NARRATOR: Why are business leaders from across the nation visiting the nation's capital to discuss military spending? What do ice cream...shoes...and toys have to do with a $265 billion military budget? Is military spending good or bad for business?

ADM JOHN SHANAHAN (USN, Ret.): I'm Vice Admiral Jack Shanahan, Director of the Center for Defense Information. Have you ever wondered what impact military spending has on your own job or on your own business? Today we examine how budget decisions and military spending impact our total economy and what that means for our total security in the future.

NARRATOR: The relationship between military spending and the business world is a puzzle of interlacing pieces which include:

A balanced budget, which has been the main focus recently for both the president and Congress. Debates over the budget involve questions about how to spend government funds to improve our economy and quality of life.

Domestic spending programs, which include education, job training and building infrastructure.

The defense industry, which builds our military equipment and provides jobs for millions of workers.

The military budget, which will total about $265 billion in 1997.

There's the public. How do these government decisions about public programs impact their lives?

The economy: There are questions about how to build new industries and enhance our competitive advantage.

All of these pieces and how they interact determine how well American businesses will be able to compete in the future.

This past year, the public watched the battle on Capitol Hill to balance the budget. This can be done in one of two ways: We can either increase taxes, which is an unpopular option, or we can reduce the amount the government spends each year. The choice has been to implement budget cuts across the board for every government agency except the Department of Defense.

These spending reductions in domestic investment and public programs, while keeping military spending off the table prompted business leaders from across the nation to join together in the creation of a coalition: Business Leaders for New Priorities.

BOB BOROSAGE: Business Leaders came out of really the passion of Ben Cohen, who is the founder and I think still the chair of Ben & Jerry's Ice Cream.

NARRATOR: Bob Borosage is the president of the Campaign for America's Future.

Mr. BOROSAGE: So, he called his friends, business leaders, other celebrities and tried to organize a group of people who would have great distinction, who as businessmen and women care about the bottom line, care about priorities, and have a real stake not in a liberal politics particularly, but in a politics that makes sense for a good economy.

TED WILLIAMS: One reporter asked me did I want to take the money from the Pentagon and give it for social welfare reform. I said I didn't say what I wanted to do with it, I said what I'm concerned about is that we should make a decision on where we want to spend our money, what's going to do the most good for this country in the long haul. And I think it's time for us to give some serious thought.

NARRATOR: The goal of this coalition is to educate the public and to bring them into the discussion about how the government spends their money. These spending decisions affect their jobs, their wages and the future of their children, but many people don't see the connection between military spending and their lives.

BEN COHEN: If you ask the man and woman on the street what's the size of the US military budget, you get an answer somewhere between $200 million and $15 billion. We're dealing with numbers that the human mind just can't conceive of. You know, how much is a billion? If you earned a thousand dollars a day, it would take you 2740 years to earn a billion dollars.

Mr. WILLIAMS: I think this is the responsibility of the American people, that they have to become aware, they have to be aroused, they have to start voting in their own interest and not letting this happen to us. So, I think this requires the interest of the American people at large, and what we're hoping to do is bring it to their attention.

NARRATOR: Business leaders have stepped forward because they have experience with scarce resources and making tough decisions. As business leaders, they can see the direct relationship between federal spending and the health of the economy and our quality of life.

Mr. BOROSAGE: They are acting basically as citizens and their concern as citizens is what kind of a society we're building and what kind of investments we're making for the future.

BRUCE KLATSKY: And I'm not speaking altruistically here now. Because if our economy deteriorates and our society deteriorates, then there aren't going to be markets for me to sell our shirts or our shoes or Ben's ice cream.

Mr. BOROSAGE: They understand the need for future investment. So, when they look at our current federal budget and they see us spending all -- sinking all of this money into military weapons that we will never use, while starving investments that are vital to our future economy, whether it's training or education of children, whether it's university scholarships, and they're much more sensitive to the future costs of not making investments now in our future.

NARRATOR: Business Leaders for New Priorities has gained support from a wide range of leading business people across the nation who run companies that sell shoes, bake bread, make clothes and produce records. They have donated their time, their money and their names to this cause to promote investment in the economy.

Mr. KLATSKY: Let me say at the outset that I very, very strongly believe in a strong defense, absolutely and unequivocally. I also believe very strongly in a balanced budget. Without that balanced budget, I fear that our economy will deteriorate and, indeed, if we try to balance that budget by depriving ourselves of important non-defense programs, that our society will deteriorate.

ALAN KLIGERMAN: I am very concerned with the effects on the emotional, intellectual and financial capital drains on this country by the military spending when that spending is not only wasteful and costs us tremendous tax dollars that I work for, that you work for, but also because that money is diverted from internal programs that can be the real thing that makes this country great.

