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Defense Spending in Fourth District States Part I: National Background . . . . 2 Survey of High School Seniors in Cuyahoga County— Some Socioeconomic Patterns 14 FEDERAL RESERVE BANK OF CLEVELAND E C O N O M IC REVIEW DEFENSE SPENDING IN FOURTH DISTRICT STATES PART I: NATIONAL BACKGROUND Defense spending, the major component of Federal Government spending, has elicited special interest in recent months, in view of both the Vietnam situation and the possible influence of such spending on the course of the economy. The fiscal year 1967 budget, which was presented to Congress on January 24, set forth Federal spending plans for July 1, 1966 to June 30, 1967. Within total Federal spending of almost $113 billion, the proposed administrative budget called for defense pur chases of $58.3 billion, or $4.1 billion more than in fiscal 1966. While it is still unclear as to the actual effects—direct and indirect—of the increase of defense spending on the economy at large, it is expected that the economic impact will be different in various regions of the nation. Accordingly, an important question is raised concerning the regional distribution of de fense spending, in terms of both magnitude and nature. This article is the first part of a study undertaken by the Research Depart ment of the Federal Reserve Bank of Cleve land to discern some insights into the regional effects of defense spending by reviewing var ious measures of defense activity in the states that are wholly or partly in the Fourth Federal 2 Reserve District (Ohio, Kentucky, Pennsyl vania, and West Virginia). It should be noted that the lack of adequate data at the regional level makes it difficult to analyze completely the regional impact of defense spending, including that of steppedup defense procurement. To illustrate, while defense spending per se is not broken down by state or region, military prime contract awards are. However, a substantial propor tion of work under prime contracts is sub contracted to firms in the same or other re gions, and the extent of subcontracting is not known. Thus, at best, prime contract data can give only a rough indication of total de fense work in a region or area. Without using rather detailed interindustry studies or a direct survey of manufacturing firms, there are therefore only indirect means of assessing the regional effects of defense spending. A brief resume of aggregate measures of defense activity, while giving little insight into regional effects, will provide perspective on the significance of defense spending for the national economy and on some of the im plications for regional areas; in other words, set the stage for a discussion of the effects of defense spending in Fourth District states. FEBRUARY 1 9 6 6 Accordingly, following the review of selected aggregate measures presented in this article, a number of indirect measures of the regional impact of defense for Fourth District states will be discussed in a subsequent article in the E conom ic Review. SELECTED AGGREGATE MEASURES OF NATIONAL DEFENSE Defense Purchases. Defense purchases, as recorded in the national income accounts, provide one means by which to judge the im pact of national defense spending at the national level. This is the most comprehensive series that records defense spending in a framework consistent with the record of eco nomic activity of other sectors. As shown in Chart 1, the peak in defense spending was reached during World War II, in 1944, when GROSS NATIONAL PRODUCT and FEDERAL GOVERNMENT PURCHASES of GOODS and SERVICES S o u r c e o f d a t a : S u r v e y o f C u r r e n t Business, O f f i c e o f B u s i n e s s E c o n o m i c s , U . S . D e p a r t m e n t o f C o m m e r c e 3 E C O N O M IC REVIEW defense purchases accounted for 41.6 per cent of GNP and 98.2 percent of all Federal purchases. After declining to a postwar low in 1947, defense purchases gradually in creased until they jumped upward during 1951-53 because of the Korean War, and then subsequently fell in 1954 and 1955. Since that time, in the past decade, the cold war threat has necessitated maintaining de fense purchases at a magnitude substantially above the pre-Korean War level. Nevertheless, in recent years, the rate of growth of defense purchases has been less than the rates of growth of GNP and total Federal purchases; consequently, defense purchases had declined to 7.4 percent of GNP and about 75 percent of Federal pur chases in the national income accounts by the first half of 1965. While the figures have re cently been on the rise because of the effort in Vietnam, the actual magnitudes and pro portions that will emerge in 1966-67 are not currently known. However, it should be noted that with a considerable growth of GNP, de fense purchases could expand in each year without increasing the relationship to GNP. Employment. Changes in employment are another indicator of the resources committed to defense uses. Comprehensive statistics are not available on the direct and indirect em ployment generated by the recent levels of defense spending, but employment can be traced for several defense-related industries, as well as for defense-related Federal Gov ernment employment. Five industries—ord nance and accessories, aircraft and parts, communication equipment, electronic com ponents, and ship and boat building and re pairing—have been designated as defense4 related to the extent that a substantial pro portion of their output flows into defense uses. Employment figures in recent years for each of the industries are presented in Table I along with data on defense-related Federal Government employment.1 While total employment in the five indus tries exhibited a moderate increase from 1958 to 1964, there were substantial changes among the individual industries. The indus tries showing the greatest gains were com munication equipment, electronic compo nents, and ordnance (including missile work); in contrast, there was a substantial decline in employment in the aircraft industry. These employment changes corresponded generally to changes in the mix of goods and services purchased by the DOD. Increased emphasis on missile development and production be ginning in the late 1950's resulted in steppedup procurement of electronic and communi cation equipment and related goods that are more essential for missile production. Federal defense-related employment also exhibited a moderate increase during 1958-64, with growing numbers of military and NASA personnel offsetting the declining numbers of DOD civilian employees. 