THE IMPACT OF THE WAR IN SOUTHEAST ASIA UPON STATE ECONOMIES, 1964-1969

MARK ALDRICH' Smith College

This paper assesses the impact of the war in Indochina on the incomes of the fifty states and the District of Columbia for the period 1964-69, the years of greatest military involvement. Previous studies of the eco- nomic effects of the Vietnamese war on states and regions have either been confined to an analysis of war-induced employment by state or have covered only the period 1965-67.'

I. THE BASIC MODEL

The analysis employs a base model used in Roger Bolton's study of the regional impact of defense spending from 1952 to 1962 [2, Chs. 2 and 31. This model has two important advantages: the data that it requires are readily available; and its use allows this paper to be interpreted as an ex- tension of Bolton's work and thus updates the evidence on the regional impact of military spending.2

The model divides the level of personal income in a state, Yp , into an autonomous component, A , and induced income, I:

(1) Y p = A + I

Induced income is generated by sales within the state and is consequently dependent upon the level of personal income in that state. In linear form the relationship is

( 2) I = a + b Y p

Autonomous income is all income that is not dependent upon the current level of personal income. Because it includes (but is not limited to) income from "exports" of goods and services to purchasers outside the state, it contains all income attributable to defense spending.

Substituting equation (2) into ( 1 ) and simplifying yields

(3)

Equation (3) reveals that, given the parameters a and b, personal income

Yp = (a + A)/(I - b )

*I should like to thank my colleagues Michele Aldrich, JulieGraham, Carol JuseNusand Charles

1 . For example, Riefler and Downing [ 7 j discuss only employment, and Leontief et al. [ S ]

2. The data are published in August issues of [ 131.

Sackrey, and an anonymous referee for helpful comments on an earlier draft of this article.

wrote too early to take into account the full impact of the war.

449

450 WESTERN ECONOMIC JOURNAL

is entirely dependent upon its autonomous component. If autonomous income is partitioned into a defense component, D, and a nondefense component, N, it follows that the larger the value of DIA, the more dependent a state's personal income on defense spending. In addition, ADIAA may be used to estimate the extent to which the increase in a state's income during a period is attributable to additional defense spend- ing. If percentage rates of growth are preferred, an index of the relative contribution of defense to income growth is given by rDD/rAA, which is the rate of growth in defense income, during a period, relative to the rate of growth in autonomous income, weighted by the ratio of defense to autonomous income in the initial year [ 2, Ch. 61. All three measures will be used to estimate state's defense dependency during the Vietnamese war years.3

I I . TESTING THE MODEL

The initial step in ascertaining how well autonomous income explains the level of personal income over the period is to estimate autonomous and induced income for each state-year.

Variable A, employed here is the simplest of the three variants of autonomous income developed by Bolton! It includes all wages and salaries in mining and manufacturing, all federal military wages and salaries, "other" labor income, proprietors' income, wages and salaries earned on farms, property income and transfer payments. The remainder of personal income is treated as i n d u ~ e d . ~

Testing the model requires estimating the parameters in equation (2). Since equation (2) is subject to simultaneous equation bias, a reduced form

(4) I = a f ( l - b ) + Ib/(l - bllA,

obtained from substituting equation (1) into (2), was fitted to annual per- capita data from 1955 to 1969. In all but three of the 51 equations fitted,

3. Regional base models like this one are not without limitations. They may overstate the role of export demand in a region's growth, and they ignore capacity constraints. In addition, autono- mous income is difficult to specify precisely. For an amplification of these and further criticisms, see [2 , Ch. 31, 141, (9 , pp. 27-60] and [lo]. Yet, as John Meyer has argued, I.. . no other empiri- cally implementable alternative to regional base models now exists" 16, p. 321.

4. Bolton's variant A2 also includes property income, transfer payments, agricultural income, federal payrolls, and wages in "other" industries, plus all wages and salaries earned in those indus- tries defined as exportaiented, based upon the use of a location coefficient. Variant Ag modifies A2 by treating only part of the income earned in exportaiented industries as autonomous (2, pp. 29-33]. Bolton employs both variants Af and A3 in many of his calculations, but rarely does the choice affect the conclusions drawn.

