San Diego’s Economy Braces to Go on Peacetime Footing

Less than a year after Japanese aircraft attacked Pearl Harbor, a group of San Diegans began to plan for the inevitable day when the war--and San Diego’s booming wartime economy--would begin to wind down.

The group was given a simple charge in 1942, according to Chamber of Commerce records: Keep San Diego from turning into a postwar “ghost town, with idle plants, empty stores, hotels and homes, unemployment and stagnation of business.”

San Diego survived the temporary economic discomfort brought by World War II’s end and went on to thrive during the decades-long, postwar boom that redefined California’s economic fabric.

This time, the end of the Cold War is spurring the massive defense spending cuts that once again are sending San Diegans scrambling to shield the local economy. At issue, as a city task force tackles the same financial planning task as the World War II group, is how defense contractors and the local community should react to the potentially damaging cuts. Should the companies pursue new money-making avenues or trim to meet the tighter future defense budgets? Should the law of supply and demand shift the work force, or should government move to preserve jobs and ease transitions for workers?

Defense cuts already have chilled the local economy, where military payrolls and defense contracting remain the second-largest component. Defense spending in San Diego County was flat at $9.8 billion in 1991, and is expected to shrink by 5% annually during coming years.

During a recent speech, Mike Keel, executive vice president of General Dynamics’ San Diego-based missiles and electronics division, said that, within five years, “it’s not unlikely that (General Dynamics’ local presence) could be half the size that we are now.” General Dynamics’ local operations employ about 16,000.

With the Cold War’s demise, the nation’s defense budget is headed “down, down and down,” Keel said. “It’s just a matter of how fast we’re going to go down and how low we’re going to get to.”

Some local contractors have responded to the shrinking defense budget by seeking commercial contracts to keep their revenue bases growing--and their employees working.

Others, including General Dynamics, the county’s largest private employer, have determined that their operations are ill-suited to making the difficult transition to civilian work.

Science Applications International Corp., with $1.2 billion in revenue, has successfully pursued commercial work in order to keep its revenue base growing. Although national security contracts accounted for nearly 70% of the firm’s revenue, defense work will account for just 54% in 1991 and even less in future years.

National Steel & Shipbuilding, which has concentrated on building ships for the military, recently christened the R. J. Pfeiffer, the first commercial ship built in the United States since 1986. Nassco also is actively seeking contracts to build the next generation of doubled-hulled oil tankers that will be needed to replace aging ships now hauling oil between U.S. ports.

Envisions, an Otay Mesa company that traditionally concentrated on Navy contracts, recently won a Postal Service contract, and is hiring 450 new employees. The contract is its first for non-military work.

However, General Dynamics executives are dead set against jumping on the economic conversion bandwagon. “Some 50% to 80% of all those that have tried to transition out of defense into commercial markets have failed,” Keel said. “We believe that it’s too risky.”

Or, as William Anders, General Dynamics’ chairman and chief executive, recently said, “Sword makers don’t make good and affordable plowshares.”

Similarly, Bernard L. Schwartz, chairman and chief executive of Loral Corp., which employs about 750 people in San Diego, noted that “defense companies generally do not have the marketplace experience to move successfully into the commercial market.”

According to Ross Starr, a UC San Diego economics professor, “textbook economics” generally would dictate that defense contractors respond to Defense Department cuts by laying off unnecessary employees, closing unwanted operations and passing along remaining capital to shareholders, who can then reinvest their funds in other companies.

To the delight of General Dynamics shareholders, that’s exactly what Anders is doing. They soon will receive a total of $2 billion in cash that the company generated through the sale of unwanted assets.

Furthermore, General Dynamics intends to sell off its remaining commercial businesses and focus on three main military items--tanks, fighter aircraft and submarines.

That strategy worries many San Diegans because none of General Dynamics’ locally based operations are within those three core businesses. Additional General Dynamics employees could find themselves without jobs--or working for other companies--as the defense contractor unloads its commercial businesses.

Although General Dynamics’ strategy--which Anders has described as “right-sizing”--is playing well to shareholders, it has irritated economic conversion advocates.

“All (General Dynamics) is doing is downsizing so they can maintain their profit margin,” said Marcia Baruta, executive director of the San Diego Economic Conversion Council, a nonprofit group founded in 1985 that espouses active government involvement in economic conversion.

Baruta argues that, for decades, defense contractors benefited from public money and now have “a patriotic responsibility to look at conversion.”

Many San Diegans are “ignoring the social cost, the cost of unemployment in communities” that will be created as defense jobs are lost, Baruta said.

This isn’t the first time that defense cuts have prompted economic hard times in San Diego. Economists note that the county was hit with significant defense cutbacks in the past, most notably after World War II and Korea.

Those cutbacks were “much larger than anything you’re going to see in coming years,” Starr said. “The good news is that that very large change in employment . . . was absorbed relatively quickly and without much disruption.”

But economists do expect financial pain. Many of the county’s skilled laborers might find that they need to move out of Southern California, Starr said, or take less-skilled, lower-paying work.

The city task force, however, is looking for ways to minimize that pain. The city of San Diego has become a strong proponent of economic conversion and government’s role in making it happen.

“The future of our city’s economy depends on keeping San Diegans employed,” said City Councilman Bob Filner. “You just can’t leave (conversion) to the individual company or the marketplace . . . because (it) isn’t just going to happen naturally.”

The city, which last month won a $55,000 state grant to fund economic conversion work, also expects to win a $100,000 Defense Department grant. The money will be used to identify how defense cuts will affect local employment levels. Later on, the city will work with other government agencies in search of ways to help defense contractors keep their people employed, Filner said.

In doing so, the task force has drawn together an unlikely coalition of interests that has military-industrial workers next to peace workers.

“We’ve got development types, organized labor, peace groups, academics, the Chamber of Commerce as well as representatives from business and consumer groups,” Filner said. “This is a comprehensive, public-private effort.”

That’s basically the same strategy that San Diegans followed during the early 1940s, when government and the private sector spent an estimated $350,000 during a search for new industries that could help to buffer the economic shock that followed World War II.

Not that it necessarily succeeded.

Despite the postwar planning effort, employees at San Diego’s wartime manufacturing plants “have been terminated . . . in steadily increasing numbers, employment offices are being crowded and ‘room for rent’ signs are being seen for the first time,” the Chamber of Commerce later reported.