1 It should be realized that not all of the output of these industries goes for defense purposes so that not all of the employment is defense dependent. Defense-related Federal employment covers Depart ment of Defense (DOD) military and civilian employment and employment in various agencies that perform work related to defense—National Aeronautics and Space Administration (NASA), Atomic Energy Commission (AEC), Selective Service Commission, and the Office of Emergency Planning. The bulk of Federal defenserelated employment is in the DOD. See Joseph F. Fulton, "Employment Impact of Chang ing Defense Program s," M o n th ly Labor Review , Vol. 87, No. 5 (May 1964), pp. 508-16. FEBRUARY 1 9 6 6 TABLE I Employment in Five Defense-Related Manufacturing Industries and Defense-Related Federal Employment, United States, 1958-1964 (in thousands) 1958 1959 1960 1961 1962 1963 1964 Aircraft and p a r t s ................................ 784 748 646 619 634 635 606 Communication e q u i p m e n t ..................... 296 340 382 405 445 434 406 Electronic c o m p o n e n t s ............................ 179 213 234 243 266 262 264 O rdn an ce and e q u i p m e n t ..................... 145 176 202 235 269 274 258 . . 147 146 141 142 141 142 144 Five-Industry T o t a l ......................... 1,551 1 ,624 1 ,605 1,643 1 ,755 1 ,7 4 7 1 ,6 7 7 Defense-Related Federal Employment . . . 3 ,6 7 5 3,571 3,511 3 ,5 7 7 3 ,8 5 7 3 ,7 5 9 3 ,7 5 0 Total Defense-Related Employment (selected industries and Federal Government) 5 ,2 2 6 5 ,1 9 5 5 ,1 1 6 5 ,2 2 0 5 ,6 1 2 5 ,5 0 6 5 ,4 2 7 5 8 ,1 2 2 5 9 ,7 4 5 6 0 ,9 5 8 6 1 ,3 3 3 6 2 ,6 5 7 6 3 ,8 6 3 6 5 ,5 9 6 Employment in Five D efense-Related Indus tries a s Percent o f Nonagricultural Employment 2 .7 % 2 .7 % 2 .6 % 2 .7 % 2 .8 % 2 .7 % 2 .6 % Total D efense-Related Employment as Per cent of Nonagricultural Employment . . . 9 .0 % 8 .7 % 8 .4 % 8 .5 % 9 .0 % 8 .6 % 8 .3 % Ship and b oat building and repairing Nonagricultural E m p l o y m e n t .................. Sources: For five industries, Report of the Committee on the Econom ic Im p act of Defense a n d Disarm am ent, Superintendent o f Docu ments, U. S. Governm ent Printing Office, July 30, 1 9 6 5 , p. 83. For defense-related Federal employment, Joseph F. Fulton, “Employment Impact of C hanging Defense Program s,” M o n th ly L a b o r Review , Vol. 87, No. 5 (M a y 1 9 6 4 ), p. 51 1 ; 1 9 6 4 figure is estimated. For nonagricultural employment, M a n p o w e r Report of the President a n d a Report on M a n p o w e r Requirem ents, Resources, Utilization, a n d T rain ing b y the United States Departm ent of Labor, transmitted to the Congress, M a rch 1 9 6 5 , p. 1 93. On average, employment in the defenserelated industries accounted for 2.7 percent of nonagricultural employment in the United States in the years shown in the table. When defense-related Federal employment is added, the average jumps up to 8.6 percent. The most recent year for which comprehensive payroll data are available is 1962 when payrolls for all defense-related employees amounted to $27.6 billion, or 6.3 percent of total personal income. (The total of defenserelated employment for the five industries and the Federal Government was higher in 1962 than for other years covered in the table. This suggests that the ratio of payrolls to personal income would be lower in the years after 1962.) Input-Output A nalysis. The economic ef fects of defense spending go beyond the di rect impact of dollar purchases on employ ment. Indirect effects are generated as firms selling products and services to the DOD, for example, increase employment, wage pay ments, and purchases from their suppliers. Suppliers in turn may further increase their employment and purchases, so that there can be substantial and widening indirect effects. A social accounting technique which is useful in analyzing the secondary and tertiary effects of total defense or other spending is 5 E C O N O M IC R E V IEW F ig u r e 1 ILLUSTRATION OF A MATRIX FOR INPUT-OUTPUT (INTERINDUSTRY) ACCOUNTING u rc h a s i n g Sector P r o d u c in g ^ \^ Industry 1 In d u stry 2 Industry 3 •••• Total •••• Indu stry N Final Total Bill O utput In te rm e d ia te O utput Sector Indu str y 1 In d u st ry 2 Purchases o f i n d u s tr y In d u str y 3 2 from in dustri es 1, 2, 3. 'W In du str y N ' S a l e : o f i n du s tr y N to i n d u s tries 1, 2, 3 a n d to fi n a l d e m a n Total I n t e rm ed ia te In pu t P r i m a ry Input s Tot al Input Source: A d a p t e d f r o m t a b l e in M . Y a n o v s k y , S o c i a l Ac c o u n t i n g Sys t ems, C h i c a g o , A l p i n e P u b l i s h i n g C o m p a n y , 1 9 6 5 , p. 1 5 2 input-output analysis.2 Input-output account ing is a method of tracing the flow of goods and services from industry to industry or 2 This type of analysis was developed by Wassily W. Leontieff, who constructed input-output tables for the U. S. for 1919, 1929, and, in conjunction with the Bureau of Labor Statistics (BLS), for 1939. The BLS also prepared an input-output table for 1947, and the Office of Business Economics of the Department of Commerce recently completed work on a 1958 input-output study, which is integrated with the national income and prod uct accounts. See Morris R. Goldman, Martin L. Marimont, and Beatrice N. Vaccara, "The Interindustry Structure of the United States: A Report on the 1958 Input-Output Study," S urvey o f Current Business, Vol. 44, No. 11 (November 1964), pp. 10-29. Digitized for 6 FRASER from economic sector to sector. The overall economy is broken up into various homoge neous sectors or industries; each industry or sector appears twice in an input-output ma trix—once as a row and once as a column. Figure 1 presents a simplified example of a limited input-output matrix. Each cell in the input-output matrix relates the input of that row (sale of the output of the industry in that row to the industry in that column) to the out put of the industry in that column. In turn, this relationship can be reduced to an "input coefficient" which, when derived for all the cells of the matrix, can be used to determine the various inputs used to produce a given FEBRUARY 1 9 6 6 output. Thus, the input-output matrix can explain the magnitude of interindustry flows in terms of the production levels of each sec tor.3 Such a set of accounts can aid in the an alysis of economic structure, as well as in the prediction of effects of increased demand for the output of various sectors or