5 . I t is likely that A f overstates autonomous income; if so, the three measures of defense de- pendency described in the text will understate states' true defense dependency.

ALDRICH: WAR IN SOUTHEAST ASIA 45 I

the coefficients of determination were above .9, and the F test was in every case highly significant. Standard errors of the estimate typically ranged from $20 to $60, and in only three cases were they above $100. The t values for the [b/(1- b)] coefficients were all highly significant; the Durbin-Watson statistic revealed significant positive autocorrelation in ten states and was indeterminate in fifteen more.

Ill. ESTIMATING DEFENSE INCOME

In order to ascertain the impact of the Vietnamese war on states' economies, one component of autonomous income- defense income- must also be estimated. The defense income concept employed here has three components: military wages and salaries, civilian payrolls of the Department of Defense, and military procurement. Algebraically,

where Dit is the defense income of state i in year t , Pa is defense income attributable to military procurement, and E, and et are respectively military and civilian payrolls of the Defense Department!

The distribution of military procurement among states was calculated as follows. Annual percentage shares of total procurement for each state were estimated, then multiplied by the national procurement total (ad- justed for expenditures abroad) to obtain the distribution of procurement between states.' To check the accuracy of the techniques employed, two alternative methods were used to calculate procurement shares, one for the entire period 1963-69, and the other, as a control, for 1968 only.

Method One for estimating state procurement shares makes them de- pend upon both prime and subcontracting data:

(6)

where V& is the percentage share of military procurement of state i in year t , S, is the state's share of prime contract awards adjusted for the lag of expenditures behind awards, X, is the state's percentage share of

V, = eqt + (1 - e)X,

6. Military pay by state includes the sum of cash plus in-kind payments to military personnel residing in the state, minus the amount withheld and disbursed to dependents, plus allotments to dependents residing in the state. For a description and critique of the procedures used, see [3 , pp. 153-551 and [12, pp. 95-97). Data on civilian payrolls are contained in [ 14). These data are on a fiscal year basis and were approximately converted to calendar year data by averaging the payrolls for the equivalent fiscal year and the one succeeding it. Thus civilian payrolls for cakndar 1966 are an average of the payrolls for fiscal 1966 and 1967.

7. Total procurement figures are from 'U.S. National Income and Product Accounts" [ 13, July issues, 1964-703. These figures were adjusted by subtracting defense procurement abroad as esti- mated in [8] .

452 WESTERN ECONOMIC JOURNAL

subcontracts, and e and (I -e l are weights adding up to one. To compute Sit in equation (6), data on the percentage distribution of

military prime contract awards among states were first adjusted for the lag of expenditures behind awards as follows:

(7)

The C terms are prime contract awards, while the p's are weights. Evi- dence on the time shape of contract expenditures suggests values of .6, .3, and .1 respectively for the weights.*

The value for S, must be adjusted for subcontracting. There is evidence that about half of all prime contract value-added is produced within the contractor's own walls. Therefore e is equal to .5 [ 2, pp. 65-67 1. For X,, Defense Department data on the percentage distribution of subcontracts among states for 1966 were employed and assumed to be accurate for the years 1963-69.9 The weight for the subcontracting distribution, ( I - el , which is the average proportion of subcontracting value-added produced within the state, is of necessity also .5.

The most important limitation of this procedure for estimating pro- curement shares is that a subcontracting distribution based on a one-year sample is assumed to be constant over a seven-year period. In order to check the accuracy of the procedure, Va has been calculated for 1968 alone (the year of greatest Vietnamese involvement) by an alternative method, Method Two.

Method Two follows Bolton explicitly [ 2, Ch. 5 J and results in:

H, represents states' yearly shares of wages and salaries in defense related industries and Mit is yearly state shares of wages and salaries in all other manufacturing." Again the sum of the weights must be unity. Weight e

8. For evidence on the weights, see (2 , pp. 60-631. Data on prime contract awards by state are published on a fiscal year basis in [ l S ] . Because of the approximate nature of the timing adjust- ment described in the text. these data were not converted to a calendar year basis.

