The Business of Peace

Susan C. Strong

WITH THE collapse of the Cold War system in the late 1980s, serious discussion of economic conversion reemerged in American political debate. For the first time since the end of World War II, a major shift of national resources from military to peaceful uses seemed a real possibility, a topic for something other than utopian speculation. Now, only a few years later, mainstream discussion of conversion is increasingly marked by a disturbing pessimism.

This pessimism recycles the old argument that conversion cannot succeed. The argument was never any good, but it is especially dangerous now. If skepticism about economic conversion continues to grow, then fear of job loss will build more support for high US military spending and a flourishing arms trade. And that means a renewed global arms race and the end of prospects for cooperative security.

In the face of this dismal development, one important source of hope is the sheer amount of local and regional conversion activity that is now moving forward. To be sure, we are not seeing a comprehensive reworking of the Cold War economy. But the wide variety of programs already in progress exemplifies future possibilities and provides a counterweight to current skepticism.

State governments, local communities, and defense firms are seriously pursuing economic conversion projects. Many of these projects are making a profitable business of applying defense technologies and skills to new civilian uses, from protecting the environment to monitoring trucks. The federal government, too, has taken steps in the direction of conversion planning. The FY90 (Fiscal Year 1990) Defense Authorization bill included $200 million for conversion. That is small change in a federal budget of $1.5 trillion. But it was the first such allocation since the beginning of the Cold War. By FY94, funding for conversion had grown to $2.5 billion, a 12-fold increase, though still dwarfed by a $275 billion military budget.

The shift from political impossibility to pragmatic planning has also changed the character of political advocacy in this area. The current federal legislative agenda for US conversion advocates focusing on such practical steps as mandating adequate advance notice to defense workers of contract reductions or terminations, and requiring companies to plan for job retention and collaborative alternative use planning as conditions for receiving federal assistance. This is the kind of day-to-day effort needed to end the dependence of the US economy on the profitability of the military sector.

Despite all this movement, however, a broader, more comprehensive economic conversion -- a "big conversion" -- continues to be stalled. It is blocked in part by familiar American fears about government involvement in the economy -- fears which ignore the role of military spending as a de facto federally funded jobs program of dubious economic merit. According to a 1993 Congressional Research Service study, every $3 billion spent on civilian economic stimulus nets 12,000 more jobs than the same spending on the military. The "military Keynesian" strategy of relying on military spending to stimulate the economy was never the best economic strategy, but it is now one the nation literally cannot afford.

The US arms trade also plays a role here, with its link to an outdated foreign policy based on arms sales and providing markets for defense producers. The United States continues to seed the developing world with weapons that may someday kill our own soldiers. And while the real problems of the planet -- overpopulation and poverty, increasingly scarce and polluted resources, swelling refugee flows and attendant social breakdown -- worsen, aggregate global military spending continues to run at roughly $600 billion a year, despite the reduction in international threats. With a military budget that dwarfs any other, the United States is the worst offender, and the effects of the civilian "investment deficit" are also being felt at home: the United States now ranks ninth internationally in per capita public education expenditures, eleventh in per capita public health expenditures, 21st in infant mortality, and 22nd in population per physician.

In short, the constructive possibilities for economic conversion -- and the dangers of failing to take advantage of them -- have never been greater. But pursuing these possibilities requires bolder initiatives, which we will never take unless we halt the current slide into pessimism. The best first step in that direction is to take a closer look at what is already happening.

Coordinated Conversion

A 1993 survey by the Center for Economic Conversion (CEC) indicated a nearly three-fold increase in national conversion activity in the second half of 1993. This striking expansion has been fostered by increasing government support and coordination of resources and by collaborative projects at the community, regional, state, and federal levels. Today, 28 military dependent states have significant levels of activity. Even the heavily defense-dependent, holdout state of California finally passed an effective conversion planning package. Clearinghouses and "one stop shops" for information about conversion are an important part of the new landscape. The federal government, for example, recently opened an Office of Economic Conversion Information, offering an 800-number, printed materials, workshops, and on-line computer access.

