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.

Relying on a federal paycheck

The Washington region ranks fourth nationwide in percent of workers in federal jobs. See full graphic

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

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.”