percent in 1989. The number of people employed in the county actually rose from 10,500

in 1976, before the base closed, to over 14,000 in 1989, and the population also grew, albeit slowly.5

Chippewa County owes a good deal of its recovery to effective local leadership and to the creation of a single

local organization to oversee economic development. However, without outside resources, recovery would have

been limited. Michigan’s decision to locate five prisons in the county was the key factor in the recovery, In addition,

the importance of State and Federal funding should not be overlooked. John Campbell, Executive Director of the

Eastern Upper Peninsula Planning Commission, noted, “The ($4.1 million) Title IX grant was the most critical

component. Otherwise we wouldn’t have gone any further."6

Altogether, Federal redevelopment funds, including a total of $6.5 million from EDA, amounted to $11.5

million (199 1 dollars) and the State provided $1.75 million. Today, Federal funds for community economic

development are scarce. The EDA special fund for defense-dependent communities is $50 million; just five

Chippewa Counties would exhaust that fund. Finally, the Air Force donated its base and buildings to the county.

In the present round of base closings, the services are allowed to sell their bases to the highest bidder. If Kincheloe

were closed today, the Air Force might well demand payment for it.

4Jobn Campbell, E!xmtive Director, Eastern Upper Peninsula paCOmmiSS iou Sault Ste. Marie, MI, personal communication,

Aug. 2, 1990, cited in OliveirA op. cit.

5~u~rnds, op. cit.; and Wilh ~ubern@ “Overcoming Geographic Isolatioru Chippewa County, Michigq” John Lynch, (cd.),

Plant Closures and Comm.uniry Recovery (W%shingtom DC: National Council for Urban Economic Development, January 1990).

%hnpbell, op. cit.

years the Federal Government has spent more than bases makes it doubtful that the bases now being

$500 million to help communities affected by base

closures.142 mlAL Even though State capacities to respond

to economic dislocations have grown since the

1970s, it is not likely that their support offsets the

decline in Federal support. In addition, communities

received bases in the 1960s and 1970s at a fraction

of their assessed value. According to a Congressional Budget Office report, at 33 bases for which

data was available, the sale price of the property was

143 Today, DoD’s about 35 percent of the total value.

interest in obtaining revenue from the transfer of

closed will be transferred as cheaply. Finally, the

current awareness of environmental problems and

the need for remediation mean that environmental

cleanup will be a major factor in base closings in the

1990s. Present legal requirements could delay significantly the reuse of bases.

Communities Recovering From Economic

Distress: Jackson County, Michigan

There is less information on community economic development after industrial cutbacks, whether

14zAndrcw Mayer, “Military Base Closures” U.S. Congress, Congressional Research Semice, updated Nov. 1, 1990, p. 4.

ld?lbid.

305-199 - q2 - 7
188 . After the Cold War: Living With Lower Defense Spending

defense or nondefense related, than on the experience after base closings, although several richly

detailed case studies are available.l44 The story of

one community-Jackson, MI-can provide a number of lessons and insights. Located in the heart of

the industrial Midwest, Jackson County illustrates

the havoc wreaked on some communities by the

combined forces of recession and the restructuring

and decline of the U.S. automobile industry. It also

sheds light on the possibilities, and the difficulties,

of community recovery from devastating economic

blows. 145

Even with a growing national economy, unless the

regional and State economies are also strong,

recovery from serious economic loss is difficult.

Committed local development efforts can help,

particularly when assisted by a strong State program

and a facility location policy that favors distressed

communities (e.g., locating a State prison in Jackson). However, even when the local and State

economic development efforts are ‘‘ftig on all

cylinders,” recovery can prove difficult. In Jackson’s case, it was only partial. Keep in mind,

however, that Jackson suffered greater losses than

all but the most defense-dependent communities are

likely to undergo.

Between 1978 and 1982, unemployment in Jackson County (population about 150,000) more than

doubled, reaching 16.1 percent in 1982. Within a

6-month period in 1983-84, Jackson experienced the

closing of two major plants, Goodyear Tire and

Rubber and Clark Equipment. The loss of nearly

1,800 jobs in these two plants, combined with the

impact on suppliers, resulted in a total loss of

approximately 3,000 jobs. Population declined by 6

percent between 1978 and 1985, as people left the

area in search of work.l46

A 1982 Chamber of Commerce survey of 240

manufacturing firms found that 80 percent of the

industrial base was tied to the auto industry. Many

suppliers had located in Jackson because it is close

to Lansing and Detroit but its wage rates were lower

by $4 to $6 per hour. That manufacturing base has

survived, but it has changed considerably. Since the

1982 study, 60 percent of the firms with 50 or more

employees have been acquired by multinationals,

and Jackson has lost four of its six firms with over

300 employees.

Faced with such severe setbacks, local officials

and business people organized to stop the hemorrhaging of their economy. The Chamber of Commerce surveyed local firms to understand the economic base of the community and to firmd out what

local companies needed to keep them in the area.

Together with the city and county governments, the

Chamber organized the Jackson Alliance for Business Development, an economic development organization that has a 13-member board representing

business, government, and academia.

Jackson focused a significant portion of its

economic development efforts on industrial attraction. The Jackson Alliance identified community

strengths in the automobile and food processing

industries and put together a professional-looking

package of information to market the community.

Jackson’s domestic and international recruiting efforts showed some results. The community attracted

a British company making automotive valve springs

(40 employees), two meat-processing plants employing 25 workers each, and a sugar-processing

company. However, one of the meat-processing

plants and the sugar plant recently went out of

business, laying off their workers. More impressively, Jackson also recruited two new Japanese

plants, Tokia Rika and Michigan Automotive Compressors (MACI). Tokia Rika announced its intention of locating in Jackson in 1991, employing 175

people, but had yet to open its plant in late 1991.

MACI, a joint venture between Nippondenso and

Toyota to make automobile air-conditioning compressors, was projected to employ around 600

people, but because of slow growth in the U.S. auto

market had employed only 370 people in 1991.

To attract the MACI plant, Jackson provided

generous incentives, including 10.5 acres of improved land that were worth $7.8 million as of 1990.

Most of the incentives were financed through a

newly created Local Development Finance Author144For ex~ple, See Terry F, Buss and F. Stevens Redburm Shutdown at yOU~gWW% Op. Cit.

145M05[ of tie follofig ~teri~ w= dram dkecdy from Letitia L. oliveir~ “Digging Out From Hard Times: Economic Recovery in Michigan ~d

Pennsylvania, ’ contractor report prepared for the (lfIlce of Technology Assessment, Aug. 17, 1990.

ld6Ro~fi W. c~letom Vice Presideng Community and Business Services, Jackson Community College, Jacksou MI, personal mmmuniatiom June

6, 1990 and August 6, 1990; and Michigan Modernization Service and the Industrial Technology Institute, “Local Area Modernization Plan (LAMP)

Draft Report: Jackson, lvlichiga~” p. 8; cited in Olive@ op. cit..
Chapter 6--Adjustment for States and Communities ● 189

ity with a $6,2-million bond issue. The bonds are

guaranteed by tax revenues resulting from improvements on the site (tax increment financing); they will

be retired over 15 years. Projected annual tax

revenues from MACI are $1.2 million, of which

about $800,000 per year will be used to retire the

bonds.

Besides trying to attract new fins, the Jackson

Alliance helped existing companies expand by

providing assistance in securing tax abatements,

loans, and land at subsidized prices. Expansions of

local companies added between 250 and 300 new

jobs. Most of these firms were also helped by State

programs, including worker trainin g and tax abatements. A business incubator was established in

November 1987 through a partnership between the

city, the Jackson Alliance, and Jackson Community

College. Since its inception, 25 firms have left the

incubator and 19 of these (15 of them manufacturing) were still in business in 1991. These firms

created approximately 100 jobs.

Other local organizations actively participated in

rebuilding the economy. Under the leadership of

Bob Carlton in the early 1980s, the Chamber of

Commerce functioned more as an economic development organization than is typical of this body.

Another active local group is the Jackson Area

Quality Initiative (JAQI), a nonprofit, communitybased organization that provides training in improving quality, productivity, and competitiveness.

Through Jackson Community College, JAQI has

offered intensive training in statistical process control for a variety of businesses. The training has

produced results. After a first round of training,

workers at Elm Plating were able to halve their

downtime, and hit zero percent downtime on a

consistent basis; recommendations coming out of

the training have saved the company over $100,000.147

Jackson’s recovery is incomplete, and as recent

events have shown, is fragile. By 1989, unemployment was down to 6.9 percent, a percentage point

higher than the national average, but with the 1991

recession, unemployment increased to over 11

percent. l48 In 1989, Jackson’s population and work

force were still slightly below 1979 levels (U.S.

population meanwhile rose 12 percent and employment 16 percent). Wages in Jackson had dropped an

average of $2 per hour.149 And, the second largest

infusion of new jobs in Jackson (after the Nippondenso plant) came from the expansion of the State

penitentiary.

Part of the recovery was due to external circumstances. The United States experienced an extended

period of economic growth from 1983 through 1989,

which was reflected in the local economy. The auto

industry, which benefited from this period of economic growth, from Japanese voluntary export

quotas, and from Japanese investment in a new

assembly plant (the Mazda plant in Flat Rock), has

decentralized in Michigan. Finally, Jackson’s convenient location between Ann Arbor and Lansing

stimulated some growth in Jackson as a ‘‘bedroom

community’ for commuters and is likely to become

an even more important factor in future growth.

Still, Jackson’s situation must remeasured against

where the community would be if it had not taken

steps to retrain its work force, improve efficiency of

its manufacturers, and market the community to

outside fins. Strenuous efforts by community

leaders did contribute to the restoration of stability

and a degree of prosperity, but did not repair all of

the damage. It is worth repeating, however, that very

few communities losing defense industries will face

as massive losses as Jackson did in the recession and

economic restructuring of the 1980s.

How Well Do Economic Development

Policies Work?

The frost step for a community affected by cuts in

defense spending is to accept that cuts will occur and

begin to develop positive strategies for adjustment.

The literature is full of stories of communities whose

response to abase closure or contract cutback was to

put all their energies into stopping what was usually

the inevitable. Because current declines in defense

spending cuts appear to be long term and not easily

reversed, it is all the more important for communi147*~JAQ1 success stories, ” JAQI Notes, spring 1990, cited in Oliveira, op. cit.

148u,s. Dep~~e~t of ~b~r, Bureau of ~bor sMtistics, Emp/oymenr and Earnings, VO1. 37, No. 5, my 1990, p. 154.

14~om Nicholls, Executive Dir~tor, Jac~on&ea~nufac~rers Associatio~ Ja&SO~ ~, ~rsonal Communication June 6, 1990, cited k ohVeti

op. cit.
190 ● After the Cold War: Living With Lower Defense Spending

ties to accept the inevitable and initiate economic

development policies.150

Interjurisdictional and institutional cooperation is

just as important. Having too many competing

economic development organizations and jurisdictions can severely limit success. Officials in several

communities affected by defense cuts see lack of

cooperation among communities as a potential

threat to successful adjustment.

151 This problem w a s

serious in southeast Connecticut, where fragmented

approaches to economic development have been

geared to a town rather than a regionwide effort.

Current efforts to organize the Southeastern Connecticut Economic Development Coalition aim to

overcome the problem.

Organizational cooperation and active local leadership are the basis but do not guarantee success.

Obviously, commitment and dedication must be

translated into well-designed and funded economic

development programs. But even the best programs

cannot fully prevent community economic distress.

One reason is that most defense cuts occur without

much notice (military base closings are the exception), while economic development programs take

time to work and produce results. Take the case of

Taunton, MA, an OEA-cited success story. In 1973,

Raytheon closed its missile site radar plant in

Taunton and laid off 1,400 workers. A cornerstone

of Taunton’s response was the development of the

Myles Standish Industrial Park (funded largely by

$3.25 million from EDA). Firms did locate in the

park, but only gradually; it was not until the end of

1985 that they had created 1,400 jobs, the number

lost in 1973. Although the economic development

efforts could be considered a success, it took over 12

years for that success to come about.152 Moreover,

Taunton was aided by the growing prosperity of the

Route 128 area in the 1980s, benefiting from the

good fortune of the region. Many communities

experiencing base closures took just as long to

regain lost jobs.153

Economic development programs alone cannot

turn around every community affected by the

defense build-down. Many factors determine a

community’s growth potential. Location and access

to markets, natural resources, skill level of labor

force, entrepreneurial ability, corporate structure,

industry mix, community leadership, growth of the

regional and national economy, and luck all contribute. If defense cuts occur in communities with no

innate advantage, economic development efforts

may play only a marginal role.

Stepping back to look at the national picture,

many communities will lose a small number of

defense-related jobs. The impact will be mild and

normal market forces will provide for full and

reasonably swift adjustment. Of the communities

that take a larger cut, some will suffer relatively little

because of compensating positive factors. In less

favored communities, active economic development

policies will be reasonably successful in some.

However, the time until recovery may be fairly

lengthy, particularly if the community gets little

advance notice of the cuts and if the national

economic performance continues to be weak. Finally, a few areas will not recover completely or

quickly, even though economic development policies may serve to lessen the depth and length of the

distress.

150A s~ateaofprewmationmy ~ve~de acertaina.mountof sense in the past when defense budgeta cutbacks came and went. For example, Vallejo,

CA has lobbied to keep open the Mare Island Naval Base since the 1920s when the base was first threatened with closure. In many ways this was a

successful strategy for the tow since it was able to keep employment at the base. However, the strategy was not without its costs. Being dependent

on one employer (the Navy) meant that a more diversiiled, civilian-oriented economy has not developed. Judy Schneider and Wendy Patton, “Urban

and Regional Effects of Military Spending: A Case Study of Vallejo, California, and Mare Island Shipyard, “ in Michael J. Breheny, (cd.), Dgfence

Expenditure and Regional Development, op. cit. It could be argued that many other smaller, defense-dependent places are in similar situations. Certainly,

defense dependency in southeastern Comecticut has closed off past development options and made it more difficult for the area to respond to today’s

defense cuts.

1510TA ~temiews ~th ~S @eleS, south-tern conn~ticu~ and st. ~m offlc~$

152Dep~rnent of Defense, Office of Economic Adjustment Econonu”c Adjustment/Conversion, Op. CiL, app. K, p. 28.

15gDep~ment of Defe~, Office of ~onomic Adjustmmt, Civilian Reuse of Former Milita~ Bases: 1961-1990, oP. cit., P. 2.
Chapter 7

Defense Companies
Content s

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

THE OUTLOOK FOR MAJOR DEFENSE COMP- . . . . . . . . . . . . . . . . . . . . . . . . . . 195

MAJOR COMPANY ADJUSTMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

Shrinking in size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199

Exporting Arms and Military Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Shifting to a Similar Commercial Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

Sales to Civilian Government Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Spinoff Companies

. . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Corporate Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . 204

Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

BARRIERS TO CONVERSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213

The Defense Company Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

DoD Practices on Development Costs and Data Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

MAJOR COMPANIES: PROSPECTS FOR CONVERSIONS IN THE 1990s . . . . . . . . 215

SMALL BUSINESS AND THE DEFENSE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Adjustment Plans of Small and Medium-Size Defense Firms . . . . . . . . . . . . . . . . . . . . . . 221

Government Programs To Help Small Companies’ Adjustment . . . . . . . . . . . . . . . . . . . 223

Boxes

Box Page

7-A. Top Defense Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197

7-B. Environment One: From Detecting Submarines to Monitoring Air Pollution . . . . . 205

7-C. Aircraft Companies as Makers of Mass Transit Vehicles . . . . . . . . . . . . . . . . . . . . . . . 207

7-D. GE Aerospace Conversion in the 1970s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

7-E. Opportunities for Defense Contractors in Advanced Transport . . . . . . . . . . . . . . . . . . 218

7-F. Frisby Airborne Hydraulics: Conversion in a Small Defense Company . . . . . . . . . . 225

Figures

Figure Page

7-1. National Defense Spending, 1940-1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

7-2. Prime Contracts for Hard Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

7-3. Outlays for National Defense Functions, 1975-1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

7-4. Percent Government Sales of Major Defense Contractors, 1990 . . . . . . . . . . . . . . . . . 196

7-5. DoD Small Business Prime and Subcontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Chapter 7

Defense Companies

INTRODUCTION

Since 1986, U.S. defense companies have faced a

Shrinking market. But it took the collapse of the

Soviet Union and the definitive end of the Cold War

to bring home the fact that the days of defense

spending at near-wartime levels were gone, and that

companies were in for serious long-term adjustments.

In the buildup of the 1980s, defense spending as

a percent of gross national product (GNP) never

reached the heights of either the Korean or Vietnam

Wars. However, in constant dollars, outlays during

the 1980s buildup were greater than in the peak years

of the Vietnam War, and total defense spending in

1986-89 was at least as high as in any 4-year period

during the Korean and Vietnam Wars (figure 7-1).1

Thus, defense dollars were fully as significant to the

companies doing military business in the 1980s as in

wartime years after World War 11.2

Appropriations for defense started going down (in

real terms) in 1986, dropping 13 percent in the 5

years 1985-90. Awards of new prime contracts also

began to decline (even in current, nondeflated

dollars) in 1986, with most of the drop coming in the

sectors that had grown fastest during the buildup:

aircraft and electronics and communication equipment (figure 7-2). Some declines in the defense

budget had already begun as the military expansion

collided with attempts to control the mounting

Federal budget deficits. But with the end of communism in the Soviet Union and cessation of the Cold

War, the prospect is for long-term cuts in defense

spending that were hardly conceivable 2 or 3 years

ago, and a new, far leaner environment for defense

companies.

The 1991 defense budget, down over 10 percent

in real terms from the year before, has already cut

deeply. To stay within this budget, major programs

that several defense companies expected to sustain

them through the 1990s must come to an early end.

A minor portion of the cuts might be accommodated

by companies’ streamlining their operations (e.g.,

centralizing maintenance and computer operations

or reducing spare parts inventories). A substantial

portion will come from military personnel reductions and base closings. But big bites will certainly

come from DoD contract awards for production of

items such as aircraft, missiles and space systems,

ships, tanks, guns, and ammunition. Prime contract

awards amounted to about $145 billion in fiscal year

1990, of which $124 billion went to private businesses (the rest went to educational and other

nonprofit institutions).

Sharp cuts in these awards could threaten the

stability, perhaps the existence, of some defense

contractors. This raises concerns that a shrunken

defense industrial base may not be able to meet

national security needs in an uncertain new world of

regional conflicts, smoldering national antagonisms,

and a possible reappearance of large-scale conflict.

OTA is addressing the national security concerns

related to weakening or disappearance of defense

companies in a companion assessment to this one.3

This report considers issues relating to defense

companies from the standpoint of the civilian side of

the economy.

On the civilian side, worries about the survival of

defense companies mostly come down to effects on

jobs, communities, and technologies that could

boost commercial competitiveness. Most immediate

is the threat to jobs. The coincidence in 1990-91 of

a recession and tens of thousands of layoffs from

major defense companies made that threat real. A

longer term worry is what may happen to defensedependent communities that are deprived of their

main livelihood. As of late 1991, none had yet

become a ghost town, but a few were looking at a

IDefense budget authon~ r~ched its peak of the decade in 1985. Outlays-actual spending under seve~ Years’ budget au~ority-p~~ ti 1989.

~efense outlays for 1990 and 1991 exclude Desert Shield and Desert Storm. If the estimated costs of Desert Storm ($61 billion) were included,

spending in 1991 might appear higher than at any time since 1946. However, much of the war’s cost was defrayed by contributions from other nations.

In addition, a portion of the ‘‘cost” was drawdowns from the huge Cold War inventories. Although a few items went into high gear production (Patriot

and Tomahawk missiles), most were not replaced, so the effects on defense companies were less than it might appear.

3~ fitefirqo~ of the ~omp~on ~=ssment, us. con~~s, office of Technology Assessment Rede~”gning ~e~ense: Planning the Transition

w the Future U.S. Dqfense Indusm”al Base, OTA-ISC-500 (Washington DC: U.S. Government Printing Offlce, July 1991); the fti report of this

assessment Managing the Nation’s Defense Indusm’al Strength in a Changing Security Environment, is forthcoming.

-193-
194 ● After the Cold War: Living With Lower Defense Spending

Figure 7-1—National Defense Spending, 1940-1991

Billion 1991 dollars

800

600

400

200

0

—

19401945195019551960 19651970197519801985 1990

— Outlay s + Budget authority

SOURCE: Department of Defense, Offlee of Comptroller, /VatAmw/Defense

Budget Estimate (Washington, DC: 1980 and 1991); and

President’s Council of Economic Advisers, Ecorrorrk ffqmt of

the President (Washington, DC: 1991 ).

fairly bleak future, especially if further contract

cancellations, big layoffs, or plant closings are

added to those already occurring (ch. 6).

The other major worry about defense companies

is that if they closeup shop, valuable experience and

technologies will go with them. Throughout four

decades of Cold War, the Department of Defense

(DoD) has been a huge source of funds for pushing

advances in technologies. DoD spending is not an

efficient or reliable instigator of technologies with

commercial applications, but through sheer size it

has been a very important one. 4 Defense companies

accomplished much of the DoD-funded technology

advance over the decades, often in research and

development (R&D) projects but also in actual

manufacture of leading edge, high technology products.5 Some of the knowledge thus created can be

transferred out of the companies involved (e.g.,

through publications, through licensing of patented

processes or products, or perhaps through people

leaving the company and enriching other companies

or institutions with their technical knowledge). But

some tacit knowledge that resides in the people who

have developed the technologies does not travel so

easily. It can dissipate when teams of people break

up, labs close down, and divisions or whole companies disappear. This doesn’t apply just to lab

50

40

30

20

10

0

Figure 7-2—Prime Contracts for Hard Goods

Billion 1991 dollars — —

v

—7— , 1 1 , 1 i

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

-+ Aircraft + Missiles + Weapons and

and space ammunition

+ Electronics –* Ships ‘x - Tanks /

and commu- autos

nications

equipment

SOURCE: Department of Defense, Washington Headquarters Servlees,

~“me Contracts Award% Fiscal Y-r 1990 (Washington, DC:

1991).

researchers or design engineers, but also to production engineers, foremen, and workers on the shop

floor.

Thus the strategies that companies adopt in the

face of declining defense spending matter not only

to their own employees and shareholders, but also to

their communities and to the Nation’s reservoir of

technology. This chapter opens a discussion but

does not fully examine the wider effects of defense

companies’ adjustment strategies. The potential for

redirecting technological resources-including those

of defense companies-from military purposes to

dual use or strategic commercial applications will be

the subject of a second and final report in OTA’s

assessment of Technology and Economic Conversion. This chapter concentrates mostly on issues of

jobs and community effects. A major question it

raises is whether there are possibilities now, under

present conditions, for companies to replace lost

defense business with commercial business and in

that way continue to provide jobs for workers and an

economic base for communities. Previous chapters

have discussed programs to help workers recover

from loss of defense jobs and communities from loss

4A ~nd and find report of this iMSeSSment deXarniW issues of dual use (military and commercial) technologies and industries. Past OTA

assessments have also dealt with the dual use issue; see Holding the Edge: Maintaining the Defense Technology Base, OTA-ISC-420 (Wsshingtou DC:

U.S. Government Printing Office, April 1989).

su~versities and govermnent-om~ laboratories also conducted much of the DoD-tidd MD.
Chapter 7---Defense Companies . 195

of defense business, but recovery from loss is

inevitably harder than avoiding the loss-assuming

that is possible.

