Economic Report of the President 1994 - The American Presidency ...

forts to cut the massive Federal budget deficit leave little room forfiscal expansion to stimulate economic growth. Second, many defensefirms and workers are more isolated from commercial marketpractice than during earlier builddowns, because the defense procurementsystem that has evolved over time has erected a wall betweencommercial sectors and defense. Third, technological innovationand the economic growth it generates may be hard hit by thedefense retrenchment, because nearly 60 percent of Federal supportfor domestic R&D was defense related and because roughlyone-fifth of the Nation's engineers work in defense-related areas.The end of the cold war was an unanticipated event with seriouseconomic consequences for several domestic economic sectors. OurNation has long accepted a collective responsibility to ease thetransition for those most heavily affected by major economicshocks, for example by providing unemployment insurance and disasterrelief. This principle readily extends to transitional assistancewhen the shock results from a large and unanticipated structuraleconomic change, particularly when government is effectively theagent of that change.For workers, the problem of large, regionally concentrated economicdislocations is made worse by a capital market imperfection.It is often difficult for workers to borrow for retraining and relocationbecause their human capital cannot serve as collateral. Suchcapital market transactions are particularly difficult to arrange forpeople who have just lost a job or who have incurred a capital losson their home—a frequent consequence of geographically concentrateddefense cuts. Moreover, dislocated workers may have adifficult time learning about job opportunities in other regions oroccupations.Defense conversion is also difficult for firms. Although many defensecontractors have access to knowledge, production facilities,and skilled workers that could be valuable if channeled to commercialapplications, the many years spent designing their organizationsto serve the needs of one customer—the Defense Department—oftenleave them without crucial skills or the right organizationalconfiguration to serve the commercial marketplace. To theextent that these firms lack internal funds to finance new investment,and to the extent they are unable credibly to demonstrate tolenders and other capital providers their potential to serve otherlines of business, these resources will not be able to move to theirmost efficient uses.The Administration's 5-year, $22 billion Defense Reinvestmentand Conversion Initiative addresses these problems of the post-coldwar transition.Workers. The initiative provides $5 billion over 5 years for workeradjustment, including funding for retraining displaced defense202