Rough road ahead

Oct. 1, 2004
WASHINGTON — Regardless of the outcome of next month's election, all industries, including advanced technology, face a rough road in the coming few years.

WASHINGTON — Regardless of the outcome of next month's election, all industries, including advanced technology, face a rough road in the coming few years.

The culprit? The growing federal budget deficit. On Sept. 7, the Congressional Budget Office (CBO) projected a deficit of $422 billion, or 3.6 percent of the gross domestic product, for the current fiscal year.

The CBO expects the situation to continue to worsen. Even if a Bush II or a Kerry administration winds down the military operations in Afghanistan and Iraq, CBO is still projecting a cumulative federal budget deficit of $1.3 trillion over the next 10 years. Without a curtailment, the projection is for $2.3 trillion.

The ultimate worst-case scenario is for the tax cuts initiated by President Bush to be made permanent, in which case CBO projects a cumulative deficit of more than $4 trillion over the coming decade.

Moreover, the Labor Department reported on Sept. 3 that 144,000 new jobs were created in August, a substantial improvement over June and July, but still far short of what will be needed to return the economy to its previous robust status.

Where this economic malaise particularly hurts advanced-technology industries is that the inevitable cutbacks in federal spending will tend to be concentrated in those programs designed to enhance the national economic infrastructure. At the top of this hit list will be research and development.

As Editor-in-Chief John Keller has noted, R&D is already strapped for funds by the increased portion of the defense budget that has to be devoted to bullets, food, and fuel to sustain the military operations. This situation can only get worse.

It probably doesn't matter who is elected president on Nov. 2. The momentum has reached a point where it is immune to any change in the White House. Moreover, the Republicans are almost certain to retain their majority in the House of Representatives, and the Democrats have only a slim chance of taking control of the Senate. Given the tendency of American voters to favor the incumbent president, particularly when a war is under way, what you have been seeing for the past four years is likely to be what you're going to get for the next four.

I had my own shocking first-hand view of this economic meltdown over the Labor Day weekend, when I attended my 50th high school class reunion in Paw Paw, Ill. I had been there five years earlier and commented afterward in this magazine about the economic renaissance that I found. I was unprepared for the complete turnaround in just five years. Thriving businesses were replaced by boarded-up stores (including ours), and "for sale" signs had sprouted in front of deteriorating houses.

It's risky to extrapolate a national macro economic trend on the basis of a weekend in tiny (population 850) Paw Paw, but this little village in the heart of the Rust Belt may be a canary in a coal mine. When the canary croaks, the miners are in big trouble.

A more useful exercise may be to examine the underlying causes of this meltdown. My choice for the guilty party is a failure to upgrade the infrastructure and thus lure new industry. At the top of this list is the school system. That local system has been playing catch-up after years of neglect. A classmate of mine said he was paying $4,800 a year in local property taxes on what is probably one of the best houses in town. That level of expenditure is obviously not sustainable.

Nor at the broader federal level are current expenditures sustainable. The cost of the war in Iraq to date has been estimated at $150 billion, and the war is draining the federal treasury of $5 billion a month. Something is going to have to give.

We've been here before. The nation's space program was off to an excellent start with the Apollo moon landing in 1969, but the financial drain of the war in Vietnam left few available funds for future space ventures or other activities that would have contributed to the national scientific and technical pool.

One might draw hope from President Bush's latest iteration of his "compassionate conservatism": many small new initiatives such as increasing job training, putting more money into community colleges, and extending health care for poor children. Taken together, these initiatives offer at least some hope that the infrastructure is getting the kind of attention it deserves. It remains to be seen, however, whether there will be sufficient follow-up after the election.

One encouraging sign is that the package is a change from the government-is-the-problem mindset of the Reagan years. Government may still be the problem, but it also represents an opportunity.

We seem to be overdue for a political realignment to achieve a national consensus on these economic issues. This is what Kevin Phillips, a Republican strategist in the Nixon White House, was proposing in his 1969 book, "The Emerging Republican Majority." The Republicans have since achieved the national majority that Phillips predicted, but I don't see the consensus on infrastructure issues.

I also find it odd that nobody except me seems to be paying any attention to the fact that this year is the 150th anniversary of the founding of the Republican Party — in 1854 in a Presbyterian Church in Ripon, Wis. The driving issue of that time, slavery, was admittedly more excruciating than today's economic problems. The Republican Party combined what were known as the "Conscience Whigs" (including an obscure Illinois politician named Abraham Lincoln) and the so-called Free-Soil Democrats in the North who parted company with their Southern compatriots over the slavery issue.

Today, there is bipartisan support for the kind of infrastructure enhancements that Lincoln and the other Whigs were championing 150 years ago. Yet this issue has taken a back seat to more urgent matters, such as the efforts to curb terrorism. I don't see this as being a zero-sum game. Today's R&D investments will play a key role in tackling tomorrow's problems.

Until a consensus can be put together, however, all industries are going to have to hunker down to ride out the current economic malaise. I still have troubling visions of that canary in Paw Paw, Ill.

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