Many large companies in the defense business can

expect to survive cutbacks, though perhaps at the

cost of brutal downsizing. Many smaller companies

face just two choices: get more commercial business

or go under.6 Not only the motivation but also the

opportunities for switching over may be greater for

small fins, which typically make parts and components, than for large prime contractors whose

business is assembling big ticket items like tanks or

missiles. Machine shops, for example, can often use

the same tools and processes to make metal parts for

trucks as for tanks. Small firms handle a significant

share of DoD purchases of goods and services—

probably about one-third of the total bought from

private businesses over the last decade, Still, the

two-thirds handled by large companies has the major

impact on jobs and communities. The final report of

this assessment will delve into the prospects for dual

use production by the whole range of companies,

large and small, and the potential contribution of

dual use technologies and industries to the Nation’s

commercial competitiveness.

THE OUTLOOK FOR MAJOR

DEFENSE COMPANIES

Defense contractors provide everything from food

and clothing for military personnel to major hardware systems such as aircraft and submarines,

construction of military facilities, and basic research

on advanced concepts that may have future military

value (e. g., materials science). Figure 7-3 shows

defense outlays by major function. The only one in

which defense contractors have no part is pay for

military and civilian DoD personnel.

As noted, the weapons system experiencing the

steepest drop in prime contract awards since 1985

has been aircraft. Consider the escalating blows to

aircraft companies. When the Navy’s T-46 trainer

was canceled in 1987, 3,000 people lost their jobs

and the manufacturer, Fairchild-Republic, was driven

out of the business of making airplanes. That event

foreshadowed the broader, deeper cuts of the early

1990s. For example:

Figure 7-3-Outlays for National Defense Functions,

1975-1991

Billion 1991 dollars

100

F

#Z!!QA~

80 +/\ k

1

‘.>

/ T F’

60 / # ”

ob : -=--==~

1975 1980 1985 1990

–

— Personnel ~– O& M + Procurement

~ RDT&E ~ Construction

NOTE: RDT&Erefers to research, development, test and evaluation; O&M

refers to operations and maintenance.

SOURCE: Office of Management and Budget, Bodgetoffhe United States,

Hsca/ Year 1992 (Washington, DC: 1991).

●

●

●

Secretary of Defense Cheney canceled the

Navy’s A-12 attack airplane in January 1991

because of delays and cost overruns, and

although continuing research on an alternative

was promised, 5,000 people at McDonnell

Douglas and 2,000 at General Dynamics were

immediately out of work, and actual production

of a substitute receded uncertainly into the

future.

General Dynamics, having lost the A-12, was

also slated to have DoD purchases of its Air

Force F-16 Falcon fighter cut from 150 to 48,

with the last buy in 1993. General Dynamics

was, however, on the winning team (with

Lockheed and Boeing) for the Advanced Tactical Fighter (ATF), a program projected to cost

as much as $65 billion over 10 to 15 years.

McDonnell Douglas, the other big loser in the

A-12 decision, also lost out for the ATF and had

no prospects for an Air Force fighter to replace

its F-15 Eagle, for which DoD purchases were

slated to end in 1991. It was left only with

planned continuing buys of the Navy F/A-18

Hornet and the new Air Force C-17 cargo plane.

me Smail Business Administration defines a small business as one that is not dorninan tin its field of operations and with its affiliates does not have

more than a specified number of employees (usually 500 to 1,000 in manufacturing, depending on the kind of product) or, for construction and service

firms, a certain amount of annual sales.
196 . After the Cold War: Living With Lower Defense Spending

. Northrop, another loser in the ATF competition, had nearly $5 billion penciled in for B-2

Stealth bombers in the administration’s 1992

budget, but this proposal failed to survive

passage through Congress, which voted in

November 1991 to suspend B-2 purchases at

the 15 already in various stages of production.

This could be the death knell of the B-2, since

further purchases depend on test results and

approval by both the Senate and the House; the

House has previously voted twice to end the

B-2 program.

Since aircraft takes the biggest portion of DoD

funding both for R&D and for procurement, the

aircraft industry is taking the biggest dollar losses.

But companies in other sectors will be hit just as

hard-maybe harder. For some aircraft companies,

there is at least some refuge in the commercial

business, whereas the civilian markets for missiles,

ships, and tanks are small to nonexistent (though

foreign military sales for some of these items are

large and growing). These stories are representative:

●

●

In military land vehicles, DoD made its last

buys of M-1 tanks and Bradley M-2 fighting

vehicles in 1991, with production to end in

1993, Although research and development of

advanced armored vehicles will continue, procurements are not expected to resume until late

in the decade.

As for ships, the last Trident missile-launching

submarine will be funded in 1991; those

planned for 1992 and 1993 are canceled, which

means a loss in prospective procurements of

$1.3 billion for the builder, General Dynamics’

Electric Boat company of Groton, CT. And

procurement of the SSN Seawolf attack submarine is slated to be cut from three a year to one

a year. Electric Boat and Tenneco’s Newport

News Shipbuilding and Dry Dock Co. of

Newport News, VA, had expected to share

production of the Seawolf. They are tussling

over which will get the remaining one per year,

with General Dynamics threatening to close the

Electric Boat submarine yard if it does not get

all the Seawolf contracts and Tenneco vowing

to cut its work force by half and get out of the

submarine business if it does not get half the

contracts. 7

Figure 7-4-Percent Government Sales of Major —

Defense Contractors, 1990 -

Grumman

Lockheed

Martin Marietta

General Dynamics

McDonnell Douglas

Raytheon

Rockwell

Westinghouse

United Technologies

Boeing

General Electric

Tenneco

General Motors

r 1 0 20 40 60 80 II00

Percent of total sales

= Government m DoD prime

sales contacts

SOURCE: Department of Defense, Washington Headquarters Services.

1~ Companies Receiting the La”~est Della; Volumes of Prime

Contract Awads, FBca/ Year 1990 (Washington, DC: 1991);

and company annual financial reports.

Until defense appropriation bills pass the Congress and are signed by the President, it is impossible

to know exactly what programs will be cut by how

much, and just what kind of hit each company will

take. What is certain is that cuts are deep, imminent,

and real.

For some companies-those most dependent on

defense sales-the prospect is more threatening than

for others. Figure 7-4 shows government sales as a

percent of total sales for a dozen of the top defense

companies (ranked by dollar value of prime contract

awards). Note that this is government sales, not DoD

sales; data for the latter are unavailable for several

companies. For some companies, nearly all government sales are to DoD, but others sell sizable

amounts to other U.S. Government agencies (primarily the National Aeronautics and Space Administration (NASA), the Federal Aviation Administration, and the Department of Energy). Box 7-A,

which describes the military products of the top 13

companies, identifies some of the companies that

make large sales to government agencies other than

DoD. Note also that DoD prime contract awards as

a percent of a company’s sales in a given year can be

misleading because sales to DoD in any year include

sales under contracts dating from earlier years.

However, the figure on prime contract awards does

~obert Holzer, “Navy’s Seawolf Sub Award ‘llreatens Future of Losing Shipyard,” D@eme News, Mar, 25, 1991.
Chapter 7--Defense Companies ● 197

Box 7-A—Top Defense Firms

McDonnell Douglas: Military aircraft (over 36 percent of 1990 sales) are the F/A-18 Hornet, F-15 Eagle,

AV-8B Harrier, C-17 transport, T-45 Goshawk trainer, and AH-64 Apache helicopter. Missiles, space, and

electronics (20 percent) include the Harpoon, SLAM, and Tomahawk missiles; Delta II rocket, and vision and C31

(Command, control, communication, intelligence) systems. Net sales in 1990 were $16.2 billion; DoD contract

awards were $8.2 billion.

Gerwral Dynamics: GD’s military aircraft division (36 percent of 1989 sales) produces the F-16 Falcon and

is on the winning Advanced Tactical Fighter (ATF or F-22) team. The Electric Boat Division (17 percent of 1990

revenues) builds the Ohio Class SSN Trident submarine and has the first SSN-21 Seawolf class nuclear attack

submarine contract. Land Systems (10 percent of 1990 revenues) makes the Ml Abrams tank Missiles, space and

electronics produce Tomahawk Standard, Sparrow, and Stinger missiles; Atlas and MLV II launch vehicles, plus

Centaur upperstages for Titan IV boosters; and a variety of electronic communications and test equipment. Net sales

for 1990 were $10.2 billion; DoD contract awards were $6.3 billion.

General Electric: GE makes military fighter, bomber, and tanker aircraft engines. Aircraft engine division

revenues were 13 percent of 1990 revenues, more than half of which is for commercial engines. GE Aerospace (10

percent of 1990 sales) produces the Aegis fleet air defense system; a variety of radar, guidance, flight control, and

visual simulation systems; and communications satellites, GE Aeropsace is also flight control subcontractor to

McDonnell Douglas on the C-17. Consolidated 1990 corporate revenues (including GE Financial Services) were

$58.4 billion; DoD contract awards were $5.6 billion.

General Motors: The Hughes aircraft division is a supplier of Maverick AMRAAM, and Phoenix missiles.

It also produces targeting systems for the AV-8B Harrier attack jet and the TOW 2 missile, and has contracts for

Army and Navy software systems for personnel and supplies. Revenues in 1990 were $103.3 billion; DoD contract

awards were $4.1 billion.

Raytheon: Raytheon’s Electronics Division (59 percent of 1990 revenues) has prime contracts for the Patriot,

AEGIS, Hawk and Sparrow missile systems. It is the second source after Hughes for the AMRAAM, Maverick,

and Phoenix systems, and after General Dynamics for the Sea Sparrow, Standard 2, and Stinger missiles. The

division also produces Aegis radar and fire control systems, and other radar, communications, computer,

anti-submarin e warfare (ASW), and electronic countermeasure systems. Its Beech Aircraft subsidiary will produce

the Air Force’s T-1A Jayhawk tanker/transport trainer aircraft. Revenues in 1990 were $9.3 billion; DoD contract

awards were $4.1 billion.

Lockheed: In aeronautics (23 percent of 1990 sales), Lockheed heads the winning F-22 Advanced Tactical

Fighter team, makes the F-1 17A Stealth fighter, C-130 Hercules, the P-3 Orion, and avionics systems. Lockheed

also has a strong missile and space systems program (51 percent), producing spacecraft, satellites, and ballistic

missiles. It is the largest Strategic Defense Initiative (SDI.) contractor. Sales in 1990 were $9.9 billion; DoD contract

awards were $3.6 billion.

(continued on next page)

provide some indication of what companies can this group are United Technologies (parent of the

expect in the future.

As figure 7-4 shows, some top defense companies

count on government sales for more than half of their

income; these include General Dynamics, Grumman, and McDonnell Douglas. Another group of

large contractors, including Martin Marietta, Lockheed, Raytheon, and Rockwell International, also

depend on the U.S. Government for more than half

of their sales, but their customers include other

agencies besides DoD. Still other large prime

contractors are diversified commercially, relying on

defense for less than one-third of their business; in

aircraft engine company Pratt and Whitney) and

Boeing. One other group of large defense companies

including General Electric, Westinghouse, General

Motors, IBM, GTE, and ITT which are fundamentally commercial firms that maintain defense divisions.

Although defense dependence at the corporate

level gives a good idea of the vulnerability of the

company as an institution, it does not accurately

portray the likely impacts from a company’s loss of

defense business on particular communities, or on

workers in particular divisions or plants. Take
198 ● After the Cold War: Living With Lower Defense Spending

Box 7-A—Top Defense Firm--Continued

Martin Marietta: Martin Marietta is highly diversified within defense. The Electronics, Information and

Missiles Group (42 percent of 1990 revenues) has contracts for some aspects of the Patriot, Hellfire, ADATS, Small

ICBM, Minuteman, Pershing, and Peacekeeper missiles systems; navigation, target acquisition, and night vision

systems; and ASW and radar systems. The Information Systems Group also has significant DoD contracts.

Astronautics (53 percent) makes Titan IV rockets and NASA systems. Net sales for 1990 were $6.1 billion; DoD

contract awards were $3.5 billion.

United Technologies: Flight Systems (including subsidiaries Sikorsky and Norden; 18.5 percent of 1990

revenues) leads the Army’s winning light helicopter team, and produces UH-60A Black Hawk, Seahawk, Super

Stallion, and Sea Dragon helicopters, plus radars, avionics, and environmental controls. The Pratt&Whitney Power

Group (33.5 percent) produces aircraft engines, including engines for the F-22 Advanced Tactical Fighter. Sales for

1990 were $21.8 billion DoD contract awards were $2.9 billion.

Grumman: Grumman Aerospace (72 percent of 1990 revenues) makes F-14 Tomcats, EA-6B Prowlers, E-2C

Hawkeyes, and A-6 Intruders. Electronics (12.5 percent) is the lead contractor in the E-8 Joint STARS airborne

surveillance and target acquisition system and produces other aircraft electronics, computerized test equipment, and

trainers. Revenues for 1990 were $4 billion; DoD contract awards were $2.7 billion.

Tenneco: Tenneco’s Newport News Ship and Drydock Co. subsidiary (14.5 percent of total 1990 revenues)

builds submarines and overhauls aircraft carriers for the Navy. While nearly all the business of the Newport News

Division is in defense, Tenneco’s other divisions are focused on commercial markets. Corporate revenues in 1990

were $14.5 billion; DoD contract awards were $2.4 billion.

Boeing: Boeing’s military aircraft division (14.9 percent of 1990 sales) makes the Air Warning and Control

System (AWACS) and E-6 submarine communications aircraft, B-2 structural components, and had contracts to

update CH-47 Chinook helicopters, A-6s, F-4Es, and the P-3 Orion. It is teamed with Lockheed and General

Dynamics on the F-22 Advanced Tactical Fighter, and with United Technologies on the light helicopter. It also

makes avionics, electronic warfare support measures, C31 systems, and missiles, and is developing the V-22 Osprey.

Revenues in 1990 were $27.6 billion; DoD contract awards were $2.3 billion.

Westinghouse: Westinghouse’s electronic systems division (24.7 percent of 1990 sales) does about 75 percent

of Westinghouse’s defense work. The division builds radar and electronic countermeasures devices for systems

including the F-16 fighter and AWACS. The division has been expanding its nondefense markets with products

such as mail-processing equipment and commercial airport radar systems. Corporate sales in 1990 were $12.9

billion; DoD contracts awards were $2.2 billion.

Rockwel International: Electronics (40 percent of 1990 revenues) makes avionics, aircraft communications,

guidance and control, and CI systems. Aerospace (30.5 percent) was the B-lB lead contractor, does aircraft

modification, and makes rocket engines. Rockwell also is NASA’s largest contractor. Revenues in 1990 were $12.4

billion; 1990 DoD contract awards were $2.2 billion.

General Electric as an example. Even though GE is the GE Aerospace plant in a small town like

a huge defense contractor in dollar amounts~ranking

third in value of prime contracts ($5.8 billion) in

1989, it ranked much lower in defense dependence,

relying on government sales for only about one-sixth

of its total corporate revenues in 1990. However, GE

Aerospace is essentially a defense company. At the

beginning of 1989, GE Aerospace had 46,000

employees; by April 1, 1991, employment was down

to 38,000 and the company planned to eliminate

another 2,000 positions by the end of 1992.8 The

diversification of the GE corporation as a whole does

not provide much help to the local economy when

Pittsfield, MA closes-down. In 1986, 7,800 of the

Pittsfield area’s 41,000 workers worked for GE

Aerospace. By 1991, GE Aerospace employment

was down to less than 3,000, with a loss of 3,000 jobs

in just 1 year, 1990 to 1991.

MAJOR COMPANY

ADJUSTMENT PLANS

Most large defense companies now realize that

there will not be a new round of defense procurements on the lavish scale of the 1980s. While some

~ata provided by GE Aerospace division.
Chapter 7--Defense Companies . 199

still expect that their special abilities will win them

an outsize share of dwindling defense contracts,

many are having to face the fact that their own piece

of the pie will diminish at least in proportion to the

smaller size of the whole pie, if not more. The big

companies see their options along two principal

lines, one which continues to concentrate on the

defense business and the other broadening out more

into the civilian economy.9 In the first category, one

option is simply to shrink in size: close plants, lay off

workers, cut suppliers loose, and get down to a

smaller core defense business. Another is to try to

sell more to foreign military purchasers.

In the category of greater activity in the civilian

economy, one alternative is to diversify at the

corporate level through purchase of going concerns

that already sell commercial products. Another

option, in parts of the aircraft business and perhaps

a few others where military and commercial end

products have much in common, is to switch

resources into making the commercial product. The

potential for this kind of switch is probably greater

with subsystems and components than with end

products, though much depends on the companies’

marketing abilities. Some companies, figuring they

know how to deal with the government, are pursuing

nondefense government agencies as customers for

systems and technologies originally developed for

the military. Not part of company plans, but an

interesting possibility from the standpoint of technology transfer, is the startup company formed by a

few entrepreneurs peeling off from large defense

fins, to exploit technologies of military origin for

commercial markets, The option that comes dead

last, in the estimation of most large defense companies, is what is often termed conversion: that is, the

company itself develops a new commercial product

line that makes use of plant, equipment, work force,

and technological know-how formerly devoted to

military products, and lines up the financing and

marketing needed to make large-scale production

viable.

Shrinking in Size

Most companies are following more than one of

the options outlined above, although they may single

out one as their main strategy. General Dynamics

Corp. (GD), second in DoD prime contract awards in

1990, perhaps best exemplifies the strategy of

preserving core abilities in defense while shrinking

radically in size. The company defines itself as a

“pure-play” defense firm whose primary business

is making major hardware systems-aircraft, missiles, submarines, and tanks. Since late 1989, when

signs of a steep defense build-down became unmistakable, top officers of General Dynamics have

made it clear that their principal strategy is to get

smaller.

GD corporate employment peaked at 105,400 in

1987. It was down to 85,000 by fall 1991, and the

company planned to shrink to 63,000 jobs by the end

of 1994, even with some new defense contracts in

hand. For example, the ATF award might keep

employment at the company’s Fort Worth plant

above 10,000, but that would still be less than half

the 22,000 employed there in 1990. Some entire

plants will be closed, others drastically downsized.

As noted, GD intends to shut down its big Electric

Boat submarine yard in Groton, CT, if it does not

win all the future Navy contracts for the new

Seawolf attack submarine. Production of Ml tanks

at GD’s Detroit plant was scheduled to end in 1991,

with nothing left behind but machining of some parts

for the Lima, OH facility. At the same time GD

employment is shrinking, so are investments. In

1990, GD’s planned capital expenditures for 1990-

93 were cut by $1 billion to $575 million, and

planned R&D spending for 1990-93 was reduced by

$380 million to half the level of the previous 4 years.

While getting smaller, GD also planned to increase dividends to shareholders and compensation

to managers. The company increased profitability

standards for new contracts, and adopted a plan to

link executive bonuses to financial performance,

The plan based bonuses for Chief Executive Officer

William Anders and about 25 other top GD executives on the price of GD stock. Bonuses totaling

approximately three times the officers’ annual base

%faterial in this section is drawn from amual reports of 10 leading defense companies, from interviews with company officials, and from articles

in general and trade press.
200 . After the Cold War: Living With Lower Defense Spending

pay were awarded in May and October 1991.10

However, in November 1991 GD’s board of directors voted to drop the plan and substitute a more

traditional stock option incentive program.ll

While shrinking is the major GD strategy, a minor

theme is to look for modest increases in commercial

business. The company expects its commercial

missile launch service business to grow; orders for

five new launches of communications satellites were

taken in 1990. Also, GD is a subcontractor to

McDonnell Douglas, making fuselages for that

company’s big new commercial jet transport MD11. However, the company underscored its commitment to its core defense business when it announced

plans in 1991 to sell its Cessna subsidiary. GD had

bought Cessna, a maker of small aircraft for both

commercial and military buyers, only 5 years earlier.

Finally, like a number of other big defense

companies, GD is seeking opportunities to transfer

military technology to nondefense government projects. Its first such venture was in magnets for the

Superconducting Super Collider. Based on its expertise in cryogenic fluid-handling technologies, largely

gained in the Atlas launch vehicle, GD was selected

as the leader for the design and prototype test of

preproduction magnets for this multibillion-dollar

government project.

Exporting Arms and Military Technology

Virtually every big defense company wants to

increase its military sales to foreign buyers. When

asked for suggestions about government policy to

ease the impact of the defense build-down, most

company officials put relaxation of U.S. export

controls on military items at the top of the list.

Moreover, reliance on exports to bolster the U.S.

defense industry has some support from the Bush

administration. 12 Although this strategy holds little

promise for strengthening commercial competitiveness or creating dual use abilities in U.S. industry, it

has a strong appeal from the companies’ point of

view. There are two serious problems, however.

First, the end of the Cold War has sent world defense

purchases into steep decline, while overcapacity of

production exists in many countries; military sales

are a buyers’ market. Second, the international arms

business is “building up a dangerously armed

world’ in which potentially renegade or terrorist

nations can use military equipment or technologies

imported from the advanced industrial states to

threaten or invade weaker neighbors.13

Most arms-producing nations collaborate with

other nations in developing advanced weapons

systems in order to reduce costs, and they also use

exports of their latest equipment to reach economies

of scale in production. In fact, some European arms

producers, with the support of their governments,

export half or more of their military output. In

contrast, U.S. policy has long been to control

military exports quite strictly, and to use them

mostly to strengthen allies and oppose expansionary

communism; the United States exports only about

10 percent of its military production. However, U.S.

arms production is so huge that on a dollar basis

American military exports in recent years were

greater than those of all the other Western powers

combined (nearly $12 billion a year on average from

1982 to 1986) and were second only to those of the

Soviet Union. (Japan prohibits military exports

altogether).

The situation in the United States is changing. In

the last couple of years, direct commercial sales of

military equipment to foreign buyers (which require

l~o~fi ]. Mcc~y, ‘‘Defe~ Firm’s Executives Reap Bonus BOrMXU%’ The Washington Post, Oct. 9, 1991, p. F1. An executive did not receive

the bonus immediately; instead half was set aside until the executive’s 65th birthday and the other half until the expiration of the plan in 1994. Meanwhile,

the executives were paid interest at above market rates on the deferred payment (13.9 percent in Octobex 1991, compared to typical current rates of 7

percent on certificates of deposit), so long as the stock price stayed above the level that triggered the bonuses.

1 l~~ony L. Velocci, Jr., “GeneralDynamics to Roll Back Controversial Compensation Plan+” Aviation WeekandSpace Technology, Nov. 18,1991,

pp. 68-69.

