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Mr. Chairman, I appreciate the opportunity to testify today on defense spending choices and their implications for the economic and budget outlook. Historic changes in world affairs have spawned a wide range of proposals for reducing U.S. defense spending. Although the desirability of spending reductions must be judged primarily on the basis of potential military threats, economic effects are also of concern.

Substantial reductions in defense spending would result in significant reductions in defense-related employment. Other economic effects will be heavily influenced by how the nation chooses to spend any additional peace dividend--for example, whether to lower the federal deficit, increase spending on public investment, or increase consumption. In choosing how to spend the peace dividend, policymakers will be caught on the horns of a dilemma. If devoted to deficit reduction or carefully chosen public investments, additional reductions in defense spending would help ease the nation's long-term economic concerns. These problems include stagnation in real wages, low growth in productivity, and a string of record-breaking budget deficits. Devoting the additional peace dividend to bringing down the deficit, however, would temporarily reduce economic growth and the creation of jobs in the economy as a whole.

Using the peace dividend to increase current spending on consumption--whether through broad-base tax cuts or consumption-oriented public spending--would avoid much or all of the near-term pain for the economy as a whole. But long-term gains in productivity and per capita consumption would also be sacrificed. Inevitably, difficult choices will have to be made among the many competing uses for the peace dividend. As of now, there are far more claims for the dividend than there is dividend to be claimed.

My statement first reviews the overall outlook for the U.S. economy and budget and then focuses on the effects of defense spending cuts on that outlook.

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