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Clinton's Troubling Welfare Plan for the State--Defense Conversion : CALIFORNIA PORTFOLIO

March 21, 1993|JOEL KOTKIN and DAVID FRIEDMAN | Joel Kotkin, a contributing editor to Opinion, is a senior fellow at the Center for the New West and an international fellow at the Pepperdine University School of Business and Management. David Friedman, a Los Angeles attorney, is a visiting fellow in the MIT Japan program.

As he seeks ways to help California overcome its addiction to military spending, Bill Clinton shows signs of adopting approaches that could turn the Golden State into a permanent welfare state. At the heart of this welfarist strategy is "defense conversion."

In contrast to his New Democrat entrepreneurial rhetoric during the campaign, the President's budding economic plans for the state seem the product of a vision of California as a society of "victims" in need of federal largess. This retrograde liberalism--government grants through large governmental and private institutions--threatens to favor precisely those companies that either have shown little ability to stimulate growth or, like General Dynamics, are redistributing their assets back to shareholders.

Clinton's emerging approach appeals to a wide spectrum of entrenched interests, among them Democratic advocates of racial quotas and set-asides, public-employee unions and academics attracted to European-style, "top-down" industrial policies. These groups view recession-wracked states such as California as ideal laboratories for their ideas.

One of the more remarkable alliances spawned by these converging interests is that of old-style liberals, who reflexively opposed the military Establishment, and large defense contractors. Defense executives are courting the entitlement crowd by offering them such carrots as inner-city investments and minority-hiring quotas. In exchange, they want support for federal bailouts in the form of job-retraining funds or conversion assistance.

The first fruits of this alliance can be found in recent proposals by Rep. Maxine Waters to give defense contractors, especially the largest ones, federal tax credits and other assistance. This approach packages well with calls for minority set-asides and affirmative-action programs. For the corporate welfarists of the shrinking warfare state, it offers the promise of continued passage on the federal gravy train.

Unfortunately for California, this approach promises to prolong its dependency on Washington while slowing the state's transition to a globally competitive regional economy. Many industry experts believe that most large military contractors are ill-equipped to transition into the commercial world, no matter how much assistance is lavished on them.

"People see (conversion) as another pork-barrel program," says Les Thomas, an aerospace-industry specialist at Price Waterhouse's Costa Mesa office. "Most of (the assistance) will end up in big bureaucratic structures and government. The money won't end up where it should go--funding technology companies and spinoffs."

Thomas suggests another approach: Encourage the defense contractors to license their technologies to new spinoff companies. These firms typically enjoy lower overhead and can pay more attention to the practical commercial applications of defense-related technology. Already, smaller new firms--Torrance engine manufacturer Dynacam Industries and Burbank-based small-aircraft manufacturer AASI, for example--are beginning to make this transition, as are scores of smaller subcontractors who used to do defense work.

These smaller firms are often bolstered by a ready supply of skilled labor and technical expertise, now more available than at any time since the post-Vietnam aerospace bust of the mid-1970s. Buttressed by tax and other incentives, such companies would be ideal to exploit new opportunities both within aerospace and within the potential growth industries of the 1990s--environmental control, advanced transportation and communications software.

"The best thing the government can do is make it easier for new companies, with new management and products, to build and expand," contends Frank Robinson, whose helicopter manufacturing firm, founded in 1973, employs more than 400 at its Torrance facility. "As long as government continues to give handouts, we'll never make the transition."

An entrepreneurially driven conversion strategy also could have a big political payoff for the new President. By adopting a growth-oriented strategy that eschews the Democratic paternalism of the past, Clinton can reaffirm his commitment to the "New Democrat" principles that helped put him in the White House and are most likely to spur the economic growth critical for keeping his party in power.

DR, MATT MAHURIN / For The Times

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