Sequestration Impact on Arizona

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It’s been a couple of months since the across-the-board federal budget cuts known as “sequestration” started. Barry Broome, President and CEO of the Greater Phoenix Economic Council, says the cuts could be worse for Arizona than the housing bubble. Broome will talk about the impacts of the sequester.

Ted Simons: It's been a couple of months since across the board federal budget cuts began. How much has the Sequester impacted Arizona, and what can the state expect if budget cuts continue? Joining us now is Barry Broome, president and CEO of the greater Phoenix economic council. Barry, always a pleasure. Good to have you here. What have we seen, what are the early impacts so far of Sequestration?
Barry Broome: Probably the most obvious impacts of sequestration are what's happening to the high-tech supply chain in the greater Phoenix region. Which is where most of our research engineering talent is sitting once you get beyond Intel, Raytheon, Honeywell, and Boeing. One-fourth of those companies are already starting to contract about 50% of the companies are stagnant. So the big concern that we have on these defense cuts and these cuts on sequestration is, what is being cut that won't come back?

Ted Simons: Again, you mentioned the big one, Intel and Honeywell and Raytheon and such, it's those smaller businesses that are so hard to recreate. Correct?

Barry Broome: Right. The good news for all of us in Arizona, I think Raytheon and Boeing and Honeywell have thought through in a very complicated way what is going to happen with these defense cuts, their investment grade global companies, they plan for market changes, five-seven years in advance. But there are over 114 companies in the valley that have over 30,000 jobs alone that are sitting with 100-200 employees, many of them research engineers, high-level technicians that don't have the wherewithal or ability to plan for these cuts. They respond to servicing and providing value-added services to the defense industry. When those supply chains get fractured and damaged, you can't really recreate them because it takes years and years for these small teams of companies to work together to provide services that are necessary to the big prime contractors to the defense industry.

Ted Simons: Did you see some of this happening even before sequestration began because of the threat of these cuts?

Barry Broome: Well, obviously the interesting thing about the supply in the greater Phoenix market, we found two or three things very interesting. One, it was very high end talent supply chain. So our original thought was, well, if the major prime contractors are providing subwork to another company, that must be work that is inferior on the technical level. Who would they trust with the technical expertise of their products? We found a lot of these companies in the valley are providing the technical expertise to the Apache helicopter, or the predator in California. We also found that the small companies were very tied to California and Texas economies. Even though they were in the valley, the idea that they were downwind so to speak from Boeing and Honeywell, weren't necessarily true. So having all these defense contractors getting prepared for this, the minute the policy was enacted, which I think is almost two years ago, has started to have that effect, but as these cuts come down, these small compelling companies are going to be irreparably damaged by these cuts and you won't be able to put these companies back together. When the country needs them during national defense or when we want to shift towards a more technology or export industry play.

Ted Simons: I've heard it described as not so much a cliff regarding sequestration, but a more rolling effect. Does that make sense to you?

Barry Broome: It does. That's actually a worse case scenario for a market. So if you take a market like ours, and you took semi conductor, for instance, a lot of people know or forget that Motorola drove the entire technology position of this market from the early 1940s clear up into the 1990s. That company for all intent and purposes is gone. The jobs were absorbed by construction retail and growth jobs. What was lost was, you know, high-end, intellectually property driven, high-end engineering and research engineering jobs. We can track the personal income loss in the valley back to the wind-down of Motorola. It's an effect that's very hard for people to see, but it's a very deep symptom that sometime stays in the economy today. The valley to this day is still suffering economically from the loss of Motorola. So these slow cuts tend to be hard for the eye to see top line performance things like revenue to government and things like that, can be replaced with a volume of jobs. What can't be replaced is knowledge and competency. So these sequestration cuts, they're indiscriminate, they will cut the good with the bad, these are heavy cuts that are consistent over a 10 year period and really creates what I call slow death to the innovation capabilities of the defense industries in the United States.

Ted Simons: And how dependent is Arizona on defense? Are we more so other regions, which would mean we would get hit more so than other areas?

Barry Broome: That becomes the question. So this is -- These are classic mistakes if you will, that people make. Because our defense assets are so wonderful, and so capable, we feel like they're safe. But at the same time, when you're making cuts of this magnitude, you're going to go where the larger markets are. If you're cutting a budget, if you're a state government, that was one of the conversations we have with our state government about cuts in education and health care, their response was, that's where the money is at. And right now we're the fifth biggest defense market in the United States of America. So when these cuts come down, we're going to be impacted even though we have tremendous confidence and capabilities, we have to guard against that. To give you the number that probably we need to pay the most attention to, Arizona's 75% of Arizona's research and development position as a state about 5.2 billion dollars on annual research and development activity comes out of the defense sector for or five companies predominantly. So if you cut those companies' capabilities, if you just cut it by 20%, it would be the equivalent of wiping out our entire higher education community from an innovation standpoint.

Ted Simons: Yet let's get to philosophy here, because we'll have people who call in, write in, who say these are government created jobs and they are built on borrowed money, and it's not the free market at its most pristine and at its best and most effective. They see government jobs here, they say this is not the kind of stable work Arizona should be looking for. How do you respond to that?

Barry Broome: First off, the defense industry built the entire export position in Arizona. Motorola came here as a manufacturing company to supply defense contractors. Licensed the chip out of bell labs and built what we know as Motorola. Most of our software development and electronics capability here in the valley that made us such a great economic powerhouse all comes out of defense. The internet, most medical development technologies, most imaging technologies, most computer and electronics technologies are all byproduct of defense industries. So even when the defense industries curtail a little bit, their ability to commercialize, or civilianize those technologies has led to most of the great things going on in the U.S. economy. So you have the center of national defense on the line, you have Arizona's number one export industry on the line, you have 75% of our R and D position, and you have the industry that created all the other compelling industries here. So there's a lot on the line, and we need to be on the balls of our feet and fighting for these jobs. I want to thank Senator John McCain for leading the effort in Arizona, Mayor Stanton has done a great job with the city of Phoenix. We can't be complacent just because it's a long fight.

Ted Simons: You've been quoted as saying this could be worse for Arizona than the housing crisis was. You're still standing by that?

Barry Broome: It will be worse than the housing crisis. Here's why -- In two years, the housing crisis was a temporary suffering. So in two years what's going to happen to home values, they're going to be stable and pretty much back to the high point. We're going to replace to 50,00 construction jobs that we lost. The fees and the economic that are -- Income that were spun into our governments are going to be recollected. The housing markets are already coming back year to year, in some cases 35%. We've never recovered from an export industry position from the loss of Motorola, which is now going on 12 or 13 years. And R and D positions are so difficult to recreate, that if we lose our R and D position in this industry, it will make the long-term economic well-being of Arizona will be far more damaged by that than the real estate crisis of the last five years.

Ted Simons: All right. Barry, good to have you here. Thanks for joining us.

Barry Broome: Thank you.

Barry Broome:President and CEO, Greater Phoenix Economic Council;

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