of the effects of increased or reduced Government defense spending. The 1947 input-output matrix already has been adapted to aid in forecasting the effect of a reduction in defense spending.4 A further adaptation of the input-output matrix to show the proportion of output of various in dustries going to defense is presented in Table II. It can be seen from the table that most industry groups are only slightly de pendent upon defense demands. Those in dustries which do sell a substantial portion of their output to the military—including trans portation and ordnance, instruments and al lied products, and electrical machinery—are 3 While the matrix presented in Figure 1 is a simpli fication, it does point out the general features of inputoutput analysis. Other sources should be consulted for a more complete and sophisticated presentation of inter industry accounting. See, for example, "The 1958 Interindustry Relation Study” obtainable from the Office of Business Economics (National Economics Division), U. S. Department of Commerce; Hollis B. Chenery and Paul G. Clark, In terin d u stry Econ om ics (4th printing; New York: John Wiley and Sons, Inc., 1965); or Moshe Yanovsky, Social A cco u n tin g S y ste m s, (Chicago: Alpine Publishing Company, 1965), p. 152. Additional sources are cited in these works. 4 See Wassily W. Leontieff and Marvin Hoffenberg, "The Economic Effects of Disarmament/' Scientific A m erican , Vol. 204, No. 4 (April 1961), pp. 47-55. For a more recent analysis, see Wassily W. Leontieff, Alison Morgan, Karen Polenske, David Simpson, Edward Turner, "The Economic Impact—Industrial and Regional —of an Arms Cut," The Review o f E con om ics and Statistics, Vol. XLVII, No. 3 (August 1965), pp. 217-41. TABLE II Proportion of Final Output of Selected Industries Devoted to Defense Dem ands* Transportation equipment an d o r d n a n c e .................. 3 8 . 4 % Electrical m a c h i n e r y .............................................. ... 20.8 Instruments and allied p ro d u c t s ................................ ... 20.2 Primary m e t a l s ..................................................... ... 13.4 Unallocated and waste p r o d u c t s ............................ ... 12.3 Fabricated metal products ................................... 8.0 Fuel and p o w e r ..................................................... 7.3 ................................... 7.0 T r a n s p o r t a t io n ..................................................... 5.9 P a p er and allied products Rubber and rubber p ro d u c ts ................................... 5.6 Chemicals and allied p r o d u c t s ................................ 5.3 M achinery (except e l e c t r i c a l ) ................................ 5.2 Nonmetallic minerals and p r o d u c t s ......................... 4.7 Lumber and w ood p r o d u c t s ................................... 3.9 Leather p r o d u c t s .................................................. 3.1 Miscellaneous manufacturing in d u s trie s..................... 2.8 C o n s t r u c t io n ......................................................... 2.1 A p p a re l and textile mill p r o d u c t s ............................ 1.9 Food and kindred p r o d u c t s ................................... 1.6 T r a d e ................................................................... 1-4 Service and f i n a n c e .............................................. 1.3 * Includes direct deliveries plus deliveries to other industries necessary for deliveries to this dem and category, i.e., subcon tractors and suppliers. Coefficients b a se d on 1 9 4 7 structural relationships. Source: M u rra y L.W eidenbaum , “M e a su re s o f the Impact o f Defense an d S p a ce Program s,” P a p e r presented at annual meet ing of Am erican Statistical Association, Philadelphia, Penn sylvania, Septem ber 9, 1 9 6 5 , p. 1 8. generally the same industries, as is shown later, that receive the bulk of military prime contracts awarded by the DOD. The indirect and induced effects of defense procurement should be recognized, although they cannot properly be quantified. Using defense-related employment as an example, the direct effect would be the employment gen erated by sales made by businesses directly to the Government. Indirect effects result when these defense-oriented firms purchase inputs from other firms. To illustrate, an in crease in defense orders received by, say, Ohio firms will lead to increased employment to meet the greater demand for output (direct 7 E C O N O M IC R EV IEW TABLE III Total Em ploym ent (Direct and Indirect)^ Per Billion Dollars of Delivery to Final Demand, 1962 D efense-Related Industries Total Electronic Aircraft Communications O rdn an ce & component and a ir except ra d io & accessories accessories craft parts TV broadcasts ................................................. , . 1 2 2 ,4 9 6 1 0 9 ,6 6 8 1 0 1 ,2 2 4 6 9 ,9 8 8 D i r e c t .......................................... , . 5 8 ,4 9 9 6 2 ,1 1 0 5 9 ,7 9 4 5 5 ,8 7 0 I n d i r e c t ....................................... 6 3 ,9 9 7 4 7 ,5 5 8 4 1 ,4 3 0 14,1 18 1 ,080 1,303 675 461 852 855 748 127 Distribution of Indirect Agricultural, forestry, and fisheries . ., . M i n i n g .............................................. Manufacturing ............................... 4 5 ,3 0 2 2 5 ,8 6 4 2 7 ,8 2 4 4 ,4 5 4 Transportation 636 ............................... 2 ,9 6 8 2 ,9 9 2 2 ,2 2 6 Communication and u t i l i t i e s .............. 1,109 1 ,058 983 369 T r a d e ............................................. . . 5 ,3 3 8 7,271 3 ,9 2 3 1 ,122 Finance, insurance, and real estate Services an d miscellaneous . .. . .............. Ratio o f indirect to d i r e c t ..................... 1 ,749 1 ,783 1,221 999 5,601 6 ,4 2 9 3 ,8 2 6 5 ,9 5 5 1.09 0 .7 7 0 .6 9 0 .2 5 1 Covers w a g e and salary employees, self-em ployed, and unpaid fam ily workers. 