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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Fredericksburg region should closely watch deficit-reduction talks

This was my business/investing column for the week in today’s FLS:

FREDERICKSBURG-area residents should be closely watching the debate in Washington on cutting the country’s huge deficits. An 18-member, bipartisan panel has been formed to study ways to make massive cuts to federal spending. Chairmen Alan Simpson and Erskine Bowles rolled out some of the early possibilities Wednesday.

While the proposals would affect all communities, the Fredericksburg area and the rest of the Washington region have an especially big stake in the outcome.

Simpson’s and Bowles’ plan involves cutting federal jobs and freezing salaries, as well as slashing defense budgets and the amount spent on military contractors.

That’s not good news for a region like Fredericksburg, in which a large percentage of the work force commutes to Washington, and defense contracting is one of the fastest-growing industries. There was an article in The Wall Street Journal on Friday about Northrop Grumman and other defense contractors getting leaner and focusing on core services in anticipation of the cuts.

Simpson and Bowles’ plan also would increase the gas tax, which would make commuting by car more expensive, and eliminate the home-mortgage tax deduction. The latter could have a negative impact on home building, which was the path to wealth for many Fredericksburg-area businesses during the housing boom (though it’s slowed dramatically in the past few years, leading to much pain for local builders).

The initial proposal also calls for a number of reforms to Social Security, Medicare, taxes and much more that seemingly wouldn’t affect the Fredericksburg area more than other parts.

Of course this week’s preliminary proposal is just that, and it’s sure to meet political resistance from both sides of the aisle (it seems especially hard to believe that the mortgage deduction will be eliminated). The commission’s full report isn’t due until Dec. 1, and even that is basically just an opening step.

But the preliminary results show the extent to which unpleasant cuts and reforms will be necessary to balance the U.S. budget, especially ones close to home.

Stay tuned.

THE NEXT GREAT THING

There was an interesting article in The Wall Street Journal this week about how Google is struggling to retain top employees, who are jumping to Facebook and other newer tech firms.

The computer engineers are seeking the perceived greater challenges and potential rewards that come with startups. Even Facebook, which was formed just six years ago, is seen as too big and stodgy for some.

Investors display similar reactions, always seeking out the next great growth company. That sometimes leads them out of investments in highly profitable companies that aren’t seen as having the same growth prospects.

Google’s stock suffered earlier this year from this trend, though it’s since recovered. Microsoft’s stock, long since given up for dead by most investors as a growth company, is still where it was a decade ago.

Yet both companies are churning out cash, are largely debt-free and are developing new products. They can use their tens of billions to pay dividends, buy back stock, research new products and make strategic acquisitions.

This isn’t a recommendation to buy either stock. But keep in mind that investors, like engineers, sometimes walk away from companies that are still clicking on all cylinders in pursuit of the next big thing.

Permalink: http://news.fredericksburg.com/businessbrowser/2010/11/14/fredericksburg-region-should-closely-watch-deficit-reduction-talks/