Defense Cuts Could Burst the D.C. Business Bubble
Business + Economy

Defense Cuts Could Burst the D.C. Business Bubble

REUTERS/Larry Downing

For decades, the Washington-area has flourished – and escaped the worst of the recession – thanks to government spending fueled by deficits. Hundreds of billions of dollars set aside for defense, homeland security, and an armada of private contractors transformed the Beltway into the country’s largest cluster of wealth.

The streets are still littered with potholes – rather than paved with gold – but plenty of Manolo Blahniks trod across the asphalt. The Census Bureau reported that seven of the nation’s ten richest counties surround the capital, with Loudon County in Virginia the best-off with a median household income of $119,134.

But the boom times are beginning to fade. The wars in Afghanistan and Iraq are getting wound down, as Congress and the White House grapple over how to ratchet down long-term deficits and spending growth slows under the 2011 Budget Control Act – which contained $917 billion in cuts over the next decade.

“We’re going to have to accelerate the effort for an economic transformation from the public to the private sector,” Democratic Rep. Jim Moran, who represents a prosperous suburban Virginia district, told The Fiscal Times. “Today, 40 percent of Northern Virginia’s economy is directly dependent upon the federal government.”

For every federal procurement dollar, the Virginia-D.C. suburbs get 15 cents, according to data tracked by economists at George Mason University. The four Virginia congressional districts within a relatively short commute of the capital received $45 billion in defense contracts during 2011, according to the Center for Security Policy. These contracts bred wealth, but also vulnerability as efforts to foster other industries were stunted by the easy flow of government money.

RELATED:  Contractors Say Defense Cuts Mean Layoffs and Chaos

Things may be even tougher if the debt ceiling talks fail and the sequestration part of the Budget Control Act takes effect. Defense Secretary Leon Panetta, who is departing the administration, believes the Pentagon won’t be able to escape the additional $50 billion of automatic defense spending cuts scheduled to take place this year under sequestration and has ordered a freeze on civilian hiring. That would cut about 10 percent of the Pentagon’s non-war-fighting budget.

“We have no idea what the hell is going on,” Panetta told reporters last week. “We simply cannot sit back now and not be prepared for the worst.”

In other words, the stunning growth of the past several years has stalled and that has real economic consequences for landlords, coffee shops, and even the Virginia Commonwealth budget. “This state is tied at the hip, the rib and a few other joints with federal spending,” said Stephen Fuller, director of George Mason University’s Center for Regional Analysis.

Few Americans may shed a tear for Northern Virginia or other regions around the Beltway. After all, the tax dollars that have allowed these areas to thrive have come from all 50 states, but the government didn’t spread the wealth beyond the greater metro area. Still, it’s the most prominent example of a national trend that will sideswipe dozens of communities as the government cuts back.

Moran’s 8th congressional district, just across the Potomac River from D.C., has the largest concentration of major defense contractors – including Northrup Grumman, General Dynamics and Boeing – of any district in the country. Defense contract spending in the district totaled $21.1 billion in 2011. Young, educated and well paid ‘millennials’ flocked to the area over the past decade. Their presence spawned micro-breweries and yoga studios, driving up the cost of living. The median age in Moran’s district is 38. Nearly 60 percent of residents have at least a bachelor’s degree. The median home value is $515,300.

But Moran expects that with the exception of cyber security, the defense industry will suffer “death by a thousand cuts.” And over time, Virginia’s economy will have to adjust to a major downturn in production of aircraft, submarines, battle ships and a panoply of sophisticated weapons systems.

“Either it’s substantial retrenchment, or it’s profound restructuring of our industry,” Moran said. “We are going to have to take advantage of what we call the rise of the creative class.”

This challenge is quickly becoming part of the Beltway zeitgeist, thanks in part to a New York Times Magazine article on Sunday examining the phenomenon. Local economic development officials are already exhausted by reporters questioning how they’ll pivot away from federal largesse.

“Every imaginable media source asks the same question: Now that the government is going away or cutting back, what are you going to do to diversify the economy?” said Gerald Gordon, president and CEO of the Economic Development Authority in Fairfax County, at a Friday conference on uncertainty in the D.C. region. “Hang on, the government isn’t going anywhere.”

No one is airlifting the Pentagon edifice out of its perch between Interstate-395 and the Jefferson Davis Highway. The CIA headquarters are still in Langley, and the names of some of the largest military contractors still grace the skyscrapers around Arlington, Va. But even a slight transition will come with a period of pain. The federal government spent about $17,700 per capita in Virginia during fiscal 2010, compared to a national average of $8,800, Michael Cassidy, president and CEO of the Commonwealth Institute, an area think tank.

While suburban D.C .was largely cushioned from the job losses that followed the 2008 financial meltdown, it has suffered dramatically in previous downturns. During the 1990-1991 recession as military cut back after the end of the Cold War, Northern Virginia lost 3.7 percent of its jobs.

“If we think about a loss of employment today that would be comparable, that would mean a loss of about 50,000 jobs in the Northern Virginia region,” Cassidy said. “That’s an eye-popping number for a lot of people to understand what’s at stake.”

The area not only survived that downturn, but grew during the rise of the dot-com era. After the tech bubble burst, it then segued its computer expertise into the homeland security build-up that followed the 9/11 attacks. Flush with federal contracts, private consultants with six-figure salaries began performing the tasks once entrusted to bureaucrats.

In short, Northern Virginia changed. The question, one that also haunts rust belt cities like Detroit, is whether it can change again.