Homeland Security--a Burden and a Boon

The federal government is launching a new industry called homeland security, with proposed spending of $38 billion, even as economists debate whether such expenditure will drag or spur the economy.

About 2% of the federal budget for fiscal 2003 is devoted to increased spending on police and fire department equipment and training, hiring air marshals and equipping airports, on anti-biological terror programs and knitting up the nation with uniform communications systems. Washington will be writing thousands of contracts for private industry.

These new expenditures will have a broad effect over the next five years. Of course, a homeland defense industry already is operating, thanks to $22 billion of extra spending in the current fiscal year as a direct result of the Sept. 11 terror attacks.

But with more detailed plans for programs in the fiscal year beginning Oct. 1, the homeland security business promises to go big time. Prospects are good for traditional security firms, but also for providers of communications and computing systems, face-recognition devices, vaccines and medicines, sensors and all sorts of defense paraphernalia and software.

However, the new industry imposes costs on the economy.

Delays for security checks have changed patterns in business travel and tourism since Sept. 11 and hurt the airlines and related industries. Manufacturing and retail industries are seeing delays in the transportation of goods and added inventory costs as a consequence of Sept. 11.

And incidents like the Fourth of July shootings in the Tom Bradley International Terminal at Los Angeles International Airport may lead to further restrictions on airport access and air travel.

Even the benefits of new budget expenditures are questioned.

“Resources spent on homeland defense are being diverted from other, possibly higher productivity purposes,” says David Resler, chief economist of Nomura Securities International.

If the nation didn’t have to spend on security, there might be more money available to invest in producing consumer goods and services to improve the civilian economy, Resler says, repeating an argument frequently made in economic circles.

But others argue that expenditures made for military purposes can change the economy in unpredictable but beneficial ways.

Jack Dangermond, founder and chairman of Environmental Systems Research Institute Inc. (ESRI), a Redlands-based company that provides maps of utility lines, water systems and other strategic operations to government agencies, sees a new national communications network in the same light as the Interstate Highway System, which was launched in 1954 as the National Defense Highway.

“That system ... was built for defense. But it has proved a great boon to commerce,” Dangermond notes.

A broad range of industries will be affected by increases in federal expenditure on security.

“New budget spending will start programs that will grow over the next five years,” predicts Don Dickson, head of Market Access International, an Arlington, Va.-based consulting firm on government contracts and publisher of Homeland Defense Journal, an online newsletter.

The traditional security industry was growing 7% a year before Sept. 11; now it is expanding at an annual pace of 12% to 15%. Large international companies have been acquiring smaller ones as a fragmented industry consolidates. Securitas of Sweden acquired Pinkerton’s agency in 1999 and Burns detective agency in 2000.

Wackenhut Corp., a Palm Beach, Fla.-based security firm with $2.8 billion in sales, agreed just before Sept. 11 to be acquired by Group 4 Falck of Copenhagen. The deal, which has been completed, created a giant firm with more than $5 billion in annual revenue.

Security is going far beyond night watchman services.

“Chief executives now take responsibility for company security, rather than lower-level departments,” says Enrique Hernandez Jr., chairman of Inter-Con Security Systems, a Pasadena-based firm that protects State Department facilities and private property in the U.S. and abroad. Its revenue is approaching $1 billion a year.

These top executives are asking how best to protect their premises and employees, and are willing to spend on new computer and communications systems to do so, says Neil Martou, vice president of business development for Inter-Con.

Security demands will spawn new technologies and applications in many fields. Proposed federal spending of $3.5 billion to equip and train police and fire departments will bring increased business to Motorola Inc. and other government suppliers.

“Motorola is all over homeland security; that’s its original business, “ Dickson says.

Motorola got its start in 1928 supplying car radios to Chicago’s police department. Today, the company has more than $5 billion in sales--15% of its annual total-- supplying communications systems to governments here and abroad.

The pharmaceutical industry will be pushed to develop vaccines and new medicines by the $5.9 billion in spending the government proposes for research on anti-biological terror systems. The National Institutes of Health will receive $3.5 billion more for research grants, bringing its total budget to $27 billion.

Defense contractors such as Raytheon Co., Lockheed Martin Corp. and General Dynamics Corp. will adapt sophisticated sensors, thermal imaging equipment and other military devices to civilian use.

Information industry giants such as IBM Corp., Oracle Corp. and Microsoft Corp. will help supply integrated national communications systems linking city, state and federal agencies.

Small to medium-size companies will get a lot of contracts too. For example, the Geomet Technologies subsidiary of Versar Inc., a Springfield, Va., engineering firm with $40 million in sales, has just been granted a $3.5-million U.S Department of Agriculture contract to design a safe system for destroying crops or foodstuffs damaged in a bio-terror attack.

Visionics Corp., a developer of face-recognition software that had $30 million in sales last year, already is designated for an undisclosed amount of new contracts from the FBI.

Visionics, based in Minnetonka, Minn., has just merged with Identix Inc., a producer of fingerprint recognition software that had $81 million in sales last year and is moving its headquarters from Los Gatos, Calif., to Minnetonka.

And ESRI makes computerized maps that can show in real time the effect of disruption or contamination on a city’s electrical grid or street and water systems. The company is confident of new business in homeland security, Dangermond says. The privately held firm has $500 million in annual revenue.

ESRI’s New York offices are blocks away from ground zero, and the company helped restore New York’s municipal emergency systems after Sept. 11.

As a new industry, homeland security will take many forms. But would the economy be better off without all this new business being done? The question can be only theoretical, because real terror attacks killed more than 3,000 people on Sept. 11 and imposed new security costs on the economy.

The fact that the heightened need for security will spur new developments that expand the gross domestic product also are part of the real consequences of Sept. 11.

It is no consolation that other countries live with the need for homeland security precautions. Britain, Israel, most of Europe, Asia, Latin America and Africa have known terrorist attacks, and the costs of guarding against them impinge on their economies.

Some economists maintain that new charges for security are ones we should have been paying all along, that threats to our civilization always were there but we didn’t take account of them.

Debatable points aside, however, the facts are that homeland security is imposing new costs on our economy, and paying them will give rise to a diverse new industry.

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