12,’

. . . The long-term survival of a number of important domestic arms programs are tied to foreign sales,’ according to U.S. Department of State

and Defense Security Assistance Agency, Congresm”onal Presentation for Secun’ty Assistance Programs, fiscal year 1992, p. 6, cited in U.S. Congress,

OffIce of Technology Assessment, GlobalArms Trade: Commerce in AdvancedMilitaty Technology and Weapons, OTA-ISC-460 (Washington DC:

U.S. Government Printing OffIce, June 1991), p. 3. Moreover, some high-ranking U.S. military oftlcers have departed from tradition to advocate foreign

sales of U.S. military equipment-including Ml tanks and F- 16 fighter aircraft-in order to support the U.S. defense industrial base and keep production

lines open. Ibid., p. 13. Much of the material in this section is drawn from this OTA report.

ls~id., pp. 16, 17. ~exmple of forei= ~i~s~es tit wme used for p~s~ f~ from tiose titmdd by U.S. policymakers is fo~d iII h.

The United States sold about $11 billion of military hardware to Iran from 1969 to 1979 and trained 11,000 military officers. These weapons and trained

officers failed to save the Shah’s regime, and were later used in the war against Iraq. The Soviet Union, France, and several developing countries were

major suppliers of weapons to Iraq before the invasion of Kuwait.
Chapter 7--Defense Companies ● 201

approval but no participation by the U.S. Government) have greatly increased. In many of these deals,

the sale of a tank or fighter aircraft, for example, is

combined with sufficient transfer of the underlying

technologies for indigenous production, under license, by the buyer nation. These were the terms of

a proposed sale by McDonnell Douglas of its F/A-l 8

aircraft to Korea; that sale fell through when General

Dynamics offered a lower price and more technology transfer for its F-16 fighter, but the GD sale is

expected to include similar terms. U.S. firms making

these sales argue that the most advanced technology

is not transferred. ‘‘We don’t sell the crown jewels, ”

they say, arguing that yesterday’s technology has a

limited shelf life and marginal relative warfighting

capacity. However, with the present sharp cutbacks

in military procurement and development of many

new weapons systems delayed for years, much of the

equipment used by the U.S. armed forces until well

into the next century could be based on yesterday’s

technology. Some of the most successful weapons

demonstrated in the Persian Gulf War were designed

in the 1970s or even earlier.

Despite a trend toward relaxation of controls on

U.S. military exports, there are cross currents. It has

been sobering to realize that Western allies of the

United States furnished a large share of the Iraqi

military machine-including its most advanced

aircraft and missiles and components for missile

guidance systems, nuclear weapons, and chemical

weapons. Not only the large-scale export of weapons

but also the worldwide proliferation of technologies

and industries for building modern weapons are

sources of increasing concern. U.S. policy is unclear.

On the one hand, the Bush administration proposed

in 1990 a sale of over $26 billion in U.S. weapons to

various Middle Eastern countries (Congress has

already permitted approximately $10 billion of that

proposed sale14), the State Department has instructed U.S. embassies to help U.S. defense exporters, and the administration has proposed up to $1

billion in loan guarantees by the Export-Import

Bank for purchase of U.S. defense equipment by

NATO members, Australia, Japan, and Israel.ls On

the other hand, President George Bush proposed in

May 1991 that major supplier nations exercise

‘‘collective self-restraint’ in arms sales to the

Middle East.l6 In Congress, there is a substantial

interest in seizing the moment to create a system of

multilateral controls over the global arms trade.17

Whatever the outcome of the policy debate, the

prospects for greatly increased exports by the entire

U.S. defense industry are dim. Foreign buyers may

be lining up for certain American-made weapons

systems that scored brilliant successes in the Persian

Gulf War, and this could give a boost to some

companies. But overall world spending for defense

has plummeted, and the competition from other

countries is stiff. Like DoD contracts within the

United States, there is not enough export business to

go around. It is not just a zero-sum game, it is

negative sum.

Shifting to a Similar Commercial Product

The similarities between some military and commercial products are great enough that it should be

possible to shift people, R&D resources, and even

some production equipment from one to the other

with relative ease. Aircraft is the prime example.

Both of the U.S. producers of large commercial

airplanes-Boeing and McDonnell Douglas—

produce military aircraft as well, though the military

side of the business is far more important to

McDonnell Douglas than to Boeing (figure 7-4).

Because of the lucky coincidence of a strong

commercial market in the late 1980s and early

1990s, both companies have big backlogs and are

shifting to a greater proportion of commercial work.

In the same way, the two U.S. manufacturers of

large jet engines, GE Aircraft Engines and Pratt and

Whitney, have tilted toward more commercial production. Not only that, all of the U.S. airframers that

specialize in military aircraft are either already doing

subcontract assembly work for Boeing’s and McDonnell Douglas’s commercial jets (e.g., fuselages, tail

sections) or are planning to do so. At least one

military airframer, Lockheed, has offered every

commercial manufacturer in the United States and

Europe anything from small parts to final assembly,

Idsen. Jo~ M~~ “tis Sales to the Middle East Since the Gulf War. ” Congressional Record, Senate, NOV. 19,1991, p. S16981.

15u.s, ConWSS, office of Technology Assessment, Global Arms Trade, op. cit., p. 21.

lbThe Washington Post, May 30, 1991, p. Al.

ITFor exmple, in Jwe 19$)1 he Semte co~ttw on Forei~ Relations ~proved foreiW ~d ad Stite wp~ent authotition bills tit wotid

direct the President to convene the major weapons supplier nations to establish a ‘‘cartel” to ban the sale of chemical nuclear, and biological weapons

and ballistic missile delivery systems to the Middle East, and to curtail sales of advanced conventional arms.
202 . After the Cold War: Living With Lower Defense Spending

but a possible deal with Airbus Industrie fell through

because of the European member companies’ desire

to keep as much work as possible in Europe.

Lockheed has, however, succeeded in expanding its

division that does maintenance and rework of aging

aircraft, including big commercial jets. It doubled its

corporate capacity for overhaul and structural rework with a facility in Tucson that opened in 1989.

And it has agreed to refurbish Japan Air Lines’ 747

fleet in hangars at California’s Norton Air Force

Base, which was on DoD’s 1988 base closing list

and will soon be vacated by the Air Force. Moreover,

Lockheed has a relatively small but thriving commercial business selling a civilian version of its

C-130 Hercules military cargo plane; among its

customers are oil companies drilling on Alaska’s

North Slope.

The shift from military to commercial production

in aircraft is not without difficulties. The biggest

impediments lie less in technology than in business

practice. True, military aircraft are designed with

different goals than commercial planes; in some

military planes (especially fighters) the highest

value is put on performance pushed to the limit, with

cost secondary, while in commercial airplanes the

top goals are safety and cost control, with performance important but a step behind. More significant

than these differences, however, is the fact that

defense contractors have one customer to deal

with--DoD--and that customer imposes by law and

regulation accounting and audit practices that are

costly, cumbersome, and unknown to the commercial world. 18 Successful defense contractors are adept

at working with these requirements, but that set of

skills gives them no advantage whatever in the

commercial side of the business, rather the opposite.

More will be said on this subject later. For now,

suffice it to say that some military airframes find

that the cost structure in their military business

makes it very hard to do large-scale commercial

subcontracting.

Some companies do manage to work both sides of

the street quite effectively. GE Aircraft Engines is

the leading example; this GE division combines all

aspects of its military and commercial business

except for marketing, while still complying with

DoD requirements. Boeing (airframes) and Pratt and

Whitney (large jet engines) both keep military and

commercial production much more separate. McDonnell Douglas is in something of a middle position,

with most of its military and commercial production

physically separated but with some interchange of

managers and engineers. And despite the separate

structure at Boeing, there is at least some opportunity to move people from the military to the

commercial side (see ch. 4, box 4-C, which describes

Boeing’s retraining program in Wichita, KS for 176

military aircraft engineers) .19

At the level of subsystems and components,

integration of military and commercial production is

often greater, and so is the opportunity to shift rather

easily into more commercial work. For example, the

aerospace division of Allied Signal Corp. makes a

whole range of items for aircraft, including auxiliary

power units and environmental control systems for

large transports, engines for smaller aircraft, actuators, engine controls, flight control systems, wheels

and brakes, avionics and cockpit displays. About

half the company’s business is military, and according to company officials it is not too difficult to shift

to commercial work; people, accounting systems,

facilities, and technologies are shared. Production is

shared when possible, as when there are common

parts (e.g., in heat exchangers, actuators, valves).

Even at the subsystem level, exchanges between

the military and commercial sides of the business are

not always trouble-free. For example, Rockwell

Collins, a world leader in both military and commercial avionics, segregates the two sides of the

business except for R&D---even though avionics is

the one part of the aircraft sector in which technology flows most freely between military and commercial projects .20 The reason is simply that military

specifications (which often cover manufacturing

processes as well as the product itself) and accounting requirements put too much of a cost burden on

the commercial side. Despite the problems, Collins

does assign engineers from its military side to

18 For ~ di~cu~~ion of DOD con~ac~ rq~ements, tie costs (hey impose, and tie reasons (hey w~e adopted, see OTA, Holding fhe Edge, op. cit.

1gB~~g’~ f~~t major reduction of defense. mlat~ jobs in (& c~ent defense build-down was announced in October 1991; 2,500 jobs are to be

eliminated in the MX missile and the Short-Range Attack Missile II programs, which will be ended following President Bush’s decision to abolish several

nuclear weapons programs.

mAs lead~g e~ples of tie tec~olo~ flow, Com officials cited fig-~ser gyos (initially developtxl by the Navy), which accurately measure

an aircraft’s attitude, and the global positioning system (GPS) for satellite navigation.
Chapter 7-Defense Companies . 203

commercial projects when they are needed, although

some retraining for attentiveness to costs may be in

order.

Altogether, despite the difficulties, the commercial aircraft business proved useful in tempering job

loss and community disruption from the very sharp

cutbacks in military aircraft procurement in the early

1990s. As a haven for some of the engineers,

computer programmers, and technicians displaced

from the defense sector, it helped to staunch

dissipation of the technology embedded in people’s

minds. It should be noted, however, that these

positive effects were fortuitous. It was good luck that

the end of the Cold War coincided with an upswing

in the cyclical commercial aircraft industry-strong

enough, it seems, to have escaped any immediate

dampening from either the Gulf War or the 1990-91

recession. Also, even a commercial industry with

tens of billions of dollars in backlogs was by no

means enough to avert serious displacement in some

aircraft-dependent communities, i.e., Fort Worth, St.

Louis, Long Island, and Los Angeles.

While the aircraft industry provides the most

opportunities for direct transition from a military to

a commercial product, there may be some smaller

openings elsewhere. For example, AM General (a

division of LTV Missiles and Electronics Group)

announced plans in June 1991 to sell commercially

its Persian Gulf War star vehicle, the Humvee (or

Hummer, more formally the High-Mobility Multipurpose Wheeled Vehicle) .21 To be offered in three

versions, priced from $40,500 to $44,000, the

civilian Hummer got off to a well-publicized start

with a $60,000-plus custom order from Arnold

Schwarzenegger. 22

Sales to Civilian Government Agencies

A first line of retreat for many companies losing

military contracts is to go for more business with

NASA. All of the leading defense contractors are

involved in space technology, making missiles,

launch vehicles, satellites, electronic control systems, or all of the above, and most have some NASA

as well as DoD contracts in space applications.

NASA’s $14.3-billion appropriation for fiscal year

1992 was only a modest 2.5-percent increase over

the 1991 level, but it included a 19-percent hike for

the new space station Freedom, up to $2.03 billion.

President Ronald Reagan had proposed building a

new space station, to be launched by the end of the

century, in 1984; from 1985 to 1991 Congress

appropriated a total of $5.7 billion for the project.

However, in recent years, estimates of the space

station’s cost skyrocketed, NASA scaled it down,23

and scientists questioned its value. In fact, several

scientific associations have opposed any further

finding for the project. The generous FY92 funding

for the project does offer opportunities for increased

sales by some defense companies, though whether

the project will eventually be fully funded is still not

certain.

Several large defense companies are aggressively

following a strategy of packaging their technologies

in a form suitable for civilian government agencies,

including several others besides NASA. Although

there may be differences between DoD and civilian

agencies, government sales are still a world apart

from commercial marketing, and are what defense

companies understand. Martin Marietta is a leading

example of the strategy. Building on its defense

work in C3

I (command, control, communication,

intelligence), the company’s Information Systems

Group has set its sights on 15-percent growth

annually from sales of information and data processing systems to civilian agencies. Already, Martin

Marietta is the overall systems engineer and integrator for the Federal Aviation Administration’s (FAA)

$16-billion upgrade of weather and air traffic

systems at U.S. airports, an effort involving several

other defense contractors, including TRW and

Norden Systems (a subsidiary of United Technologies). Martin Marietta has sold similar services in

Canada, France, and Australia. The company is also

supplying software for data processing to the Social

Security Administration, data processing facilities

to the Department of Energy’s (DOE) Western Area

Power Administration, remote data networking and

processing services to the Agriculture Department’s

*’Jack Keebler, “@l0,000-plus Hummer Goes Public,” Automotive News, June 24, 1991, p. 4.

~~e price to DoD for the Hummer is $26,000. Ibid.

~~e cost of building space station Freedom was originally estimated at $8 billiou a 1990 estimate was nearly $39 billion. A scaled down and

stretched out project would cost $30 billion by 1999, according to NASA, but the work on the station would not be cmnplet~it could later be enlarged

and enhanced. The U.S. General Accounting OffIce estimated the overall cost of building, launching, and main

through 2027, at$118 billion; a more recent estimate is $180 billion.

mthe station in space for 30 years,
204 ● After the Cold War: Living With Lower Defense Spending

National Agricultural Statistic Service, and automated mail-sorting machines to the Postal Service.

This strategy is a fruitful one for technology

transfer from military to civilian activities. It also

holds promise for easing the transition for workers

and communities, avoiding dislocation and disruption by continuing the same kind of activities in the

same places with many of the same people.

Spinoff Companies

Sometimes, enterprising employees of large companies decide to form their own companies to exploit

for commercial uses military technologies that the

large company has developed but does not wish to

bring to market. The value of this approach is in

technology transfer. It usually does not save existing

jobs or use existing plant and equipment, but if it

succeeds it may create new jobs, energize local

communities, and contribute to the Nation’s industrial competitiveness.

Little has come to light about entrepreneurial

spinoffs in the current defense build-down, and it

may be too soon to judge the success of such efforts.

However, examples from earlier periods of defense

cutbacks illustrate how they can work. One such is

the Schenectady, NY company Environment One,

founded in 1969 by six engineers who left GE’s

General Engineering Lab to commercialize a technology that originated in an antisubmarine device.

Box 7-B tells the story.

Assuming that there are enterprising people who

want to start up a company based on military

technology, such as the founders of Environment

One, often the main impediment is getting enough

financial backing. Obtaining necessary intellectual

property rights could also be a problem in some

cases. The large companies that were the seedbed of

the technologies sometimes help startup companies

get past these obstacles. For Environment One, GE

was helpful in licensing its technology on affordable

terms. A few years later, in the 1970s, GE tested the

idea of a Ventures Group in which it supported small

spinoff companies trying to commercialize technologies developed in GE’s basic science Research

Lab. (Not all the technologies were military in

origin, but about 60 percent of the lab’s funding at

that time came from DoD). For the 5 years the

program lasted, GE fostered the startup of eight

companies, putting up enough funds to hold a

45-percent interest in each.

Eventually GE abandoned the program, but it did

chalk up some successes. For example, Intermagnetics General was founded in 1971 as part of the

Ventures Group by Carl Rosner, who had been head

of GE’s superconductivity research program. At that

time, GE itself was unwilling to bet on the commercial potential of the technology, but supported

Rosner’s startup with 45-percent GE financing.

Before long, Intermagnetics General bought out

GE’s share and afterwards grew from an initial

investment of $7 million to a company of 450 people

with annual sales of $50 to $60 million. Its main

products are materials and magnets for the medical

diagnostics industry.

Corporate Diversification

A defense company that faces big losses in

military contracts can try to protect its corporate

fortunes by buying firms that are already successful

in making and selling commercial products. Thus

the defense company does not have to learn unfamiliar management and marketing skills, but can rely on

its new subsidiaries to keep on doing what they

know how to do. There is a danger in this strategy.

In the conglomerate vogue of the 1960s, many

corporations (including but not limited to defense

companies) acquired diverse strings of companies

on the theory that if one line of business declined

another would prosper and keep corporate profits on

an even keel. The trouble with some of these

conglomerates was that corporate managers got into

businesses they did not understand and turned

successful firms into failures or, more often, found

that the subsidiaries fell below the profitability

standards of the parent corporation.

In some cases, however, diversification has

worked very well. An example is the Raytheon Co.

based in Lexington, MA.24 Raytheon is a top defense

company, fifth in prime DoD contract awards in

1990, and the maker of the acclaimed Patriot missile

as well as several other missile systems and components, radar systems, and electronic and communications equipment. Raytheon is also a major nondefense company; nearly half its sales are nonmilitary.

2’$Much of fie ~terial on Rqqhmn’s diversifkation experience is drawn from Robert W. DeGrasse, Jr., ‘‘Corporate Diversification and Conversion

Experience,” in John E. Lynch (cd.), Economic Adjustment and Conversion of Defense Indusm”es (Boulder, CO: WestView Press, Inc., 1987).
Chapter 7---Defense Companies ● 205

Box 7-B—Environment One: From Detecting Submarines to Monitoring Air Pollution

Environment One of Schenectady, NY, is an example of a successful spinoff from a major corporation, using

technology originally developed for the military to produce commercial items.l In the mid-1950s the General

Engineering Lab at GE (the advanced engineering lab, at that time separate from the pure science Research Lab)

developed a submarine detection system for the Department of Defense using condensation nucleide monitoring

to detect submicron particles. The principle is that of the Wilson cloud chamber, in which the presence of particles

too small to detect optically is inferred by observing the beads of condensation they trigger in a small chamber of

cold, low-pressure vapor.

GE’s research engineers developed a device with a very small (2 inch by 5/8 inch diameter) chamber that could

take afresh sample of air every second and expand it rapidly to supercool it, and represent condensation by an analog

voltage. This resulted in the ASR-3 antisubmarinee device, capable of detecting the trail of diesel smoke particles

left by a snorkeling submarine as far as 100 miles away. NATO used the device for submarine detection through

the early 1960s. The same technology was applied during the Vietnam War for a “people sniffer” that could detect

people hiding in foliage.

The group working on the technology in the General Engineering Lab realized that it could also be applied to

monitoring air pollution, detecting smoke, and finding faults in polymers, which emit minute particles prior to

failure. In view of the growing concern about pollution at the time, the engineers proposed that GE develop this

aspect of the technology. GE chose not to, and in 1%9 a team of six engineers, including Frank Van Luik the present

chief executive officer (CEO), left the lab to found Environment One, taking with them 20 lab workers. In an

amicable arrangement with GE, the six entrepreneurs bought the patent for the particle detector and also the patent

for an innovative grinder pump for home sewage treatment, which some of the six had developed. The price was

$20,000 plus a royalty of 4.5 percent. GE was offered the chance to retain a 51-percent share in the company with

the option of buying the rest back if successful, but declined out of wariness of potential antitrust violations.

The company began with a good technology base, but slender financing and no name recognition. Learning

how to market its products was the biggest challenge, made more difficult by the disappointment of not having the

GE label to instill customer confidence. With no financial backing from GE, the fledgling company had to rely on

the founders’ savings and startup money from a small private investor group that knew of the founders’ work at GE,

to take the company through the process of licensing the novel grinder pump and generally becoming known.

The company had sales of $12 million per year in the early 1990s. Its business remained largely in the

manufacture of the two original product lines, with a small fraction (about 10 percent) in a measurement service.

CEO Frank Van Luik attributes Environment One’s survival to its concentrating on a few specialized products in

which it excells technically.

l~o~tion on b company, its products, and the technologies they are based on ww provided to OZ4 by COIIlp~Y offlctis, including

CEO Frti Van Luik and Oeorge Ska4 Senior Engineer, Incipient Fire Detectors and Oenerator Condition Monitors.

Raytheon’s experience as a defense contractor make a vigorous effort to bring the price down to a

goes back to World War II when it was a leading level households could afford. Amana was given the

manufacturer of radar equipment. As early as 1946,

when DoD canceled hundreds of millions in contracts with the company, Raytheon managers decided to diversify. Most of the early attempts (into

television and germanium semiconductor production) failed to pay off, but by the mid- 1960s a new

CEO, Thomas Phillips, was ready to try again. By

the late 1950s Raytheon had developed a commercial microwave oven, originated by a Raytheon

engineer right after the war and based on military

radar. But the expensive Radarange was sold mostly

to institutions such as hospitals and restaurants. Not

until 1965, after Raytheon bought the consumeroriented Amana Refrigeration, Inc., did the company

job of producing and selling microwaves to consumers.

Raytheon later bought two other major appliance

subsidiaries, Caloric and Speed Queen and, mostly

through acquisition, has entered such diverse fields

as small aircraft (Raytheon owns Beech Aircraft),

energy services, heavy construction equipment, and

textbook publication. A few more of these ventures,

besides the microwave oven, were based on genuine

transfer of the parent firm’s defense technology. For

example, the sound-emitting device used by Raytheon’s oil exploration firm, Seismograph Service

Corp., sprang from the company’s military work on
206 . After the Cold War: Living With Lower Defense Spending

sonar. Beech Aircraft offers examples of technology

transfer both ways: the Air Force made a big buy of

Beech business jets for trainers; and the newest, still

experimental, Beech executive jet is the Starship,

made of advanced composite materials first used in

military aircraft.

For the most part, however, Raytheon got into its

commercial ventures through purchase, not internal

development. Where there was internal commercial

development of a military technology, the process

was complex, both from the engineering and the

management standpoints. Raytheon executives

stress that although the company is about half

defense and half nondefense, the two halves are

separate. Explaining the reason for commercial

acquisitions, a company executive said: “We knew

almost nothing about commercial marketing.”25

The separation means that crossover of employees

from the defense to the commercial business has

been limited. In fact, when the Vietnam War was

winding down in the late 1960s, Raytheon terminated 8,000 employees, or 15 percent of its work

force-mostly in defense plants in the Boston area.26

This suggests that while diversification can be a

valuable strategy for the firm and its shareholders, it

may not offer much to communities and workers

affected by the defense build-down.

Conversion

Conversion, defined as redirecting an existing

work force, some technologies, and possibly some

equipment from military into commercial production, has taken place in the past with widely varying

results. Conversion after World War II was massive,

fast, and successful. But conditions then were very

different from those of the 1990s. For one thing, in

those pre-Cold War days military production was

universally seen as a temporary diversion from

normal business. In the auto industry, for example,

tooling and machinery for making cars were put in

storage after Pearl Harbor, but within weeks after

war’s end they were back in service and producing

1942 models. Conditions after the Vietnam War

were more like those of 1990-91-a substantial

reduction in defense spending combined with detente and a U.S. economy in recession.27 Following

Vietnam, several large firms tried conversion with

results that are remembered in corporate history as

unmitigated fiascoes that should never be repeated.

