Koelemay's Kosmos

Doug Koelemay

Taking Care of Business (2)

Virginians like spending the tax revenues generated by Northern Virginia's booming economy. But if they don't invest in the region's prosperity, the cash cow may run dry.

Correcting an overdependence on federal dollars and underinvestment in boomtown Northern Virginia are twin challenges for the Virginia economy in 2005.

Much attention this time of year is focused on the General Assembly meeting in Richmond through February 26 and rightly so. State government will enjoy double-digit growth in tax revenues in these first months of 2005 compared to 2004. The state budget won’t be nearly as penurious as in recent years past. Unfortunately, these positive developments hide vulnerabilities the Virginia economy faces in the years ahead, including the growing dependence of the state’s economy on federal government spending, and Virginia's continuing under-investment in the Northern Virginia economy.

Dr. Roger Stough of George Mason University’s School of Public Policy discussed the vulnerability of the Northern Virginia economy earlier in January in a presentation to regional leaders. “It is well known to economic development practitioners and theoreticians,” Dr. Stough began, “that economies that are heavily dependent on one of a very few sectors are highly vulnerable to huge cyclical changes, decline and potentially on the downside, death.” His examples ranged from mining towns to transportation hubs that have been overtaken and abandoned, but his comments continued on the Northern Virginia economy that “is much more dependent on the federal sector than any other urban region in the U.S.” This can be dangerous at a time when record budget deficits require spending reductions.

Up to one third of the Greater Northern Virginia economy that includes Washington, D.C. and suburban Maryland depends on federal worker wages and salaries, government benefit transfers and federal contracting. Stough estimates the direct, indirect and induced effects of the federal government account for more than 50 percent of the gross regional product. That dependency grew as defense and homeland security spending boomed at the same time the commercial sector fell into a recession. Now growth in federal spending is projected to decelerate, and it is not clear which sector will lead the boom Virginia needs from Northern Virginia in the years ahead.

That leads to the second serious question: How long can Virginia’s economy rely on Northern Virginia’s economy not only to grow, but to boom? The methodology used by Dr. Stough for the Northern Virginia regional economy, for example, would suggest that the Commonwealth relies even more heavily on Northern Virginia than that region relies on the federal government. Direct, indirect and induced effects of economic activity in Northern Virginia could account for up to 70 percent of Virginia’s gross state product.

The most recent recession illustrated that when Northern Virginia’s economic growth even went normal, state tax revenues stagnated. Since demands for services continued to grow, core programs from education to transportation faced dramatic and immediate shortfalls in revenues needed to sustain them. Not coincidentally, most Virginia political leaders, whether responsible or recalcitrant, see the bitter ink used to write the budget in 2004 spilling over into an election year.

Dr. Stough at George Mason University suggests that developing some sense of urgency is the first step toward understanding and addressing these dependencies before a cyclical change catches Virginia and its economic engine flat-footed. Though Stough projects solid 4.5 percent annual growth for Northern Virginia’s economy over the rest of the decade, he doesn’t necessarily see the explosiveness that marked the late 1990s. That explosiveness requires greater investment from both the private sector and state government to Virginia education and skills training, entrepreneurship, new company formation in emerging fields, such as biotechnology and nanotechnology, intrapreneurship (commercial innovation within existing companies) and rapid growth companies focused on the commercial, not government sector. The strategy recognizes that investments and incentives pull ideas into companies and propel companies into growth companies with explosive job creation potential.

Gov. Mark R. Warner and members of the General Assembly are proposing many new, if discrete economic development initiatives that at least acknowledge the need to strengthen and diversify Virginia’s economy outside of Northern Virginia. For every seemingly positive idea to boost economic development across the state, however, there seems to be purposeful ignorance about the need to diversify the economy in Northern Virginia.

In Virginia Works, for example, the Warner administration proposes to link communities, workforce strategies and existing industries in new ways and to piece together a business attraction superfund if needed. But it did not launch a new strategy for the research and transportation networks needed to support the Northern Virginia economy as it adds over 140,000 new jobs over next three years. An initiative to establish a new state university in Southside has received a lot of attention, but there has been little exploration of the need to accelerate the development of George Mason University in the heart of Virginia’s economic boomtown.

The General Assembly may agree this year to capitalize a technology commercialization loan fund to help turn university ideas into goods and services, but it has not included research and development as major benchmarks in its process of giving state colleges and universities more operating and accounting freedom. And while there is underway an effort to simplify and lower telecommunications taxes, there are only minimal direction and incentives to speed up broadband deployment and tele-work.

Even more contrary, there are impractical and expensive protectionist measures proposed to limit state government purchases to U.S. goods and services made and delivered by Americans at a time when foreign investment in Virginia and exports from Virginia are growing. And many officials still hesitate to consider new incentives to attract venture capital, assist entrepreneurs and seed new company formation in the emerging nanotechnology and biotechnology sectors, though Virginia remains at distinct disadvantage vis-à-vis neighboring states and other high-tech regions.

In the end Roger Stough questions whether the institutional infrastructure to help viable companies grow is strong enough or even exists in all regions in Virginia. Unlike traditional economic development attraction strategies that support those ready to move a business or start one, he observes, state government offers little support to help existing companies create more jobs, increase revenues or become more competitive. Yet, the  enterprises he refers to abstractly as “non-local commercial businesses” are the potential potential growth companies that compete globally and could decide to locate and create jobs anywhere that is attractive.

“How to justify helping viable companies grow is a key question in Virginia’s future,” Stough concludes, “but the answer is the jobs they create, particularly those companies that serve commercial markets, not the federal government.” Therein lies a strategy to begin balancing Northern Virginia’s dependence on federal dollars and Virginia’s dangerous underinvestment in Northern Virginia.

-- January 31, 2005