[From the New York Times, Tuesday, Oct. 21, 1969].

PENTAGON PLACES COST OF CUTBACKS AT 212,000 JOBS

REDUCTION OF 10 PER CENT IN WORK FORCE OF INDUSTRY TIED TO INFLATION FIGHT

(Special to The New York Times)

WASHINGTON.-The Pentagon said today that 212,000 jobs in the defense industry would be eliminated by next spring because of recent defense spending cuts. The Pentagon Controller, Robert C. Moot, told newsmen this morning that this cutback of 10 percent of the industry work force was a necessary part of the President's anti-inflation campaign.

He said that the spending cuts, which total $4.1-billion and were previously announced, had cut procurement programs 20 percent and would "have a combined impact of over 500,000 jobs or slots" being cut from defense payrolls, including the 212,000 in industry.

Earlier announcements

Mr. Moot said that the Defense Department had already announced it would reduce the 3.45 million in the services by 220,000 and its 1.2 million civilian employes by 68,000.

The rest of the 500,000 job reductions, according to the Controller, would come from among "the two million employes in the industry related to defense." He stressed the Pentagon's belief that the reductions in the defense industries and the Government could be achieved without widespread dismissals or an "induced recession."

Mr. Moot's statements, and those by Defense Secretary Melvin R. Laird at a news conference last Thursday on preparations for the postwar budget, were made to detail the anti-inflationary actions taken or planned by the Pentagon, and to indicate the results expected.

Attrition and transfers

Mr. Moot expressed his department's hope that most of the manpower reduction in Government and industry could be handled through normal attrition and transfers.

He said there were specific placement programs in the Defense Department, and in cooperation with the Labor Department, to assure that those who lost jobs would be given first chance at other jobs.

He named "home construction" as one of the areas where manpower was needed and said, "The freeing of people does not necessarily mean they join the unemployment ranks."

He also cited the Pentagon's Office of Economic Adjustment, which has been formed to handle base closings, as one of the programs that would "minimize the regional impact" of the payroll reductions.

Both men appeared confident that the budget and manpower cuts announced would have a "substantial favorable effect" in curbing inflation.

Mr. Moot said that defense spending accounted for "75 to 80 percent of all goods and services purchased by the Federal Government," and thus any cutbacks would have a significant impact on inflationary spending.

He pointed to several economic indicators showing that Pentagon acquisition of hard durable goods was down about 20 percent and that only "missiles and space systems and combat vehicles have not shown this downturn."

"As these indicators crystallize into current activity," he said, "a definite slowdown in the defense industry should become apparent.”

The CHAIRMAN. Gentlemen, I will call on the out-of-town witnesses first. Due to the lateness of the hour, we may have to put over other witnesses until tomorrow morning.

The next witness will be Prof. Seymour Melman of Columbia University.

Dr. Lewis, would it be feasible for you to testify in the morning? Dr. LEWIS. Tomorrow morning?

The Chairman. Yes.

Dr. LEWIS. Yes.

The CHAIRMAN. We would hear you this afternoon, but we have votes scheduled on the tax bill at 3 and 4 o'clock. We will have many interruptions this afternoon.

STATEMENT OF PROF. SEYMOUR MELMAN, ECONOMIST AND PROFESSOR OF INDUSTRIAL ENGINEERING, COLUMBIA UNVIERSITY

The CHAIRMAN. Would you proceed, Doctor, in your own way? Mr. MELMAN. My name is Seymour Melman, economist and professor of industrial engineering at Columbia University.

In 1961, several colleagues and I perceived the prospect of very rapid growth in military budgets in the United States, and their use for multiplying nuclear overkill capability, and in the pursuit of wars of a Vietnam sort.

It was also perceived that this was likely to absorb a significant block of industrial resources, including plant capacity, research capability, skilled manpower of many sorts, and that sooner or later the country would face the problem of moving these resources back to civilian use.

We, therefore, undertook to conduct a seminar at Columbia University on the problem of conversion from military to civilian economy. That seminar operated from 1961 to 1968.

