Defense cuts could hurt Maine badly

Regardless of the situation in the Middle East, the end of the Cold War is almost certain to result in lower defense spending in the United States.

Many people fear the cuts will hamstring the New England economy, which already is limping from the sluggish real estate market. Maine remains more vulnerable than other New England states to such reductions, according to a recent study by the Federal Reserve Bank of Boston.

Yolanda K. Henderson, an economist with the Boston FRB, said the defense buildup of the 1980s consisted mostly of contracts for research and development services and military hardware, rather than an increase in the number of troops.

Nationally, prime military contract awards amounted to $514 per capita between Oct. 1, 1986, and Sept. 30, 1989. During the same period, Connecticut received contracts worth $1,651 per capita, while Massachusetts won contracts valued at $1,405 per capita.

The other four New England states received a substantially lower proportion of defense contracts. Maine won the highest amount, $480 per capita, but it was still below the national average.

Henderson studied two possible scenarios for future defense spending: a Bush administration proposal to cut spending to 4.2 percent of GNP by 1995, and an alternate proposal to trim spending to about 3.2 percent of the GNP.

Under either scenario, the pattern of federal purchases was expected to remain constant. For example, it was assumed that 15 percent of missile procurement contracts would be awarded to New England firms, as in recent years.

The president’s proposal would cause prime contract awards to decline at an annual rate of 3.8 percent nationally, and 4 percent in New England. Under the alternative case, contracts would fall at a rate 8.5 percent yearly for the nation and 8.7 percent in New England.

“For state economies, these projected slowdowns in defense-related activities are far from devastating, but they will feel burdensome in the context of simultaneous weakness in the real estate, financial services and computer industries,” wrote Henderson.

While Maine received a relatively small share of defense contracts during the Reagan-era buildup, Henderson’s study showed it would suffer more than any other New England state under either budget-cutting scenario. Contracts would decline 5.8 percent under the president’s proposal and 9.7 percent under the alternative.

“Maine is projected to suffer as a result of its reliance on shipbuilding,” wrote Henderson, “but much of this decline already took place in sharp cutbacks at Bath Iron Works since the 1987 fiscal year.”

Connecticut is also expected to fare badly, because of its reliance on aircraft and submarine contracts, while the decline in Massachusetts would be tempered by more gradual reductions in missiles, electronics and research contracts.

The other three New England states would feel the effects of the cutback, but less intensely.

Altogether, the New England economy could lose from 57,000 to 134,000 civilian jobs in the defense sector by 1995, according to Henderson.

Of course, the Defense Department could choose to cancel entire weapons systems, which would disproportionately affect the state where the primary contractor was located.

Maine also is vulnerable to reductions in military personnel. The military installations at Limestone, Cutler, Winter Harbor and Brunswick give Maine the region’s highest percentage of Defense Department spending on personnel.

The military payroll in Maine amounted to 2.8 percent of gross state product during 1989, according to Henderson. That’s well above the national average of 1.8 percent of GSP.

The only other New England state to exceed the national average was Rhode Island, where military payrolls amounted to 2.1 percent of GSP.

“(Maine and Rhode Island) would appear most vulnerable to (personnel) cutbacks in terms of potential economic damage,” wrote Henderson.

Except for the closing of Pease Air Force Base in New Hampshire, plans for shutting military bases have not been completed. That makes it impossible to know if New England will see any further personnel cutbacks, Henderson wrote.

While the effects of the proposed reductions on the New England economy would be significant, Henderson found the impact would be less severe than the defense cuts after World War II and the conflicts in Korea and Vietnam.

“Although total percentage cutbacks in New England … might be comparable to those of the post-Vietnam era, the annual rate of cutback would be only half as large,” she wrote.

Even so, the economist urged New Englanders to take steps to minimize the unemployment costs that may result from defense cutbacks.

“The prospects of layoffs in defense industries should prompt governments and companies to re-examine their programs of job market information and job placement assistance,” she wrote.

On the positive side, displaced defense workers will have above-average skills and experience, according to Henderson. State governments should emphasize the quality of this labor pool when trying to attract new manufacturing businesses, she said.