08/09/2011 04:06 pm ET Updated Oct 09, 2011

How the Debt Ceiling Aftermath Threatens the Bay Area's Recovery

With the current austerity craze dominating the debate in Washington, it's important to prepare ourselves for what significantly less Federal spending might mean to us here in the Bay Area. Never mind that during the debt ceiling dithering, nobody explained to the American public that the debt ceiling itself only deals with paying the bills our nation has already racked up and has nothing to do with future spending levels (that's what the Federal Budget is for). But as some in Congress clearly decided, it was time to put the country through a self-inflicted financial crisis that made even the Greeks laugh at us.

But what is now clear is that Federal spending levels are about to fall precipitously. Over the long term, getting our Federal books balanced is undoubtedly a good idea (here's where the Greeks stop laughing). But in the short term, it may not be the best way to stimulate growth. The evidence that cutting spending drastically grows the economy does not exist. But what does exist is the lesson from an analogous situation in 1937, the last time the country was emerging from a deep financial crisis like this one. Then, the cut spending crowd was just as vocal, forcing Congress to cut back spending, only to push the country off the ledge again into a deep recession. Only the massive government spending of the war effort finally ended the miserable aftermath of the Depression.

Like it or not, federal spending is part of the overall economy. Simply reducing it without a corresponding increase in private-sector demand will shrink the economy, likely plunging us back into recession. I'm no economist, but worryingly, neither are most members of Congress or journalists, so this little Economics 101 lesson is not commonly told.

Though we are in the midst of a technology boom here in the Bay Area, funded though venture capital, IPOs, and acquisitions, Federal spending still funds a sizeable chunk of our economy, from R&D grants to major research universities like Stanford and UC Berkeley to highway and infrastructure funding like the new Bay Bridge and the Transbay Terminal, to enforcement of environmental regulations that keep our air and water clean and our food healthy. Could many of the attributes that make the Bay Area such a unique place in which to live and work be at risk? Could the Federal Government pull the rug out from under one of the only bright spots in the entire U.S. economy?

Recently, the American Society of Civil Engineers (ASCE) released a report giving our public infrastructure a grade C. Our new airport facilities like SFO's T2 propped our scores up a bit, but the individual score for our highway and transportation infrastructure was a D-minus. Modern, efficient, multimodal transportation is one of the keys to keeping our local economy growing, but guess where 50% of California's infrastructure funding comes from? You guessed it. So it's not likely that things are going to improve any time soon.

California already sends more revenue to Washington than it gets back in programs and services, yet Federal funding still makes up about 50% of California's state budget. Draconian cuts at the Federal level will mean even more dire fiscal circumstances for our state. So when Uncle Sam's checkbook slams shut, we'll be in worse shape than ever, a situation not likely to help the Bay Area compete with world-class regions around the world.

While Chinese cities are busy digging mass transit systems below ground, will San Francisco be left with an unfinished Central Subway or a partially completed and bus-only Transbay Terminal? Will High Speed Rail link our state's major cities and make our economy move more efficiently? Or will we still be fogged in at SFO waiting for our flights to LA? More worryingly, will our deteriorating infrastructure make New York or Boston look better to start-ups seeking long-term growth potential? Or worse, will Singapore or Sao Paulo be the home to the next technology boom?