Still more significant are new partnerships for conversion emerging in defense-dependent regions, with participation by business, universities, community organizations, unions, and government. The need for such partnerships grows out of the basic structure of the Cold War defense sector. The defense economy is not simply a collection of separate firms. It is a complex economic world, largely segregated from the commercial economy, with its own social networks and industrial culture. Individual defense firms are components of a pyramidal structure of government purchasers, prime contractors, and smaller subcontractors.

Conversion requires that firms break free from this structure. They cannot simply make new goods with new technologies for new markets. Instead conversion often requires establishing a different economic world featuring regional networks of firms, and collaborative relationships among firms, government, and unions.

One of the most interesting teams doing innovative work along these lines is CALSTART -- a southern California consortium of labor, universities, federal labs, aerospace manufacturers, and other businesses. CALSTART's ambitious goal is to develop a major new California industry, focused on pollution-reducing, advanced transportation technologies, including key components for electric vehicles. Designed to address economic dislocation -- and deteriorating air quality -- in the Los Angeles area, it is a model of a regional economic revitalization project.

The project has already had some success, both because of initial government assistance and because of its ability to coordinate existing regional resources. CALSTART began with over $21 million in committed funding from 45 companies and organizations and applied for an additional $6 million from the state of California and the federal government -- support which had been earmarked for consortia of this type. Because the California defense workers already have many of the skills needed for the proposed activities, the consortium expects to be able to create 55,000 new jobs in the state by the year 2000. It is now hiring production workers, including some International Association of Machinists members, for a machine shop to make components for electric vehicles.

The pool of local resources is not confined to the skills of defense workers. CALSTART's Los Angeles headquarters are located in an office and manufacturing facility in Burbank on loan from Lockheed, which also serves as the site for a business incubator for advanced transportation technologies. And a CALSTART office has just opened in northern California, with the aim of establishing an electric car plant at the transitioning Alameda Naval Base.

Maine's Economic Conversion Project is another novel public/private partnership. The principal vehicle for the project is an Environmental Industries Initiative, whose programs include a Targeted Industry Initiative in alternative energy and transport modeled after California's CALSTART and an environmental clean-up skills training initiative.

The Maine project is of particular interest because it combines conventional conversion planning with a particular focus on environmentally sound, "sustainable" growth, recognizing the enormous economic opportunity provided by shifting to suitable environmental industries. According to Executive Director Susan Schweppe, the environmental industry is the fourth-fastest growing industry group in the country, so state business leaders are very receptive to this emphasis.

The Maine example also illustrates an important trend in the new politics of conversion. Local and state projects are often advocated by citizen activists. The most successful advocates, though, are not the pressure groups that make demands and then leave all the details of policy to the state, but the activists who develop expertise in planning and networking with a wide variety of constituencies and aim to "stay at the table" -- to continue to have influence on and be included in conversion planning once it is underway.

CALSTART and the Maine project are parts of a much wider universe of collaborative conversion initiatives. CEC has identified 14 state or local level conversion projects which, like the Maine initiative, have a "sustainable development" emphasis, ten consortia for new business development, and 39 projects focused on industry group conversion, with ten especially targeting manufacturing. In addition, 36 state or local level projects are addressing the retraining, re-employment and retention of the work force.

Such collaborative efforts are not confined to the private sector. The Los Alamos and Livermore weapons labs are also busy publicizing their efforts to develop partnerships with civilian business. And local citizens' groups are actively working to promote formal conversion plans for the labs, assisted by expert economic advisors and planners.

As for military bases, some 100 around the country are in various stages of the conversion planning process, with another round of closings expected in 1995. In its survey of 97 bases that have already been shut down and completely converted since 1961, the Office of Economic Adjustment (the Defense Department agency charged with assisting base closure) found that 171,000 new jobs have more than replaced the 87,557 Defense Department civilian jobs the bases used to provide.

