Financial Turmoil and Homeland Security

by David Silverberg

The potential impact of Wall Street's meltdown on national response and resilience.

This month's turmoil in the financial markets and the shape of the economy will have an effect on homeland security (HS)--albeit indirectly and over a long period of time.

In the short term, the fall of major Wall Street trading institutions like Bear Stearns or Merrill Lynch and the drying up of credit generally, while affecting some of the companies active in the HS market, should not have a direct impact on any government activity related to any of the HS disciplines like counterterrorism or disaster response.

Over the longer term, however, the effect of the economic slowdown is going to be felt across the board, which is always the case with macroeconomic trends.

It is likely going to be felt in state and local tax receipts, which in turn will have an impact on state, local and tribal responder operations, particularly when it comes to training, hiring and some new equipment purchases. These will likely be postponed, drawn out and in some cases cancelled.The sharp rise in gasoline prices this year has already been felt this way.

We will likely see more of these effects in the 2009 fiscal year and we're seeing it in a larger sense in California where Gov. Arnold Schwarzenegger (R) and the state legislature are currently in the longest budget standoff in California's history. California is always a leading indicator for the nation and if this holds true the next sessions of state legislatures around the country should be contentious ones.

The economic slowdown is also going to affect federal tax receipts but the federal government can simply increase its debt, which it will no doubt do as needed.

It is that US national debt, now running at an estimated $9.6 trillion and increasing at an estimated $1.77 billion per day, that will have the greatest impact over the long term. As foreign creditors hold US debt, the US lattitude for unilateral action, particularly in foreign affairs and more specifically in the War on Terror, will be increasingly constrained.The kind of largely unilateral actions like the invasion of Iraq that the United States could undertake with impunity in 2003, will be progressively less possible or likely as US economic weakness grows. The financial consequences of unilateral US actions, for example against Iran, Sudan or Pakistan, will have to be a higher priority in US policymakers' calculations and the possible disapproval of US creditors, like China, will likely restrict US freedom of action.

On the other hand, HS and the protection of US lives and property against all hazards remains a fundamental function of government and no administration, this year or into the indefinite future, can afford to be caught by surprize by a terrorist attack or an act of Nature. As a result, national vigilance will have to be maintained and HS investment will have to continue. Indeed, as state and local tax revenues fall, the states, locals and tribals will have to look to the federal government and HS grants to make up many of the gaps in their HS coverage and first responder funding. Theoretically, there should continue to be a robust HS grant program, no matter what happens on Wall Street.

The presidential candidates have not fully addressed the debt issue and HS has barely been mentioned in the campaigns so it's unclear how either of them will handle these challenges, which will be waiting on the Oval Office desk no matter who occupies the seat come January.

While reform of congressional earmarking is always promised and a new administration will try to control it, the fact remains that congressional earmarking remains one of the few ways that general tax revenues can be put to specific projects in specific localities. HS earmarking has been particularly popular among members of Congress and is likely to remain so. This will have the effect of making up for some of the fall in state and local revenues.

So the HS economic outlook is mixed. An ebbing tide lowers all boats--but some vessels have to remain shipshape and ready to sail on a moment's notice no matter the tide or weather and homeland security is one of those boats.