9. The subcontracting data are contained in 17, p. 61. Unfortunately, the data were compiled from a sample of large contractors and therefore may be unrepresentative.

10. Defense related industries are, according to Bolton (2, pp. 67683, SIC 19, Ordnance; SIC 366, Communications Equipment; SIC 367, Electronic Components and Accessories; SIC 372, Air- craft and Parts; SIC 373, Ships and Boats; and SIC 381, Engineering, Laboratory, and Scientific and Research Instruments. Wage data on these industries, broken down by state, are contained in [ 16); wage data in manufacturing by state are published in August issues of [ 131.

ALDRICH: WAR IN SOUTHEAST ASIA 453

should be interpreted as above, while /3 represents the average proportion of contract value-added produced in defense related industries, and (1 - e - 0) the proportion produced in other manufacturing." Estimates of & computed by Method Two are clearly comparable to Bolton's find- ings and thus may be contrasted with his 1962 results to provide both evidence on the impact of the war in Vietnam and a check on the accuracy of the computations derived from equation (6).'*

The estimate of yearly procurement by state is then

(9) Kit = N, yt where Kit is yearly procurement by state and N, is the national procure- ment total. Since this is a personal income model, and since Kit is on a value-added basis, it is estimated that

where P, is the contribution made by military procurement t o the per- sonal income of state i in year f.

The estimation of yearly defense income by state can be summarized by combining equations ( 5 ) through (7) and (9) and (10) into

(1 1) Dit = . 7(Nt[e(pl Cit + p2Cit-I + pjCit-2) + (I - e)Xi t l }+ Eit + F;:t

Yearly estimates of procurement and percentage shares of procurement by state were computed for 1963-69 according to equations (6) and (9), and procurement shares alone were also estimated for 1968 employing equation (8 ) . States' defense income for 1963-69 was estimated using equation (1 ] ) . I 3 These data, plus the estimates of A, developed to test the regional base model in Section 11, provide the basis for the analysis be10w.l~

11. Bolton 12, Chs. 5 and 71, computed bt using alternative values of .3, .2, and . I , for p. In this study alternative values of .3 and .2 were used for p when 5, was calculated for 1968 via Method Two. The choice made little difference in the findings, and so, unless otherwise noted, calculations in the text employing Method Two were made with p equal to .2.

12. Unless otherwise noted, all calculations that employ fKures on procurement or procurement shares were computed using Method One.

13. Data on procurement, procurement shares, civilian payrolls of the Department of Defense, and defense income by state for 196369 are available from the author upon request.

14. It cannot be stressed too strongly that the calculations in the following section are provi- sional fmres , no better than the model and methods used to compute them. In addition to prob- lems associated with the use of regional base models, neither of the methods used to estimate procurement shares is entirely satisfactory, although their general agreement for 1968 (to be noted below) is heartening.

454 WESTERN ECONOMIC JOURNAL

IV. IMPACT OF THE WAR I N VIETNAM ON STATE ECONOMIES

An interesting and perhaps unsuspected conclusion revealed by an analysis of military spending by state is that the Vietnamese war does not seem to have resulted in a major shift in the procurement of con- ventional hardware toward the older industrial areas of the East and Middle West.15 This conclusion is independent of whether procurement shares are estimated by Method One or Method Two.

The Korean war buildup led to major increases in procurement in old industrial areas of the Middle West because it caused sharp increases in the purchase of such relatively simple hardware as trucks and tanks. When the war ended, more complicated weapons-for example, missiles -gained in importance, and procurement shifted toward aerospace cen- ters in the Pacific, Mountain, West South Central, and New England states. During 1952-56 the East North Central states lost nearly 10 percentage points of procurement (Michigan alone lost nearly 7), while California gained 5% [2, pp. 117-221. The war in Vietnam led to no such shift in procurement patterns. The Spearrhan coefficient of rank correlation be- tween state procurement shares (V&) for 1962 and 1968 was .96 using Method One and .97 using Method Two. Both figures were significant.

