Where Did the Peace Dividend Go?

FOR the U.S. economy, peace will provide a modest but significant bonus--and only minor dislocations. Previous postwar conversions were economic turning points: consumers rushed to buy goods that had been scarce during the fighting, and the Government choked off defense spending in favor of domestic projects. By contrast, the Viet Nam War never required quite enough of the nation's output to cause such shortages in civilian goods, and the U.S.'s spending on it has shrunk considerably in the past three years. Says Economist Edward Fried of Washington's Brookings Institution: "The peace dividend has virtually been paid."

The war has been a debilitating experience for the economy. Since 1964 the U.S. has poured in $107.8 billion in direct spending, an amount second only to the $664 billion spent in World War II. In 1969 at the height of the war, the direct cost was $21.5 billion. This led to huge budget deficits and punishing inflation. In an attempt to curb that inflation, the Government created the recession of 1970 and imposed the wage-price controls. More than that, the high cost of Viet Nam forced the nation to put off spending for many badly needed domestic projects--schools, hospitals, sewage plants and mass-transit systems.

These economic problems stemmed from Lyndon Johnson's determination to press ahead simultaneously with costly social programs and a costly war--without raising taxes to pay for them. Johnson's economic advisers began calling for a tax increase in 1965, arguing that war spending was mounting much faster than the Pentagon was willing to admit. Arthur Okun, then a member of the President's Council of Economic Advisers, recalls glancing skeptically over one set of military-cost estimates marked "For internal consumption only" and penciling in the margin, "but not to be swallowed." Nevertheless, fearing the political onus of a war tax, Johnson held off seeking it until 1967.

Considering the vast sums spent on Viet Nam, why will the once vaunted peace dividend be so small? The main reason: many of the benefits have already been parceled out during the slow, tortuous winding down of the war. The 10% income surtax that became effective in 1968, for example, was cut by three-quarters in 1970 and canceled altogether thereafter.

What about specific savings in the defense budget resulting from a pullout? War spending in the current fiscal year, including military aid to the South Vietnamese government, is budgeted for $7.3 billion. Roughly $1.5 billion of those expenses would be incurred whether there was a war or not; for example, the ships of the Seventh Fleet would have to be manned and serviced wherever they were. Thus, Pentagon planners estimate that peace would bring a savings of $5.8 billion annually. But Pentagon leaders insist that all of this sum--and more--will be needed for other military purposes. For one thing. President Nixon has ordered up several new strategic-weapons systems, including North American Rockwell's B-1 bomber and Lockheed's Poseidon missile. Nixon expects defense costs to rise from $76.5 billion in this fiscal year to $83 billion by fiscal 1975.

Thus, far from fearing peace, many big defense contractors look forward to it as an essential step in winning contracts for future projects. Says John C. Bierwirth, vice president of Grumman Corp.: "Once the present expenditures for daily combat support are behind us, the military will begin to improve current aircraft." In addition, under terms of the proposed settlement, the U.S. would continue supplying South Viet Nam with nearly all of its defense needs, including aircraft, tanks and guns. True, some war suppliers, mostly manufacturers of bomb casings and small-arms ordnance, will lose substantial business. As many as 100,000 jobs are dependent upon the current war effort. But except for the Government, the employers of such workers tend to be small, localized firms that have a limited impact on the total economy. Few big companies depend upon Viet Nam for as much as 1% of their revenues.

The economy, which is already in the midst of an extremely healthy growth period, would probably pick up yet a bit more quickly on the psychological lifting power of a rise in consumer confidence. That in turn might light up Wall Street. The key Dow Jones industrial average after all has jumped following every wisp of a peace rumor for years. Yet strangely last week, when peace seemed closer than ever, the Dow Jones rose less than four points; the most plausible explanation that brokers could offer was that investors had largely discounted a settlement in advance. Brokers remain optimistic, agreeing with Spencer Trask & Co.'s Raymond F. DeVoe Jr. that the war "has kept a lid" on stock prices.

Most businessmen also expect the war's end to pay them benefits as the result of a boost in national morale. Says J. Peter Grace, chairman of the broadly based W. R. Grace & Co.: "Essentially, peace will bring about the promise of greater stability, which businessmen value highly." Like most other Americans, business leaders for the last few years have generally considered Viet Nam a bad investment that ought to be discarded, even at some sacrifice, at the first opportune moment.

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