But the special difficulties of the planning process for base conversion must not be underestimated. Completing a conversion can take as long as ten years, with serious local economic impact along the way. The problem of toxic clean-up adds another layer of difficulty which was not a factor in reporting on base conversions from earlier eras. It now appears that the best results are achieved when the planning process starts early enough and all the stakeholders are represented in the process (as is happening, for example, at the Mather and Norton Air Force bases in California).

Individual Firms

Alongside these more collaborative efforts at conversion, many individual defense firms are also working to convert significant portions of their business to civilian activities. The press seems to prefer covering shocking stories of massive layoffs, but ingenious transitions are quietly proceeding all over the country. A May 1991 study by the Winbridge Group found that more than three-quarters of the senior executives at 148 defense firms were planning commercialization over the next five years. According to a 1992 report from the CEC, 77 defense dependent firms were described in newspaper accounts to be already actively engaged in converting or planning to convert defense technology, materials, or products into civilian business opportunities. And in 1993, when the Clinton administration made about $456 million available through the Technology Reinvestment Program to firms planning "dual use" products and technologies, it received nearly 3,000 proposals.

One reason for all this churning is that many smaller suppliers for big firms know that it is a case of convert or die. Subcontractors at the bottom of the defense economy pyramid are highly dependent on big prime contractors. But those big firms have been doing more themselves and reducing the level of subcontracting. So the number of suppliers has dropped sharply, from a mid-1980s high of 120,000 to only 30,000 today. Moreover, with prospects of failure concentrating their minds, firms have been making rapid adjustments. Despite the fact that new product development can sometimes take as long as seven to ten years, 75% of the firms that have studied commercialization possibilities have already started selling new products.

There are, in fact, many new civilian, environmentally-sustainable technologies suitable for conversion efforts, including communications technology, pollution monitoring or remediation devices and activities, alternative transport, new light composite materials and manufacturing processes, some of the "smart highways" proposals such as transit and vehicle identification, and alternative energy devices and civilian shipbuilding initiatives. The special importance of these new areas of opportunity is their potential to create new markets.

Westinghouse, for example, now supplies radar surveillance systems for a variety of civilian activities including aviation, drug interdiction, transportation management in long-haul trucking and metro transit, security systems, and law enforcement. Northrop is studying civilian markets for gyroscopes in cars and non-ozone depleting chemical cleaning equipment; Hughes has a new commercial software package; Kaman, a veteran at conversion, has recently begun to produce parts for GE engines and Boeing jets, and to develop a new civilian "aerial truck" helicopter for logging, fire fighting, and powerline work; and Science Applications International Corp. has modified its military technology to medical-imaging technique and research.

Some firms are taking the idea of innovative products for new markets especially seriously. The Sacramento-based Aeroject is retooling from rocket fuel to "frozen smoke," an ultra-light insulation material. EDO Corporation of New York is using its durable, lightweight composite materials to make graphite bicycle spokes. And then there is the newly patented Mobot, a missile-inspired, self-guiding lawnmower.

General Lessons

The story of conversion is not simply a record of separate firms and partnerships, each pursuing its own path. There are common threads, emerging patterns, and a potential for learning. Spectra Enterprise Associates, a venture capital fund, has helped 14 defense-oriented companies to find new business opportunities through conversion. Spectra's experience suggests some important lessons for addressing the handicaps defense firms face in learning how to make goods that sell after a lifetime of federal largesse. The first lesson is that the biggest obstacle to conversion is not on the engineering side but the business side. Although defense engineers have had little experience making products for markets, Spectra found that they could learn it quickly with the right management leadership and reasonably transferable technology. Defense industry executives at the giant defense firms, by contrast, may take no interest in conversion and prefer to engage in a battle to the death for whatever military business is available, rather than trying to learn how to do business in a civilian, market-oriented manner. This is why Spectra often brings in new top management when it begins work with a company.