Changes in state and regional procurement shares (A &) between two periods provide a more sensitive index of the impact of the war than a simple ranking by share for two years: Vietnam did result in considerable variation in the change in state and regional procurement shares when compared to the immediate prewar period. The rank correlation of AV& by states in Table 1 for 1956-62 and 1962-68 (when procurement shares for the latter period are computed using Method Two) is -.30 and insignificant.

As Table 1 shows, several states, including California, Washington, Utah, Colorado and Massachusetts, which had experienced major increases in procurement shares during 1956-62, suffered sharp losses during the 1960’s. But it was Texas, a relatively new industrial state, that experi- enced the largest absolute increase in its share over the two periods, and the West South Central states as a group increased their procurement share more than any other region. Connecticut and Missouri also experienced large absolute increases in procurement shares, but their gains were due more to aircraft procurement than to conventional items.” In short,

15. Both Roger Bolton and Murray Weidenbaum have argued that Vietnam, because it increased the share of conventional weapons in procurement, reallocated defense spending toward the older industrial areas of the Middle West 111 , pp. 152-57, 216-171.

16. The rank correlation by AVj, of the same states for 1956-62 and 1963-68, when procure- ment shares for the latter period are computed using Method One, is -.13, and it too is insignificant.

17. Missouri‘s share of prime contracts for airframes and related assemblies rose from 9% of the US. total in fiscal year 1962 to a high of 25% in fiscal 1967, while Connecticut’s share of aircraft engine prime contracts rose from 43% in fiscal 1962 to a peak of 51% in fiscal 1966 [ IS ] .

4 5 5 ALDRICH: WAR IN SOUTHEAST ASIA

Table 1-Changes in Procurement Shares for Regions and Important States, Selected Years (In percentage points)

1963-1968 1962-1968. Method One Method Two 1956-1962. State

California Colorado Connecticut Florida Georgia lllinois Indiana Kansas Maryland Massachusetts Michigan Minnesota Missouri New Jersey New York North Carolina Ohio Pennsylvania Texas Utah Virginia Washington Wisconsin Region New England Middle Atlantic East North Central West North Central South Atlantic East South Central West Southcentral Mountain Pacific

+2.29 + .88 -1.10 +1.16 - .01 -2.05 - .36 - .72 - .60 +1.22 + .36 + .12 - .23 - .56 -1.13 - .09 -1.22 - .46 - .25 + .86 + .66 + .48 + .06

+ .07 -2.16 -3.21 - .52 +1.47 + .02 - .37 +2.07 +2.75

-2.70 - .74 + .64 + .04 + .59 + .39 + .44 - .29 + .07 - .19 - .01 + .60 +1.03 - .77 - .55 + .12 - .25 + 5 1 +2.81 - .51 - .04 -1.17 + .12

+ .73 - .81 + .64 + .99 + .64 + .63 +3.08 -1.42 -3.92

-3.30 - .76 + .80 + .28 + .62 + .63 + .45 - .51 + .05 - .69 - .02 + S O +1.21 - 1.07 -1.29 + .15 - .06 + .31 +3.45 - .66 + .10 -1.33 - .01

+ .32 -2.04 +1.00 + .I1 +1.20 +1.04 +3.68 -1.70 -4.06

Source: Column one from Bolton 12, Table 211. *Computed with p = . 2 .

Table 1 shows that while the war in Vietnam did create important changes in state and regional procurement patterns, these neither constituted a shift toward conventional procurement in the old industrial areas-spe- cifically the Middle West-nor were sufficient to disrupt prewar procure- ment patterns. ''

The Vietnamese war also failed to disrupt the extreme geographic con- centration of defense spending. As Table 2 shows, the top eight states' share of procurement either rose by five percentage points between 1962 and 1968 or fell by only one point, depending upon whether Method One or Two is employed to calculate the 1968 figures. The share of the bot-

18. Vietnam did not result in a redistribution of defense payrolls either. The rank correlation for total defense payrolls among states (.Fit + Fit) between 1962 and 1969 is .97, and it is significant.