As the discussion and examples below indicate,

there is a good deal of justice in that evaluation, but

it does not tell the whole story. There were some

modest successes, especially in technological innovations. There were also some large technological

failures, as aircraft companies ventured into the

unfamiliar but seemingly simpler businesses of

making light rail cars and buses; it proved to be

harder than it looked. While the companies’ difficulties were compounded by shifting government

policy, another very important factor was the different demands on managers in a commercial versus a

defense business-especially control of costs, attention to product reliability, and marketing know-how.

Aerospace to Mass Transit

The best-known attempts at conversion in the

1970s (see box 7-C for details) were those of Boeing

Vertol, Boeing’s helicopter division, and Rohr

Industries, a long-time manufacturer of nacelles

(housings for aircraft engines). Both companies

ventured into making light rail cars for trolley,

elevated, and subway systems and both left the

business after some costly losses. Grumman’s illstarred attempt to manufacture buses is an example

of diversification rather than conversion, since it

came about through purchase of a going concern, the

Flxible Co., from Rohr. However, like the Boeing

and Rohr stories, it illustrates the perils of taking on

a complex new product without sufficient understanding of cost and reliability problems and without

allowing time to test the new product in operation.

It is interesting to note that while neither Grumman nor Rohr solved the technological difficulties

plaguing their mass transit vehicles before getting

out of the business, Boeing did. The light rail cars

that Boeing hastily put into service in Boston to

comply with its contract-the cars that were such a

notorious failure-were later improved and given

lengthy tests under actual operating conditions in

other cities. These improved cars performed suc-

~David Gumpert, “Raytheon Prospers Despite Big Slow Down in the Defense Industry, ” The Wall Srreer Journu/, Mar. 5, 1971.

~De@asX, op. cit., p. 108.

~~ere me si~lcmt differenms as we~. Defense spending was a larger share of GNP in the @Vietnam War Y-S (9.2 percent ~ 1968 V. 6.5

pereent in 1986). On the other hand, defense outlays in constant dollars were larger in the Reagan buildup, and the Nixon-Kissinger detente of the early

to mid-1970s was fragile compared to the deftitive end of the Cold War in the early 1990s. See ch. 1 for further discussion.
Chapter 7--Defense Companies ● 207

Box 7-C—Aircraft Companies as Makers of Mass Transit Vehicles

Boeing Vertol—A decline in military orders for the Chinook CH-47 helicopter in the late 1960s and early

1970s led Boeing’s Vertol division (located in Delaware County, PA) to start work on light rail vehicles.l Boeing

managers hoped to capitalize on the company’s experience in systems integration, on company technologies they

saw as superior to those of competitors in the light rail car industry, and on national demand projections for roughly

2,000 cars during the 1970s, Further, the facility Boeing Vertol planned to use, formerly owned by Baldwin

Locomotive, was well suited to testing and shipping rail vehicles. Finally, Boeing thought it likely the Federal

Government would offer subsidies for mass transit and, at least as important, would develop national standards for

transit cars. Indeed, before getting into production, Boeing won contracts with the Department of Transportation’s

(DOT) Urban MaSS Transit Administration (UMTA) to develop transit car specifications and standards.

In 1973, Boeing Vertol won its first production contract-an order to produce 150 cars for Boston and 80 for

San Francisco of what was optimistically called the U.S. Standard Light Rail Vehicle (SLRV). UMTA had

developed the SLRV specifications in the hope they would encourage economical mass production of transit

vehicle-and UMTA had the means to urge cities to buy into the standards, since at that time it provided 80 percent

of capital funds to local transit authorities. The two cities did specify some differences in requirements on the first

order, but these were no more than variations on the same basic design. Boeing Vertol hoped other cities would order

the standard vehicle and select options to tailor it to local needs.

The SLRV was in fact anew-generation trolley car, designed to be safer and more comfortable than cars then

being made in the United States and Europe. But Boeing agreed to a compressed schedule for the Boston order,

without building in time for thorough operational testing of the new design. In the rush to meet the schedule and

avoid penalties, Boeing tore out unsatisfactory components and modified the cars on the production line. The first

of the new vehicles began service in Boston in January 1977 and within weeks developed problems with brakes and

other major components. In response, Boeing made over 65 design modifications in the first year of operation, but

in the end had to settle without delivering the last 40 of the 175 cars originally ordered, and with losses of tens of

millions of dollars on the contract.

Learning from the Boston experience, Boeing modified the trolley cars subsequently delivered to San

Francisco, and they proved reliable. A 1974 contract with Chicago for 200 cars for its elevated system included a

substantial testing period, and these cars too have performed well over the years. Nonetheless, Boeing decided to

leave the transit market at the end of the 1970s. First, the transit market turned out to be more sluggish than had

been projected. But also, by the mid- 1970s UMT.A was backing off from national transit car standards, leaving local

transit authorities free to demand their own designs. The differences in each order increased costs. Perhaps most

important, the upturn in defense spending in the last years of the Carter administration and the enormous increases

in the Reagan years promised much bigger defense business (and probably many fewer headaches) than anything

the transit business had to offer.

Even at its height, the transit car operation did not reemploy a large proportion of Boeing’s idle defense workers

or resources, although most of those used (75 to 85 percent of the engineers and 95 to 100 percent of the production

workers) had previously been involved in the helicopter operation. Transit production never involved more than 550

people, compared with 4,300 still employed at the Chinook plant in the mid-1970s, and a high during the Vietnam

War of 13,000. However, some of the production techniques and tools employed on the trolley line were borrowed

from aerospace production.

Rohr Industries--Rohr’s venture into mass transit was more ambitious and ultimately less successful than

Boeing’s.2 It began in the middle 1960s, not in response to a defense build-down but as an outgrowth of a new

company president’s wish to ‘‘fill valid, rational human needs. ”3 Rohr made a bid to San Francisco’s Bay Area

Rapid Transit system (BART) that was below expected expenses, in the hope of establishing a strong position in

the market. The company believed it could apply its aerospace skills to advance the state of the art in mass transit,

IMucb of the Boeing-Vertol story is drawn from Robert W. DeGrasse, Jr., “Corporate DiversKlcation and Conversion Experience” in

John E. Lynch (cd.), Econonu”cAajustment and Conversion o~D#emelndus~”es (Boulder, CO: WestView Press, 1987); and Linda fCravi@ “The

Wages of Peace, ’ contract report prepared for the OffIce of Technology Assessment August 1990. Information about the SLRV was amplilled

by telephone iritemiews with Earl Weinstein of Allied Signal Aerospace.

2~e Pticipd sowm for this section is DeGrasse, ibid.

g~id., citing Roy J. WS, “Shattered Dreams: Rohr Industries Grew Fast and Currently It’s Shrinking Fast Tbo, ” Wafl.t$treer Journal,

NOV. 5, 1976.

(continuedon next page)
208 . After the Cold War: Living With Lower Defense Spending

Box 7-C-Aircraft Companies as Makers of Mass Transit Vehicles--Continued

It undertook to develop a transit vehicle that was a “quantum jump” in sophistication and reliability. In 1%9, Rohr

won a contract to supply 450 rail cars to BART, and 3 years later contracted with the new Washington, DC subway

system for another 300 ears.

Rohr found the task far harder than expected. Cars were delivered late both to San Francisco and to

Washington, and once delivered the cars developed problems with brakes, doors, and car seals that persisted even

after extensive modifications. Continuing financial losses and a change in Rohr’s management prompted

withdrawal from the rail car business in 1976.

Like Boeing, Rohr had tried to produce a new generation of rail cars without allowing enough time first for

development and then for debugging. Again, like Boeing in Boston, Rohr had to modify cars that were already in

service--an expensive proposition. Unlike Boeing, Rohr did not stay in the business long enough to iron out the

technical problems but opted to cut its losses--especially since UMTA’s failure to establish national standards for

transit cars made forecasting the market very chancy.

Grumman--Grumman’s excursion into mass transit was in buses, through purchase of the Flxible Co. of

Loudonville, OH from Rohr.4 Grumman did not attempt to use its own technology, equipment, or work force in the

venture; the bus it launched was a Rohr design, representing another of that company’s attempts to advance mass

transit technology. Rohr had bought Flxible in 1970 as part of its diversification into transit. It sold the company

to Grumman in 1978 when, shaken by losses in its rail transit business and having changed management, it

abandoned the transit market On Grumman’s side, the purchase was a hedge against diminished expectations of

Navy orders for its F-14 fighter (the Tomcat, which as it turned out had many lives, undergoing repeated

modifications and lasting through 1991).

The new Flxible—Rohr—Grumman bus, dubbed the 870, ran into trouble almost as soon as it went into service.

One of the New York buses collapsed when the A-frame supporting the body over the rear axle snapped. In quick

succession, all the transit systems using 870s took the buses off the streets for inspection and repair. Checks revealed

that four major components in the bus’s chassis were likely to crack and give way altogether. In the end, Grumman

agreed to retrofit all of some 2,900 buses it had built and to extend the warranty. In 1983, Grumman sold its bus

company to the General Automotive Corp., and by 1988 had settled lawsuits with Chicago and New York transit

authorities.

Grumman claimed that the 870 was the most thoroughly tested bus that Flxible had overproduced. But the 870,

like the BART and Washington subway cars, was a new design. And the approach to testing was that of the

aerospace industry, with a computer analysis followed by a test to destruction under extreme conditions, and then

a drive testona‘‘torture track. What it did not have was a lengthy test on real city streets, complete with potholes;

the only actual driving on city streets as part of the test was of a bus specially fitted with advanced measuring

instruments operated by an engineer.

As noted, Grumman’s bus enterprise was diversification through purchase, not conversion of its own resources

to nondefense production. But three decades earlier, right after World War II, Grumman did undertake a conversion

that succeeded, and became two subsidiaries of the company that are still thriving todays The company found itself

with excess aluminum manufacturing capacity after the war and looked for new uses for it, other than military

airplanes. One was canoes; another was the bodies of large high-sided commercial trucks. The subsidiary making

both products became Grumman Olson, which is still the largest producer of walk-in truck bodies, sharing the

market with Union City Body Co., a GM subsidiary.

Another offshoot of Grumman’s World War II aluminum production is Grumman’s Long Life Vehicle (LLV)

subsidiary, which makes Postal Service vehicles. Grumman won out against three other companies in a competition

to make mail delivery vehicles that would stand up much longer than the previous steel-bodied jeeps. Grumman’s

aluminum vehicle, designed to last 24 years, won the Postal Service contract in 1986. The company will make

99,150 vehicles under the contract, and is now producing nearly 20,000a year (using a GM chassis), with sales in

1990 of $391 million.

4Much of the Grumman story is drawn from David Young, “Puttiog the 870 Back ‘lbgether,” Mass Transit, May 1981.

5~*()~ ~()~~ ~~LLV is drawn from the company’s annual reports and from telephone interviews with Steve

O’Brien+ Director of Bushes s operations, Grumman LLV and J. Edward Waesche, Direclor of Opedons Analysis, Grumman Corporation

Bet@age, NY.
Chapter 7--Defense Companies . 209

There is very little connection today between Grumman LLV and the Grumman aerospace company. The kinds

of aluminum used in trucks and aircraft have diverged so greatly that the companies do no joint purchasing, and

LLV is now big enough to stand on its own. On rare occasions, LLV might use an engineer from the parent company

to solve a special problem in working with aluminum. But for the most part, the connection is only corporate.

Allied Signal Aerospace--This company is a maker of a wide range of equipment for both military and

commercial aircraft. “If it flies in the Western world and doesn’t have a beak, it has something on it from Allied

Signal,’ company officials says The things the company makes include power units for large commercial jet

transports, engines for smaller planes, actuators, wheels and brakes, flight control systems, avionics, and cockpit

displays.

Like Rohr, Allied Signal foresaw an expansion of the demand for public transport and in the mid-1960s decided

it could apply some of its experience in aerospace control technology to transit systems. Its strength lay in its

electronic “chopper” switches, which were superior to the mechanical switches in use at the time for controlling

transit cars. Allied Signal had developed several advanced control systems by the end of the 1960s and tried them

out on the BART test track. On the basis of these tests, BART specified chopper controls in its Request for Proposals

for design of the system.

Although Allied Signal failed to win the initial BART contract (Westinghouse got it), the company became

the leading contractor for several experimental prototype rail vehicles for DOT’S Office of High Speed Ground

Transportation. And by 1973, it joined Boeing Vertol in production for the Boston/San Francisco order for Standard

Light Rail Vehicles. The company’s reputation grew, and at one point in the 1970s it was the supplier for every U.S.

and Canadian light rail program requiring electronic controls.

Despite Allied Signal’s technological success and its domination of the market for transit control systems over

much of a 15-year period, the venture was barely self-sustaining financially. In 1988, Allied Signal sold its transit

control business to the Swedish-Swiss firm Asea Brown Boveri. The lackluster financial performance was partly

due to the fluctuating fortunes of mass transit in the United States. Not only did UNTA back off from developing

a standard rail car, but Federal Government financial support for mass transit was cutback deeply during the Reagan

years while defense spending skyrocketed. It was not just defense-based neophytes that left the business but also

such well-established pillars of the American industry as Pullman, Budd, and GM. More and more of the business

moved abroad, especially to Canada and Italy where governments do offer some support to mass transit and the

industry that makes the vehicles.

Allied Signal officials offer another reason for the transit venture’s lack of financial success. The ups and

downs of the transit business meant that there were never enough orders to justify setting up a separate division,

so the transit venture was conducted together with the company’s aerospace business. The tendency in defense

aerospace to elevate performance over cost control “infected” the transit business. Costs were geared to meeting

the exacting demands of the military. But to win orders, the transit business had to lower the price to a point where

it was hard to make a profit.

61WUW for this ~tion is drawn from OTA interviews with Allied-Signal -space OffiC& in lb~, CA in Apd 1990 and

telephone interviews in Oetober-November 1990.

I

cessfully in Chicago and San Francisco, giving years $5.6 billion in 1981 (1991 dollars) to $2.9 billion by

of reliable service. They did not prove enough of a

moneymaker to persuade Boeing to remain in the

business, especially since Boeing’s expectation of a

national standard for light rail cars (which would

have helped producers achieve economies of scale)

came to nothing. Moreover, the defense buildup of

the early 1980s offered plenty of profitable business

to occupy the company’s plant, equipment, and work

force. At the same time that government spending

for defense soared to wartime levels, Federal subsidies for mass transit systems shrank from a peak of

1988.

A company that scored a clear technological

success in a mass transit venture was Allied Signal.

That did not, however, translate into financial

success. As described in box 7-C, Allied Signal was

the dominant North American producer of electronic

controls for transit systems over a 15-year period in

the 1970s and 1980s. Yet the venture did little better

than break even, and was sold to a European firm in

1988. Part of the reason for the failure to make

money was the instability of government support for
210 ● After the Cold War: Living With Lower Defense Spending

mass transit but another part, according to company

officials, was the burden of producing in a defense

business environment that paid too little attention to

control of costs.

Shipbuilding to Multiple Options

Ingalls Shipbuilding of Pascagoula, MS, a division of Litton Industries, Inc., was able to put

together several military and commercial alternatives when two major Navy contracts were winding

down in the late 1970s, and there was little hope for

new jobs because of the Carter administration policy

to reduce Navy shipbuilding.28 Company managers

saw no single option that would produce enough

business in the short term to keep the shipyard going

and maintain its skilled work force, and in the long

term enable the company to bid on future high

technology Navy contracts. Ingalls first made itself

into an overhaul and repair facility for Navy ships,

which kept its outfitters busy. Then it went after

commercial business with the offshore drilling

industry, starting with overhaul and repair of drilling

rigs and proceeding to license the design for a unique

kind of deep water jack-up rig. The rig business

employed Ingalls steel workers and succeeded well

enough to capture 10 percent of the market from

1979 to 1982, keeping several thousand people

employed. A venture into rail car assembly was less

successful, not because of technical or marketing

failure, but because demand for rail cars for grain

exports fell far short of expectations in the early

1980s. Ingalls also pursued miscellaneous construction projects, such as making steel decks for bridges.

With all these various and modestly successful

attempts at conversion, Ingalls employment was still

cut in half (from 25,000 to 12,000) with the

retrenchment in Navy ship construction. The Reagan

administration’s program for a 600-ship Navy put

IngalIs back mainly in the defense business, with

some increase in employment in the mid and late

1980s. In the 1990s, the company may well face the

necessity for a more permanent transition to a mixed

defense and commercial business.

GE Aerospace Conversion in the 1970s

In the early 1990s, the defense-oriented GE

Aerospace group was committed to a strategy of

focusing on military business and shrinking in size

if necessary; employment dwindled from 46,000 in

1989 to 38,000 in 1991, and was expected to go

lower. A quarter of a century earlier the Re-Entry

Division of GE Aerospace tried a different strategy,

embarking on a series of projects that sought to

transfer technology, people, and products from

military work into new nondefense business.29 From

1967 to 1980, the share of DoD work in the division

fell from 100 to 50 percent.

One motive for the strategy was to redirect GE’s

innovative technologies into important new areas as

the Vietnam War wound down. Another motive, at

least as compelling to the Re-Entry Division, was to

win out (or at least survive) in the internal competition among GE divisions. In the 1960s, the Re-Entry

Division, which had developed the heat shielding for

intercontinental ballistic missiles in the 1950s,

found itself competing for space and defense business with a new Satellite Division. Re-entry problems, fairly well solved, were now taking aback seat

to the weaponry component in ICBMs and to rocket

research generally. The Re-Entry Division was

losing work but it still needed to meet the corporate

revenue requirements for every GE division, and its

director wanted to keep his talented team of engineers together.

The division, expanding into new fields that

managers saw as socially useful and technically

challenging, was renamed the Re-Entry and Environmental Systems Division. Ground rules for new

projects in the division were that they should: 1)

have government assistance, to reduce GE’s costs

and provide insulation from market uncertainties; 2)

take full advantage of GE’s Corporate Research

Center and transfer as much technology as possible;

and 3) concentrate on areas where GE had a

significant technical advantage.

As described in box 7-D, at least one of the

projects, manufactured housing, had a fair degree of

success despite a turnabout in government policy

that withdrew the assistance GE had counted on.

Others were promising but were sold off at an early

stage, or failed to meet GE’s financial requirements

but were taken up profitably by other companies. At

—

~~e hgalls story is based mostly on DeGrasse, Op. cit.

z~oma[ion on GE ~rospace’s conversion projec~ in the 1970s is drawn from OTA interviews and telephone interviews in October-December

1990 with GE officials, including Otto Klti who was manager of the GE Aerospace Re-Entry Division during the years when the projects took place.
Chapter 7-Defense Companies . 211

Box 7-D--GE Aerospace Conversion in the 1970s1

Manufactured Housing: A Modest Success

GE Aerospace chose low-cost manufactured housing as a promising project for conversion from military to

nondefense business in part because the venture had some government support. From about 1968, a U.S.

Government market existed-housing at Air Force bases. More government support was added the next year when

George Romney, then Secretary of Housing and Urban Development, introduced Operation Breakthrough, a scheme

to advance low-cost housing technology. As a former President of American Motors Corp., Romney believed that

the mass production techniques of autos could be applied to housing. GE Aerospace was among 22 successful

bidders (selected from 530 proposals) for awards of $300,000 to $500,000 to design and build housing modules.

GE Aerospace went so far as to produce a number of manufactured houses in west coast facilities. But its

domestic modular production halted in January 1973 with the repeal of Operation Breakthough’s subsidies for

low-cost housing using new technology (the repeal was one of a range of Federal cost-cutting measures). Without

the subsidies, it was no longer feasible to transport bulky house modules as far as 1,000 miles from where they were

made.

The collapse of the domestic market was not the end of manufacturing housing for GE Aerospace, however.

It was operated successfully in Iran and Japan for several years, providing some payoff on GE’s investment. In Iran,

GE served as the government’s engineering consultant in building anew town to support a copper mining project.

The houses were built onsite using GE expertise to construct steel frames that supported traditional local materials,

such as adobe. A fortuitous benefit of having designed housing modules suitable for U.S. rail transport was that the

frames could stand up to Iranian earthquakes.

The Iranian venture was only marginally profitable. A joint venture with a Japanese partner proved more

lucrative. The partner duplicated GE’s factory in Japan, and GE made $6 million on the sale of 450 houses to Saudi

Arabia. The modules were shipped in flotillas of ocean-going barges that could be cut loose when storms threatened

and rounded up afterwards. With an assured market, production became so efficient that the houses were delivered

3 months early, netting an extra bonus for the partnership. Plans to sell the houses in Japan never materialized,

however, because the Japanese housing market suffered heavily in the 1974 oil crisis. The operation came to an end

in 1976.

Along-term benefit for GE turned out to be the international experience gained from working in Iran and Japan.

Some people involved in the housing ventures put their experience to work in the Aircraft Engine Division (which

is strong in international sales), and the chief engineer from Iran went into product support for commercial aircraft.

l~o~tiorl for this box was provided by former and presmt OffiCidS Of GE hsp~.

(continued on next page)

least one, hydroponic farming, never got off the — program tend to believe that defense companies are

ground. - -

In 1981, with the Reagan administration defense

buildup and many new opportunities for military

contracts in GE Aerospace, enthusiasm for the

conversion projects waned. At the same time, Jack

Welch became GE chairman, and his credo is that if

GE is not number one or number two in a business,

then GE should not be in it. Also, GE’s hurdle

rate—i.e., the required rate of return on a new

investment-is reputed to be the highest of any

major U.S. corporation.

All of this has added up to a decision by GE

Aerospace to undertake no more conversion attempts. Even those present and former GE officials

who point to successful aspects of the 1970s

ill-suited to meet the marketing and cost demands of

the commercial sector. Another possible way of

converting military technology to commercial products is outside the defense firm, perhaps with some

form of government assistance to encourage the flow

of technology into the startup companies.

Community-Based Conversion Efforts

In some cases of threatened closure of major

defense facilities, community activists have tried to

avoid the closure by proposing---a demanding—

that the company undertake conversion through

joint community-labor-management efforts. The

reasoning is that because of the community stake

in economic stability and the workers’ stake in jobs,

they as well as company managers should be

305-199 - 92 - 8
212 . After the Cold War: Living With Lower Defense Spending

Box 7-D-Aerospace Conversion in the 1970s-Continued

In the United States, there may be some mom general long-term benefits to the public from Operation

Breakthrough. 2 Although the goal of building whole houses like cars was never fully achieve& there were fruitful

aspects to the program--in particular, cooperation with States to develop building codes appropriate ● for industrial

housing, with the Interstate Commerce Commission to set reasonable transport rates, and with building trades

unions to agree to manufactured housing. Moreover, some of the elements pioneered by GE in its modular

manufacturing housing are reappearing m current energy-saving technologies for dwellings.

Spinoffs

.