2 Does not include "multiplier” effect, i.e., employment generated b y respending of income for consumer and capital goods. Source: Jack Alterman, “Interindustry Employment Requirement,” M o nth ly Lab or Review, Vol. 88, No. 7 (July 1965), pp. 8 4 2 - 4 4 effect). Because the Ohio firms will also have to increase inputs other than labor, indirect employment will be generated to supply the additional resources that the Ohio firms require. On top of this, there are induced effects as the increased direct and indirect defense employment generates more expenditures for consumer goods, houses, etc., and as business firms and state and local governments invest and expand to meet the new demands. Thus, a change in defense spending can have widespread indirect and induced effects. j . . rr . r .i •n i » j l *i_ Indirect ettects are further illustrated by the use of interindustry employment requirement t , tables that can be derived from the input^ output table referred to earlier. Such a table has been derived from the 1958 input-output study, and several defense -oriented components are reproduced in Table III. For example, the delivery of a billion dollars of products from the ordnance and accessories industry to the Government would generate 122,496 jobs. Of this total, 58,499 would be in the ordnance industry itself (direct) and 63,997 jobs would be in industries supplying parts, materials, transportation, and other services to the ordnance industry (indirect). In nearly all cases, the bulk of the indirect jobs will be in manufacturing.5 (Because the interindustry employment requirements are calculated from — ——— 5 For more insi* ht into the indirect and subcontracting effects of a Government contract, see Kenneth G. Slocum, ,,nDefense , vFallout: ,, . uHowDPentagon , nContract for $1 D.1 V Billion Spreads Throughout Economy," W a ll S treet Journal, November 18, 1965. FEBRUARY 1 9 6 6 TABLE IV Military Prime Contract A w ard s for the United States, Fiscal Years 1951-1965 (millions of dollars) :al Y e a r Contracts Fiscal Y e ar Contracts 1951 $ 2 9 ,6 2 0 1959 1952 3 8 ,4 7 9 1960 2 0 ,4 0 7 1953 2 6 ,9 9 5 1961 2 2 ,1 1 2 1954 10,631 1962 2 5 ,0 3 9 1955 13 ,9 7 2 1963 2 5 ,2 3 4 1956 16,491 1964 2 4 ,4 1 7 1957 1 8 ,1 4 4 1965 2 3 ,2 6 8 1958 2 1 ,0 0 9 $ 2 1 ,9 1 9 Note: D ata include only contracts with net value of $ 1 0 ,0 0 0 or more distributed b y states. Source: Prime C on tract A w a rd s b y State, O ffice o f Secretary of Defense, Departm ent of Defense the input-output table for the U. S. economy, such computations have the same limitations as input-output analysis and, of course, are not necessarily applicable to individual states or regions.) Military Prime Contracts. Trends in military prime contract awards provide an additional way of viewing the overall impact of defense activity. Prime contract awards are contracts or orders awarded to firms to supply the DOD with various goods and services. More specif ically, these awards cover procurement for such things as research and development, construction, petroleum, subsistence, cloth ing, and operating and maintenance supplies. Contract awards have the additional advan tage of allowing a breakdown by state, and for recent years, by procurement program. (A procurement program is a grouping of items obtained separately under prime con tract awards according to the nature of the object procured, such as missile and space products, or electronic components.) Such data facilitate to some extent analysis of the regional effects of defense spending. A major limitation of prime contract awards for regional analysis is that not all, or even most, of the work for any contract is necessarily done by the firm receiving the contract. Prime contracts are awarded to firms performing the final assembly of the product and do not re flect the large amount of subcontracting which may be done by firms in other states. Thus, at best, prime contract awards are an imperfect guide to regional effects of defense spending. Data on the dollar volume of contracts awarded in the U. S. since 1951 are presented in Table IV. The general pattern of prime contract awards is similar to that of defense purchases. Prime contracts reached a peak of $38.5 billion in fiscal year 1952, falling to a low of $10.6 billion in 1954, and then climbing again, reaching the recent high in fiscal 1963. Since that time, total military prime contract awards declined in fiscal 1964 and fell again in 1965. (The effect of the Vietnam buildup will appear in prime contract awards for fiscal year 1966, which began July 1, 1965.) Available data on costs incurred by the AEC and prime contracts awarded by the TABLE V Costs Incurred by A EC and Prime Contracts Aw arded by N A S A Fiscal Years 1961-1965 (millions of dollars) Fiscal Y e a r AEC NASA $ 380 1961 $ 2 ,7 9 5 1962 2 ,8 8 9 939 1963 2 ,8 3 0 2,181 1964 2 ,7 9 5 3 ,4 9 0 1965 2 ,7 4 8 4 ,1 0 3 Note: N A S A a w a rd s cover contracts o f $ 2 5 ,0 0 0 and over. Sources: Atomic Energy Commission, and N ational Aeronautics and S p a ce Administration 9 E C O N O M IC R E V IEW MILITARY and NASA PRIME CONTRACT AWARDS, and AEC COSTS INCURRED, UNITED STATES F isca l Y e a r s B illio n s of d o lla r s N O T E : M i l i t a r y p r i m e c o n t r ac t s c o v e r a w a r d s wi t h net v a l u e of $10, 000 t hat ar e d i s t r i b u t e d by state; N A S A co n t r a c t s cover direct a w a r d s of $25,000 ond over; A E C a w a r d s c o ns i st of cos ts i ncur red for o p e r a t i n g , m a i n t e n a n c e , a n d NASA are presented in Table V.6 The AEC and the NASA perform defense and non defense work, although much of the civilian work also has defense benefits. Since these agencies do not operate under the DOD, their procurement is not included in military prime contract awards. Costs incurred by the AEC and contracts awarded by the NASA are of much smaller magnitudes than DOD military prime contracts. While the AEC costs in curred have fluctuated within a fairly narrow range since 1961, NASA contract awards have exhibited substantial growth, reflecting the acceleration of both defense and nonde fense space and missile activity. Chart 2 portrays the contract awards of the DOD and the NASA and costs incurred by the AEC, as well as the combined total. Combin ing contract awards and costs incurred is one way to view the overall picture of defenserelated procurement. As shown in the chart, the combined series experienced a rather sharp increase in fiscal 1962, continuing to increase moderately until it reached a peak in fiscal 1964. The series then declined slight ly in 1965. Changes in total awards and costs incurred are dominated by changes in DOD contracts, although the rapid growth of NASA awards did offset the decline in both AEC costs incurred and DOD contract awards in fiscal 1964. The large dollar volume of military prime contract awards are concentrated among a relatively few firms engaged in defense work. Table VI shows the concentration of such ca pi tal expenditures. S o u r c e s o f d a t a : Prim e C o n t r a c t A w a r d s b y State, O f f i c e o f Secretary of Defense, De pa rt m en t of Defense; Atomic Energy Commission; and National Aeronautics and S p a c e Administration. 