How the US budget steers US business. As Washington giveth and taketh away, industries wax and wane
Washington — Just as Christmas ends, the world's biggest buyer is writing out its own wish list. The Reagan administration today releases its fiscal 1988 budget, which tells Congress where it wants to spend money and where it wants to cut back.
This agenda is of no little interest to corporate America. Though the process is often slow and undramatic, industries rise and fall with those government spending priorities - whether it is stringing a highway system across the country, putting a man on the moon, or providing health care for the poor and elderly.
But the fiscal 1988 budget, if it gets through Congress somewhat intact, will likely create more corporate losers than winners.
The losers will include farmers and farm equipment companies. White House budget director James C. Miller III recently warned that agriculture programs will be changed in the '88 budget to eliminate incentives to overproduce.
Veterans, too, will find their benefits pared, which will, in turn, affect hospitals and their suppliers. But more worrisome for hospitals is that the government is expected to propose cutting health care spending by $90 billion over the next five years. And some doctors may find it far less lucrative to practice medicine if the government can change the way it reimburses physicians to resemble the way it reimburses hospitals. The winners are ...
This budget's winners will probably include high-tech firms, especially those involved in laser and space technology for the Strategic Defense Initiative. Undoubtedly, however, military contractors will find the 3 percent increase in defense spending a disappointment.
Small and medium-sized companies may find more contracts (garbage collection, security services to supplement a reduced police force, etc.) thrown their way as all levels of government try to ``privatize'' services in the name of cost cutting. And nursing homes, health care companies that tend to patients outside of the hospital, as well as private, price-competitive health plans will likely continue their raoud growth.
Construction companies may get a reprieve from a long dry spell, since the administration appears to be succumbing to congressional pressure to spend more on cleaning the nation's waterways. (Congress may also push through a federal highway program.) This will mark a welcome turnaround for construction companies, which have watched contracts shrink as government pared spending over the last six years.
Today's budget is also a signpost for the evolving role of government spending in shaping the private sector - a role that some see as more remote but no less important, one that others see as destructive to America's international competitiveness.
``For the last 20 years, government budget policy has been shifting away from infrastructure and capital spending toward transfer payments,'' says Robert Crandall, senior fellow at the Brookings Institution in Washington. The result is a more indirect link between what the government buys and the industries it stimulates - or allows to wither from lack of spending.
In the past, the government played a major, if not solo, role in industries that later became the economy's Broadway hits. The early growth of the computer and electronics industries, for example, can be traced to World War II, which launched a search for new weapons systems and electronic ways to control them.
The government poured money into schools such as Massachusetts Institute of Technology and its spinoff research laboratories. Boston's Route 128 and California's Silicon Valley - areas that until recently have pulsated with growth through recesssion and boom - owe their prosperity in large part to the Pentagon.
And to NASA. The rush to put a man on the moon in the 1950s and '60s, spearheaded by the National Aeronautics and Space Administration (NASA), accelerated the computer boom. Apollo and other programs not only paid for development of integrated circuits (the brains of the computer) but along with the Pentagon were the primary buyers of this technology.
The government also lit a fire under the aerospace industry. The first commercial jet (the 707) was derived from the Air Force KC-135 tanker technology. And much of the technology used in the 747 and DC-10 was developed when Boeing and McDonnell Douglas were vying to build the jumbo cargo carrier for the government. (Lockheed won.) A new role for Uncle Sam
But some think the government's influence on high technology will become more remote.
``Although Uncle Sam used to be not only the inventor but also the primary user of new technologies, that's no longer going to be the case,'' says Philip Webre at the Congressional Budget Office. ``The civilian markets now are so mature that they're not conservative; they chew up new technology very quickly.''
Others worry about the government's hand in the marketplace. ``Through our pattern of government expenditures, we are shaping our industrial enterprises in ways that may detract from their capacity to compete effectively in international markets,'' says Robert Leone, a lecturer in public policy at Harvard's Kennedy School of Government.
The problem, he says, is that the government is a price shopper ($500 coffee pots not withstanding). This has been especially true during the Reagan administration, which has cut back most programs except defense. The focus on cost ``discourages competition on the basis of service, quality, and technological innovation,'' Mr. Leone says. It is these qualities, especially technological innovation, that give American firms their competitive edge, he says. Victims of changing priorities
Whether military-related spending has been good or bad for America, it has at least been constant. Other industries, however, have not fared so well with the ebb and flow of priorities.
In the 1930s and '40s, for example, public programs and research made US farmers the most productive and technologically advanced in the world. But government price supports made some farmers inefficient and the effort to reduce subsidies has been squeezing many out of business today. This year's budget will accelerate that trend.
Now agriculture has been upstaged by high-technology in the government's priority list, as underlined by this year's budget.
Construction companies have also weathered the boom-bust scenario. Between 1956 and '66, the government built the nation's highway system. It was happy days for the makers of asphalt.
Soon after, however, the lucrative contracts began to dry up, although this was mitigated by the environmental movement of the '70s, which benefited waste-management companies and firms manufacturing equipment for meeting emission regualtions.
Since 1980, however, the government has cut its outlays for infrastructure - highways, bridges, dams, water treatment plants, etc. - by 30 percent (after inflation). But this year things are looking up, with a highway and clean water act on the horizon. Reshaping health care
Perhaps the most dramatic example of an industry remolded by government spending - not just how much it spends, but the way in which it spends it - is in health care. As the dollars spent on Medicaid and Medicare ballooned in the 1960s and '70s, health care became an enormously profitable business. Private companies rushed into the market, setting up for-profit hospitals, private health plans such as health maintenance organizations and preferred provider organizations.
The Reagan administration clamped down in 1983, when it switched from paying hospitals for the cost of the treatment, plus a profit margin, to primarily paying a set fee for a particular type of treatment, regardless of the hospital's cost. That held down the growth of Medicare expenditures on hospital care, but it has let some hospitals make record profits.
``It's created incentives to develop cost-effective technologies,'' like says Marion Ein Lewin, a health policy expert with the American Enterprise Institute. Hospitals, for example, now use machines that allow kidney stones to be removed without an operation.
It has also spawned an ancillary market: Hospitals are quicker to release patients - and this has been a boon to home health care services (visiting nurses, for example) and other outpatient facilities.
Still, it is the federal budget deficit - not federal spending - that probably has the most impact on American business.
Marver Bernstein, an economics professor at Georgetown University, points out that the deficit turns logic on its head. In more solvent times a spendthrift government would benefit industry by generating products, adding jobs, and supporting technological innovation. But, overall, business worries about the impact of the huge structural budget deficit on the nation's economy and supports a cutback in government spending to decrease the deficit.
``If a budget reduction tends to raise confidence in the business community,'' Professor Bernstein says, ``then that's likely to have a positive impact on business growth and economic activity.''