456 WESTERN ECONOMIC JOURNAL

Table 24oncentration of Procurement and of Military and Civilian Wages and Salaries, Selected Years

(In percent)

Rocurement 1968

1962 Method One Method T w * Top Eight States 60.0 64.8 59.0

(California, NewYork, New Jersey, (Calif., N.Y.. Tex.. (Calif. N.Y., Tex., Ohio, Pennsylvania, Massachusetts Conn., Ohio, Pa., COM., Ohio, Pa., Connecticut; Texas and Illinois tie) N.J., Mass.) Ill., NJ.)

Bottom Ten States 1.4 1.3 .86

Payrolls

I962 1969 Top Eight States 49.0 57.0

(California, Virginia. Texas, New York, Pennsylvania,

Georgia, Florida, New Jersey)

(California, Texas, Virginia, Georgia, Maryland, Florida,

North Carolina, Pennsylvania)

Bottom Ten States 2.5 1.9

Sources: Figures for 1962 procurement shares taken from 12, Table 18. with f l = .3]; payrolls for 1962 computed from 12, T8bles 24 and 251.

*Computed with p = .3.

tom ten states reveals an unambiguous decline over the same period.19 Geographic concentration of military and civilian payrolls increased over the war years, with the share of the top eight states rising from 49% to 57% and that of the bottom ten states declining from 2.5% to 1.9% over the period 1962-69.

Although the distribution of both payrolls and procurement is highly concentrated, states that are high on one list do not necessarily rank high on the other. Only Texas and California are among the top five recipi- ents of both payrolls and procurement. Moreover, states that are highly defensedependent vary greatly with respect to the relative importance of procurement and payrolls. When ranked by D/A , only Connecticut of the ten states most dependent upon defense income in 1969 was predomi- nantly dependent upon procurement, with 93% of its defense income (G/D&> coming from that source. Missouri received 68% and California 65% of their defense incomes from procurement. Hawaii, on the other hand, got 92% of its defense income from payrolls [(E, + F,J/Di,I. Alaska

19. The share of the bottom ten states is sensitive to the value of p when Method Two is em- ployed. Figures in Table 3 were computed with @ = .3. With p = .2, the bottom ten states received 1.4% of procurement in 1962, and 1.2% in 1968.

ALDRICH: WAR IN SOUTHEAST ASIA 457

received 85%, Virginia 84%, Washington, D.C. 72%, and Georgia and Utah 67% each, of their defense incomes from payrolls. If the long-run compe sition of the military budget shifts from payrolls to procurement, as seems likely with the advent of such innovations as the electronic battlefield, these "base dependent" states may well be the hardest hit.

The pattern of states' defense dependency was no more upset by the Vietnamese war than was the distribution of .the components of defense income. Table 3 presents four measures of the importance of defense spending to state economies during 196469.20 From the data on D / A , states were ranked for 1964 and 1969, and the Spearman coefficient was a significant .98. From data taken from Bolton for 1956-62 [2, Ch. 61 and the figures in Table 3 for 1964-69, both rD and rDD/rAA have been employed to rank states according to the contribution of defense spending to their economies during these two periods. The Spearman coefficient for rD is .93; for rDD/rAA it is .83, and both coefficients are significant.

The fact that war in Vietnam did not result in a major shift in states' defense dependency implies that those states that gained most from the war typically were those most defense dependent before the war. When ranked by AD/AA from 196469, nine of the states in the ten ranks that gained most from the war were among the ten states most dependent upon defense spending in 1964 when ranked by D / A . Of the states in the ten ranks that gained least from the war, all but two were in the ten ranks with the lowest ratio of D / A in 1964. As might have been expected, Cali- fornia and Texas, already highly defensedependent, rank among the major recipients of defense income during the war years.