Conversion is the process of changing the use of labor and other production resources from military to civilian purposes. To make available the primary results of this seminar and collateral work in this field, I am pleased to be able to report to the committee that the Prager Co., in New York City, will publish in February 1970, a set of six volumes comprising a collection of research papers in this field. These will deal with the conversion of industry and occupations to defense needs, the conversion of military-oriented research and development to civilian uses, the conversion of nuclear facilities from military to civilian uses, to conversion of shipbuilding from military to civilian markets, potential civilian markets for the military electronics industry and, finally, local economic development after military bases close.

In the time which seems reasonable in this hearing, I wish to sketch out in brief form certain key elements of the conversion problem as it now appears.

I will do this under the following headings: First, the importance of the subject now; second, the magnitude of the problem; third, key requirements for conversion; fourth, condition of depleted industries; fifth, the urgency in this period and; sixth, first steps required by the Congress.

The importance of the subject stems first of all because of the competence that coping with the conversion problem will give to the Congress for the control of the Federal budget. The Federal budget means, primarily, the military budget.

Second, the Congress has a responsibility to the people engaged in military work, for they have been invited and urged to do this work, not only by acts of the executive, but by the actions of the Congress in appropriating funds.

Third, the Congress may wish to be able to treat security problems on their merits alone, and not to diffuse the treatment of military and other security problem with considerations of livelihood and economic well-being for limited industries, labor forces, management, technical groups, universities, and the like.

Fourth, competence for the conversion process is a prime requirement if this Nation is to have capability for implementing new priorities. Indeed, the conversion from military to civilian economy comprises the essence of changing national priorities.

Fifth, if there is to be a revaluation of national priorities and a reallocation of tax and other funds, then public support is needed for the changes involved, and that surely means having a viable alternative for the people engaged in military work of a specialized sort. Sixth, there is a leadtime problem that dominates the conversion issue as soon as one approaches actual implementation. No changes from military factories to civilian plants, from military occupations to civilian occupations, from military use of bases to civilian use of bases, is conceivable without thoughtful and careful advance planning. Finally, in caring for this conversion problem the Congress will be directly attacking the grievious inflation in the U.S. economy. The essential fact is that military economic activity, while contributing wages and salaries to the persons involved, yield products that exit from the marketplace upon being produced. These products are not part of the current level of living. Neither can they be used for further production.

In terms of economic function, independently of other worth that may be attached to them, these products are, therefore, in the nature of parasitic economic growth. This parasitic economic growth does not enter into the exchange system which integrates the division of labor of the society. Money is paid for the work that is done, but no one's money can be used to buy back these goods and services once produced. Therefore, the money paid for these purposes is an essential part of the pressure towards price inflation.

Second, I turn to the magnitude of the problem. To say that we spend about $80 billion for military purposes doesn't begin to disclose the dimensions of what is at issue here. For out of that almost $80 billion, $44 billion in 1968 was expended for industrial and other goods and services by the Department of Defense.

It is critical to examine this industrial activity in terms of its impact on the use of working-man hours. Unlike money, which lends itself to rapid multiplication in a short period of time, manpower is finite in quantity, and skilled manpower, especially, limits the production capabilities of any society. Thus, even a nation of 200 million people, with a gross national product valued at $900 billion and more, is restricted in its production capability by the quantity and character of skilled manpower and the places it is used.

There are 3.4 million men and women in the Armed Forces, and 4.1 million civilians work for the Pentagon and in military industry. Of the 4.1 million civilians, 3 million are in military industry, and about 1.1 million are Department of Defense employees. Altogether, then, 7.5 million persons accounted for in this way are directly employed in military activity.

I emphasize the words directly employed, since it is difficult to trace back the successive levels of subcontracting by which, for example, part of the labor force of a roller bearing factory is, in fact, in the military service, since a part of that portion of the labor force is involved in the bearings manufactured for military purposes.

Senator RANDOLPH. What would you say was our total labor force in this country?

Mr. MELMAN. The total labor force is 77 million, excluding the Armed Forces. Theses counts of those directly engaged in military work, however, need to be supplemented even by an estimate of those indirectly involved. For example, from studies of military bases and similar activities, it is appreciated that for every 100 civilians employed on a military base, about 258 others are dependent for livelihood outside the base.