10 6 Costs incurred are not the same as prime contracts awarded, but they are a fairly close approximation. Costs incurred cover operating, maintenance, and capital expenditures. FEBRUARY 1 9 6 6 TABLE VI Percent of Dollar Volum e of Military Prime Contracts Received by Firms Involved in Defense Production Fiscal Years 1961-1965 Fiscal Top 1 0 0 Top 5 0 Top 2 5 Top 5 Year Firms Firms Firms Firms 1961 7 4 .2 % 6 5 .8 % 5 4 .8 % 2 4 .8 % 1962 7 2 .3 63.4 50.8 2 2 .5 1963 7 3 .9 65.6 5 1 .9 23.2 1964 7 3 .4 65.8 5 2 .9 23.8 1965 6 9 .0 6 0 .9 * 4 8 .3 2 2 .9 * Based upon top 4 9 firms. Sources: Joint Economic Committee, Background material on Econom ic Im p act of Federal Procurem ent: M aterials pre p a red for the Subcommittee on Federal Procurements and Regulations, 89th Congress, 1 st Session, April 1 9 6 5 . Also, previous reports. For 1 9 6 5 , ‘‘Lockheed Holds a S te a d y Lead,” Business W e ek, N ovem ber 27,1 9 6 5 , p.35. awards among the top 5, 25, 50, and 100 firms receiving contracts during fiscal years ^ G I GS. It can be seen that the top 5 firms received slightly more than 20 percent of all military prime contract awards in the U. S., the top 25 firms about 50 percent, and the top 100 firms nearly 75 percent.7 Putting it another way, in each of the years except fiscal 1965, the top 4 firms received contracts totaling in excess of $1 billion. These large defense manufacturers, however, have many plants dispersed throughout the country and are not solely dependent upon Government purchases. Of 35 firms receiv7 The decline in concentration apparent in 1965 is primarily due to a decrease in missile and aircraft con tracts which usually go to the larger companies. There appears to be even greater concentration in NASA awards than in DOD contracts. In 1964, the top 5 firms received 50.8 percent of total NASA awards; the top 25 firms, 81.2 percent; and the top 50 firms, 87.1 percent. As a general matter, however, subcontracting tends to distribute defense work over a much larger number of firms and to reduce the degree of apparent concentration. ing the largest amount of defense and space contracts in 1963, such contracts accounted for half or more of the total sales of those com panies in only 17 cases. The other 18 firms sold most of their output to nondefense cus tomers.8 Data on prime contracts by procurement program, which are available only for fiscal years 1962-64, provide another indication of defense impact by pointing out the industries most closely linked with defense work. Data on procurement programs are presented in Table VII for both the three years separately and as three-year totals, because annual move ments over the three-year period may or may not be indicative of changing procurement patterns. (The three-year total may give a better indication of the significance of any program by eliminating more or less random factors.) On the basis of three-year totals, the programs are ranked in descending order of dollar magnitude of program awards. The cumulative percentage distribution (last col umn) provides a means of judging the relative significance of various programs. The missile and space systems accounted for more than one-fourth (26.1 percent) of all military prime contract awards during fiscal years 1962-64, while airframes and related assemblies accounted for 15.2 percent (41.3 percent less 26.1 percent). The top three pro grams accounted for over half of all military prime contracts, and the top ten programs for slightly legs than 90 percent. Thus, the bulk of DOD procurement falls within a relatively 8 See Murray L. Weidenbaum, "M easures of the Impact of Defense and Space Programs," Paper presented at annual meeting of American Statistical Association, Philadelphia, Pennsylvania, September 9, 1965, pp. 19-20. 1 1 E C O N O M IC R EV IEW TABLE VII Net Value of Military Prime Contract A w ard s of $10,000 or More, by Procurement Program, for United States, Fiscal Years 1962-1964 (millions of dollars) Fiscal Ye ars Program Program Rank1 1962 3 -Y e a r 1963 1964 Total Cumulative % Missile and S p a ce S y s t e m s ................. 1 $ 6 ,8 2 7 $ 6 ,8 5 5 $ 5 ,8 0 7 $ 1 9 ,4 8 9 Airfram es & Related Assem blies & Sp are s 2 3 ,1 7 8 3 ,6 5 8 4 ,4 9 3 1 1 ,3 2 9 4 1 .3 Electronics & Communication Equipment . 3 3 ,3 4 3 3 ,1 4 2 3 ,0 1 2 9 ,4 9 7 5 4 .0 61.5 2 6 .1 % S e r v ic e s .............................................. 4 1 ,555 1,834 2 ,2 1 6 5 ,6 0 5 S h i p s ................................................. 5 1 ,559 1,746 1,529 4 ,8 3 4 68.0 C o n st ru c tio n ....................................... 6 1,205 1 ,117 1,296 3,6 1 8 72.8 Aircraft Engines & Related Sp a re s . . . 7 1,201 1,118 1,121 3 ,4 4 0 77 .4 A m m u n it io n ....................................... 8 924 894 672 2 ,4 9 0 80.7 P e tro le u m .......................................... 9 844 838 762 2 ,4 4 4 84.0 All Other Supplies & Equipment . . . . 10 824 735 715 2 ,2 7 4 87 .0 Other Aircraft Equipment & Supplies . . 11 775 704 553 2 ,0 3 2 89.7 S u b s i s t e n c e ....................................... 12 637 586 583 1,806 92.1 94.1 Com bat V e h i c l e s ................................ 13 554 574 353 1,481 N oncom bat V e h ic le s ............................ 14 492 459 426 1 ,3 7 7 9 5 .9 Textiles, Clothing & Equipment 15 419 266 272 957 9 7 .2 W e a p o n s .......................................... 16 222 217 213 652 98.1 Construction Eq u ip m e n t......................... 17 93 111 92 296 9 8 .5 9 8 .9 . . . . Production E q u ip m e n t ......................... 18 102 105 60 267 M e d ic a l & Dental Supplies & Equipment . 19 10 5 67 77 249 99.2 Photographic Equipment & Supplies 20 73 62 66 201 9 9 .5 M a teria ls H andling Eq u ip m e n t.............. 21 41 66 54 161 9 9 .7 O ther Fuels and L u b r ic a n t s ................. 22 36 34 22 92 99.8 M ilita ry Building Supplies 20 84 1 0 0 .0 * . . Age Distribution .................. 23 23 41 Transportation E q u ip m e n t..................... 24 3 3 0.7 6.7 100.0* S e p a ra te ly Procured Containers and H andling Equipment ..................... 25 1 0.8 2 3.8 1 0 0 .0 * * These p rogram s constituted such a small percentage o f the total that they were rounded to 1 0 0 percent. 