Beyond the Great Recession: Preparing Virginia for Expected Cuts in Federal Spending

Virginia, along with the rest of the country, is clawing its way out of a major recession that began in late 2007 following the bursting of the nationwide housing bubble. Despite the looming prospect of a reduction in federal spending and many simmering problems around the world, the state's economy today is well situated for a healthier future, according to Bill Shobe, an economist at the University of Virginia. But achieving and maintaining Virginia's economic health will require thoughtful guidance by state policymakers because Virginia faces a federal spending cut that could be greater as a share of its total economy than in almost any other state. Shobe warns, "It is now likely that both the military and nonmilitary components of federal spending will not just decelerate, but will fall in absolute terms." Shobe's team at the Cooper Center used the REMI econometric model to study the economic effects of a sudden 30 percent drop in federal government employment in Virginia. Following a difficult period of adjustment, there is a silver lining; labor becomes relatively more valuable to the economy, so as the adjustment unfolds, the workers who remain have a lower rate of unemployment and higher purchasing power than before the drop in federal jobs. Results like these reinforce the need for careful attention to how the economy adjusts to changes in public policy. According to Shobe, "Government attention to education, entrepreneurship and the efficient provision of public goods will do considerably more for citizens of the state than any direct efforts to change the balance of trade with other states and with the world. The ultimate goal should be to make your human capital and your civic institutions so attractive that firms will be willing to pay a bonus to locate here rather than vice versa."
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The Virginia News Letter