Good Reasons Behind Government Deficit

By James Flanigan

Feb. 3, 2002 12 AM PT

President Bush on Monday will attempt to deliver a big boost to the economy, as well as return the United States to years of deficits, when he presents to Congress a proposed budget of more than $2.1 trillion in expenditures for fiscal 2003, which begins Oct. 1.

The White House projects another deficit to follow in fiscal 2004, and further deficits are likely until later in the decade. The federal budget will run a $106-billion deficit in the current year, fiscal 2002.

But that’s not a bad thing, economists say. The government is pumping money into the economy, expanding industry at a time when the business community is not investing with the vigor it showed in the 1990s. And American consumers, taken in the aggregate, are too burdened by debt to lift and propel the giant U.S. economy.

So government will provide the engine, and because the economy is lagging today, higher government spending is not likely to boost interest rates in the next year or two.

Moreover, there are reasons to spend, says economist William Rhodes of Rhodes Analytics, a Boston-based research firm for institutional investors. “We’ve suffered a serious, nefarious attack by a crew of maniacs who want to kill us en masse, so it behooves us to defend ourselves and that requires a lot of borrowing and spending,” Rhodes says.

Defense spending would expand under the proposal to $379 billion, from about $331 billion in the current year, as the Pentagon embarks on a decade-long program of buying aircraft and ships and all sorts of missile-guiding electronic gear, not to mention raising the pay of about 1.5 million members of the armed forces.

The Air Force’s F-22, made by Lockheed Martin Corp., and Joint Strike Fighter, by Lockheed and Northrop Grumman Corp., and the Navy’s F/A-18 fighter, made by Boeing Co., will be ordered in great numbers over the decade.

A long-range military strategy, in which the U.S. cannot count on having overseas bases, requires cargo and troop carriers. So there will be years of orders for C-130 planes by Lockheed and C-17 planes by Boeing. Ships will be needed, from shipbuilding subsidiaries of General Dynamics Corp. and Northrop Grumman.

And a new tanker plane will be needed to replace the half-century-old KC-135, which was a model for the Boeing 707 commercial jet. “The Air Force wants the Boeing 767 to replace it,” says Loren Thompson, director of Lexington Institute, a research company in Arlington, Va.

Federal outlays for homeland security, a new budget category born of the terrors of Sept. 11, would rise to $38 billion under Bush’s proposal. And that level of government commitment is spurring the development of a whole new industry in the United States.

The traditional security industry consists of 12,000 small guard service firms and a few large skilled companies, including Wackenhut Corp. of Palm Beach, Fla.; Securitas of Sweden, which in recent years has acquired the Pinkerton and Burns agencies in the U.S.; and Inter-Con Security Systems, a privately owned company in Pasadena that protects U.S. embassies and many government buildings in the U.S.

But the industry is being transformed by the events of Sept. 11, says Neil Martou, vice president of business development for Inter-Con. All companies and institutions, particularly electric utilities, water treatment firms and shippers of chemicals and other materials, recognize a need for more sophisticated security services.

The security industry will be adding jobs in the next few years--guards, inspectors, consultants on security matters. “Security is moving from a routine company function to a concern of the chief executive,” Martou says. His company has received hundreds of requests for guidance since Sept. 11.

Spurred by government spending, “new private capital will invest in this industry,” Martou says. New systems for identification and property tracking will emerge. Traditional alarm companies, such as the Sensormatic and ADT subsidiaries of Tyco International Ltd., will have to scurry to keep up with changing technology. Science Applications International Corp., a large employee-owned firm in San Diego, is just completing development of a new product that uses ultrasound techniques for identification.

Budget Thinking Not This Expansive Since ‘80s

The biotechnology and pharmaceutical industries will receive funds to work on defenses against bioterrorism. The response to terrorism’s challenge will be broad. “Homeland security will make America not only stronger but in many ways better,” Bush said in the State of the Union message. “Knowledge gained from bioterrorism research will improve public health.”

Bush pledged to expand spending on education and health and aid to unemployed workers. Budget thinking has not been so expansive since the 1980s, when President Reagan raised defense spending dramatically and launched a period of big deficits in the federal budget.

The 1980s had some parallels to today. The U.S. had a large trade deficit then and has one today. The twin deficits--budget and trade--were a source of concern then because other countries were growing and developing--Japan in particular--and the U.S. was concerned with its own competitiveness.

But the comparisons end there. Today the world economy practically revolves around the U.S. Japan remains in economic doldrums that have lasted 10 years. Europe, including once-dynamic Germany, has its own problems of spurring economic growth.

So the U.S. economy remains the dominant economic engine. Washington’s new deficit spending will help spur the world economy too, mainly by increasing U.S. ability to import goods and services from other economies.

This probably will widen the trade deficit. However, those other economies, from Asia to Europe to Latin America, will continue to invest in U.S. government and corporate securities, as they currently do at the rate of more than $1 billion a day.

Deficit Spending Risky but Necessary

Deficits in the federal budget and in the trade account are likely to persist for some years. Is there a risk to that? Sure, continued government deficits lead to higher interest rates and a crowding out of private business as the economy recovers. Down the road, the U.S. economy may have to go through a budget-tightening process similar to that of the early ‘90s.

But in the present circumstances, from the standpoint both of national defense and the economy, deficit spending is not a bad thing.

And it’s a good idea also to recall other developments of the 1980s that may see parallels to this decade. Partly because of the great increase in defense related research in the ‘80s, that decade saw the development of microprocessor technology and unprecedented advances in communications technology. When the ‘80s ended with the fall of the Berlin Wall, the flowering of technology that was the 1990s dawned.

A decade is too far to look ahead today. But in the next year or two, big federal budgets will spur new surprises for the U.S.--and world--economy.

James Flanigan can be reached at jim.flanigan@latimes.com.

The Big Money

The federal budget proposal for 2003 that President Bush will send to Congress on Monday will total more than $2.1 trillion. Here are some of the larger expenditures (In billions).

Category 2003 2002

Social Security $470 $451

National defense 379 331

Medicare 263 249

Income security* 177 169

Medicaid 152 143

Education, training & social services 67 65

Homeland security 38 20

International affairs** 24 23

Science, space & technology 22 21

*food stamps, family support, earned income tax credit, unemployment insurance.

**State Department, trade promotion, foreign aid