Companies, academics say budget cuts threaten U.S. competitiveness

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Mandatory U.S. budget cuts known as sequestration are resulting in job losses across the country and threaten to undermine U.S. competitiveness in the global economy, industry executives and academics said on Monday, urging Congress to reverse the cuts.

Wes Bush, chief executive of Northrop Grumman Corp (NOC), one of the biggest U.S. weapons makers, said his company had already reduced its workforce by 19 percent in recent years, and more cuts were likely unless U.S. lawmakers ended the across-the-board cuts required under sequestration.

Bush, who is also the chairman of the Aerospace Industries Association, said arms makers realized that the end of the wars in Iraq and Afghanistan meant U.S. military spending would decline and that weapons needed to become more affordable.

But he said the additional cuts now facing the Pentagon and other government agencies were reducing funding for critical research and development programs, which could hurt the U.S. economy and threaten national security in years to come.

The Pentagon and its suppliers are bracing for $500 billion in additional sequestration budget cuts over the decade beginning in fiscal 2013, on top of $487 billion in reductions to spending that were already planned.

Top U.S. military officers have warned lawmakers that the cuts in defense spending have eroded America's preparedness for war, and industry executives say they will also take a toll on future national security programs.

Bush said China and other countries were continuing to increase their investment in research and development of new technologies even as U.S. spending declined.

"Other countries are seizing the moment, they are seizing this opportunity," he told a news conference. "This is a global competition and if we stay on this track, we're going to lose."

Ian Steff, vice president of the Semiconductor Industry Association, said his industry invested about $32 billion, or 20 percent of its revenues, in research and development (R&D) last year, even as revenues declined, but the drop in federal funding would eventually take a toll on the sector.

He said R&D spending as a percentage of economic output had remained constant in the United States over the past 10 years, but it had surged by 90 percent in China and 50 percent in South Korea over the same time period.

Hunter Rawlings, president of the Association of American Universities, told the news conference that economists agreed that over half of U.S. economic growth in the past few decades was based on innovation, but future technology development would be stunted unless the cuts were reversed.

Holding up his iPhone, Rawlings said, "This is a great Apple product ... but none - none - of the technological inventions that made this product possible were made by Apple. They came out of government-sponsored research."

Rawlings said he was particularly troubled by a National Science Foundation study that showed university spending on all R&D declined in constant dollars in 2012 for the first time since 1974.

"This research ... is the lifeblood of innovation, and innovation is the lifeblood of our economy, of advances in health care and in the nation's security," Rawlings said.

The budget cuts were already leading to layoffs across the country, and the effect would likely get worse next year since the Pentagon and other government agencies had largely used up funding from past years that helped offset this year's cuts.

The automatic spending cuts went into effect earlier this year after Republicans and Democrats failed to agree on U.S. budget priorities. Democrats have sought to raise revenues from the closure of tax breaks for the wealthy and large corporations while Republicans have refused to consider tax hikes and want to pay for any easing of the sequester with spending cuts on federal benefits programs.

Many people at the news conference called for a balanced solution that included aspects of both approaches.

More than 100 industry executives signed a letter sent Monday by the Aerospace Industries Association to President Obama and key lawmakers in which they underscored their concerns about the budget cuts and their negative effect on jobs, competitiveness and future growth.

They said defense R&D accounted for about 0.25 percent of U.S. gross domestic product after sequestration, down from 1 percent in the 1960s.

"Investment in the defense industrial base is not a spigot that can be turned on and off without consequence. Research can take years to yield results and key skills can take a lifetime to develop," they said. "Sequestration will fundamentally alter the defense industry's ability to respond to future demands."

Smaller companies that provide components for big weapons makers will be especially hard hit if the spending cuts continued, Dorothy Coleman, vice president of the National Association of Manufacturers, told the new conference.

"We're talking here about the nation's future economic development being hurt by a policy that is not only short-sighted, but totally wrong-headed," she said.

(Reporting by Andrea Shalal-Esa; Editing by Ken Wills)