Several of the conversion projects GE Aerospace undertook in the 1970s never came to fruition for GE itself,

but were taken up successfully by smaller, flexible companies with lower overhead and lesser requirements for

payback on investment One example was an oil and water separator that involved no moving parts but was simply

a series of carefully designed baffles that drew on GE’s skill in fluid flow modeling. The product was just beginning

to make money, although not much by GE standards, when it was sol&

Another example involves a more complex technology-too complex in fact for commercial success, in the

form developed by GE. Bearing the intriguing name of cybernetic anthropomorphic manipulator (CAM), the device

was a remote manipulator GE developed for the Navy, based on earlier GE work for the Army. The CAM allowed

an operator to perform delicate tasks in a hostile environment not only working with distant objects but also feeling

and responding to their resistance to motion through a force feedback control mechanism. GE saw commercial .

possibilities for the device in undersea work for the oil industry, in a joint venture with Exxon; in handling

500-pound blocks of hot titanium in TRW’s Cleveland foundry; and m building Wankel engines on an automated

assembly line.

The project met various setbacks. Neither the TRW foundry nor the Wankel engine program survived the

1974-75 recession. Exxon found that the CAM’s five degrees of freedom and force feedback mechanism were more

sophisticated than needed for its undersea maintenance work, and GE soon sold the technology to a minisub

company, which successfully developed a simpler and cheaper version. However, GE’s version of the CAM did

eventually, in a roundabout way, find application in the space shuttle. GE Aerospace provided it as a prototype to

help NASA develop bid specifications for the space shuttle manipulator arm, but GE Aerospace did not win the

production contract SPAR of Canada with the backing of its government for development costs, submitted the low

bid, after which it subcontracted to GE Canada. All GE research and expertise on the CAM technology was

transferred to GE Canada.

Still another technology that failed as a GE project but ultimately helped many small startup firms in the

biotechnology field was nutrient reclamation. GE Corporate Research Laboratory engineers developed a genetically

altered microbe that could recycle cattle manure into protein for animal feed When moved from lab to ranch, the

project failed because Contaminants, including heavy metals, blown in from the desert made the process

unworkable. Although GE had by this time abandoned the venture, it did win a patent for the microbe in a landmark

Supreme Court decision in 1978. This provided a timely stimulus to several small firms that started up in the

aftermath of the GE experiment. Only a large corporation like GE, with a powerful legal and patent staff, could have

pursued such a case, and in this way it was responsible for entrepreneurial activity by others.

meon on public benefits ~rn ~BrcaMm@ waa provided by Henry my, U.S.~ofBn~, David Moore,

U.S. Dcpartmmt of Housing and Urban Dcvclopmmg and Professor Charlie B- Univcndty of Oregon.

involved in exploring alternative uses of a plant that warning that a firm planned to close, combined with

is no longer in defense production.30 The same

—

assistance from government agencies and communireasoning has been applied to closures of major ties, have helped to change a company’s decision to

nondefense plants that are the source of a commu- close a plant; in a few others, employees have bought

nity’s livelihood. In some of these cases, early out the company.

31 In many cases, however, the

Wor an exposition of this view, see Ann Markusem and Joel Yudke~ Dismantling the Cold War (New York NY: Basic Books, forthcoming);

Seymour Mew The Denu”litan”zed Society: Disarmame nt and Conversion (Montreal: Harvest House, 1988).

slForabrief discussion of conditions inwh.khgov ernmentassistamxo rcommunity efforts may help to aaveatroubledplan~ see U.S. Congress, Oftice

of Technology Assessment, Technology and Structural Unemployment: Reemploying Displaced Adults, OTA-ITE-250 (Springfiel~ VA: National

Technical Information Service, 1986), pp. 209-213.
-—

Chapter 7-Defense Companies ● 213

changes needed for plant survival are so great that

closing down is the only reasonable option. Moreover, when a large U.S. company decides to close

one of its plants for strategic reasons, that decision

is usually not open to change. In the United States,

there are neither the laws nor customs that exist in

Europe and Japan impelling large companies to look

for solutions other than worker layoffs to changing

market conditions or company strategy.

If it is difficult for community efforts to keep a

nondefense plant that is slated for closing in business

(often without even a change in product line), the

difficulties multiply with defense plants. Managing

defense production is a world apart from managing

commercial production (see the discussion below).

Conversion of a defense facility means undertaking

the design, production, and marketing of quite

different products—a challenging feat even for

managers with commercial experience. Even in

Germany, which does have laws, institutions, and

customs that encourage alternatives to layoffs in

industries undergoing structural change, community

planners are finding that it is difficult to convert

defense companies or divisions directly into commercial production and sales. They are looking

instead at alternatives where the government is the

customer, for example, in environmental cleanup

programs.

In the United States, there have been several

energetic attempts by community activists, joined in

some cases by labor unions, to encourage defense

plants threatened with closure to convert to commercial production, but none so far has succeeded.32 A

bill in the 102d Congress that would require defense

companies to establish alternative use committees to

plan for economic conversion in case of closure of

reduction was referred to several House committees;

at this writing no action had been taken on the bill.33

BARRIERS TO CONVERSION

The Defense Company Culture

The main reason defense companies give for

reluctance to venture into commercial production is

the great differences in company practice and culture

between defense and commercial business. Many

studies and reports have called attention to the

differences that make it difficult to combine defense

and commercial business. 34 Defense companies

have evolved over 40 years of Cold War into

separate organisms. Most large defense contractors

that assemble complex weapons systems or make

major subsystems are geared to low-volume production of highly specialized, expensive equipment. In

designing the equipment, the main emphasis is on

technical performance and meeting DoD requirements. In contrast, many commercial products have

to combine reliability and affordable cost with

high-volume manufacture. Even in the aircraft

industry-where the defense and commercial products have a good deal in common, many manufacturing processes are similar, and final assembly of both

is a painstaking labor-intensive job-the differences

are striking. In 1990, while Boeing was turning out

about 12 per month of its all-time best-selling

commercial jetliner, the 737, it was planning to

complete work on just one B-2 bomber per month

(the production cycle for a much reduced order of

B-2s will be still longer).

It is possible to exaggerate the differences in

design requirements and manufacturing processes

between defense and commercial production. Some

military items (e.g., small arms and ammunition)

and many intermediate goods destined for military

items (e.g., some kinds of semiconductors) are mass

produced in much the same way as-sometimes

together with-their commercial counterparts. In

fact, the famous American system of manufacture,

involving interchangeable parts made on machine

tools, was invented in the 19th century partly in U.S.

armories for the manufacture of guns. Nevertheless,

there are enough differences in design goals and

manufacturing practices to add up to some wide

divergences between defense and commercial companies. The DoD practice of imposing rigid, detailed

specifications and standards throughout procurement further exaggerates the differences, and has

blocked technological progress for defense applications in fast-moving fields such as fiber optics and

optoelectronics. Defense contracts may lock in

technologies and applications that no one producing

commercially is willing to build at reasonable cost.

Still more pervasive are different management

practices. In large part, these are a response to

sz~~sen and Yudk~ op. cit.

33H.R. 441.

~See, for eqle, U.S. COngreSS, Offke of Technology Assessment, Holding the ~ge~ oP. cit.
214 ● After the Cold War: Living With Lower Defense Spending

detailed government supervision. Defense contracting is probably the most heavily regulated business

in the United States. In addition to the usual

environmental, health and safety, and fair labor

regulations that apply to all firms, defense companies must comply with DoD reporting requirements

and undergo extensive reviews and audits. Some

firms refuse to do defense work because they find

that putting up with the audits is more trouble than

it is worth. The reason for such detailed oversight

was the government’s concern that taxpayers’ dollars not be wasted and that defense contracting not

be prey to favoritism or fraud. But the supervisory

system developed under Federal law and DoD

regulation is extremely costly, both to the government and to companies. It demands extra people and

time on both sides; the Pentagon has over 25,000

auditors, investigators, and inspectors, and the

companies must employ tens of thousands of their

own auditors to respond to DoD’s demands for

information. All this generates large overhead costs,

which are then passed along in higher prices to the

government. Probably a leading reason why most

companies doing both defense and commercial work

keep the two sides separate is so as not to burden the

commercial business with the overhead from the

defense side. Many companies, or divisions of

companies, that learn to work with DoD’s demands

for high technical performance, to meet confining

and sometimes outmoded military specifications,

and to live with detailed supervision, simply restrict

most of their business to defense.

Finally, commercial marketing and distribution

are alien to defense companies. DoD prime contractors have a very few buyers to deal with and no need

for a distribution network. It was marketing and

distribution capacity, at least as much as experience

in cost-conscious, high-volume manufacturing, that

made Amana indispensable to Raytheon when the

company went into the business of making microwave ovens for households.

DoD Practices on Development Costs

and Data Rights

If a defense company does see commercial

promise in military technologies it has developed,

certain DoD practices related to government-funded

R&D could be a real hindrance to commercial

development either by the company itself or by a

startup company licensing the technology. At present, DoD regulations require that companies selling

products based on technologies developed at the

department’s expense to non-U.S. Government customers must pay DoD back for a pro rata share of its

development costs.35 The law does not explicitly

require this recoupment of development costs,

except in the narrow situation of sales of major

military systems to foreign governments36 (the idea

is that the foreign governments should not get a free

ride at the expense of American taxpayers). And the

recoupment requirement is contrary to the spirit of

several other laws and an Executive Order that

encourage granting companies intellectual property

rights to technologies developed with Federal funds,

as an incentive to commercialization.37

The Administration recently proposed new regulations that would limit this cost recovery somewhat. 38 DoD would not demand recovery of R&D

costs from subsequent commercial sales in some

cases of minor military procurements (roughly,

those that cost DoD under $50 million in development cost and result in less than $200 million in total

sales to DoD and other parties). Also cost recovery

would be restricted to sales of products using at least

50 percent of the original military system; the

threshold now in force is 10 percent. Many in

industry consider the proposals an improvement, but

still question the need for any recoupment beyond

what the statute requires.

Another impediment to the commercialization of

military technologies lies in the treatment of data

that firms develop or use for contracts with DoD.

The issue is the extent to which DoD can acquire,

use, and pass on such data. DoD often needs the data

3548 c.F.R., pm 271.

~&-ms Expon Conhol Act of 1968, Public Law 90-629, as amended, see. 21, codifkd at 22 U.S.C. 2761(e).

qT~ese laws &lude fie Stevenson-Wyd,ler T~~oloW hmovation Act of 1980, the Patent and Trademaxk Amendments &t of 1980, the Bayh-Dole

Patent Amendments of 1984, the Federal Technology Transfer Act of 1986, the Omnibus Trade and Competitiveness Act of 1988, and the National

Competitiveness Technology Transfer Act of 1989. The Executive Order is No. 12591 (Apr. 10, 1987). See the discussion in U.S. Congress, OfIice of

Technology Assessment, Making Things Better: Competing in Manufactun”ng, OTA-ITE-44 3 (Washington DC: U.S. Government Printing OffIce,

1990), pp. 184-194.

3856 Federal Register 55250, 55264 (O@. 25, 1991).
Chapter 7--Defense Companies ● 215

for various purposes. At the most basic level, it

needs enough data to perform in-house training,

operation, and maintenance. In some cases, DoD

might want to hire third parties to perform some of

these functions, and would need to pass on some data

for the purpose. To allow competitive follow-on

procurements of additional units and/or spare parts,

DoD needs to provide data to prospective bidders.

However, a problem for commercialization arises

here. DoD’s sharing of data rights with third parties

could stop a company from developing commercial

applications of a military technology, since if the

data are available to others, the value to the company

of the commercial product is likely to be lessened or

lost. In fact, some company officials have told OTA

that the prospect of DoD sharing their technical data

with other firms is one reason for separating the

commercial and defense sides of their business; they

do not want to endanger the confidentiality of

technology they have developed for commercial

products by using the data in military projects.

DoD has considerable discretion in negotiating

rights in technical data, within a broad statutory

framework. 39 DoD always takes at least ‘‘limited

rights,” for in-house use of the data for operation,

maintenance, and so on, and on the whole industry

does not complain about this. Companies do often

complain when DoD seeks rights to use all the data

for “government purposes. ” This includes sharing

the data with other firms for competitive follow-on

procurements as well as for outside maintenance

contracts. In principle, DoD can demand that other

firms keep the information secret and use it only for

the procurement at hand. However, it is hard to

ensure that competitors will restrict their use of key

information. Finally, DoD sometimes demands ‘unlimited rights,” which means that DoD can use or

pass on the data for any purpose.

The technical data rights issue has been troublesome for decades. The pendulum has swung back

and forth toward more or less rights for the

government, and the law has grown quite complex,

but so far there is no satisfactory solution that meets

both the need for efficient procurement and the need

to promote commercialization of government technology. Industry officials have asked to sit down

with the government representatives to negotiate

and draft regulations cooperatively, but the government has so far not seen fit to do this. In October

1990, the Administration proposed new regulations

on technical data rights,40 but these met with sharp

criticism from industry and were withdrawn. The

Defense authorization act, passed in November

1991, requires the establishment of an advisory

committee with representatives from industry, government, and academia to draft revised regulations

by June 1992.41 Given the complexity of the issues,

a cooperative effort may be the only way to get the

problem solved.

MAJOR COMPANIES:

PROSPECTS FOR CONVERSION

IN THE 1990s

The obstacles to large-scale ventures by major

defense contractors into commercial production are

serious. Nevertheless, several companies had taken

at least initial steps in that direction in the early

1990s, often beginning with sales to civilian government agencies.42

On the negative side, the differences between

civilian and defense business are a daunting impediment to conversion. The record of defense companies that tried to make the transition in the 1970s—

mediocre at best, technically embarrassing and

financially draining at worst—is no inducement.

Prospects for conversion are still dimmer for a

number of defense companies because they are

carrying a high burden of debt. One reason is that

many companies used debt to finance big expan3~~ ~Ov~~~ S@tUte i5 fomd at 10 u.s. c. 232o. DOD’S governing regulations are found at 48 C.F.R. 227.4. me connoversy is perhaps me &V~test

for data developed jointly at government and industry expense, for which the statute gives the least guidance.

@55 Federal Regisfer 41788 (Oct. 15, 1990). The regulations would have applied tO all Federal agencies.

ZtlNatio~ Defeme Au~ori~tion Act for Fis~~ years 1992 ad 1993, fiblic Law 102.190, sec$ 807. ‘f’he act f~er provides bat tie Secretary Of

Defense must issue revised regulations by September 15, 1992, and that for every regulation recommended by the advisory committee that he does not

adopt he must report his reasons to Congress.

42A 1991 smey of exWutives at 125 defense ~ompafies fo~d titmost were plaming to at least s~dy commerci~ markets, that one-half had tried

a commercial venture in the past 5 years, and that of those, one-half reported a success. However, these commercial ventures apparently included

acquisition of existing commercial enterprises as well as conversion (as defiied here). David Hughes, ‘‘Sumey on Defense Firm Commercial Efforts

Shows Surprising Rate, Activity. ” Aviation Week & Space Technology, Dec. 9, 1991, reporting on a sumey by the Fraser Group and DRI/McGraw-Hill

of Lexingtom MA and the Winbridge Group, Inc. of Cambridge, MA.
216 ● After the Cold War: Living With Lower Defense Spending

sions in the Reagan buildup and now don’t have the

defense business needed to amortize those investments. According to one estimate, total debt as a

percentage of capitalization in the defense aerospace

industry rose from 28 percent in 1981 to 34 percent

in 1989, and several big companies are considerably

worse off than the average. For example, both

Grumman and Lockheed have debt-to-equity ratios

of more than 50 percent.43 Moreover, some companies have taken enormous losses on freed price

development contracts, in which they gambled

hundreds of millions of their own money hoping to

make it up by winning the production award. The

losing team for the Advanced Tactical Fighter,

Northrop and McDonnell Douglas, are reported to be

out $750 million in their own funds on the project.

General Dynamics, a member of the winning team

for the ATF, still lost out in the A-12 cancellation,

and is also saddled with long-term debt that rose

from $18 million in 1984 to $636 million at the end

of 1990. With these high debt burdens and with

declining profits in the past few years, defense

companies are not highly regarded in the stock

market; aerospace stocks were selling at 5 to 8 times

earnings in late 1990, versus 13 to 14 for all companies on the Dow Jones index.44 Entering a risky

new commercial venture takes money, which many

of these big defense companies cannot easily raise.

The fact remains that many defense companies

have military technologies they developed for military use that they recognize as possessing commercial, or at least nonmilitary, promise. The easiest

move is into nondefense sales to governments.

Westinghouse Electronics Systems, for example,

has long supplied advanced electronic systems to

DoD. Prompted by the defense build-down, the

group is expanding in complementary civilian markets, including air traffic control and drug traffic

interdiction (both having government purchasers)

but is also reaching out to home security systems,

which is a purely commercial market. The group’s

non-DoD market grew from 23 to 27 percent of sales

in 1990, and is projected to reach 50 percent by 1995.

Drawing on its experience in C3I systems, Westinghouse is already a leading supplier of sensors for

drug interdiction. TRW is pursuing a similar strategy. It has sold to the New York Stock Exchange a

computer-based security system that guards access

to the building and its various parts, such as the

trading floor. Possible future customers for a TRW

security system include embassies and airports.45

These examples, and others discussed above,

make another point: defense companies that are

interested in conversion have begun with products,

as well as markets, that they know best. Two kinds

of products that seem promising are information

management systems and monitoring systems that

rely on remote sensing devices. The latter might find

application in environmental programs, as well as in

security systems. Also, defense technologies that

have achieved high performance in hostile environments might find uses by commercial companies

that operate under similar conditions (e.g., in the

deep sea, the desert, or the polar regions).

The same factor, product similarity, also makes it

feasible for many companies in the aircraft business

to shift from military to commercial work. None of

the dedicated defense companies that do final

assembly of military airplanes (Lockheed, Grumman, Northrop, General Dynamics) plan to become

Ml-scale commercial airframes but, as noted above,

all are doing subcontract work for the commercial

companies or plan to do so. Some have gone into

repair and rework of commercial aircraft on a fairly

large scale. At the subsystems and components

level, the opportunities to shift to the commercial

side are still greater. For example, the Sundstrand

company of Rockford, IL, a supplier of actuators,

constant speed drive generators, and other hardware

for aircraft, shifted from as much as 60 percent

defense work to 25 percent in the 5 years 1985-90.

What major defense companies are now disinclined to do is embark on large-scale production of

big hardware systems with which they have no

familiarity--e.g., subway cars. The transit business

was frustrating to aircraft companies in the 1970s

not only because of their technological inexperience,

and consequent false starts or failures, but also

because of inconsistent government policy (i.e., the

abandonment of uniform national standards for light

rail car, and the decline in subsidies for mass transit

ds~~ony L. Velocci, Jr., “Third-Quarter Results Mask Defense Industry Weakness,” Aviation Week and Space Technology, Nov. 12, 1990, p. 20.

~l%id.

45 Glenn Zorpette, “Suppliers Are Challenged ‘Ib Downsize Gracefully as They Seek To Divers~,” IEEE Spectrum, vol. 27, No. 12, November 1990,

p. 33.
Chapter 7--Defense Companies ● 217

in the 1980s). However, there could be a new

opportunity in the 1990s for some defense companies to use their technical expertise in developing

certain challenging new transportation technologies,

for example, electric vehicles. Support by States,

especially California, for developing advanced transportation technologies makes the prospects more

attractive. Box 7-E describes some of the possibilities.

SMALL BUSINESS AND THE

DEFENSE INDUSTRY

Small and medium-size firms--collectively, “small

business" 46—are important players in defense production, accounting for over one-third of DoD

purchases. Over the last decade, small business

received $18 to $27 billion in annual DoD prime

contract awards, or about 16 to 17 percent of all

awards and 19 to 20 percent of awards to U.S.

business firms.47 Complete figures on subcontracts

are not available, but reports by large firms to DoD

indicate that small businesses have received $13 to

$22 billion, or 37 to 40 percent, of military

subcontract dollars over the last decade .48 The sum

of prime contract awards and subcontracts from

large firms to small business was on the order of $46

to $48 billion per year in the 5 years 1986-90, and

amounted to 35 to 37 percent of awards to U.S.

business firms49 (figure 7-5).

The small and medium-size firms selling goods

and services to DoD or its prime contractors are a

diverse lot. Under Small Business Administration

(SBA) definitions, these firms might range from a

10-person machine tool shop, to a semiconductor

producer with nearly 500 employees, to a manufacturer of missile engines with just under 1,000

workers. so SBA oversees several congressionally

mandated programs that are meant to help small

Figure 7-5-DoD Small Business Prime and

Subcontracts

Billions of current dollars

140

120

100

80

60

4 0

20

0

SOURCE: Department of Defense, Washington Headquarters Services,

Ptirne Contracts Awmds, Fisca/ Year 1990 (Washington, DC:

1991).

firms compete for government contracts, both for

procurement and for R&D.

Some small defense firms were started up for the

purpose of selling to DoD, frequently by people who

previously worked for large DoD contractors and

understand the intricacies of the defense business.

Often these firms are niche producers of sophisticated or specialized military goods and have little

experience in commercial production and marketing. Some of them may simply close up shop if

defense contracts or subcontracts dry up, but many

are strongly motivated to survive by converting to

commercial production. Other small companies that

produce military goods, either as prime contractors

or as subcontractors, already sell some of their

output to commercial customers; many are looking

to expand those sales.

Although information about small defense companies is limited, there is evidence that most have

both military and commercial customers. For exam46A ~m~] bu~in~~~ & d~fm~d by s~] Busin~s Ad~s@ation re~tions @#@ 19.101) M OIE tit is Mepndent.ly Ownd Md OpCrS@ k KIOt

dominant in its field of operations, and with its afllliates does not employ more than a specified number of employees (usually not more than 500,750,

or 1,000, depending on the type of product called for by the contract). For construction and some service industries, the criterion is a specifkd annual

dollar volume of sales or receipts, rather tban the number of employees. This definition is drawn fkom DoD, Washington Headquartm Service,

Directorate for Information Operations and Reports, Prime Contract Awards.’ Fiscal Year 1990, DIOR/P03-90 (Washington, DC: U.S. Government

Printing Office, n.d.), p. 60.

AyIbid., table 3, p. 11. “Awards to U.S. business firms” are for work in the United States done by U.S.-owned fm. Other awards went to other

government agencies, educational and nonprofit institutions, and foreign-owned companies.

‘Wbid., p. 57.

49~~~s ~~= 1(3* l.ss,pfie ~n~ac~ plu5reP~~ su~ntracts to dbusiness ~O~ted to about 33 Percertt Of the total awards to U.S. business

firms, but the data are probably better for the later period. The number of large defense fm reporting to DoD the value of their subcontracts to small

business rose continuously from 1,133 in 1981 to 1,664 in 1990.

~or construction and some service industries, the SBA criteria are speciiled dollar volume of receipts rather than number of employees.
218 . After the Cold War: Living With Lower Defense Spending

Box 7-E-Opportunities for Defense Contractors in Advanced Transport

The state of land transport today is comparable in some ways to that of aviation 30 years ago. A physical

infrastructure is in place, carrying a growing volume of passengers and goods, but the field barely incorporates any

of the advanced electronic communications technology that supports modem aviation. Defense firms kinking to

apply resources elsewhere might find some opportunities in advanced transportation technologies. An added

attraction is that California, where many defense firms have their home, is in the forefront of promoting new

transport technology.

