Sequester punctures area economy’s government-dependent bubble

Recent American history is strewn with examples of regional economies that grew dangerously dependent on a single industry: Los Angeles with aerospace in the early 1990s, Northern California with tech at the turn of the millennium, Detroit with auto manufacturing and Las Vegas with home building in the mid-2000s. When shocks rattled those industries, those regions bled jobs, and their economies sputtered.

None of those areas relied as much on a single source for jobs and growth as the Washington region does on federal government spending today.

This is the economic vulnerability exposed by the budget cuts brought on by sequestration. A decade of expanding federal largess has shielded the metro area from the worst effects of the financial crisis and the slow recovery. It also left the region, in investment terms, with a precariously unbalanced portfolio — heavily concentrated in a single stock, which is now falling.

“This is our spending bubble,” said Stephen Fuller, director of the Center for Regional Analysis at George Mason University. “It’s really distorted our economy.”

That sort of distortion is exactly what economic development officials usually try to avoid. Balanced growth is more stable and less prone to disruptions from technological advancement, international trade or, in this case, Congress.

But economists say there’s reason to believe that Washington’s coming disruption won’t be as bad over the long run as what other regions have experienced. For one thing, the federal spending slowdown doesn’t appear likely to slam the economy as hard as the Great Recession slammed housing or the tech crash hurt Silicon Valley. It’s looking like a slowdown, not a meltdown.

Also, the nature of Washington’s government-fueled growth — particularly the highly educated workers it brought to the area — should help it rebound and diversify in coming years. That’s because highly skilled workers tend to be more adaptable in the labor market when they lose their jobs, able to transition fairly easily into new industries or take the initiative to start innovative companies of their own.

In the near term, however, most economists expect the sequester cuts to hit the regional economy harder than almost anywhere else in the country. Fuller projects federal payrolls in the region will fall to $37.9 billion in 2017 from $42.4 billion in 2012, a 10 percent drop even without adjusting for inflation. He says that contracting spending dropped 8 percent from 2010 to 2012 and will fall an additional 5 percent this year and next year because of sequestration. The District, Maryland and Virginia will combine to lose about 450,000 jobs as a direct and indirect result of the cuts, he estimates.

Growth and job creation will both be “very slow” in 2013 in the area, in large part because of sequestration, said James Bohn­aker, an associate economist at Moody’s Analytics. They should pick up again in coming years, he added, but for the near future, “the Washington area is definitely going to be a laggard compared to the national economy.”

That’s the price of the Washington area’s economy having grown uniquely addicted to government.

Fuller calculates that four of every 10 dollars in the regional economy flow directly from the federal government in the form of federal salaries, contracting for defense or civilian work or transfer payments such as Medicare and Social Security. If you account for how much of that money supports other sectors of the economy, such as entertainment, Fuller says, the overall impact of federal spending is even larger.

It’s a recent jump: From 1995 to 2008, a little more than three of every 10 dollars flowed straight from federal spending. But the recession knocked out a lot of non-government economic activity. That left federal spending, which ballooned after the Sept. 11, 2001, terrorist attacks — contracting alone rose from about $30 billion in 2000 to more than $80 billion in 2010 — as a much larger leg of the area’s economy.

In an interview with The Washington Post’s Karen Tumulty, former senator Alan Simpson (R-Wyo.) shares his feelings on the sequester cuts. (The Washington Post)

Few other regions come close to that level of dependency on one industry. Of the 3.1 million people employed in the Washington area, nearly 450,000 work for the federal government or the military, according to a Brookings Institution analysis of workforce data from Moody’s. That’s 14 percent. None of the other 10 largest metro areas in the country have more than 3 percent federal employment.

More than a third of the District of Columbia’s economic output in 2009 was generated by government, according to the Census Bureau. No state in the union owes such a large share of its economy to government — or, for that matter, to any other classification of industry that the Census Bureau tracks.

In contrast, aerospace jobs accounted for less than 10 percent of Los Angeles County’s employment when defense cutbacks gutted the industry there in the early 1990s. Information technology jobs made up less than 15 percent of the San Francisco Bay area’s workforce when the tech bubble burst. At pre-recession peaks, manufacturing represented about a fifth of Detroit’s economic output, and real estate and construction combined for about a quarter of the output in Las ­Vegas.

The decline of each of those industries coincided with national recessions. That doesn’t appear to be the case for Washington, which should help mitigate the effects of federal spending cuts on the region.

Other reasons the local economy might not implode, despite its overdependence: Government spending is slowing, not cratering. And spending cuts will be more likely to throw highly educated federal workers and government contractors out of work. Higher-skilled workers are more likely to find new jobs quickly, according to Labor Department statistics. As they spread through the private sector, creating new businesses or helping to staff them, they should help the economy diversify.

Together, those factors make the D.C. area’s reliance on government “a relatively less dangerous addiction than others,” said Mark Muro, director of policy at the Metropolitan Policy Program at Brookings. He also said the region should have seen the need to branch out economically years ago.

“Diversification can never be sold until it’s too late,” Muro said. “Complexity breeds resilience. It’s true in natural systems, and it’s true in economics.”

Local leaders have made some attempts to encourage diversification in the past few decades. Officials at the Fairfax County Economic Development Authority recruited oil giant Mobil to locate its headquarters in Northern Virginia in the early 1980s, only to see the successor company, Exxon Mobil, announce last year that it would move 2,100 employees there to Houston. More recently, the county has lured Volkswagen and Hilton Worldwide to open offices.

Gerald L. Gordon, president and chief executive of the development authority, said he is looking toward the cultivation of new industries such as alternative fuels research, cybersecurity and “personalized medicine,” which aims to scour patients’ genetic codes for clues about what conditions they may be vulnerable to. Companies in those industries will need skilled information technology workers, he said, making them good possible homes for downsized IT contract workers.

“Our strengths in information technology are going to serve us well,” Gordon said. “I see that as our superhighway going forward.”

Jim Tankersley is the editor of Storyline, where he explains complex public policies and illuminates their human impact.
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