What Peace Might Bring

Like General Sherman, most U.S. investors are convinced that war is something less than heaven. Last week, ignoring the normally bearish portents of monetary upheavals abroad and higher interest rates at home, Wall Street's customers seized on rumors of brightened peace prospects in Viet Nam to continue the stock market's best rally in more than a year. The Dow Jones industrial average rose four points to close at a year's high of 961.61. All told, the 38-point rise since late April was the Dow's best performance since 13 months ago--when peace talk was also in the air.

Wall Street, and much of the American business community, favors what Economist Paul A. Samuelson calls a "dovish-bullish syndrome"--which conjures up visions of a hybrid creature with wings, hooves and horns. Recent history shows that peace pays. World War II and Korea were followed not by the depressions that had been predicted, but only by mild recessions that were soon erased by new bursts of prosperity. A stand-down in Viet Nam would help both to cool inflation and to open new opportunities for dealing with some of the social ills that hurt the nation and its economy.

Timetable for Transition. The economic consequences of peace would depend on the speed of its return. Only recently has the Administration begun a study, headed by Presidential Economic Adviser Herbert Stein, of how the transition should be made. No one expects a difficult conversion, partly because the war has driven a relatively small wedge into the economy. The defense budget accounts for only 9% of the nation's output of goods and services, compared with nearly 13% in Korea and 41% in World War II. Direct spending on the war amounts to 3% of the gross national product, and some 1,500,000 people hold war-related jobs.

One schedule prepared last year by Charles Schultze, then Lyndon Johnson's budget director, assumes that there will be a transition of two years or so from a war economy to something close to pre-Viet Nam conditions. Were a cease-fire to begin this July and troop withdrawal in January, Schultze figures that the current $79 billion Pentagon budget could decline by $7 billion in 1970 and by $13 billion in 1971. Since about one-third of the demobilized G.I.s would be going back to school, the labor force would have to absorb only some 600,000 new members--not enough to pose serious employment problems.

Peace Stocks. Besides bringing G.I.s home, the war's end would free other draft-age Americans to pursue normal civilian careers and resume buying autos and houses. Those possibilities are reviving talk in Detroit of 10 million-car sales years. On Wall Street, shares of companies involved in construction have become favored "peace stocks."

The transition would span at least several quarters, partly because plants making strategic stockpile items will have to keep running full tilt for a while to rebuild war-depleted inventories. Then, after Pentagon stocks were replenished, about 225,000 jobs at munition factories would be in jeopardy. New contracts--and the task of replacing some of the 2,690 planes and 2,608 helicopters destroyed in Viet Nam--would continue to keep aerospace firms fairly busy. They would not lose much more than $2 billion of their current $9 billion-a-year military aircraft business, and they might lose a great deal less. Textile and boot manufacturers would suffer, and so--to a lesser extent--would electronics companies, airlines and railroads. The prospects are that war-aggravated inflation would continue, at least for a short period. Many cost increases are programmed into the economy, among them a scheduled 9% pay raise for nearly 3,000,000 federal employees next July 1.

Debate over Dividend. The size and shape of the "peace dividend"--the resources freed to the nation by an end to the war--remains open to question. It would not be nearly as huge as claimed by those who blame all the nation's ills on Viet Nam. On the over-optimistic premise of a possible ceasefire early this year, Schultze projected a dividend that would grow from $8 billion in 1971 to as much as $40 billion a year in 1974 as the economy continued to expand. During his campaign, President Nixon mentioned a dividend figure of $10 billion.

Nixon suggested that the dividend be split between a tax reduction and social programs, particularly aid to education. Before he joined the Administration, Economic Adviser Stein headed a Committee for Economic Development group that proposed spending most of the money to alleviate urban, racial and poverty problems. The group also recommended cutting the basic corporate income tax back to 38%, down from the "temporary" Korean War rate of 48%. In any case, debate over the peace dividend should lead to a valuable new appraisal of the nation's priorities--and its fresh opportunities.

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