Mr. KLATSKY: I am convinced that the Department of Defense budget stands in our way and unless we look at it and look at it carefully, we'll never balance our budget.

NARRATOR: Why is it important to balance the federal budget? We will spend 15 percent of this year's federal budget to pay for interest on the national debt. That is roughly $232 billion which is unavailable for other investments, purchases or public programs.

Both the president and Congress have proposed plans for balancing the budget by 2002. Both of these plans would reduce spending on domestic programs by $240- to $300 billion over the next seven years. Neither plan calls for further reductions in military spending in future years.

A recent report by the Congressional Budget Office estimated that in the period between 2001 and 2010 annual spending for new weapons will average as much as two-thirds more than in 1995. This means that all other federal programs, such as education and law enforcement, will not only have to bear the brunt of these cuts in spending, but also cover the future increases in military spending.

JEFF FAUX: The problem is that if we spend this money on defense, we are not spending it in other areas. We all understand that for the American economy to compete in the world, we need to increase our investment in education, in training, in our human capital.

NARRATOR: Jeff Faux is the president of the Economic Policy Institute.

Mr. FAUX: We need to increase our investment in our infrastructure -- in our roads, in our water systems, in our transportation. We need to increase our investment in technology, so that we can start creating the products for the next century.

NARRATOR: What effect does a $265 billion defense budget have on our economy and our businesses?

Mr. FAUX: The defense budget places a big burden on the economy. In some respects, even though it's slightly down from where it was during the Cold War, it's an even bigger burden because we face global competition that we didn't face ten years ago. Since the Berlin Wall fell down, we've entered this global economy and Eastern Europe, China -- there's all kinds of new actors in the economic scene and competition for American workers and American business is much fiercer than it used to be.

Mr. BOROSAGE: Well, the big burden is we're in a period of austerity politics where we're trying to balance the budget and without raising taxes. In that context, the military budget is now more than half of all discretionary spending.

NARRATOR: Discretionary spending is the amount of money that the government appropriates each year for spending on a variety of public programs. The discretionary budget totaled about $530 billion in 1996. This accounts for one-third of all federal spending, and this amount has been shrinking for the past 30 years.

Half of this funding goes to a variety of domestic and international programs, including: housing, agriculture, education, environmental protection, law enforcement, space exploration, research and development, international assistance and other activities.

The other half is spent on the military.

What is the impact of this disproportionate spending on the military?

ANN MARKUSEN: We're really stuck in a situation right now where nobody really wants to talk about the defense budget.

NARRATOR: Ann Markusen is a senior fellow at the Council on Foreign Relations.

Ms. MARKUSEN: On the other side, we have fights over things like Social Security, where the old are being pitted against the young. Meanwhile, discussions about investment, public investment, the infrastructure, the research and development and education, have more or less been stopped because we're saying we can't afford them.

Mr. BOROSAGE: When these choices are being made and what's being cut are domestic investments over year after year after year and what's being preserved are military weapons and building the next generation of military weapons, then over ten or fifteen years, if we continue on that course, that will have a significant economic effect.

NARRATOR: The health of our economy depends on the investments we make in things such as roads, so that goods can be delivered; transportation, so that people can get to work; and worker training, which increases productivity.

Evidence shows that long-term investments in education and research and development pay off because they often increase productivity which, in turn, increases company profits, worker income and the strength of our economy.

On the other hand, short-term investments may have a negative impact.

Ms. MARKUSEN: I think in the longer term, the problems really are that the defense budget, by and large, is consumed in a given year and that part of it that you might think of investment, which is buying B-2 bombers or Seawolf submarines and other equipment, doesn't really have a positive productive impact on the economy in the longer term, or a very small amount.

NARRATOR: Even with the end of the Cold War, we continue to spend high levels of money on weapons designed to fight the Soviet Union. For instance, in 1997, we will spend about $684 million on the B-2 bomber and $920 million on the Seawolf submarine.

Ms. MARKUSEN: Both kinds of expenditures, both the big ticket items and the other -- all the operations and maintenance and manpower, really takes up a big part of the budget from things that would otherwise be available for investment, for infrastructure, for research and development, and education.

NARRATOR: The result of reducing the amount of public spending on infrastructure can be seen in a variety of ways:

The median hourly wage has fallen 7.5 percent since 1973, so families have to work harder to maintain their incomes.

The amount of money spent on physical infrastructure has fallen dramatically by about $15 billion between 1977 and today.

The impact of this can be seen in the condition of our streets, byways and bridges. It is hard for any business to prosper or even run efficiently if infrastructure is in disrepair and workers are not adequately trained.

Mr. FAUX: To the extent that we're putting that money in defense now when we don't need it, we are putting a huge burden on our present economy and, more important, on our future.

