Its Effects on the Economy

EISENHOWER and Zhukov exchange letters; the Russians back down on the Austrian peace treaty; a Big Four meeting is proposed; Soviet leaders plan a friendly visit to Tito.

Scarcely a day passes without some hint of easing international tensions--and Wall Street traders, who hate uncertainty above all, become cautious.

After making no headway at all for a week, the Dow-Jones industrial average last week tumbled more than six points before steadying (closing figure: 419.57, off 4.27). Such war-baby aircraft stocks as Boeing, Douglas, Lockheed and Northrop have dropped as much as 35% from their 1955 highs. In the back of every investor's mind lie some nagging questions.. What would happen to the U.S. economy in the unlikely event of real peace breaking out? What would another sharp cut in defense spending mean to the various segments of industry?

Partial answers can be found by examining the effect of cutbacks made since the end of the Korean war. From the peak of the Korean buildup to the post-Korea low last fall, the annual rate of Defense Department military spending dropped from $46 billion to $32.8 billion; it is now running at a rate of $36 billion, and will probably drop to $34 billion in fiscal 1956. Yet despite the $13.2 billion drop, the U.S.

economy suffered only a mild hesitation in 1954 in the boom.

Even if all should turn out to be milk and honey on the international front, the largest conceivable cutback in military spending in the near future would be no more than 20%. That would be a cut of about $7 billion, only about half the size of the drop that the nation took in its stride in the past two years. The overall effect of such a cut on the economy would be mild, since military spending even now comes to no more than 10% of the gross national product.

Some industries, notably aircraft and electronics, and some geographical areas would be hard hit. But executives in the aircraft industry, which now employs 790,000 believe that their companies could continue to operate profitably and maintain their productive efficiency in the face of a 20% cut or even more. Currently, the aircraft industry's sales are dropping from 1954's $8 billion to a maintenance level of between $6 billion and $7 billion a year. That is a downward adjustment of about 20% and no one is crying havoc. In Los Angeles, where almost 25% of the work force is in aircraft production, the Southern California Research Council estimated two years ago that if defense orders were cut back 25% in 1955, unemployment in the area would rise to no more than 6% of the insured work force; assuming a 50% cut, it would rise to 12%.

Even that would be below the 14% figure during the recession of 1949.

Almost without exception, the effects of a 20% defense cut on other industries would be minor, because of the huge expansion planned to meet civilian needs (capital spending by industry this year will probably top 1954 by 5%) and the fact that so little of industry's capacity is on defense production.

No more than 5% to 7% of the current record steel output goes into defense, and the steel companies are now planning a new round of expansion (with outlays up 29% this year from 1954) to meet civilian needs.

There are shortages in such other key metals as copper, nickel and aluminum. With output of military tanks and trucks at a low level, far less than 10% of the auto industry is now devoted to defense output (though some firms, e.g., jeep-maker Willys, might feel the pinch of a defense cutback).

The textile industry, which at one point during the Korean war was devoting almost 20% of its capacity to military orders, is now more than 95% in civilian production.

What would happen to uranium mining and the atomic-energy industry if atomic weapons were banned or restricted? The best guess is that civilian applications would come forward so swiftly to use the plants, materials and manpower now devoted to making atomic weapons that the industry would actually benefit.

If a large cut in military spending enabled the Administration to cut total outlays, it would undoubtedly follow the same policy it did after Korea: cut taxes by as much as, or a little more than the cut in Government spending, thus spur consumer spending.

Harvard Economist Sumner Slich-ter, who has proved an accurate prophet in the postwar years, outlined what tax cuts could mean. Said he: "A $4,000-a-year man might well be living like a $5,000-a-year man. Or, putting it another way, it might enable people to live on a scale in 1956 or 1957 that they hadn't considered possible before 1960." Said Chairman Arthur Burns of the President's Council of Economic Advisers: "A large-scale reduction or elimination of armaments would give us a magnificent and welcome opportunity for raising living standards."

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