Thus, using a factor of 2.5 and applying that to the civilian persons working for the military, we estimate 10.2 million persons additionally dependent for livelihood. Allowing for a civilian dependency factor of 66 for every 100 million persons on U.S. bases, and assuming 1.5 million uniformed persons on various U.S. bases, then about 990,000 jobs are dependent on them. Altogether, then, employment indirectly dependent on U.S. military activity amounts to about 11,190,000. Add those directly involved, 7.5 million, to the indirectly dependent and we find that approximately 18.690,000 persons depend for their employment on military and closely related activity. By this reasoning between 20 and 25 percent of the labor force is directly or indirectly involved. Further allowing for 2 dependents of each civilian in full-time employment, we arrive at an estimate of over 40 million Americans dependent for their economic sustinance on military and related activity.

As an example of the significant effect of military activity, may I draw, Mr. Chairman, on the State of Texas to exemplify certain conditions. This State is neither the largest nor the smallest State in respect of military and related activity.

The Department of Defense advises that in fiscal year 1968, $4,087,182,000 was the value of new military prime contract awards in the State of Texas.

The CHAIRMAN. What year was that?

Mr. MELMAN. Fiscal year 1968.

The CHAIRMAN. Over how many years would that be spent?

Mr. MELMAN. That is difficult to say. It is certain, however, that it would not be spent entirely in the fiscal year 1968. The expenditures would surely extend over a period of years.

The CHAIRMAN. For fiscal 1966, I believe, the amount spent in the State on those prime military contracts was $1,600 million.

Mr. MELMAN. If that was the case in fiscal 1966, Mr. Chairman, then it is clear that there has been a very considerable escalation since 1966, because the new prime contract awards of $10,000 or more in the State of Texas were for fiscal year 1966, $2.209,454,000: for fiscal year 1967, $3,546,978,000; and, again, for fiscal year 1968, $4,087,182,000.

Also in the State of Texas, a series of military installations employ more than 70,000 civilians on their premises. Taking into account the mode of estimation previously suggested, it would mean, for example,

that at Fort Bliss, which employed 5,906 civilian persons as of June 30, 1968, that one would expect approximately 12,000 to 15,000 other civilians in the surrounding communities to be dependent for their livelihood on the spending power generated from those directly employed by the military on this base.

The CHAIRMAN. We wouldn't expect those employees to be unemployed if the war in Vietnam ended, because Fort Bliss is a support for the White Sands Missile Range, and an old, permanent fort on the border.

Mr. MELMAN. Mr. Chairman, both the historic

The CHAIRMAN. You could discharge all the 600,000 men in South Vietnam and you still wouldn't reduce the size.

Mr. MÅLMAN. The critical consideration

The CHAIRMAN. What we have is we so escalated the number of men we employed overseas, with 540,000 in Vietnam and 50,000 in Thailand, others in Laos, others in the Navy with the buildup in back of them on the islands of the Pacific, you would take nearly 1 million people out of the military establishment and you still wouldn't change very much the number in this country by deescalating all the vast deployment of military forces overseas that has taken place since 1961; isn't that true?

Mr. MELMAN. I doubt it, Mr. Chairman, for the following reason

The CHAIRMAN. Where would you put the 2,700,000 Professor Smith mentioned we would have left if we got back to the previous level? There was a big escalation in military personnel overseas. We have sent them overseas since 1961.

Mr. MELMAN. Since 1961, Mr. Chairman, the Military Establishment has been revised in many respects. The Armed Forces of the United States were redesigned to fight three wars at once: First, a NATO engagement, presumably then a nuclear war with Russia; second, a war in Southeast Asia and; third, a lesser military operation in Latin America.

The forces were changed not only in size but in character. Historical considerations prior to this period are not necessarily a proper basis for understanding the present condition. Accordingly, Mr. Chairman, major revision of U.S. Armed Forces, whether at home or abroad, will proceed insofar as the Government of the United States, hopefully the Congress, proceeds to review the plausible security requirements of the United States.

Thus, the United States could conceivably move away from a threewars-at-once preparation and turn to a more plausible security system, prior to internationally agreed disarmament. A rational militarysecurity program could include: nuclear deterrent capability; second, capability for shielding the shores of the United States; and third, capability for participating in international peacekeeping with other states. Such a U.S.-security policy would open up the feasibility and desirability of making substantial reductions in the Military Establishment by budget reductions of as much as $54 billion.

May I note, Mr. Chairman, that I made a series of recommendations along these lines in May 1969 to the Senate Armed Services Committee. I request the permission of the Chair to insert in this record the nature of those recommendations, because they bear on the