1 Based on 3 -y e a r totals. Source: O ffice o f Secretary of Defense, U. S. Departm ent of Defense, M ilitary Prime Contract A w a rd s b y Region a n d State, Fiscal Years 1962, 1963, 1964, August 1 9 6 5 few areas. The aerospace and electronics industries as a group accounted for almost 60 percent of prime contract awards. Eco nomic effects of these awards, however, reach far beyond the aerospace or electronics industry. CONCLUDING COMMENTS Several notable aspects of defense spending emerge from the preceding review of selected Digitized for12 FRASER aggregate measures. In recent years, less than 10 percent of the nation's resources have been absorbed by direct defense spend ing, and this ratio has been declining. This is apparent in the ratio of defense spending to GNP, in the ratio of defense-related private and Federal employment to nonagricultural employment, and as implied in the ratio of payrolls of defense-related private and Fed eral employment to personal income for 1962. FEBRUARY 1 9 6 6 The Vietnam buildup has apparently arrested the decline in the ratio of defense purchases to GNP and may even raise it somewhat in the near future, although the actual magnitudes and proportions that will emerge from the buildup are not currently known. In addition, the direct effect of defense pro curement is generally limited with regard to industries and products involved. The top three procurement programs accounted for over 50 percent of procurement from 1962 to 1964, while the top ten programs accounted for almost 90 percent. The bulk of defense purchases has been for highly specialized products—aerospace products and electronic and communication equipment—which fur ther indicates a high degree of concentration. There is not only concentration among the items procured, but also among the firms supplying the DOD. This suggests that changes in defense spending would have the greatest direct effect on a relatively few in dustries and on major firms within these in dustries. The concentration of defense procurement among certain industries and major firms raises the likelihood of geographic concen tration. That is to say, those areas or regions with the appropriate types of productive ca pacity to meet the specialized defense needs would be expected to receive the bulk of DOD procurement. As a result, changes in defense spending would be of considerable signifi cance for employment and output of defenseoriented regions. Against this background, a subsequent article will explore, within the limits of available data, the significance of defense spending for Fourth District states. 13 E C O N O M IC R EV IEW SURVEY OF HIGH SCHOOL SENIORS IN CUYAHOGA CO U N TYSOME SOCIOECONOMIC PATTERNS This article concludes a series of three articles1 based on the May 1965 survey of high school seniors in Cuyahoga County and their plans for further education. As indicated earlier, the May 1965 survey is part of a broader study of the economics of higher ed ucation in the Cleveland area undertaken by the Research Department of this Bank with the cooperation of the Cleveland Commission on Higher Education. The purpose of the Commission is to aid in the development of higher education in the Cleveland area for the benefit of the local population and the community at large. The May survey obtained information on two aspects of the socioeconomic background of the students, namely, family income and college attendance of parents. As discussed in the earlier articles, analysis of that infor mation documented to a significant extent a number of patterns which are usually as sumed on a prio ri grounds: children from homes with higher incomes where one or 1 The two earlier articles were: "Survey of High School Seniors in Cuyahoga County,” E con om ic Review, November 1965, page 12; and "Survey of High School Seniors in Cuyahoga County—Some Additional Find ings,” E con om ic Review, January 1966, p age 19. Digitized for14 FRASER both parents had attended college tend to graduate from high school at an earlier age, plan to continue their education in greater numbers and actually do so, win more firstround and multiple acceptances from col leges, attend private colleges in and outside Ohio in greater numbers, and receive more scholarship awards. To test further the validity of these findings, and perhaps uncover other patterns, student responses on plans to continue their edu cation and acceptances received were re lated to census tract data2 on median family income, nonwhite population, and persons of foreign stock.3 Some insights into such re lationships could be helpful in meeting higher education needs in the Cleveland area—and perhaps elsewhere—of those who look to area schools for post-high school education. METHODOLOGY Where appropriate, data for city schools have been arranged in configurations based 2 U. S. Census of Population: 1960 Final Report P.H.C. (l)-28, Census Tracts, Cleveland, Ohio S.M.S.A. 3 The term "foreign stock” is used by the U. S. Census to include both foreign-born persons and native-born persons one or both of whose parents were foreign-born. FEBRUARY 1 9 6 6 TABLE l-a Selected Socioeconomic Variables (City of Cleveland) Compared with Intent to Continue Education and Acceptances Received (M a y 1965 Survey of High School Seniors in the City of Cleveland) Nonwhite Population as Percent o f Total Population in High School Districts1 Percent of Percent of Percent of M e d ia n Fathers Mothers Students Students Family Attended Attended Intending to A ccepted- Income1 C o lle g e 2 C o lle g e 2 Continue2 Percent o f M ay 19652 6 7 % an d o v e r ................................................. $ 3 ,9 1 5 9% 8% 75% 17% 3 3 -6 6 .9 % ..................................................... $ 5 ,3 4 2 15% 13% 76% 23% less than 3 3 % ................................................. $ 6 ,4 3 6 13% 9% 64% 34% $ 5 ,9 3 5 13% 10% 67% 31% Percent of Addendum : Figures for City of Cleveland as a whole 2 8 . 9 % ............................................................ TABLE I-b Persons o f Foreign Stock as Percent of Total Popu Percent of Percent of Percent of M e d ia n Fathers Mothers Students Students Family Attended Attended Intending to Accepted- Continue2 Income1 C o lle g e 2 C o lle g e 2 ..................................................... $ 6 ,4 3 5 13% 9% 64% 34% less than 3 3 % ................................................. $ 4 ,9 3 5 14% 12% 76% 22% $ 5 ,9 3 5 13% 10% 67% 31% lation in High School Districts1 3 3 -6 6 .9 % M ay 19652 Addendum : Figures for City of Cleveland as a whole 3 0 . 9 % ............................................................ Sources: 1 Com puted from census tract d a ta — U. S. Census of Population, 1 9 6 0 2 Federal Reserve Bank of Cleveland on percentages of nonwhites and persons of foreign stock in the population of each school district (see Tables I-a and I-b). Data have also been aggregated into four groups, arbi trarily using the Cuyahoga River as the divid ing line for both city and suburbs: Cleveland East and Cleveland West (Table II), and Sub urbs East and Suburbs West (Table III). Data on students from the parochial high schools and from three Cleveland high schools are excluded from the aggregates because atten dance at these schools is not geographically based. CITY OF CLEVELAND PUBLIC HIGH SCHOOLS Cleveland East is both more heavily pop ulated and more diverse in its socioeconomic patterns than Cleveland West. As Table II shows, Cleveland West has a higher propor tion of persons of foreign stock and the East a higher proportion of nonwhites. Persons of foreign stock are more widely dispersed geo graphically than are non white persons. As shown in Table I-b, those areas with the high est concentrations of persons of foreign stock tend to enjoy fairly high incomes (higher than 15 E C O N O M IC R EV IEW the city-wide median of $5,935), and to have a slightly smaller percent of students intending to continue their education but a slightly higher rate of acceptance than the city-wide averages. As income decreases, the spread between intent and acceptance widens. As shown in Table I-a, those areas with the high est concentrations of non whites tend to have relatively low incomes (lower than the citywide median), but higher rates of intent to continue education and lower rates of accep tance than the city-wide averages. Perhaps the most significant pattern re vealed by comparing data on student re sponses with racial and foreign-stock data is that, while the intent to continue education is high in areas with large nonwhite populations, the rate of acceptance by comparison is low (see Table I-a, lines 1 and 2). Conversely, in areas with a high percentage of foreign stock the rate of intent is lower but the acceptance rate higher (see Table I-b, line 1). Turning to the first of the two observations made above, that is, the wider spread between rates of intent and acceptance in predomi nately nonwhite areas, a number of possible influences suggest themselves. For one thing, it is possible that the high intent rate may actually be an overstatement, reflecting a number of personal and psychological factors associated with responses to a question of this type. On the other hand, the wider spread between intent and acceptance may be due to inadequate scholastic preparation. Or, given the socioeconomic background of the students, it may be due to a lack of know-how or sophistication as to how, when, and where to apply to colleges and universities. Such TABLE II Socioeconomic Background of Seniors in the Public High Schools of the City of Cleveland and Intent to Continue Education and Acceptances Received as of M a y 1965 N um ber of respondents1 ................................................................... M e d ia n fam ily income2 C leveland Cleveland City of East W e st Cleveland 2 ,0 9 6 ................................................................... 1,311 3 ,4 0 7 * $ 5 ,5 8 3 $ 6 ,5 0 6 $ 5 ,9 3 8 ................................................. . $ 2 ,3 9 8 - $ 9 , 7 7 0 $ 2 , 9 6 9 -$ 8 ,8 5 7 $ 2 ,3 9 8 - $ 9 , 7 7 0 Range o f m edians b y school districts2 ................................................. . $ 3 ,9 1 5 -1 6 ,6 9 2 $ 5 ,9 0 4 -$ 7 ,3 2 6 $ 3 ,9 1 5 -$ 7 ,3 2 6 R ange o f m edians b y census tracts3 Nonwhite population 1 9 6 0 census2 ..................................................... 45% 2% 29% Range of nonwhite population b y census tracts 1 9 6 0 3 ......................... 0 -1 0 0 % 0 -4 3 % 0 -1 0 0 % 2 -7 6 % 0 -2 % 0 -7 6 % Range of nonwhite population b y school districts I 9 6 0 2 Foreign stock2 ..................... ................................................................................. 26% 39% 31% .......................................... 0 -6 7 % 2 0 -5 5 % 0 -6 7 % R ange o f foreign stock b y school districts2 .......................................... 9 -4 5 % 3 5 -4 6 % 9 -4 6 % R ange of foreign stock b y census tracts3 ............................ 69% 63% 67% High school seniors accepted as o f M a y 1 9 6 5 1 ................................... 27% 37% 31% ............................................................... 13% 13% 13% Mothers attended co llege1 ............................................................... 11% 8% 10% High school seniors planning to continue education1 Fathers attended co llege1 * Excludes 8 4 8 students in the 3 Cleveland public high schools where attendance is not related to residence. Sources: 1 Federal Reserve Bank o f Cleveland 2 Com puted from census tract d a ta — U. S. Census of Population, 1 9 6 0 3 U. S. Census o f Population, 1 9 6 0 Digitized for16 FRASER FEBRUARY 1 9 6 6 TABLE III Socioeconomic Background of Seniors in the Public High Schools of Cuyahoga County (Exclusive of the City of Cleveland) and Intent to Continue Education and Acceptances Received as of M a y 1965 C u y a h o g a County N um ber o f respondents1 ................................................. M e d ia n fam ily income2 ................................................. R ange of medians b y census tracts3 ................................ Range of medians b y school districts2 ................................ Suburbs Suburbs excluding East W e st City o f Cleveland 5 ,7 6 5 4 ,9 2 6 10,691 $ 8 ,8 9 5 $ 8 ,1 9 0 $ 8 ,0 3 6 $ 5 ,9 9 6 -$ 2 5 ,0 0 0 -}- $ 5 , 6 0 3 - $ l 2,1 8 7 $ 5 ,6 0 3 -$ 2 5 ,0 0 0 -(- $ 6 ,8 4 4 -$ 1 5 ,7 2 4 $ 7 ,3 8 6 -$ 1 0 ,4 4 7 $ 6 , 8 4 4 - $ l 5 ,7 2 4 Nonwhite population 1 9 6 0 census2 ................................... * * * Range of nonwhite population b y census tracts3 .................. 0 -3 5 % 0 -2 1 % 0 -3 5 % Range of nonwhite population b y school districts2 .............. Less than 1 - 4 % Less than 1 - 1 % Less than 1 - 4 % Foreign stock2 ............................................................... 40% 32% 36% ......................... 1 6 -6 8 % 1 3 -5 0 % 1 3 -6 8 % Range of foreign stock b y school districts2 ......................... 2 1 -4 6 % 2 0 -4 0 % 2 0 -4 6 % Range of foreign stock b y census tracts3 High school seniors planning to continue education1 78% 80% 79% High school seniors accepted as of M a y 1 9 6 5 1 ..................................... 5 6 % . . . . 56% 56% Fathers attended co llege1 ................................................................. 3 5 % 33% 34% Mothers attended co llege1 ................................................................. 