Federal cutbacks a challenge for Md. — not a cause for panic

Our view: State's dependence on government jobs and contracts is likely to decline, but we have the building blocks to diversify the economy

October 01, 2011

Maryland's economy is heavily dependent on government spending, and the increasing pressure in Washington to rein in the nation's deficits is definitely cause for worry. According to a new report from the Census Bureau, Maryland's share of federal spending effectively remained flat between fiscal 2009 and fiscal 2010, posting so small a gain that it failed even to keep up with the modest rate of inflation. That's bad news, but it's hardly cause for panic.

Maryland took in $96 billion in total federal payments in 2009. That includes everything from Medicare benefits to defense contracts. Last year, that figure edged up to $96.3 billion, about $1.4 billion less than we would have needed just to keep pace with inflation. Given the efforts of Congress' "super committee" to reduce the deficit — and the urging of Republicans and even President Barack Obama to make much greater progress on the issue than the committee is charged with — there's reason to fear that last year's effective decline in spending is the prelude to much worse things to come. Considering that $96.3 billion is almost 31 percent of Maryland's gross state product, the fifth-largest share in the nation, any decline in federal spending could have a major impact here.

But some context is important. The level of federal spending Maryland saw in 2009 and 2010 represented a huge increase over previous years; even adjusting for inflation, federal spending in the state jumped by 24 percent, or almost $19 billion, from 2008-2009, the result of a huge infusion of stimulus funds, among other things. In general, federal spending in Maryland has been on a major upswing since 2001, thanks in part to the role Maryland-based agencies, such as the National Security Agency, play in post-Sept. 11 security.

What that means is that while Maryland has always been dependent on federal government spending, it has only very recently become quite this dependent. If Congress were to vote tomorrow to balance the fiscal 2012 budget through cuts alone, and if those cuts were applied equally to all programs, Maryland's share of federal spending would drop to a level we saw as recently as 2007. That's not welcome, but it's not doomsday either.

Moreover, there's reason to believe that Maryland will fare somewhat better in federal budget cutting than other states. About $41 billion of Maryland's take comes from federal workers' salaries and procurement contracts. That's money that could be particularly vulnerable to cutbacks. However, it's important to remember that the growth in federal jobs in Maryland in recent years has been driven not so much by the good fortune of our proximity to Washington but by the highly educated workforce we have, and by the presence of agencies, like the NSA, that are increasingly crucial to our national security. That's why Maryland was a big net winner in the Defense Department's last base realignment and closure process, and it's why the state is becoming a center for the government's new cybersecurity efforts. That's not to say that federal spending cuts won't hurt Maryland, just that the blow may be tempered.

Even so, the leveling off and likely decline in federal spending here means that government is not going to be the kind of growth industry in Maryland that it has been during the last decade, and the state needs to take steps to foster entrepreneurship and job growth here.

State leaders are cognizant of that fact and have worked in the last few years to leverage our competitive advantages, both in emerging fields such as biotechnology and in traditional strengths, such as the Port of Baltimore, which will soon be better equipped than nearly all of its competitors to handle the large cargo ships due to be steaming through the Panama Canal when its expansion is complete in 2014. Gov. Martin O'Malley made good use of a trade mission to East Asia this year and is planning another to India. And the University System of Maryland has made it a strategic goal to foster greater commercialization of the research its faculty produces. Those efforts may not bear immediate fruit, but they are the kinds of things we need to do to further diversify the state's economy.

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