NARRATOR: This year the government will spend $265 billion on the military. Compare this to several other government programs. [Bar graphs displayed on screen.]

Spending for defense has been reduced by nearly 40 percent from its peak during the Reagan build-up in the mid-1980s. However, it still accounts for half of all discretionary spending.

Can we afford to spend this much on the military or are we on the path toward bankruptcy?

Mr. BOROSAGE: Well, it's not quite that way. The military budget as a percentage of our GDP is not very large. Actually, it's down to about 4 percent of GDP. It is a bearable cost, in that sense. And this is an incredibly rich country, and so it could afford to sustain this military if it chose to.

NARRATOR: Some people do question whether we can safely cut military spending. There remains the concern that a decrease in the amount we spend on defense will result in weak and hollow armed forces.

Can we reduce the military budget without hampering our ability to protect America?

Mr. BOROSAGE: I think it's clear that dramatic reductions can be made and sustain the most powerful military in the world.

Mr. KLIGERMAN: Even Newt Gingrich says we don't need to spend what we're spending on the military to defend the US; we're spending the money to increase our influence abroad.

NARRATOR: There is no longer the threat of the Soviet Union. We have to ask then, what does pose a threat to our national security?

Ms. MARKUSEN: I mean, it is I think just remarkable that a military that says we are in a more dangerous world because we don't know what the threat is can get away with saying we still need levels of spending that are where they were at in a Cold War era like the 1970s.

Mr. KLIGERMAN: We'll spend about $265 billion on the military this year. The combined totals of the rogue nations that the Pentagon considers its potential rivals totals less than 15 billion, a small fraction of that. The Russians, now our allies in Bosnia, spend about $63 billion, having cut their military spending by 80 percent since 1990.

I always think that business is about common sense and this offends that sense.

Ms. MARKUSEN: If we substantially lowered defense spending -- and the estimates really are that we could get by with $50 billion to $100 billion less without really threatening American security -- that would free up a tremendous peace dividend.

NARRATOR: The cuts in military spending that these business people and professionals are proposing will whittle away the waste, not our ability to protect ourselves. They call for responsible and efficient forms of management.

Mr. KLATSKY: I understand that McDonnell-Douglas charged us $6000, more than $6000 for a door hinge. The Pentagon spends almost $400 million for 600 VIP aircraft to ferry their folks around, to take a helicopter instead of a 15-minute cab ride from Andrews Air Force Base to the Department of Defense.

This morning I woke up at six o'clock, walked down out on 54th Street and First Avenue, got a Yellow Cab to take the shuttle to Washington, D.C. Not to get a private jet, not to get a helicopter, not to be in an entourage of automobiles or a driver, just a regular Yellow Cab in the City of New York. That's all I'm asking us to look about. I don't see where that jeopardizes our national defense.

If I ran my company that way, there's no doubt in my mind that the board of directors would fire me.

NARRATOR: The Pentagon's inefficiencies have become well-known but what about the defense industry that creates and sells the weapons? What role does it play in the general economy?

It is a business like all others. But because it produces very specialized products, it cannot easily adapt to changing demands in the market, such as the end of the Cold War.

Mr. FAUX: I think today in America much of the defense industry has become a jobs program. That is, we're spending money on defense not because we have vast enemies in the world that we need to defend ourselves against -- America is the world's only superpower. But we're spending it because we haven't figured out a plan for what to do with these people who are working in the military sector.

NARRATOR: The defense industry has been a large part of our economy for over 40 years and employs millions of people. It will be difficult to substantially reduce it, and perhaps even harder to integrate it into the civilian economy.

Mr. FAUX: You can take from that two conclusions: One, we should continue wasting our money by making things we don't need. Or, we should get ourselves a plan in order to convert people from working on high-quality, high-tech stuff that we don't need in the world to high-quality, high-tech products that we can sell in the world and make ourselves a little money.

NARRATOR: However, recent conversion programs have lacked any real incentives for change. In fact, the Pentagon actually pays millions of dollars to defense companies to merge and consolidate rather than convert.

Ms. MARKUSEN: You know, this is what I really call the privatization of conversion. I mean, here you have this period of time where we really could have helped workers move into new occupations, companies move their technology into civilian product lines, which many of them are doing and want to do, but instead the Pentagon is actually paying companies to merge and consolidate with other companies.

NARRATOR: This kind of aid to defense companies is unique. The government does not offer this kind of help to other companies for them to consolidate in order to better compete in the world.

Ms. MARKUSEN: There's a rather profound distortion in where we spend money in the economy. It's really tough to get money to spend on environmental technologies or other areas that are emerging in the economy where we might really expect to make big gains in the quality of life and to develop new industries that would carry us on forward in the future. And instead, we're still really spending research and development money on relatively esoteric technologies that don't have the payoff for us in terms of creating new industries for the future.