2 3 % 21% 22% * Less than 1 percent. Sources: 1 Federal Reserve Bank of Cleveland 2 Com puted from census tract d a ta — U. S. Census o f Population, 1 9 6 0 3 U. S. Census o f Population, 1 9 6 0 aspects as incomplete forms, failure to file on time, lack of knowledge of scholarship and loan possibilities, little notion of how to match one's own interests and abilities to the varied offerings and requirements of the many col leges, universities, and specialized schools in the community, state, and nation, all have a bearing on the rate of acceptance, irrespective of what intentions may be. If the home is not experienced in such matters, the burden which falls upon the student seeking admission and the guidance counselors who aid him is correspondingly greater, no matter how well prepared the student may be academically. Finally, as shown in Table I-a, in the case where the spread between intent and acceptance is greatest, both median family income and the percent of parents who have attended college are the lowest, which tends to corroborate generally the foregoing reasoning as well as the findings of the earlier articles, PUBLIC HIGH SCHOOLS ^ CUYAHOGA COUNTY The well-known d ifferen ces betw een central-city and suburb are revealed by comparison of the data in Tables II and III. In the suburbs, median income in 1960 was more than $2,000 higher than in the city. In addition, the nonwhite population was less than 1 percent for the suburbs as a whole, compared with 29 percent for the city, and in no school district in the suburbs did the nonwhite population exceed 4 percent. In contrast, persons of foreign stock accounted for 17 E C O N O M IC R EV IEW 5 percentage points more of the total popu lation in the suburbs than in the city.4 Also, the number of high school seniors planning to continue their education was 12 percent age points higher in the suburbs, while the number of those who had been accepted at the time of the survey was 25 percentage points higher. The proportion of both fathers and mothers who had attended college was more than twice as high in the suburbs. Similar to the city, the suburbs east of the Cuyahoga River presented a more mixed pattern, showing the school districts with the highest proportion of nonwhites (4 percent) and the highest proportion of persons of for eign stock (46 percent). The eastern suburbs had both higher incomes and a wider range of incomes. Interestingly, however, there ap pears to be an income level above which students' own interests and capabilities may be as influential as income in determining intent to continue education. Accordingly, there was virtually no difference between East and West Suburbs in the percent of students indicating an intent to continue ed ucation, and no difference in the acceptance rate. Figures for individual districts (not shown in Table III) confirm the strong influence of family income and college attendance of parents. In 1960, there were nine districts in which median family income exceeded $9,000. At least 84 percent of the students in each of these districts indicated an intent to continue their education, and in all but two at least 70 percent reported having been ac cepted (the exceptions reported 67 percent and 66 percent). In the same nine school dis tricts, the proportion of fathers who had at tended college ranged from 41 to 74 percent and of mothers from 24 to 58 percent. These compare with overall suburban figures of fathers 33 percent and mothers 23 percent. Such patterns likewise corroborate the con clusions drawn in the second article of this series regarding the marked impact that both family income and parents' education have upon children. NOTE CONCERNING THE SPECIAL CLEVELAND CENSUS OF APRIL 1965 D ata on nonw hite po p u latio n by census tracts as determ in ed by the Sp ecial Cen su s o f April 1965 have recently been re leased. While to tal p o p u latio n o f Cleve lan d decreased by approxim ately 75,000 between 1960 an d 1965, the nonw hite 4 The inverse relationship between areas largely non white and those with a relatively high percent of foreign stock is implicit in the definition of the terms "native born” and "foreign stock'' (see footnote 3, page 14). Almost all Negroes are native born of native parentage, while about 40 percent of the white population of Cuya hoga County is of foreign stock. Digitized for18 FRASER p o p u latio n in creased from 253,108 to 279,352, or 10 percen t. As o f A pril 1965, the nonw hite p o p u latio n o f Cleveland represented 34 p ercen t o f the total, an increase o f 5 percen tage p o in ts. C om p ariso n o f census tract d ata for 1960 an d 1965 reveals th a t in m o st tracts show ing an increase in the nonw hite p o p u latio n , a s u b sta n tia l proportion o f nonw hites h ad also been reported in the 1960 census. However, a few tracts ch an ged d rastically in racia l com position between 1960 an d FEBRUARY 1 9 6 6 1965. For exam ple, o f three tracts which h ad a nonw hite p o p u latio n o f 0.1 percen t or less in I960, one in creased to 84.5 p e r cent in 1965, an oth er to 58.2 percen t, an d a th ird to 57.7 percen t. While the am o u n t o f change clearly was uneven in p a r tic ular areas o f the city, an d the 1960 d ata used in Table I-a generally u n d erstate the proportion o f nonw hites in various school d istricts, it was felt th at relatio n sh ips am on g the several socioeconom ic facto rs used in this article w ould have h ad less validity if 1965 racia l co m p o si tion figures were com pared with 1960 d ata on m edian incom es an d foreign stock. Incom e d ata for un its sm aller than coun ties are n o t available beyond those p u b lish e d in the 1960 Census. However, the R eal Property Inventory o f M etro p o litan Cleveland (a p riv ate research o rgan ization ) h as a tte m p te d to relate n u m ber o f fam ilies by cen sus tracts in 1964 to 1960 m edian fam ily in com es by census tracts, using classification s o f in com e ten th s. The three tracts cited above as having ch an ged d rastically in racia l com position were fo u n d to have rem ain ed in the sam e incom e ten th between 1960 an d 1964. This su g g e sts th a t the gen eral p a tte rn s described in this article are u n likely to have been altered appreciably since 1960. Additional copies of the E C O N O M IC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, Cleveland, Ohio 44101. Permission is granted to reproduce any material in this publication. 19 Fourth Federal Reserve District
@FedFRASER