California’s Department of Transportation (Caltrans) is developing the State’s transport infrastructure in

several ways, guided by the goals of economic prosperity, environmental quality, energy conservation, equity, and

mobility. l commuter rail transport, financed by a doubled State gasoline tax and a rail bond issue approved by

California voters, is getting more emphasis. Although rail cars for the California systems are now made by foreign

companies, the State’s long-term, reliable financial support for commuter rail systems might attract U.S. companies

into the field. Some American firms already make components and subsystems and some do the final assembly for

largely foreign-made cars.2 However, a more promising area for U.S. defense contractors might be in development

of new technologies rather than expansion of existing systems.

Electric Vehicles

The California Clean Air Act of 1988 identified a range of strategies for arresting the decline of the State’s air

quality. 3 These included the use of low-emission vehicles, with annual targets that require an increasing fiction

of an automaker’s fleet to meet progressively tighter standards. In November 1991 the governors of nine

northeastern states and the mayor of Washington, DC signed a memorandum of understanding agreeing to support

adoption of the California rules in their States.4 If all these States, and three others in the region that seem likely

to join, adopt the California standards, 36.7 percent of the vehicles in the Nation would be affected providing a

considerable encouragement to manufacturers of alternative fueled vehicles. California alone has an 11.5 percent

share of the national market.

Various improved and new technologies based on alternative fuels could satisfy the standards. The strictest

category, “zero-emission vehicles” (mcaning no measurable quantities of hydrocarbons, carbon monoxide, and

nitrogen oxides), are first required in 1998 for 2 percent of an automaker’s new models. ‘he fraction grows to 5

percent in 2001 and 10 percent in 2003.5 The only existing vehicles that meet these standards are electric vehicles

(EVS). Hydrogen-burning internal combustion engine vehicles could also satisfy the emission requirements, but

very few of these have yet been built, so that most potential manufacturers regard them as a longer term option.

The skills available in southern California including many in the aerospace and defense communities, are

well-suited to EV production. However, the first EVs built in response to California’s public policy initiatives will

be foreign-made. In 1989, the Los Angeles City Council staged a competition for proposals to develop and build

10,000 EVs over 3 or 4 years.6 The city offered the winner financial support in the form of long-term loans on

favorable terms; by late 1991 they had amounted to $7 million: The city also agreed to buy some of the vehicles

for its fleets, although most were intended to be sold to private customers.

1~~ Department of Tnulqmatiom “California Transportation” Direction” ~ Nov. 15, 1989.

%&r Fe&ml “Buy Ameriean” nx@mnents, which apply when Federal funds are rnvolved in purchase of the ears, assembly of ears

must tieplaeeintheUnited States and 51% of theeomponentsmust be made in~ Several foreigncompanics have opened fti assembly

plants in the United States in order to meet these requirenmits.

3U~veni~ ~ cti~ T.,os AXI@CS, H&nter for Regional Policy Studies, Prospects for Altern@”ve Fuel Vehicle use and

Production in Southern California: Envwonmental Quality and Economic Development, Woricing Paper No. 2 (UCLA: May 1991).

%e nine States wererlda~ Maine, Ivfaxylan& Massachusetts, New Hampshire, New Jersey, New York kmsyhmi~ and Vi@n&

with WaAiX@oL DC also party to the agreement. Conneetieug Rhode Ida@ and Vermont are also likely to adopt the new standards. Jim Henry

and Kristine Stiven Breese, “Calif. Air Rules May Cover Northeast” Automotive News, Nov. 4, 1991, p. 1.

5A~0~tive News, Feb. 25, 1991.

s~~ tiw from “~S @elea Initiative Request for Roposals” ~d PA communication with Glenn Barr of Councilmm

-in Braude’s office, Sept, 9, 1991. Coumilman Braude was the author of the initiative.
Chapter 7-Defense Companies ● 219

Although General Motors is developing an EV, it did not put in a bid, nor did any large U.S. company. A

Swedish/British company, Clean Air Technology (CAT), won with a proposal for a hybrid vehicle equipped with

an electric motor and batteries for stop-and-go city driving and a small, precisely tuned gasoline engine for highway

cruising. The four- or five-passenger vehicles will probably sell for about $25,000, a price that reflects the city’s

low-cost loans. The estimated launch date for the first 3,000 vehicles is the spring of 1992. The frost vehicles will

be produced in Worthing, UK. Los Angeles representatives are exploring with CAT the possibility of setting up a

manufacturing plant in southern California if the vehicle is successful, but nothing has been settled.

Another source of encouragement for production of EVs could be the Federal Government. The Surface

Transportation Act of 1991, passed by Congress in November 1991, authorized $12 million for fiscal year 1992 to

support at least three EV consortia.7 The consortia are to design and develop EVs and advanced transit systems,

related equipment, and production processes. At least one-half of the funds for the consortia must come from

non-Federal sources; the act encourages them to include small businesses and defense and aerospace firms.

A group that aims to use the high technology talents in southern California for making EVs is Amerigon, of

Los Angeles.8 Founded in 1990, the company is coordinating small and medium-sized aerospace and other high

technology firms in the area to produce subsystems for an EV, the prototype to be ready in early 1992. According

to Lon Bell, Amerigon’s founder, the technology of EVs is so different from that of vehicles powered with internal

combustion engines that the established automobile manufacturers, with their tremendous resources sunk in one sort

of production technology, are not the natural suppliers of EVs. Bell’s approach was to match lists of customer or

user requirements with available skills, breaking down the EV into 45 subsystems that can be developed

independently, and seek the appropriate local engineering firm to work on each of them.

Many of those involved in the enterprise believe that major aerospace companies are no more likely than the

big auto companies to become successful EV producers, in part because the aerospace managers and engineers are

accustomed to a business in which product cycles are at least 15 years. Aerospace subsystem producers, on the other

hand, might be the source of skills that could forma supplier base for a new kind of vehicle industry. Also, marketing

to mass consumers is not a strong point of defense and aerospace fins, but marketing will obviously be an important

factor in launching widespread EV use. Although California’s Clean Air Act requires that a certain fraction of autos

be zero-emission vehicles, it is not clear that consumers will want to buy them. Today’s EVs are expensive and

limited in driving range. By 1998, the price and other qualities may be more appealing, but they will still be

unfamiliar. The first purchasers may well be companies or agencies with specialized needs (e.g., utility companies,

the Postal Service), but if they ever are to make a big difference in air quality and oil consumption, a mass market

of consumers will have to develop.

Smart Cars and Highways

Some quarters of the defense and aerospace business see promising conversion opportunities in the range of

technologies termed “smart cars and smart highways. ” Although the technologies do offer some potential for

application of the skills of defense firms, the potential has rather narrow limits.

Smart cars and highways--or, more formally, intelligent vehicle and highway systems (IVHS)--are meant to

ease the increasing congestion on American roads by employing many of the technologies widely used in defense

and aerospace: communications, sensors, electronic controls, and systems integration. IVHS technology uses

computerized signals, driver information systems, and automatic vehicle control for traffic management. The most

advanced form of IVHS is an automated highway network, in which cars are controlled by signals from the road.

Such a system would require expertise in the integration of many complex subsystems of communication, sensors,

information processing, and so forth-similar to what major defense contractors do for other purposes.

7H.R. 2$X(), the kt~odal Surface Transportation Infrastructure Act of 1991. No funds have yet been approptitd for tie EV pmat this writing. Funds maybe reprogrammed fkx.n elsewhere in the Department of Transportation’s budget or an appropriation may be sought

in the second session of the 102d Congress. Other bills relevant to EVS included S. 324, the National Energy Strategy Act of 1991, which included

as a short title the Electric Vehicle Technology Development and Demonstration Act of 1991, and authorized a total of $60 million of R&D @

demonstration programs. It failed to pass, however. H.R. 1538, the Electric Vehicle Act of 1991, which also provided R&D suppofi was reported

to the House in September 1991, but has gone no further.

8

Lon BellChauman “ of Amerigo~ personal communication Sept. 23 and 24 and Oct. 17, 1991.

(cwntinuedon next page)
220 ● After the Cold War: Living With Lower Defense Spending

Box 7-E-Opportunities for Defense Contractors in Advanced Transport --Continued

The trouble is that the opportunities for defense companies are probably greatest in advanced IVHS systems,

and these are the farthest from realization. The technologies need further development, and installing them would

not only be expensive but would require sophisticated cooperation among many public and private institutions. For

example, establishing an electronic toll and traffic management system in a large metropolitan area, where Federal,

State, local and city jurisdictions adjoin and overlap, would involve negotiating daunting institutional barriers.

Furthermore, some of these systems might encounter strong consumer resistance; drivers may object to ceding

control of their cars to an electronic system.

In the near term, the most promising commercial applications of IVHS technologies are less complex, e.g.,

computers in cars to give drivers continuously updated information on traffic conditions and routes. The

manufacture of such devices demands the kind of experience and knowledge possessed more by producers of

consumer electronics than by firms making defense and aerospace equipment. In this market, companies will be left

behind if they lack abilities for rapid design, volume production, and effective marketing of cheap, reliable items

that are easy to use without special training or continual maintenance.

The more advanced forms of IVHS are unlikely to develop without strong government backing. Federal

spending for IVHS has been small, but could increase greatly in the next few years. Federal funding for the

technology was about $2.3 million in fiscal year 1990 and $20 million in 1991. The highway bill passed by Congress

in November 1991 authorized $660 million for IVHS research over the next 5 years. Accordingto the General

Accounting Office, a program to develop IVHS might require total government R&D funding (State and local as

well as Federal) of as much as $34.4 billion over the next 20 year9 While this is a substantial amount, it does not

compare to the sums of about $30 billion per year that the Federal Government has paid defense contractors for

research, development, testing, and evaluation in recent years.10

IVHS could be one component in the Nation’s response to its transportation needs. It may offer some defense

companies the chance to apply their skills, but it probably will not amount to much of their business in the near to

medium term, and entry to the field will not be easy.

%s. (3eneml Accounting Oillee, Sma# Highways: An Assessment # Their Potential To Improve ~vel, GAO/PEMB91-18

(w=MB@a DC!: May 1991).

l% Hy= MM, DoD contracts @ P~v* _ ‘or~dm’elopmalg testing, and evabation amounted to $192 billion

@pmment of Defense, Prime Contract Awar&, Fiscal Year 1990, DIOiUP03-90 (Wasbin@m

w~-m~$ 1~)).hldditiOQDOD “

DC: DoD OSD Dimamtc for rnfolmadom

~-~$3.6 biUionfordcfmrclatcd indqmdm R&D and bid axxi

-

~

.sP@MtkS m Jm Ooklla staff lqlcciaust for special tccbnology program, Offlcc of Ileputy Director of W&ate ltmarch and

 for Rcseamh ad Advanced Tccbmlogy, pcrwnal catmunicatioq Nov. 25, 1991); the Dqmmxtt of Bnugy spatt $3 billion in

de.rmsc-related Contract R&D, some Ofwhicll went to private colnpslde$ @ep@mmt of Energy Dcfmsc~$fuWYmProgram Plan,

December 1990).

pie, a 1989 survey of 97 small and medium-size dependent than service sector firms; 37 percent of

prime DoD contractors and subcontractors in Ohio

found that in 57 percent of the firms, half or fewer of

employees worked on defense contracts; and 65

percent of the firms reported that half or less of their

profits came from defense contracts.51 A 1990

survey of prime defense contractors (mostly small)

in New England showed that 40 percent of sales

were to DoD.52 Interestingly, manufacturing firms

(286 of the 355 firms responding) were less defensetheir sales were to DoD, compared to 52 percent for

all the service firms, and 69 percent for business

service companies. In St. Louis, 152 prime defense

contractors (again, mostly small) responding to a

survey reported that 27 percent of their sales were

defense-related companies to 62 percent in the

private domestic market.53 A 1991 survey of prime

defense contractors in Pennsylvania found that,

sl~kekl III&SySttXIM, hc., ‘1’hkc COT. d bfz commdwtioIIs, ~., Ohio’s Changing Dt$ense Procurement Patterns: A Company

Perspective, report to the Ohio Department of Development, Small and Developing Business Divisio% Jan. 8, 1990, app. C. ‘l%e questionnaire did not

ask what percentage of sales were due to defense contracts.

52B~ of Bostou ~Nmics ~~~~

 4‘Swey of NCW Eng~d Defense Contractors,” ~ObCX 1990.

Ssst. ~ufi ECODOmiC Adjmtment and Divedication Task Force, ‘‘Suxvey of Defense Prime Contractors in the St. Louk Metropolitan Arq’

September 1991, table 5. Although McDonnell Douglas responded to the survey, most of its responses were omitted from the statistical analysis.
Chapter 7--Defense Companies ● 221

overall, sales to DoD averaged 13 percent of all

sales.54 Large firms (over 500 employees) were just

about average in defense dependence. The highest

rates of defense dependence were found in the very

smallest manufacturing firms (under 20 employees),

with 45 percent of sales to DoD, and in medium-size

manufacturing firms (250-499 employees), with 30

percent DoD sales.

Adjustment Plans of Small and Medium-Size

Defense Firms

It seems reasonable to expect that small companies already making commercial as well as military

sales are in position to increase their commercial

sales. Although these firms must keep separate

accounts for their defense work, their managers and

work force, very often their production equipment

and sometimes the product itself are the same for

their military and commercial customers. Unlike

major companies that are in both defense and

civilian business, small companies rarely have

separate defense divisions. Small metalworking

companies, in particular, are inherently dual use.

While it may be technically feasible for these

companies to substitute commercial work for declining defense contracts, it is not necessarily easy.

There may not be enough commercial work to go

around. In a Maryland survey of small defense

contractors and subcontractors, respondents cited

competition as their number one problem in getting

new commercial customers .55 OTA found the same

concern in interviews with several small custom

machine shops in Massachusetts in May 1991. At

one shop, which has four computer numerically

controlled (CNC) machine tools, 17 well-trained

employees, and an excellent reputation, the owners

were spending most of their time chasing new

commercial customers, without much success. This

interview took place at a low point in the recession,

which hit central Massachusetts especially hard;

times may improve. However, many of the owners

doubted that commercial customers could make up

for loss of defense contracts in the custom machine

business. Some voiced fears that job shop work

would go overseas.56

Aside from the critical flaw of too few commercial customers, and despite their success in recent

years in getting defense contracts, all of these

Massachusetts shops much preferred commercial to

defense business. The owner of one explained that

there is no loyalty in DoD contracting and little

repeat business, which means there is a new learning

curve on each order, which in turn lowers profits.

DoD business also involves waste of time-in

waiting for contracts, waiting for clarification of

drawings, extra paperwork, and the incredible detail

of military specifications. With commercial customers, the shop can develop long-term relationships

and trust; take orders or ask for clarifications over

the phone; and get orders for many different parts or

long runs of particular parts without going through

new bids and new competition.

Managers of several machine shops emphasized

that their equipment and people are dual use. In fact,

high-tech production and quality inspection equipment bought for defense work has made them more

versatile and competitive in commercial markets.

For example, one pointed to the precision capabilities in his shop as allowing him to produce bearing

housings for fine graphics printing presses, where

tolerances are extremely exacting, and to build tools

for the manufacture of semiconductor chips. Another shop makes block-and-pin type universal

joints for everything from bowling alley cleaners

and garbage compactors to machine gun drives, tank

turrets, and missiles. The president of this firm

thought that loss of defense business, with its low

profit margin and administrative hassles, was a real

opportunity to go out for more commercial work.

The firm recently bought a 4-year-old shop with all

CNC machines, highly trained workers, a broad

sales base, and a manager who is a Jehovah’s

Witness and will not do defense work.

Still another Massachusetts firm makes small

hand-held borescopes--remote optical viewing equip54p~wYlv~~ ~dU~~ R~S~U~e centers and ~M(_j peat Mck c ‘s~ey of &partment of D~e~ Conmctors in PerUISylVaKlh, ’ n.d. The

survey was sent to 1,705 establishments in Pennsylvania% responses were received from 187 manufacturing and 144 nonmanufacturing firms. Sales data

were for 1989.

f’5Preliminary results of a survey by Maryland’s Department of Economic and Employment Development reported to a symposium of the National

Governors’ Association Apr. 5, 1991. Complete report is forthcoming.

56Bo~ ~att and ~~ey—a ~jor ~stomer for New England mac~e shops—and GE Aircraft Engines we~ said to be sending job ShOp orders

abroad. This may reflect the increasing fkquency of offset agreements in sales of aircraft engines to foreign customers (i.e., agreements to subcontract

some of the work to the country of the purchaser).
222 ● After the Cold War: Living With Lower Defense Spending

ment for looking into areas normally inaccessible to

the human eye. The company started up in the early

1970s, making devices for looking into reactor cores

for the then-thriving nuclear power industry. In the

1980s, the company turned to DoD as a customer,

making equipment for inspecting aircraft engines

and gun barrels. But in the later 1980s company

managers decided to rely less on DoD sales, with its

tight regulation, low profits, and unreliable repeat

orders. They moved into medical applications,

which is the biggest and fastest growing market for

borescopes. It was easy for them to meet Food and

Drug Administration quality requirements since

they were already meeting tough DoD standards for

quality and durability. Ohio firms also reported that

equipment and skills they acquired for precision

machining of military goods could be applied to

health care products, where close tolerances are also

demanded. 57

Although some of these firms have found new

commercial customers with considerable success,

the main worry of most small to medium-sized

defense firms in shifting to more commercial

business is in sales and marketing. Surveys of New

England, and Ohio firms pointed to marketing as the

top concern.

58 The companies mentioned availability of financing as a second major constraint in

getting into new or expanded commercial production.

The Pennsylvania and St. Louis surveys found

similar results although the questions were framed

differently .59 Asked to rank kinds of business

assistance that interested them, the St. Louis firms

rated market research and marketing strategies first

and second. Access to financial assistance was

ranked third. As in Ohio and New England, the St.

Louis firms evinced considerable interest in export

markets. In Pennsylvania, over half the firms reported that they were developing domestic markets

in response to anticipated DoD cutbacks; about

one-third said they were developing new products,

revising marketing plans, or developing international markets. Over one-third of manufacturing

firms were interested in financial assistance for

machinery and equipment or for new product

development; about 20 percent were interested in

technical assistance for new product development.

If small firms that already have a mix of defense

and commercial sales find difficulties in the way of

expanding their commercial business, the problems

would seem to be still greater for companies that

concentrate on defense production. Even here,

however, there are success stories. One of the

best-known examples of conversion to commercial

production, dating from the 1970s, was of a relatively small company, Rolm Systems.60 Rolm’s

conversion effort began in 1974, in the aftermath of

the Vietnam War, but it was not so much a response

to loss of military business-military sales were still

holding up-as a desire to continue the company’s

rapid growth.

Rolm Systems was founded in 1969 to produce

rugged computer equipment under license from Data

General. The market was largely military, both U.S.

and foreign, but also included some oil and paper

companies that used computers in the field. Rugged

computers remained the company’s entire business

until 1974, when management began to explore

getting into production of telecommunications equipment, in particular private branch exchanges (PBXs)

for businesses. Managers calculated that the company was reaching the limits of the market for

rugged computers (at around $20 million a year),

and sought to diversify in order to continue the rapid

growth of their first 5 years. The choice of the

business telephone market was a natural one; PBXs

have much in common with computers, and 80

percent of the technology needed was already

available within the company. New people were

brought in for sales and marketing, and for aspects

of telecom technology that diverged from computers. Rolm’s first telecom offering was in 1976; by

1982 PBXs were half of the company’s business. At

that point, IBM bought the company but later sold

the military computer business to Loral, at the behest

of the Justice Department on antitrust grounds. Both

descendants of the original company were doing

well in 1991.

57~ketel info-systems, Inc., et id., Op. cit.

58Bh of BostoU op. cit.; Marketel et d op. cit.

Sgpemylvafia Indus~~ R~o~ce Centers and KPMG Peat Matwic~ op. cit.; St. Louis Economic Adjustment and DiversXlcation mk Force, op.

cit.

60~t~ for ~s ~tion coma from fitewiews ~~ Compay offic~s of ~r~ Ro~ ~ SyC ~r~ now O- the Rolm mili~ computer

business) and IBM’s Rolm Systems (H3M now owns the Rohn PBX business).
Chapter 7-Defense Companies . 223

A more recent example of conversion of a small

defense company is the Frisby Airborne Hydraulics

company of Freeport, NY. This company, long a

captive of the military airframe companies on Long

Island, has deliberately reduced its defense dependence from 90 to 25 percent. Frisby had the advantage

that some of the products for its military and

commercial aircraft company customers were very

similar; but it also found new commercial applications and customers for a technology (a heat

resistant, leak-proof solenoid valve module) it had

developed for the military, and it is now starting

production of a wholly new product in the commercial field. The transformation was not easy. It took

vigorous efforts to sell to new customers, improve

productivity and lower costs, and adopt a new

management style based on improved worker training and labor-management collaboration.

Government Programs To Help Small

Companies’ Adjustment

Several government programs that are designed to

assist small business generally could be suitable for

helping small defense firms expand their commercial business. At the Federal level, many laws give

special breaks to small business. For example, the

‘‘Buy American’ laws that affect U.S. Government

purchases of many items give a price advantage of

6 percent to U.S. firms generally (i.e., the government must buy American unless the price offered by

a foreign firm is at least 6 percent lower), but small

businesses get a 12-percent advantage.

There is special Federal financial help to small

business, mostly in the form of governmentguaranteed loans; these amount to about $3.5 billion

a year ($3.6 billion in fiscal year 1990). In addition,

the Small Business Investment Corporations and the

Minority Small Business Investment Corporations,

private companies licensed by SBA, are subsidized

by the Federal Government to the tune of about $84

million in 1990. These corporations make equity

investments as well as loans to small firms, amounting to $629 million in fiscal year 1990, Many States

have financial assistance programs of various kinds

for small business,61 and though figures on the total

available from these programs do not exist, they are

probably bigger and almost certainly more varied

and accessible than federally guaranteed loans. For

a small example, two of five Massachusetts small

metalworking firms interviewed in depth by OTA

had built their plants and bought machinery using

low-interest financing from the Massachusetts Industrial Finance Authority; none had used a federally guaranteed loan from SBA for the purpose.

The SBA also operates a few programs that offer

business management and marketing advice to small

firms--most often, small retail or service establishments. The Small Business Development Centers

(SBDCs) are mostly located on college campuses,

provide advice from faculty or students on particular

problems firms bring to them, and get half their

funding from their home college or university (the

other half comes from SBA). Fifty-three SBDCs,

located in 46 States, were supported by $55 million

in Federal funds in fiscal year 1990. SBA has

recently begun efforts to strengthen the SBDCs’

ability to serve small manufacturing firms with

technical and managerial advice.

Volunteers in the Service Corps of Retired

Executives (SCORE) offer brief workshops and

counseling on business management to small fins.

According to some who have received their services,

their greatest benefit is entree to networks in which

the SCORE volunteers are well established members.