A related lesson is that successful conversion requires management that can let go of conventional military planning practices such as concurrency -- the practice of designing and testing at the same time, instead of designing, testing, and redesigning. The efforts by Boeing-Vertol to convert from military aircraft to light rail cars in the 1970s, for example, failed in part because of an unwillingness to let go of military management procedures.

A third factor is the importance of stability in federal funding and uniform standards for products. Boeing-Vertol suffered, too, from the negative effects of inconsistent government support and regulation.

A final ingredient, especially for smaller firms, is patient capital. Firms must identify an alternative product, test the market for it, design it, change their manufacturing process, and then market their product. This all takes time. And that means lenders, whether public or private, who are prepared to wait for a return. One of the most fundamental obstacles to successful conversion of any kind is an expectation that it will happen overnight, coupled with a rush to premature judgment of failure if the process takes longer than expected.

Are Defense Workers Getting Left Behind?

Conversion, of course, is not simply about novel partnerships and innovative firms; it is about employment. Ideally, successful conversion of a defense firm should ensure new employment for the workers. Frequently, firms get out of the defense business by laying off defense workers and buying civilian firms to form new divisions. This is different from the process by which firms convert some or all of their capacity, reducing or entirely eliminating their defense dependency. Many of the most successful cases of conversion have come from direct involvement of shop floor workers in the planning process. Frisby Airborne Hydraulics is the classic example of a successful effort to involve employees in the process by using worker planning teams and profit sharing plans. Emphasizing the importance of this process, unions in the defense industry are urging the formation of "alternative use committees."

But the overall record of involving labor in the process is poor, which probably accounts for quite a few failures to convert. Labor groups working at Unisys in Minnesota, for example, have been able to identify 12 alternative products since 1989, including such items as computerized irrigation devices, low power electric ballasts, and equipment for handicapped persons. After years of stonewalling the labor group's ideas, Unisys has finally promised to discuss this subject. But a recent study by economist Ann Markusen and her team of researchers found that Unisys has already decided to build one of the products suggested, a satellite-based remote sensing system, but in their Salt Lake City plant.

Another example of an ignored labor conversion alternative comes from Electric Boat. A Connecticut-based firm, Electric Boat continues to make the controversial Sea Wolf submarine because of a decision by the Clinton administration aimed at winning the support of Connecticut voters. A union official there notes that the company could make deep submersible research vessels for farming the ocean floor, deep sea mining, and energy resource identification, if federal funding were available and the company leadership willing. But because of the new Sea Wolf contract, the company recently returned millions of dollars of conversion support from Connecticut and Rhode Island, and now refuses to consider any conversion ideas.

The truth is that while some companies are moving briskly ahead with conversion, many American defense workers have become casualties of the approach to conversion taken by the federal government and individual firms. Estimates vary, but most sources agree that over the period 1991-95 about a million civilian military workers of all types will be displaced, along with about 360,000 uniformed personnel. Some experts predict that the number of lost jobs in military serving companies and in the armed services could nearly double by 2001. Counting the so-called "multiplier effect" of civilian jobs created in military serving communities by military workers as consumers, John Tepper Marlin estimates that the total job loss over this five year period could be as much as two million.

Because US civilian manufacturing jobs have also been vanishing, it is not easy to find alternatives to low-paying service jobs for highly skilled former defense workers. So-called job training without real jobs at the end of the process is a naive or cynical solution to the serious employment problems created by military cutbacks. Many defense workers already have transferable skills and just need solid new work opportunities. The same can be said for regular military personnel who are being separated in the Defense Department's own downsizing process.

Needed: A Federal Conversion Policy

All the evidence about the right kind of federal policy points in one direction -- the separate efforts of individual firms and regions need support from a national technology policy with goals matched to people's real interests, served by a vigorous civilian job stimulus program. But we are not getting it. The Clinton Administration's conversion policy has focused thus far on some high technology grants and limited community- or worker-adjustment assistance. And the lion's share of the technology funding has been devoted to technologies with both military and civilian applications -- the "dual use" approach of the Technology Reinvestment Program (TRP).