NARRATOR: The money we have invested in the defense industry has resulted in some innovations and spinoffs which are applicable to civilian life and have started new civilian industries.

Mr. FAUX: There are a number of places in which investment in the military sector have had payoffs for the American people. The computer industry, the high-speed transportation industry, in terms of aerospace. We have a number of products, lasers, things of that sort that were created for military purposes and were shifted over, so that we can enjoy some of these things in the civilian sector.

Ms. MARKUSEN: Absolutely, there's no question that early Cold War spending, especially in the early forties and fifties, really helped to seed the industries that dominate our manufacturing comparative advantage today, just as agricultural R & D and extensions services helped our agricultural industry be so strong.

NARRATOR: We have seen great payoffs in terms of our investment in military research and development in the past. The question now is whether or not future investments will reap similar benefits.

Ms. MARKUSEN: There were terrific spinoffs that ended up creating up these large commercial sectors. But by and large, that significance had really run its course by the end of the sixties.

Mr. FAUX: We need to take the kind of investment we've made in the military and not wait for 30 years until finally we get some sort of civilian benefit from it, but directly invest in the sort of civilian technologies that we need to make our lives better and more productive.

Ms. MARKUSEN: The things that we're funding on the military side today, things that are associated, say with ballistic missile defense, et cetera, they just simply do not have the same payoff for the domestic economy because now they're very esoteric, very specialized military functions that are just simply not replicable for providing products that people would need and use in the rest of the economy.

NARRATOR: What happens if we continue to spend such high amounts on the military?

Mr. BOROSAGE: It won't be that the military is too costly, as a kind of general thing, it will be that it has sapped -- in a time of budgetary constraints and austerity, it has taken up too much of the resources that are left and we have starved investments that are needed.

Mr. FAUX: What you invest in today depends on how competitive and, therefore, how productive and, therefore, how rich you will be in the future. And if you're not investing in your people, not investing in your civilian technology, and instead putting it into a rat hole of defense, then 20, 30 years from now things will be a lot worse in the United States compared with our competitors and probably worse compared to what people are enjoying today.

Mr. BOROSAGE: Instead of spending money on new inventions and research that would help develop more sustainable technologies, we're spending it on fast jets that nobody can afford, and we're going to close ourselves out of markets in the future, and that will have a large economic effect.

Ms. MARKUSEN: In the longer term, if we don't make an investment in education, in infrastructure, and in research and development, civilian research and development, it's going to be tougher for our companies to compete, and that will have a negative impact on employment.

NARRATOR: There is little doubt that we have the best equipped and trained military in the world. They can defend our security interests. But national security requires both a strong military and a strong economy. When the amount we spend on our military starts to impair our ability to invest in our economy and compete in the global market, we are decreasing our overall security.

Mr. KLIGERMAN: I suggest we be smarter, making certain that our cities are safe, that our children are the best educated in the world, that our infrastructure is the most efficient. That would build our economy. We'll provide a shining example of a democracy that works and it would increase our influence in the world far more than building more guns or stationing more troops.

Mr. WILLIAMS: I just read the other day that Korea, who we're busy defending, is the fourth largest seller of semi-conductor products in the United States, in the United States, and that includes the Japanese and that includes major United States manufacturers.

NARRATOR: As we continue to decrease spending on domestic investment, the ability of our businesses to compete in the global marketplace will also decline.

Mr. FAUX: We are spending about half of what we should be, in terms of public investment in the future. The Japanese are spending much more than we are. The Europeans are spending much more than we are. So that gradually what's going to happen as those countries invest more in education, in technology, in new systems for the environment, and we invest less, we are going to be disadvantaged competitively.

Mr. WILLIAMS: I think what made these foreign countries have this ability, whether it's Germany, Japan, Korea, they haven't had to spend the money for the military that we've been spending to protect them from what, I don't know.

NARRATOR: The United States spends 3.3 percent of its GDP on the military. Compare this to some of our economic competitors: Japan spends about one percent and Germany about 2 percent. They are focussing more on their economies than on their militaries. They are increasing their wealth while maintaining their security.

Mr. KLIGERMAN: It's the quality of life that suffers so much in this country when the dollars are drained away from the Head Start programs, from AmeriCorps, from all the things that are important. We've lost sight sometimes of what it is we're trying to do. What is it we're defending?

ADM SHANAHAN: National security is more than just the strength of our military. A sound social fabric, effective political leadership, and a vitally strong economy count for more. We need to ensure that the investments we make both protect our security and increase our wealth as a nation.

Join us next week when we look at high-tech weapons and their role in the future of warfare.

For "AMERICA'S DEFENSE MONITOR," I am Jack Shanahan.