A Federal program that could prove especially

useful to small defense companies is the Small

Business Innovative Research (SBIR) program,

which set aside $460 million of Federal R&D money

for small businesses during fiscal year 1990. Under

this program, established by Congress in 1982,

Federal agencies with R&D budgets of more than

$100 million a year must set aside 1.25 percent of

their contract money for small and medium-sized

firms. In 1989, 3,183 awards were given to small

companies to do R&D work for Federal agencies.

The program is in two stages: first, feasibility studies

of promising ideas (2,346 awards in 1989, for a totaI

of$118 million); second, development of the ideas

with the greatest potential (837 awards, $341

million).

The General Accounting Office has issued several

reports on the SBIR program, generally giving it

61 For ~ de~cnption of ~ ~@y “fied ad ~ovative pro-of f~ci~ aid to bus~ess ~ tie $tate of ~ctiga~ see btitia L. OhVeh, “Digging

Out From Hard Times: Economic Recovery in Michigan and Pennsylvania,’ contractor report prepared for the Office of Technology Assessment August

1990.
224 . After the Cold War: Living With Lower Defense Spending

high marks for effectively funneling R&D money to

small firms and helping young companies develop

advanced technologies.62 A possible major shortcoming of SBIR, from the point of view of companies’ converting to commercial production, is that

DoD is the biggest funder (since it has far more R&D

contract money than any other Federal agency).63

However, for this very reason the program could

offer real opportunities to adapt military technologies to civilian use. Frisby Airborne Hydraulics did

just this in forming a partnership with a North

Carolina firm that won an SBIR award from the Air

Force for a heat exchanger to cool airplane engines.

Frisby intends to market the technology to a variety

of commercial customers, not only in aircraft but

possibly also in electronics (see box 7-F).

Another kind of program that offers promise to

small defense companies intending to convert to

commercial production is technology extension

assistance. 64 Technology extension has real potential to raise the performance of America’s 350,000

small manufacturing firms (not just defense fins),

but such programs are still quite few and scattered.

They exist at both the State and Federal levels, but

the States are ahead. In early 1991, 16 States had

genuine extension programs (defined as those setup

to give one-on-one technical advice to individual

fins, with field agents as part of the program), and

another 7 had technology demonstration or assistance centers. Most of these centers are fairly new,

but a handful have several years’ experience and one

(Georgia Tech’s highly regarded Industrial Extension Service) has existed for nearly 30 years. A

rough estimate of what States spend on these

programs is $50 million a year. Congress established

a Federal program in the 1988 trade act; by 1991 it

included five Manufacturing Technology Centers

and was funded at about $10 million. Congress has

shown considerable interest in strengthening and

expanding technology extension. The FY92 funding

for Manufacturing Technology Centers was increased to $15 million, but several other bills that

received serious consideration in the 102d Congress

would broaden the present program and authorize

spending of as much as $50 to $75 million a year.65

The contribution technology extension can best

make to small firms is not so much state-of-the-art

products straight out of the R&D lab, but rather

acquaintance with best practice in manufacturing.

Many small defense firms are at the cutting edge

technically, and some may be prepared to enter

commercial markets at the high end.66 However,

many can use help in getting their productivity up

and costs down by such things as organizing work to

get rid of waste, acquiring the right machinery for

the job and using it efficiently, training workers in

techniques for in-process quality control, and encouraging worker participation in production improvements.

Learning how to sell in the commercial world is

a particular challenge for small defense fins. Some

States include in their range of services to small

firms assistance in finding customers. For example,

in the late 1980s Michigan developed its Market

Scout program to help auto suppliers move into new

markets. On the basis of input-output tables, the

program generated a detailed list of industries that

buy from particular supplier industries and have the

potential to be good customers (e.g., declining

industries were pruned from the list). Market Scout

also developed data on what alternate products a

supplier might be able to make, given certain

specific kinds of machinery and workers in certain

occupations, and what industries would be likely to

buy them. Like many other States, Michigan was in

dire financial straits in 1991, and it cut out funding

for Market Scout and several other innovative

business support programs.67

6~omp&ollm Gener~ of tie UfiWI Stites, &ner~ ACCOUn@ Offke, Implementa”ng the Small Business innovation Development Ac+The First

Two Years, GAO/RCED-86-13 (Washington DC: 1986); A Projile of Selected Firms Awarded Small Business Innovation Research Funds,

GAO/RCED-83-l13D (Washingto~ DC: 1986); Effectiveness of Small Business Innovation Research Program Procedures, GAO/RCED-87-63

~-to%~: 1987); S~ll Business Innovation Research Participants Give Program High Marks, GAO/RCED-87-161BR (washingto~ DC:

1987); Federal Research: Assessment of Small Business Innovative Research Programs, GAOIRCED-89-39 (Washington DC: 1989).

@With dm~es in defense ~n~, DoD R&D funds could be CUG however, it was one part of the X@OrUd defense budget.

@For de~~ di~cw~ion of technolo~ ext~ion pro- in the Ufited s~s, see o~, A4aking Things Better, Op. Cit., ChS. 2 @7.

6%242 Ch. 2.

6 6Even ~tit tie hi@y sop~tica~ pr~uc~ my not be prep~ed to se~ in co~erci~ ~ke~, howmer. They IIMy need tO redeSigIl their

producq get manufacturing costs down and reliability up, and strengthen their marketing.

67~e nonprofit ~dus~~ ‘r=~olo~ ~stitute (which &d developed the progr~ un& s~te ~ts) twlc over the program on a pay-for-mice

basis.
Chapter 7--Defense Companies . 225

Box 7-F—Frisby Airborne Hydraulics: Conversion in a Small Defense Company

Frisby Airborne Hydraulics, with about 100 employees, was a “captive” Long Island subcontractor to

Grumman and Fairchild-Republic for over 30 years.1 According to its co-owner, Greg Frisby, the 1987 cancellation

of the T46A trainer program after production of only two planes was “devastating.” Since DoD had planned for

400 T46As, the company assumed that the trainer was a long-range military commitment Frisby spent $300,000

developing the required advanced hydraulic control system, with a heat-resistant, leak-proof solenoid valve module

that could be placed close to the engine. When DoD canceled the contract, the company received a government

check for $40,000 in compensation.

Nevertheless, Frisby managed to survive and prosper while reducing its dependence on military contracts from

90 to 25 percent-and at the same time, keeping to a primary goal of no worker layoffs. It did so through a

combination of aggressive marketing, changing its management style, and increasing worker participation in

production decisions.

Frisby hired a sales team who agreed to work on commission and were familiar with the needs of the aerospace

industry, and it backed up the sales effort with extra responsive customer service. About this time, Boeing (already

a Frisby customer) announced “Operation Eagle, “ in which all its suppliers were to reduce prices 25 percent and

freeze them at that level for 5 years. Frisby, with some trepidation, signed the contract. This prompted the company

to add a major push for increased productivity to its marketing and service efforts.

Frisby moved to “participative management“ in improving product design and production efficiency. It

eliminated a layer of management, setup an employee committee on cost-cutting, instituted profit-sharing, offered

flexible work shifts, encouraged hourly workers to contribute to production improvements, and held monthly

financial statement review meetings with all employees. It cross-trained employees, all of whom now have a second

skill, and paid for employees’ education, based on grades. It taught English to non-English speaking employees

(everyone from porters to operators).

According to Frisby’s owners, the results of these efforts include:

. 50-percent reduction of scrap over each of 3 years 1987-90;

. 20-percent reduction of rework costs;

. no employee turnover in 1989-90;

. improved profit margins;

● 30 percent growth in sales volume; and

● no layoffs-in fact, increased employment.

l’r’hia a~~ of the conversion of Frisby Airborn Hydraulics *a~y defense cmpany to a mostly ~c~

is drawn mostly from Linda Kmvi% “Wages of Peace: Cornrmmity and Industry Experience With Military Cutbacks,” contractor report

=for tie Ml= of T-logy Assea_ August 1990, and is baaed on an interview with Greg Risby, co-owner, wy 16,1990 and

nomic Adjustment After the Cold War,” testimony by Greg Frisby before the Joint l?conornic Comrm“me, Us. congress, Mar. 20,1990.

(continued on next page)

Some States are making explicit efforts to target A few State and local governments are creating

their existing business assistance programs to de- new programs for the specific purpose of helping

fense contractors. For example, Ohio recently held firms convert from defense to commercial produca conference bringing together small defense con- tion. For example, the California Aerospace Suptractors to help identify new markets. Connecticut plier Improvement Program is working with small

Innovations Inc., a quasi-public State financing aerospace subcontractors to help them modernize

agency, has set aside $2 million to invest in their production processes, in response to defense

defense-dependent firms to help them fund new spending reductions as well as tougher international

product and market development. competition. 68 Jointly administered by California’s

a~e ~rom~s promotional mttids s~e.o “Faced with reductions in defense spending as well as international compctitioni there is mounting

pressure for many fins, particularly suppliers to aerospace companies, to explore more cftlcient manufacturing techniques. ”

69C~iforfi’s Employment Tr~g ~~is fid~ by an employem’ payoll @X S* to the ~e~loylnent iD.SlllWICe @ lt Cm be USd tO

retrain displaced workers or active employees who need remaining in order to avoid displacement.
226 . After the Cold War: Living With Lower Defense Spending

Box 7-F—Frisby Airborne Hydraulics: Conversion in a Small Defense Company--Continued

Frisby is now producing hydraulic actuators, micro pump packages, and valves of varying complexity for

Boeing, McDonnell Douglas, Beech, and Cessna. Boeing now represents 40 percent of Frisby’s sales. Frisby has

evidently become a favored supplier, since Boeing does not ‘compete’ the company, that is, solicit bids from other

companies. Frisby still has military sales on the C-17, and while it values these sales, Frisby’s co-owner comments

that “the paperwork requirements for the C-17 couldn’t fit into the airplane.”

While improving its sales, service, management, and productivity, Frisby also found another market for its

heat-resistant and leak-proof solenoid valve developed for the T46A; i.e., in deep hole oil drilling. A new plant in

Clemmons, NC will be home for assembly, repair, and overhaul of Frisby’s solenoid manufacturing operations.

Moreover, Frisby has entered into a partnership with an R&D firm to commercialize a Small Business Innovative

Research (SBIR) Phase II winning system for advanced cooling of avionics and electronics. The R&D firm, from

North Carolina, had won 34 SBIRs. Its heat transfer technology, developed with funding from the Air Force,

provides a better way to cool avionic systems. The system can cool radar engine systems 40 times better than air

or water. Large aerospace braking systems contractors are interested in this technology; it might also be used to cool

semiconductor circuit boards. This production too is scheduled for North Carolina

Frisby’s owners believe that their successful transition was largely due to the flexibility inherent in smaller

companies, and to products readily adaptable to commercial in the aircraft business. They “do not believe that it

is impossible for large contractors to make similar transitions. ’ However, in noting the disinclination of some large

contractors, Frisby’s owners noted that they had received no response from one big company to their proposal for

a joint undertaking to produce a major hydraulic system needed for the Boeing 777 airplane. Frisby looked

elsewhere, and has found a more commercially oriented prospective partner.

According to Greg Frisby, “What is urgently needed [for company conversion] is unprecedented

communication and cooperation between labor and management. Employees must be willing to cross-train,

cost-share through concessions and do whatever else is necessary to aid in the transition. Management, though, must

work hand in hand with labor and include employees in all restraining, productivity and cost savings decision

making.

Department of Commerce, Employment Training a demonstration project for that purpose. The OEA

Program, 69 and community colleges, the program

provides training in total quality management,

including statistical process control, just-in-time

procurement, and teamwork/communications,

through workshops at four Centers for Applied

Competitive Technologies and through onsite training. In the program’s frost 2 years, employees from

more than 1,600 companies are expected to attend

the seminars, and 200 companies are expected to

enroll in the more in-depth, onsite training.

At the Federal level, there is scarcely any assistance specifically targeted to defense firms wishing

to convert. However, DoD’s Office of Economic

Adjustment (OEA), a small agency whose experience lies mostly in helping communities plan for

adjustment to military base closings, is involved in

is working with the State of New York and local

communities to provide technical assistance to nine

defense contractors on Long Island, to help them

move into commercial markets. A technical consultant is working with the firms to develop strategic

plans and help them apply for assistance from local,

State, and Federal Government programs to implement the plans. OEA provided $100,000 for the

project, the State $70,000, and the nine firms

$120,000; local governments and the Chamber of

Commerce will provide another $50,000 to $70,000

in-kind support. The nine firms selected are in three

size categories and three categories of defense

dependency (75 to 100 percent defense, 50 to 75

percent, and up to 50 percent).

69c~iforfia*~ E~~l~~@ T~M Pmpam ~ f~ded by an employe~’ payro~ @X similar to tie MemplOyKllent insurance tllx; it Call be Used tO

retrain displaced workers or active employees who need retraining in order to avoid displacement.
Appendix A

Defense Spending and Employment
Appendix A--Defense Spending and Employment ● 229

Table A-l—National Defense Outlays and Budget Authority, 1940-91

Budget Budget

Outlays Outlays authority authority

(billions (billions (billions (billions

of current of constant of current of constant

Fiscal year dollars) 1991 dollars) dollars) 1991 dollars)

1940 . . . . . . . . . . . . . . . . .

1941 ... , . . . . . . . . . . . . .

1942 . . . . . . . . . . . . . . . . .

1943 . . . . . . . . . . . . . . . . .

1944 . . . . . . . . . . . . . . . . .

1945 . . . . . . . . . . . . . . . . .

1946 . . . . . . . . . . . . . . . . .

1947 . . . . . . . . . . . . . . . . .

1948 . . . . . . . . . . . . . . . . .

1949 . . . . . . . . . . . . . . . . .

1950 . . . . . . . . . . . . . . . . .

1951 . . . . . . . . . . . . . . . . .

1952 . . . . . . . . . . . . . . . . .

1953 . . . . . . . . . . . . . . . . .

1954 . . . . . . . . . . . . . . . . .

1955 . . . . . . . . . . . . . . . . .

1956 . . . . . . . . . . . . . . . . .

1957 . . . . . . . . . . . . . . . . .

1958 . . . . . . . . . . . . . . . . .

1959 . . . . . . . . . . . . . . . . .

1960 . . . . . . . . . . . . . . . . .

1961 . . . . . . . . . . . . . . . . .

1962 . . . . . . . . . . . . . . . . .

1963 . . . . . . . . . . . . . . . . .

1964 . . . . . . . . . . . . . . . . .

1965 . . . . . . . . . . . . . . . . .

1966 . . . . . . . . . . . . . . . . .

1967 . . . . . . . . . . . . . . . . .

1968 . . . . . . . . . . . . . . . . .

1969 . . . . . . . . . . . . . . . . .

1970 . . . . . . . . . . . . . . . . .

1971 . . . . . . . . . . . . . . . . .

1972 . . . . . . . . . . . . . . . . .

1973 . . . . . . . . . . . . . . . . .

1974 . . . . . . . . . . . . . . . . .

1975 . . . . . . . . . . . . . . . . .

1976 . . . . . . . . . . . . . . . . .

1977 . . . . . . . . . . . . . . . . .

1978 . . . . . . . . . . . . . . . . .

1979 . . . . . . . . . . . . . . . . .

1980 . . . . . . . . . . . . . . . . .

1981 . . . . . . . . . . . . . . . . .

1982 . . . . . . . . . . . . . . . . .

1983 . . . . . . . . . . . . . . . . .

1984 . . . . . . . . . . . . . . . . .

1985 . . . . . . . . . . . . . . . . .

1986 . . . . . . . . . . . . . . . . .

1987 . . . . . . . . . . . . . . . . .

1988 . . . . . . . . . . . . . . . . .

1989 . . . . . . . . . . . . . . . . .

1990 . . . . . . . . . . . . . . . . .

1991 . . . . . . . . . . . . . . . . .

1.7

6.4

25.7

66.7

79.1

83.0

42.7

12.8

9.1

13.2

13.7

23.6

46.1

52.8

49.3

42.7

42.5

45.4

46.8

49,0

48.1

49.6

52.3

53.4

54.8

50.6

58.1

71.4

81,9

82.5

81.7

78.9

79.2

76.7

79.3

86.5

89.6

97.2

104.5

116.3

134.0

157.5

185.3

209.9

227.4

252.7

273.4

282.0

290.4

303.6

299.3

298.9

19.4

65.9

224.9

533.9

672.0

761.1

437.1

119.9

82.0

113.7

111.8

172.1

312.2

346.9

330.2

280.4

264.7

268.4

263.5

264.3

258.8

258.9

274.0

278.1

275.1

249.3

268.6

312.6

342.2

332.3

306.6

278.8

258.2

234.7

225.0

219.7

212.5

214.9

215.3

222.7

229,0

240.6

258.2

280.2

292.2

310.8

328.3

329.2

328.3

329.5

314.9

298.9

44.0

9.0

9.5

10.9

16.5

57.8

67.5

56.9

38.7

32.9

35.0

39.4

40.0

45.1

44.3

45.1

50.2

52.1

50.6

64.4

73.1

77.8

78.5

75.3

72.7

76.4

79.1

81.5

86.2

97.3

110.2

117.2

126.5

143.9

180.0

216.5

245.0

265.2

294.7

289.1

287.4

292.0

299.6

301.6

306.9

285.6

425.4

88.1

82.9

97.4

127.1

362.3

438.4

373.1

263.7

221.8

224.0

241.8

234.6

250.1

241.5

244.2

269.1

273.6

259.5

247.0

291.8

318.0

339.9

313.2

281.3

255.2

245.8

234.7

223.0

215.1

226.7

236.7

233.0

231.7

236.1

267.3

299.2

326.6

342.9

365.7

349.5

336.4

329.5

324.9

318.5

285.6

SOURCES: Stephen AlexisCain, Defense Budget Projec4 “AnalysisoftheP residents’ FY1991Defense Budget Request” Washington, DC,JanuaV 1991;

and Office of Management and Budget Budgetofthe L/nitedStates, Historical Tables (Washington, DC: 1992).
230 . Afier the Cold War: Living With Lower Defense Spending

Table A-2—Defense Employment by State, 1991

Percent

Private Active Total Total

defense

of total

duty DoD defense employment employment

industry militaryacivilians employment 1990 in defense

Alabama . . . . . . . . . . . . . . 38,893

Alaska . . . . . . . . . . . . . . . . 6,778

Arizona . . . . . . . . . . . . . . . 52,110

Arkansas. . . . . . . . . . . . . . 17,471

California . . . . . . . . . . . . . 536,472

Colorado . . . . . . . . . . . . . . 49,822

Connecticut. . . . . . . . . . . . 98,207

Delaware . . . . . . . . . . . . . 6,854

District of Columbia . . . . . 13,973

Florida . . . . . . . . . . . . . . . . 113,419

Georgia . . . . . . . . . . . . . . . 60,751

Hawaii . . . . . . . . . . . . . . . . 8,291

Idaho . . . . . . . . . . . . . . . . . 4,387

Illinois . . . . . . . . . . . . . . . . 82,211

Indiana . . . . . . . . . . . . . . . 63,946

lowa . . . . . . . . . . . . . . . . . . 19,976

Kansas . . . . . . . . . . . . . . . 25,157

Kentucky . . . . . . . . . . . . . . 20,657

Louisiana . . . . . . . . . . . . . . 39,867

Maine . . . . . . . . . . . . . . . . 12,886

Maryland . . . . . . . . . . . . . . 75,716

Massachusetts . . . . . . . . . 136,250

Michigan . . . . . . . . . . . . . . 66,896

Minnesota . . . . . . . . . . . . . 46,712

Mississippi . . . . . . . . . . . . 31,378

Missouri . . . . . . . . . . . . . . . 85,747

Montana . . . . . . . . . . . . . . 3,611

Nebraska . . . . . . . . . . . . . 9,293

Nevada . . . . . . . . . . . . . . . 6,334

New Hampshire . . . . . . . . 15,646

New Jersey . . . . . . . . . . . . 88,432

New Mexico . . . . . . . . . . . 15,202

New York . . . . . . . . . . . . . . 183,274

North Carolina . . . . . . . . . 45,823

North Dakota . . . . . . . . . . 3,441

Ohio . . . . . . . . . . . . . . . . . . 122,286

Oklahoma . . . . . . . . . . . . . 23,285

Oregon . . . . . . . . . . . . . . . 14,975

Pennsylvania . . . . . . . . . . 111,329

Rhode Island . . . . . . . . . . 11,969

South Carolina. . . . . . . . . 22,689

South Dakota . . . . . . . . . . 3,148

Tennessee . . . . . . . . . . . . 33,259

Texas . . . . . . . . . . . . . . . . 191,896

Utah . . . . . . . . . . . . . . . . . . 18,322

Vermont . . . . . . . . . . . . . . 6,022

Virginia . . . . . . . . . . . . . . . 129,963

Washington . . . . . . . . . . . . 72,408

West Virginia . . . . . . . . . . . 10,702

Wisconsin . . . . . . . . . . . . . 38,421

Wyoming . . . . . . . . . . . . . . 3,441

Nation . ...............2,900,000

18,706

21,660

23,239

8,968

169,522

33,110

7,091

4,460

13,883

75,368

44,583

39,936

4,743

35,243

5,523

366

20,902

30,210

23,832

5,485

33,186

8,722

8,385

998

13,470

15,507

4,329

12,696

9,280

2,164

16,037

14,757

28,627

69,724

10,001

11,551

25,640

1,003

6,099

3,926

37,263

6,593

8,861

112,608

5,809

149

89,489

35,785

529

1,088

3,628

1,184.734

25,796

5,688

10,470

4,818

123,433

12,921

5,080

1,822

17,302

32,797

38,437

19,857

1,376

21,269

14,635

1,702

6,856

13,079

9,427

10,224

43,197

11,989

10,965

2,923

11,280

19,457

1,311

4,173

2,104

1,675

26,858

9,840

18,839

16,141

1,931

34,759

23,980

2,955

51,672

4,355

19,965

1,451

7,732

59,227

21,294

641

108,184

28,886

1,778

3,270

1,090

930,911

83,395

34,126

85,819

31,257

829,427

95,853

110,378

13,136

45,158

221,584

143,771

68,084

10,506

138,723

84,104

22,044

52,915

63,946

73,126

28,595

152,099

156,961

86,246

50,633

56,128

120,711

9,251

26,162

17,718

19,485

131,327

39,799

230,740

131,688

15,373

168,596

72,905

18,933

169,100

20,250

79,917

11,192

49,852

363,731

45,425

6,812

327,636

137,079

13,009

42,779

8,159

5,015,645

1,782,706

260,660

1,657,239

1,063,968

14,016,522

1,702,110

1,705,091

347,460

291,883

6,062,368

3,085,583

563,936

471,743

5,693,243

2,687,523

1,433,366

1,263,902

1,694,210

1,780,832

597,485

2,450,186

2,985,722

4,242,385

2,288,998

1,109,470

2,498,507

383,329

833,696

604,280

596,164

3,862,037

670,757

8,250,627

3,331,724

322,001

5,137,551

1,479,640

1,411,003

5,589,099

484,926

1,680,263

353,593

2,280,861

8,034,608

763,809

294,149

3,148,489

2,416,785

708,529

2,475,088

236,628

119,086,734

4.7

13.1

5.2

2.9

5.9

5.6

6.5

3.8

15.5

3.7

4.7

12.1

2.2

2.4

3.1

1.5

4.2

3.8

4.1

4.8

6.2

5.3

2.0

2.2

5.1

4.8

2.4

3.1

2.9

3.3

3.4

5.9

2.8

4.0

4.8

3.3

4.9

1.3

3.0

4.1

4.8

3.2

2.2

4.5

5.9

2.3

10.4

5.7

1.8

1.7

3.4

4.2

alncludes active duty military personnel station~ in the States and the District of Columbia, but not those stationed overseas.