V. CONCLUSIONS

In summary, a regional base model that makes state personal income dependent upon autonomous income adequately explains the level of state personal income during the years 1955-69. Use of this model, along with the estimates of state defense income for 1964-69, made it possible to estimate the impact of changes in defense income upon state personal income during the Vietnamese war years. Although some important state and regional changes in procurement shares did occur, two alternative measures of military procurement revealed that prewar procurement pat- tenis were basically undisturbed; further, that the West South Central states rather than the older industrial areas of the Midwest experienced the largest gain in procurement shares. The extreme geographic concen- tration of both procurement and payrolls prevailing during the late 1950's

20. Since the choice of Methods One or Two had so little effect on states' ranking by procure- ment shares, defense income and defense dependency were computed with procurement estimated only according to Method One.

458 WESTERN ECONOMIC JOURNAL

Table 3-Impact of Defense Spending by State, Various Measures (In percent)

Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New York New Jersey Pennsylvania Ohio Indiana Illinois Michigan Wisconsin Minnesota Iowa Missouri North Dakota SouthDakota Nebraska Kansas Delawnre Maryland District of Colurr Virginia West Virginia NorthCarolina SouthCarolina Georgia Florida Kentucky Tennessee Alabama Mississippi Arkansas Oklahoma Louisiana Texas Montana Idaho Wyoming Colorado Utah Nevada Arizona New Mexico Washington Oregon California Alaska Hawaii

D/A 1964

9 18 3

12 14 23 11 13 9

10 9 6 6 4 7 6

17 13* 9 9

15 8

21 tbia 23

21 4

11 15 24 17 10 10 15 12 7

16 9

20 9 6

16 21 31 17 18 22 23 4

28 56 42

rgD/hA

6 14 9

19 18 30 9

13 11 9

12 7 8 6 9 7

22 6*

-2 5

12 11 26 35 26

2 11 20 23 13 10 13 15 14 6

18 11 28

3 3

-7 15 17 16 18 14 6 4

28 38 31

1964- 69 D/A 1969

8 17 9

14 16 28 10 13 10 10 10 6 6 5 8 7

19 11 5 7

12 9

23 25 26 4

12 17 24 14 10 11 14 12 7

16 11 23 1 4

10 18 30 15 18 17 15 4

21 46 35

‘D 1964-69

3.6 6.1

26.0 6.3 9.5 9.0 5.2 6.9 8.2 6.6

10.2 8.2

10.3 9.2

15.3 8.8 1.2 1.8**

-1.5 4.3 6.4 5.1 1.7 7.3 8.0 2.8

10.9 11.5 9.3 I .6 7.8

11.1 7.9

10.2 6.7 9.6 9.8

13.3 2.0 4.6

-2.5 5.8 3.2 9.8 9.8 4.4 2.6 7.1 1.5 4.9 6.1

a D/A A 196469

5 14 14 21 19 31 8

12 12 9

13 7 9 6

10 7

19 5

-1 4

11 11 28 38 26

2 15 21 23 12 I0 13 14 15 6

18 11 32

3 3

-6 15 16 16 19 13 5 4

21 36 30

*Computed for 1965; 1964 is unrepresentative. **Computed for 1965-69.

ALDRICH: WAR IN SOUTHEAST ASIA 459

and early 1960's was if anything increased by the war, and states' ranking by defense dependency remained largely unaffected. Consequently, those states already most defensedependent before the war were also its major beneficiaries.

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4. B. Chinitz, "Contrasts in Agglomeration: New York and Pittsburgh,"Am Econ. Rev., May 1961,

5. W. W. Leontief et al., T h e Economic Impact-Industrial and Regional-of an Arms Cut,"Rev.

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Economy qf the United States, ed., S. Melman, New York 1971, pp. 13747.

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Econ Stat., Aug. 1965, 47, 21741.

Lobor Rev., July 1968, 90, 1-8.

Dec. 1969,49, 40-47.

10. C. M. Tiebout, "Exports and Regional Economic Growth," lour. Pol. Econ., Apr. 1956, 64.

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160-64.

90th Cong., 1st Sess., 1 (1967).

Survey of firrent Business. Washington 1956. 13. -, SUW. ckn: BUS., 1964-1970,44-50. 14. U.S. Department of Defense, Estimated Payrolls for Militaty and Civilian Personnel. Washing-

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