Do Fiscal Cliff Issues Continue to Threaten Long-Term U.S. Stability?

While Congress was able to come to a last-minute fiscal cliff deal -- really a "past-minute" deal that was backdated -- there are still serious concerns facing both the national and global economies. Aside from the fact that the debt ceiling is now looming large on the horizon and government spending has not really been addressed, many of the fiscal cliff issues have simply been pushed a few months down the road. The sequestration cuts have been delayed by two additional months, but given the track record lawmakers have had recently, it is difficult to be optimistic about the prospect of a comprehensive solution, even with the additional time. It is this concern, as well as the potential impact of these cuts, that has led some commentators to tie fiscal cliff issues to a lack of long-term stability for the U.S. economy.

The future is in jeopardy
Sequestration refers to previously agreed-upon budget cuts that will automatically take effect as a part of a bipartisan initiative. The idea behind the initiative was that by creating a severe penalty in the form of the sequestration cuts, Congress would be forced to reach a resolution; shockingly, Congress underestimated its own capacity for pettiness. As a part of the recent fiscal cliff deal, these cuts were delayed for an additional two months.

In a recent article, the dean of the Thayer School of Engineering at Dartmouth, Joseph J. Helble, investigated the dangers of the fiscal cliff on the long-term position of the U.S.: "Allowing sequestration to occur, imposing deep cuts on an already strained science and engineering enterprise, is the surest way to cede our technological leadership. It is the surest way to fail." Mr. Helble points out that sequestration cuts would have resulted in an 8.4% reduction in R&D spending.

Sequestration cuts would have compounded an already alarming trend in reduced R&D spending: Even without the cuts, these expenditures account for less than 2% of the budget, down from 2.7% for non-defense research in 1980 and 3.5% in 1970. In even more basic terms, the U.S. is not creating enough engineers to allow us to remain competitive over the long term. Unless we want math and science jobs to all look for greener pastures, it will become increasingly important to address this issue.

Critical trends
To put the risk of losing math and science jobs into even greater perspective, it is useful to briefly consider some of the biggest recent trends in a variety of fields. Advances in technology are currently taking place in diverse areas of research and development. These include medicine, energy research, and obviously the technology arena itself. As IBM (NYSE: IBM  ) explains, "Every day, we create 2.5 quintillion bytes of data -- so much that 90% of the data in the world today has been created in the last two years alone." Big data research is likely to be as critical to the next wave of technology as cloud computing has been -- and cloud computing is just gaining practical applications through companies like Amazon and Google.

Medicine continues to march forward, with companies like Merck (NYSE: MRK  ) shaking off the expiration of critical patent protection to pave the way forward. In spite of the loss of its critical Singulair asthma treatment patent, the company continues to boast an impressive pipeline, including 15 drugs in phase 3 trials. Energy research is taking all sorts of unexpected turns as well, ranging from the advances in shale gas and oil to wind power. Virginia's Department of Mines, Minerals and Energy, for example, has recently submitted a proposal to the U.S. Department of the Interior's Bureau of Ocean Energy Management to conduct research not only collecting data on wind velocities and waves in wind energy areas, but also exploring the impact of wind power on bird and bat activities.

Facing the future
While delaying the catastrophic events that were associated with going over the fiscal cliff is a good first step, as Mr. Helble explains, this is not sufficient:

We need these engineers to tackle the enormous challenges we face in energy, the environment, communications, and health care... These challenges won't disappear because we face a 'fiscal cliff.' Solving them requires sustained investment over many years, the kind of investment that many Asian countries, Israel, and the European Union continue to make. R&D spending growth has outpaced the U.S. in those places during the past decade.

In order to remain competitive, the U.S. needs to continue to spend money in the areas that have helped us to be competitive to date.

The problem, in my opinion, is not just one of dollars but of ideology. At a time when there is a need for serious belt-tightening in the government, it is hard to imagine an easy argument for spending more money on "potential." A great deal of R&D money never leads to its intended result, but this is still the path to innovation. When the amount that is spent on things that are "needed" today butts up against those things that we may develop in the future, it must be a value judgment that leads us to protect the future, even at some cost to the present. In terms of putting your money to work, the decisions being made over the next two months are likely to impact not only U.S. financial dominance, but U.S. technology dominance as well.