SOURCES: Military andcivilian DoDemploymentfromtheDepartmentof Defense, Se/ectedManpowerSkdistics FY1990(Washington,DC:1991).industry

employment are OTA estimates using methodology described inchapter3.
Index
Index

A-12 aircraft, 16,70, 81,97, 103, 104, 195,216

Advance notice, 11,50, 89-90, 159-160. See also Worker

Adjustment and Retraining Notitfiation Act

Advanced Tactical Fighter, 14, 195, 216

Advanced Technology Program, 36,53

Aerospace Employment Project, 117

African Americans, 25,48, 130, 137-139, 140

Air Force

displaced worker assistance programs, 92-93

numbers and composition, 129-131

personnel cuts, 136

veterans’ adjustment programs, 145

Airbus Industrie, 169,202

Aircraft industry, 14-17,30,63-64,195-196, 201-203,206-210,

213,216

Alabama, 185

Alaska, 12, 13, 158

All Volunteer Force, 25, 129, 131, 139. See also Military

personnel

Allied Signal Corp., 202,209-210

AM General, 203

American Institute of Aeronautics and Astronautics, 117

Antelope Valley, CA, 160-161

Arizona, 93

Arkansas, 166

Arms sales. See Exporting arms and technology

Army

displaced worker assistance programs, 92

numbers and composition, 129-131

personnel cuts, 136-137

veterans’ adjustment programs, 143-146

Army Career and Alumni Program, 92,94, 145

Aroostook County, ME, 166

Atlanta, GA, 156

B-lB bomber, 64, 121, 160

B-2 Stealth bomber, 11,64, 196, 213

Baltimore, MD, 163

Base closings

advance notice, 11, 159-160

displaced workers, 66

effectiveness of development efforts, 185-187

environmental problems, 26, 50, 166-169, 187

impacts, 26, 164-166, 169

local economic conditions, 165-166

property transfer, 26,50, 166-169

Base Closure Account, 168

Bath, ME, 25, 158

Bath Iron Works, 14, 156

Beech Aircraft, 205, 206

Benicia Arsenal, CA, 185

Berkeley Pl anning Associates, 79

Blue-collar workers, 18, 19,22-23,64,65,71,73, 95,97, 163

Blytheville, AR, 166

Boeing, 8, 11,24,29,30,63,96, 108, 117, 121, 122, 197, 198,

201,202,206-209,213

Boeing Vertol, 206, 207

Boston, MA, 26, 156, 158, 162, 164, 182

.-.

Bradley M-2 fighting vehicle, 196

Brookly Air Force Base, AL, 185

Buffalo, NY, 163

Business and Industrial Development Loans and Grants, 176

“Buy American’ laws, 223

C-17 cargo plane, 195

C-130 cargo plane, 202

California, 12-13,144, 156,158,160-166. See also Los Angeles,

C A

assistance for displaced workers, 81-82, 84, 88,98, 123, 124

support for transportation initiatives, 30, 53, 217, 218-219

unemployment insurance benefits, 75

California Aerospace Supplier Improvement Program, 225-226

Cameron Station, Alexandria, VA, 165

Canada’s Industrial Adjustment Service, 87

Career Awareness program, 144

Center for Applied Technology, 123

“The Center for Practical Solutions,” 118

Champaign County, IL, 166

CHAMPUS, 143

Chanute Air Force Base, IL, 92-93, 166, 168, 174, 178, 179

Cheney, Richard, 16,81, 138, 195

Chicago, IL, 166

Chippewa County, MI, 186-187

Cincinnati, OH, 163

Civilian employees of DoD

advance notice, 89-90

displacement, 47,59-61,65-66

OPM Placement program, 91

policy issues and options, 46-47

Priority Placement Program, 22,90-91

prospects, 97-99

severance pay and unemployment insurance, 91-92

transition assistance programs, 22, 89-97

Civilian Health and Medical Program of the Uniformed

Services, 143

Civilian service, 48, 139, 140

Colorado, 70,72-73,90,92,93,99, 166

Commissary access, 143

Commonwealth Career Center, 123

Communications industry, 14-16,40,203-204,222

Community Development Block Grants, 176

Community impacts

base closings and realignments, 11, 164-169, 185-187

defense-dependent communities, 12-14,25-28,34-35, 158-

159

economic development efforts, 170-190

factors affecting, 159-164

Federal assistance programs, 172-176

locations of defense spending, 12-14, 154-159

mitigating impacts, 169-184

policy issues and options, 48-51

reasons for concern, 153-154

State and local assistance programs, 176-184

urban vs. rural defense dependency, 159

Connecticut, 12, 14,25, 156, 158, 196

Connecticut Innovations Inc., 225
234 . After the Cold War: Living With Lower Defense Spending

Critical Technology Application Centers, 36

Danish Technological Institute, 183-184

Data rights, 54-55,214-215

Defense companies

barriers to conversion, 213-217

conversion, 29-30, 206-213

Culture of, 29, 39, 213-214

development costs and data rights, 54-55,214-215

displaced worker assistance, 94-97

diversification, 29, 199,204-206

downsizing, 60, 199-200

exporting arms and technology, 29, 200-201

government assistance programs, 31,35-36,51-55

impacts, 14-18, 28-31, 193-195

major company adjustment plans, 198-213

outlook, 28-30, 195-198, 215-217

policy issues and options, 31-32,51-55

sales to civilian government agencies, 203-204, 215

shifting to commercial products, 62-64, 201-203

small business, 30-31, 217-226

spinoff companies, 204

technology extension, 31, 35-36, 224

Defense Environmental Restoration Account, 168

Defense Environmental Restoration Program, 168

Defense Outplacement Referral System, 144

Defense spending

cutbacks, 3-6, 193, 229

historical perspective, 6-11,229

locations of, 11-14, 154-159

Denver, CO, 166

Department of Comme rce, 49-50, 174-176

Department of Defense. See also specific branches of the

military; Civilian employees of DoD; Defense

companies; Military personnel; Office of Economic

Adjustment; Veterans

DoD-wide transition assistance, 143-144

transition assistance for civilian employees, 22, 89-97

Department of Energy, 53, 196

Department of Labor, 20,21-22,25, 33,34,42-43,46,77,78,

81, 87, 106, 116, 123, 125, 145, 147

Department of Veterans’ Affairs, 25

Derson Group, 97

Deutsche Airbus, 169, 179

Development cost recoupment, 54-55,214-215

Disadvantaged workers, 82-83

Displaced defense workers. See also Civilian employees of

DoD; Engineers

adjustment assistance programs, 19-23, 41-46, 71-89

advance notice, 70,89-90

costs of displacement, 66-67

dimensions of displacement, 18,59-66

DoD assistance programs for civilian employees, 89-94

elements of effective assistance programs, 67-74

industry assistance programs, 94-97

labor-management cooperation, 70-71

policy issues and options, 41-48

prospects, 18-19,97-99

rapid response, 42-43, 70

retraining, 43, 45, 72-74

U.S. vs. foreign practice, 67

Displaced Employee Program, 91

DoD, See Department of Defense

DOL. See Department of Labor

Drake, Beam, Morin, 95

Eaker Air Force Base, AR, 166

Eaton AIL, 16

Economic Adjustment Committee, 172-173

Economic development

assisting existing and new businesses, 181-184

attracting new industry, 51, 179-181

effectiveness, 184-190

organizing and planning for, 178

policy issues and options, 3941,50-51

programs for, 26-28, 174-176

Economic Development Administration, 27,32,34,49-50,51,

174-176

Economic Dislocation and Worker Adjustment Assistance

allocation of EDWAA funds, 4344, 87-88

changes in, 41-42, 78-79

discretionary funds, 80-82

DOL supervision and assistance, 42

engineers, 33, 47-48, 121-124

Federal responsibilities, 86-87

funding, 34,45-46,77

history, 77-78

links with DoD outplacement programs, 94

quality of services, 19,33-34,82-84

rapid response, 33, 42-43, 79-80

spending rules, 88-89

state and substate funds and responsibilities, 34, 84

training, 33-34,43,4748, 84-86

veterans, 146-147

EDA. See Economic Development Administration

Edgemont Army Depot, SD, 162

Education

of enlisted personnel, 25, 131-133

GI Bill, 25, 147-149

as national goal, 40, 72-73

EDWAA. See Economic Dislocation and Worker Adjustment

Assistance

Eglin Air Force Base, FL, 184

Electric Boat, 14,96,99, 158, 196

Electric vehicles, See Transportation industry

Electronics industry, 64

Employer attitudes

layoffs, 67

perceptions of veterans, 129, 133

Employment Service, 75,86, 143-144, 146

Engineers

age factors, 24, 110

company assistance programs, 23-24, 118-121

continuing education, 24, 112-115

current layoff and reemployment experience, 109-112

degrees, 24, 111

dissipation of technical know-how, 17-18,47

entrepreneurial assistance, 125-126

government assistance programs, 23,47-48, 121-124

impacts of defense cutbacks, 23, 103

moving to civilian employment, 107-109

policy issues and options, 47-48

post-Vietnam War build-down, 106-107, 116-117

professional associations, 117-118
Index ● 235

prospects, 23, 103-105

retraining, 24,33-34,47-48, 115-126

salary levels, 24, 107, 108-109

specialization, 24, 107, 111

teacher training, 47-48, 124-125

Enlisted personnel. See also Military personnel

education and aptitude, 25, 131-133

employer perceptions, 129, 133

Entrepreneurial assistance, 36, 125-126

Environment One, 204,205

Environmental issues

base transfers, 26,50, 166-169, 187

U.S. environmental industry, 40

Equal opportunity employment. See Social impacts

Exchange access, 143

Experience Unlimited job clubs, 123

Export Promotion Services, 176

Exporting arms and technology, 29,200-201

F-14 aircraft, 104

F-15 aircraft, 104, 195

F-16 aircraft, 104, 195, 201

F-22 aircraft, 14, 195, 216

F/A-18 aircraft, 16, 195, 201

Fairchild, 172

Fairchild-Republic, 195

Fairfax County, VA, 179

Family service centers, 145

Farmers Home Administration, 176

Federal Aviation Administration, 29, 196, 203

Florida, 84, 158, 184, 185

Florida Technology Coast Manufacturing and Engineering

Network, 184

Fort Carson, CO, 70, 72,92,99

Fort Dix, NJ, 145, 146

Fort Douglas, UT, 178

Fort Meade, MD, 165

Fort Oral, CA, 166

Fort Polk, LA, 162, 166

Fort Sheridan, Chicago, IL, 165

Fort Worth, TX, 16, 158, 203

Frisby Airborne Hydraulics, 222-223, 224,225-226

General Dynamics, 14, 16,29,81,97, 103, 104, 110, 195, 197,

199-200

General Dynamics’ Electric Boat, 14,96,99, 158, 196

General Electric, 29, 197, 198,204

General Electric Aerospace, 54,65,71,83,95,96,98, 110, 111,

120, 122, 124, 158, 198,208

General Electric Aircraft Engines, 96,98,201,202

General Motors, 29, 197

George Air Force Base, CA, 178

Georgia, 156, 163

GI Bill, 25, 147-149

Glasgow Air Force Base, MT, 162

Groton, CT, 25, 158, 196

Grumman, 16, 29, 104, 108, 111, 161, 197, 198, 208-209, 216

GTE, 29, 197

Hagerstown, MD, 172

Hawaii, 12, 13, 87, 158

Hazeltine, 16

Health care, 25, 143

Historical perspective on defense spending, 6-11

Housing, 143

HUD Community Development Block Grants, 176

Hughes, 163-164

Humvee, 203

IBM, 29, 197

Illinois, 92-93, 165, 166, 168, 174, 178, 179, 187

Immigrants, 64-65, 163

Indiana, 178, 179

Indianapolis, IN, 179

Industrial recruitment, 51, 179-181

Ingalls Shipbuilding, Pascagoula, MS, 12, 210

Institute of Electrical and Electronics Engineers, Inc., 105, 117

Intellectual property rights, 54-55,214-215

Intermagnetics General, 204

Iosco, County, MI, 166

ITT, 29, 197

Jackson County, MI, 85, 185, 187-189

Japan

continuing education for engineers, 113

subsidies for foreign fins, 180

and worker displacement, 67, 68-69

Jefferson Proving Ground, Madison, IN, 178

Job fairs, 80,93,96, 115, 120

Job Training Partnership Act Title HA, 79, 82-84,89

Job Training Partnership Act Title III. See Economic

Dislocation and Worker Adjustment Assistance

Kansas, 158, 172

Kincheloe Air Force Base, MI, 186-187

Labor-management cooperation, 67,70-71

Leesville, LA, 162, 166

Lewiston Air Force Base, MT, 162

Lima, OH, 12, 158

Limestone, ME, 162

Litton Industries, 210

Local impacts. See Community impacts

Lockheed, 29,76,95,97,104,107, 110,111, 120,160-161,163

197, 201, 202,216

Long Beach, CA, 16, 19

Long Island, NY, 16, 26, 156, 160, 162, 163, 164, 182, 203

Loring Air Force Base, ME, 162, 166

Los Angeles, CA, 12, 19,26,64-65,84,98, 158, 160-161, 163,

164, 169, 182,203

Louisiana, 162, 166

Lowry Air Force Base, Denver, CO, 93

M-1 tank, 196

M-1A2 tank, 104

M-2 fighting vehicle, 196

Madison, IN, 178

Maine, 14, 25, 156, 158, 162, 166

Managers, 24, 65,71, 73,95

Manufacturing, 5, 10, 14-18, 64-65, 170. See also Defense

companies

Manufacturing Technology Centers, 35, 50,52, 224

Mare Island Naval Shipyard, CA, 71,91, 93-94

Marietta, GA, 163

Marine Corps

numbers and composition, 129-131

personnel cuts, 136
236 ● After the Cold War: Living With Lower Defense Spending

Market Scout program, 224

Martin Marietta, 197, 198,203-204

Maryland, 12,70-71, 158, 163, 165, 172

Mass transit. See Transportation industry

Massachusetts, 12,19,22,29,65,71,75, 83-84,97,98,122,123,

125-126, 158,221

Boston, 26, 156, 158, 162, 164, 182

Pittsfield, 65,71,98, 158, 198

Taunton, 190

Mather Air Force Base, CA, 93

McDonnell Douglas, 14,16, 17,63,70,71,76, 82,%, 98, 103,

104, 107, 110, 120, 121, 124, 125, 178, 195, 197,200,

201,202,216

Michigan, 85, 162, 166, 185-189,224

Michigan Automotive Compression, 188

Military base closings. See Base closings

Military personnel. See also specific branches of the military;

Veterans

characteristics of enlistees, 131-133

cuts by service, 136-137

education and aptitude, 25, 131-133

employer perceptions, 129, 133

how forces are cut, 134-136

minorities, 5, 25,48, 130, 137-139, 140, 149

numbers and composition, 129-131

numbers and composition of cuts, 24-25, 133-139

Skills and training, 133

women, 139

The Miltran Guide to Career Opportunities, 147

Minorities, 5,25,48, 130, 137-139, 140, 149

Mississippi, 12,210

Missouri, 16, 125, 126, 158, 163, 178,203,220,222

Montana, 162

Monterey, CA, 166

Montgomery County, MD, 163

Montgomery GI Bill, 25, 147-149

National Aeronautics and Space Administration, 29,53, 196,

203

National Association of Counties, 79

National Association of State Budget Officers, 177

National Centers of Manufacturing and Process Technology, 53

National Defense Education Act, 33,48

National Executive Service Corps, 124

National Governor’s Association, 49,79,81,87

National Institute of Standards and Technology, 35,36,51-52,

53

National League of Cities, 49, 117

National Research Council, 113

National Science Foundation, 33,47, 103, 108, 109, 113

National service program, 48, 139, 140

National Society of Professional Engineers, 116

National Technological University, 114

Naval Air Station at Moffett Field, CA, 165-166

Naval Underwater Systems Command, 158

Navy

displaced worker programs, 90,93-94

numbers and composition, 129-131

personnel cuts, 136

veterans’ adjustment programs, 145

New Careers in Teaching, 149

New England, 156-157, 161,220,222

New Hampshire, 165, 169

New Jersey, 145, 146

New Jersey Provisional Teacher Program, 124-125

New London County, CT, 156

New York, NY, 166

New York State

Buffalo, 163

Long Island, 16,26, 156, 160, 162-164, 182,203

New York City, 166

Newport News, VA, 12,25, 158, 1%

Norden Systems, 203

North Carolina, 84

Northrop, 64, 196, 216

Norton Air Force Base, CA, 160-161, 179,202

OEA. See Office of Economic Adjustment

Office of Economic Adjustment, 8,27,34,49,50,51, 166,

172-174, 178, 185,226

Office of Personnel Management Placement Program, 91

Office of Work Based Learning, 87

Officers, 130

Ohio, 12, 158, 163,222,224-225

Okaloosa County, FL, 158, 184

Oregon, 184

Oscoda, MI, 162, 166

Palmdale, CA, 11

Pease Air Force Base, NH, 165, 169

Pennsylvania, 182,220-221,222

Persian Gulf War

effect on arms sales, 29, 201, 203

effect on employer perceptions of veterans, 48, 129

effect on transition programs, 145

Philadelphia, PA, 182

Philadelphia Naval Shipyard, 66

Pittsfield, MA, 65,71,98, 158, 198

Policy issues and options, 31-36,39-55

Portsmouth Naval Shipyard, 80, 81,90,99

Pratt and Whitney, 14, 110,201,202

The Presidio, San Francisco, CA, 165

Priority Placement Program, 22,90-91,99

Project Choice, 92-93

Pueblo Army Depot, CO, 72-73,90,92

Rantoul, IL, 166, 168, 174, 178, 179, 187

Rapid response, 20,33,42-43,67,70,78, 79-80

Raytheon, 29, 190, 197,204-206

Regional impacts, 11-18. See also Community impacts; State

impacts

defense-dependent regions, 156-157

economic development efforts, 170-190

locations of defense spending, 154-159,230

Relocation and reemployment, 24,71-72,98-99, 110, 111, 143,

179

Remedial training, 74

Research and development. See Technology development

Retraining, 43,45,72-74,84-86

Rockwell, 29,64,96, 121, 124, 160, 198

Rockwell Collins, 202

Rohr Industries, 206,207-208

Rolm Systems, 222

Sacramento, CA, 166

Sagadahoc County, ME, 156
Index Ž 237

Salt Lake City, UT, 178

San Bernardino County, CA, 178

San Jose, CA, 158, 162, 182

SEATECH, 182

Seattle, WA, 11, 158, 161, 166

Seawolf attack submarine, 14, 196

Service Corps of Retired Executives, 223

Severance pay

civilian employees of DoD, 91-92

displaced workers, 94,95

military personnel, 25, 142

Shipbuilding industry, 12, 14,63, 196, 208

Shultz, George P., 67

Skill certification, 144

Small Business Administration, 176, 182-183,223

Small Business Development Centers, 176, 182,223

Small Business Innovative Research program, 223-224

Small businesses

adjustment plans, 221-223

defense dependence, 30-31,217-220

entrepreneurial assistance, 36, 125-126

government adjustment assistance, 31,223-226

technology extension, 31, 35-36, 224

Social impacts

on immigrants, 64-65, 163

loss of family-wage jobs, 64-65

loss of opportunity for minorities, 5,25,48, 130, 137-139,

140, 149

South Dakota, 162

SRI International, 76,79,83,88

St. Louis, MO, 16, 125, 126, 158, 163, 178,203,220, 222

State impacts. See also Community impacts

defense-dependent States, 12-14, 157-158

defense employment by State, 13-14,230

economic development efforts, 170-190

factors affecting, 159-164

Federal assistance programs, 172-176

locations of defense spending, 154-156,230

policy issues and options, 48-51

reasons for concern, 153-154

State and local assistance programs, 176-179

State technology extension programs, 35,51

Sudden and Severe Economic Dislocation program, 27,34,

174-176

Sundstrand, 216

T-46 Navy jet trainer, 16, 195

TAP. See Transition Assistance Program

Taunton, MA, 190

Tax incentives

for defense company conversion, 36, 54-55

engineer training, 47

entrepreneurial companies, 36, 54

State and local economic development, 181

Teacher training

engineers, 47-48, 124-125

soldiers, 149

Technological Institute, Denmark, 183-184

Technology development

development costs and data rights, 54-55,214-215

government-industry partnership, 40,53

Technology extension assistance, 29-31,35-36,51-52,224, 225

Technology Mobilization and Reemployment Program, 116

Technology resources and expertise, 5, 17-18,28, 194

Technology Utilization Project, 116

Tenneco, 12, 196, 198

Texas, 16, 158, 203

Texas Instruments, 95, 98,99, 107, 112, 115, 120-121

Tokia Rika, 188

Trade Adjustment Assistance, 45, 85

Transition Assistance Program, 22,25,92, 143-146

Transition Bulletin Board, 91

Transportation industry, 30,40,53-54,206-210, 218-220

Trident missile-launching submarine, 196

Truman Annex, Key West, FL, 185

TRW, 203,216

UCX, 142

Unemployment insurance, 4445,74-75,85,91, 142

United Airlines, 179, 180

United Nuclear Corp. (UNC), 14,73-74,82,96,97,99, 110,111,

158, 159

United Technologies, 29, 110, 198,203

U.S. Conference of Mayors, 79, 117

Utah, 178

Veterans. See also Military personnel

in the civilian economy, 139-142

dimensions of personnel cuts, 133-139

educational benefits, 25, 147-149

effects of involuntary separations, 24-25, 129

employer perceptions, 129, 133

separation benefits, 25, 48, 142-143

skill transfer, 141

teacher training, 149

transition assistance programs, 25, 143-147

veterans’ organizations, 147

Veterans’ Educational Assistance Program, 147-148

Veterans’ organizations, 147

Virginia, 12, 13,25, 158, 165, 179, 196

WARN. See Worker Adjustment and Retraining Notification

Act

Washington, DC, 13,26, 158, 162, 163, 164, 166, 182

Washington State, 11, 125-126, 158, 161, 166

Weber, Arnold, 67

West Virginia, 87

Westinghouse, 29,70-71, 197, 198,216

White-collar workers, 65, 71, 73, 95. See also Engineers

Wichita, KS, 158, 172

Wichita Engineering Association, 117, 122

Williams Air Force Base, AZ, 93

Women, 139

Wood Products Competitiveness Corp., 184

Worker Adjustment and Retr aining Notification Act, 18,23,42,

75-76,81,89,97, 121, 143

Wurtsmith Air Force Base, MI, 162, 166