The D.C.-Area Government Bubble

by Veronique de Rugy

As my colleague Matt Mitchell says, “Virginia has a federal bubble, because it is just not sustainable.” This week’s chart illustrates that point. Using data from the U.S. Census Bureau’s “Consolidated Federal Funds Report for Fiscal Year 2010,” it shows the states with the largest and smallest share of their economies fueled by the federal government.

As you can see, the Maryland and Virginia economies have grown increasingly reliant on federal government spending; roughly a third of Virginia’s economy relies upon the federal government. States that receive large defense payouts are among the top recipients of federal funding; one-third of federal expenditures in Alaska, Virginia, and Hawaii are spent on defense. On the other hand, one third of federal funding to Maryland and Connecticut goes to health and human services.

It is interesting to note that the Census data and this chart exclude the District of Columbia, which receives $102,904 per capita in total federal expenditures. Needless to say, when it comes to federal dependency, D.C. eclipses all these other states.

It’s true that D.C., Virginia, and Maryland have suffered less than other states during the recession thanks to their proximity to the federal government. However, to Matt’s point, when and if the funding goes away — when the federal bubble bursts — these states could find themselves in a very uncomfortable situation. The Washington Examiner has a good article illustrating this point this morning:

Federal spending cuts will ravage the Washington-area economy, and businesses are preparing for the worst with hiring freezes and budget cuts of their own, according to local economic experts.

Virginia, Maryland and the District are among the top five jurisdictions where federal procurement dollars were spent in 2010, with $78.9 billion spent in the Washington region last year, according to a report by the Greater Washington Initiative.

But that flow of cash may slow dramatically. [...]

The federal government makes up 12.8 percent of jobs in the region, but the scope of the federal government’s impact extends to nearly every other sector, according to John Stell, economist with PricewaterhouseCoopers. It’s the other 77 percent of job sectors, such as commercial real estate, hotels, airports, and even dining and retail industries, that will all feel the weight of the budget ax, he said.

While spending cuts spare individuals from tax increases, the effect of the supercommittee’s failure won’t be lost on the region’s government contractors, as well as real estate, travel, and hospitality industries in the region that rely on the benefits of a robust federal work force.

The whole thing is here.

Update: Talking about Virginia and Maryland, The Examiner also has a story today about how they are at the top of nation for food-stamp fraud. Here is the list of lost money per every $100 in food-stamp benefits in FY2010:

  1. Connecticut
  2. Maryland
  3. Vermont
  4. Nevada
  5. Virginia

The District is only 21st on this list.

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