Five weeks before another round of deep Defense Department cuts is set to go into effect absent action from Congress, budget analysts and elected leaders throughout the region are renewing concerns about the Washington area’s reliance on Pentagon spending and the need to advance private sector growth in its place.
No state is more reliant on defense spending than Virginia, where it affects nearly 13 percent of the commonwealth’s economic output, tops nationwide, and provides the basis for 11 percent of jobs, third in the nation.
D.C. and Maryland also rank in the top 10 in Defense Department spending among states, with 6.9 percent and 5.8 percent of their output relying on defense respectively, according to a department report released last year.
In some ways Virginia is still reeling from automatic spending cuts known as sequestration that took place in 2013. The state’s gross domestic product had zero growth in 2014, according to a recent Department of Commerce report, third worst among states.
Though the unemployment rate remains below the national average, office parks in Northern Virginia have emptied while defense contractors consolidated or closed locations, and developers of some new buildings have had trouble finding companies willing to sign deals.
According to the Defense Department research, things are likely to worsen over the next four years. From 2010 to 2012, Virginia experienced $9.8 billion in defense cuts, with the vast majority of losses in Northern Virginia. Direct defense spending in the state is projected to drop from $64 billion this year to under $62 billion in 2019.
Virginia’s elected leaders are sounding the alarm, with Senators Timothy M. Kaine (D) and Mark R. Warner (D) repeatedly calling for budget legislation to replace the sequester.
Kaine took to the Senate floor in June, before Congress left for vacation, to call for a budget deal similar to the one struck by both parties in 2013. That legislation, Kaine said, “absorbed sequesters cuts, but it also found targeted ways to provide relief both to defense and nondefense accounts and that’s what we should be doing.”
Congress did not act then, and Kaine embarked last week on a five-day economic tour between Norfolk and Virginia Beach, joining Warner to renew their concerns before the Hampton Roads Chamber of Commerce Aug. 17. If Congress does not act before Oct. 1, tens of billions of dollars in new defense cuts will take place as part of the sequester.
“If we have the return of sequestration, it’s going to be even worse than it was a couple of years ago, because every agency, particularly the Defense Department, has cleared out most of their coffers,” Warner told the group, according to WVEC (ABC). “So that’s why they’ve got to get rid of sequestration and those negotiations need to be starting now, and not wait until the end of September.”
Even as Virginia’s leaders plead for short-term relief from Congress, there are increased calls for the commonwealth to wean itself off Pentagon spending so its economy will no longer remain so reliant on military growth.
Gov. Terry McAulliffe told the Metropolitan Council of Governments last month that he had no idea if sequestration would take place this year or not but that the state needed to pivot away from its reliance on defense spending to private sector industries and areas where military spending is expected to increase long-term, such as cybersecurity.
Mark Muro, a senior fellow at the Brookings Institution, said that if another round of sequestration takes place it will keep the region on an economic “downramp” but he was not optimistic that Congress would be able to avoid it.
He said the long-term concerns could be more problematic because the Washington region has relied on military spending to provide “stealth industrial policy” that supported innovation and new business in an array of other industries.
“A huge portion of the region’s advanced industries presence owes to 50 years of accumulated technology capabilities, purchasing, and human capital development through the military industrial complex,” he said in an e-mail. “That’s where ultimately all of our biotech, software, and now cyber and big analytics capacities come from.”
Last week, former Federal Reserve Chairman Ben Bernanke, speaking at a forum hosted by Brookings, said that some of the past cuts amounted to “a self-inflicted wound” because they were made to aid the economy but had something of the opposite effect. He warned that further reductions weren’t likely to help either.
“These cuts were made for economic reasons but in fact they mostly went in the wrong direction in the sense that they were a mild negative in an economy that was trying to recover,” he said.
Long-term, Bernanke said a reduction in military research and development spending could also have a negative effect on innovations that can be commercialized and lead to private sector growth.
One example he raised was the way military laser research led to advances in later surgery and the creation of bar codes and DVDs.
“There are plenty of examples where military technology has been extremely important for private sector growth and technology,” said Bernanke, now a scholar at Brookings.
Follow Jonathan O’Connell on Twitter: @oconnellpostbiz