Washington Could Ruin Washington

Federal spending cuts will mean fresh economic problems for the Washington, D.C., metro area.

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Washington, D.C., avoided the worst of the economic crisis, but the nation's capital may soon face more economic pain than the rest of the nation. Lawmakers are facing the prospect of deep spending cuts, and though those cuts are on the federal level, they would likely hit the seat of national government the hardest, as the federal government and the industries it supports in the D.C. area are forced to make tough spending and personnel choices.

Spending cuts are coming—that much seems certain. Across-the-board sequestration cuts totaling $1.2 trillion over 10 years are scheduled to kick in starting March 1. That includes $500 billion that will be cut from defense spending and $500 billion from nondefense discretionary spending. Taken together, those potential cuts, declining war spending, and spending caps instituted in the Budget Control Act that established the sequester will cause government spending to decline sharply, by 11 percent over the next two years, according to a recent analysis from Goldman Sachs.

On Capitol Hill, neither side seems willing to give up any ground to avoid sequestration. Democrats want more revenue from closing tax loopholes. Republicans, meanwhile, refuse to budge, hoping for Democrats to give more ground on cutting spending.

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The pain of those cuts would likely disproportionately fall upon the seat of federal government, as federal agencies potentially freeze hiring and lay off workers. The Washington, D.C., region is also home to myriad companies that benefit from proximity to the nation's politicians, such as the defense contractors located in northern Virginia.

A slowdown in government spending could mean fewer jobs, less consumer spending, and slower growth in the nation's capital. This week, these possibilities took a step closer to reality, when the Obama administration warned in a memo to federal agencies that it may have to "consider placing employees on temporary furlough, or taking other personnel actions, should sequestration occur."

"We're not used to slowdowns. We're not used to stagnation," says Jim Dinegar, president and CEO of the Greater Washington Board of Trade, a group that represents big business in the D.C. metro area, which extends into the suburbs in Maryland and Northern Virginia. Still, D.C. workers could find themselves out of their jobs if sequestration happens, he says.

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In part, Dinegar believes that President Obama worsened the local effects of sequestration when he proposed this week to again postpone sequestration cuts, in exchange for a package of short-term spending cuts and tax increases. That could make business owners and executives think differently about their future plans.

"It makes a bad situation somewhat worse because [if I'm a businessman] I'm not hiring people until I know there's a clear path forward," Dinegar says. "I'm not expanding my office space until I know a clear path forward. That's putting a chill on the regional economy."

But Congress's intransigence isn't helping, Dinegar adds, with what he calls its "resignation" that sequestration is coming.

Even if Congress avoids sequestration, other spending cuts are likely, and those would also likely fall disproportionately upon the nation's capital, says one economist.

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"As the entitlements and transfers part of the federal budget is growing, it's going to squeeze out the part of the budget that actually produces something," says Chris Edwards, an economist at the Cato Institute. Because lawmakers are loath to cut entitlements, he says, that means more discretionary cuts. And lots of discretionary spending, be it for federal workers or defense contracts, feeds the Washington, D.C.-area economy.

In fact, it's possible that the D.C. region is already seeing a slowdown, says Stephen Fuller, director of the Center for Regional Analysis at George Mason University.

CORRECTION: An earlier version of this article mistakenly attributed a report to the National Security Network. The report is from the Center for International Policy.