In a recent analysis of TRP, Michael Oden of the Project on Regional and Industrial Economics (PRIE) argues that "reliance on dual use criteria raises serious questions about who should decide which technologies and companies are critical for the nation's real security. For instance, technologies for mass transportation and for improving energy efficiency missed the TRP list of 28 critical technologies." More fundamentally, the TRP "dual use" program is based on the flawed assumption that products can be simultaneously designed for civilian and military uses. There have of course been some famous military "spin-offs," like teflon. But such spin-offs are typically due to inadvertence, and they take a long time to emerge. Consumers do not need and will not pay for coffee pots that can be dropped from a plane at high altitudes and still produce a nice cup of coffee.

A recent PRIE study of defense contractors and applicants for TRP funding underscores the troubles of the dual use approach to conversion. As the Spectra experience indicates, defense conversion does not require the kind of assistance provided by TRP grants. Instead, they principally need to learn how to meet the demands of civilian markets. That means access to venture capital, market expertise, and management retraining. The federal government could help in these areas with loan funds, management and technical assistance, and stimulus for start-ups and innovative experiments by workers from defense firms, as well as extensive retraining. In addition, direct federal and state purchase of new products could help jump-start a bigger market for conversion.

Beyond these efforts, conversion advocates are also pressing for federal incentives for defense firms to do advance planning by means of tax credits and preferential treatment in Defense Department contract awards for worker retention measures, as well as connecting laid-off workers to new job opportunities. The latter would mean public investment in such public benefit areas as infrastructure repair and replacement, energy efficiency, and mass transit.

PRIE Executive Director Ann Markusen recommends an even more ambitious approach to conversion which would benefit not only displaced defense workers but out of work employees from all sectors. She calls for a civilian "industrial strategy for human needs" that would create new jobs by reinvesting the peace dividend in socially and environmentally constructive activities, instead of just pouring it into deficit reduction (which has not been proven to create massive numbers of new jobs). Representative Lynn Woolsey (D-CA) has recently introduced a Displaced Workers Retraining Act that would begin to move policy in this direction.

Communities also need more and better quality assistance, because much of the actual work of converting happens at that level; handled well, conversion can be a powerful vehicle for revitalizing local and regional economies. Many more regional consortia like CALSTART, combining the interests and talents of business, labor, and community leaders for true conversion projects, should be fostered as well. And as in the case of CALSTART, the federal government can play a creative role by acting to facilitate such new economic alliances.

Political Urgency

The need for such policies is increasingly urgent, for political as well as economic reasons. Unless conversion receives the kind of funding and regulatory support it desperately needs in the next few years, the combination of tirelessly reiterated myths about conversion failure in firms, with the impact of real pain among workers and communities, could lead to a political backlash that would serve the interests of those who wish to see the military budget remain high. Military spending is not a national economic program. It is not the most effective way to create jobs, build communities, promote national prosperity, or reduce the trade deficit. It is always, in the end, about destruction. But conversion is hard work, requiring real economic reconstruction. The illusion that military spending creates prosperity will continue to have popular resonance, as long as there is no serious alternative on the table with real political support. And the result of that illusion could be a descent into ever greater misery fueled by an ever-growing, useless, wasteful, and dangerous global arms race. Serious planning for comprehensive conversion is the key to our escape from this nightmare.

Selected Sources

Bertelli, Dominick, "Contractor Conversion in the U.S.," Council on Economic Priorities, New York, 1993. Cassidy, Kevin J., and Bischak, Gregory A., ed., Real Security, SUNY, 1993. Markusen, Ann, and Yudken, Joel, Dismantling the Cold War Economy, Basic Books, 1992. Marlin, John Tepper, "Military Conversion," in Changing America, Mark Green, ed., New Market Press, New York, 1992.

Originally published in the April/May 1994 issue of Boston Review

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