Flood of Wartime Spending Keeps Nation’s Capital Flush With Capital

Tourism here was devastated by the Sept. 11 attacks, flattened to Depression-era levels. The anthrax scare made matters worse, as news accounts painted a picture of a city under siege. The only airport--a feared terrorist target--closed temporarily and even now is operating far below capacity.

Buffeted by a storm of terrorist-related problems, the nation’s capital would seem to be ripe for economic meltdown.

Yet the Washington area is one of the few major metropolitan regions in the country that is not in recession. In fact, thanks to federal spending in wartime, it has proved to be remarkably resilient.

“Follow the money,” said Stephen S. Fuller, an economist at George Mason University in Virginia, whose reports on regional forecasts are baseline reading for local governments. Even before the war on terrorism, federal spending in the Washington area was expected to increase to about $80 billion this year, up from $77 billion in 2001. Now, spending in 2002 is expected to reach at least $85 million.

Evidence of a wartime boom abounds. The office vacancy rate in the District of Columbia has fallen to 5.2%, about half the national average. Area home prices are rising, forecast to post the nation’s highest increase--7.2%--this year. And the defense consultants and information technology companies, whose skyscrapers line the highway from Washington Dulles International Airport into town, are on a hiring binge.

TRW Inc., a $3-billion company based in Reston, Va., is so short-staffed it is contacting former employees and retirees--especially those with security clearances--asking them to return.

Historically, war has always been good for the economy of the nation’s capital.

During the Civil War, poet Walt Whitman was one of a flood of office-seekers arriving in town (he lamented that the overflow had boosted the price of a beer to 38 cents). During World War II, an influx of government jobs produced a housing shortage so severe that President Franklin D. Roosevelt authorized temporary housing on the National Mall for the so-called Government Girls who came to work as typists and clerks while the men went off to fight.

The current war--despite its unique multi-front mobilization against a terrorist network rather than a sovereign nation--shows every sign of continuing the pattern. In November, the Washington region posted a 12-month gain of 40,800 new jobs--the highest number in the nation, according to the Labor Department. During the same period, other communities were hurting; the Los Angeles metropolitan area, for example, lost 11,500 jobs.

But if war has generally conferred an economic bounce locally, this one is different, dramatized by a profound redefinition of federal spending. This boom is driven not so much by the government creating jobs as by the private sector minting them with federal dollars. Thanks to President Reagan’s campaigns for privatization in the 1980s and President Clinton’s efforts to reinvent government in the 1990s, both political parties have embraced the principle that the private sector is more efficient, flexible and innovative than the sluggish federal bureaucracy.

The numbers tell the story. The federal work force here peaked in June 1993 at nearly 400,000 workers. By 2000, 66,000 of those jobs were eliminated. While spending on federal procurement--the purchase of goods and services--increased nearly 16% nationwide during the same period, in the Washington area it increased nearly 68%.

“There’s been a remarkable increase in federal procurement of services, and a decrease in the purchase of goods,” Fuller said.

The New Economy, federal style, is more technology-driven, less hardware-based. And Washington, which has no manufacturing base or hometown industry to call its own, no baseball team or strong local government, and few local heroes except transplants such as Michael Jordan imported from Chicago, is uniquely situated to benefit.

Mark Zandi, chief economist at economy.com, a consulting firm in West Chester, Pa., said federal spending is “flowing into the Washington, D.C., economy” in part because of the area’s diversity. This war requires defense spending and appropriations for research in such areas as bioterrorism, tapping the resources not only of the technology firms in suburban Virginia but also the medical research companies clustered around the National Institutes of Health in Bethesda, Md.

Renewed public confidence in government, coupled with the dot-com collapse that left many young entrepreneurs eager for stable employment, has also increased the interest in the kind of jobs Washington is now generating.

“A year ago, there was nothing sexy about being a government contractor,” said Charlene Wheeless, spokeswoman for DynCorp, a $1.8-billion-a-year, employee-owned consulting firm based in Reston that earns 98% of its revenue from government contracts. “Today, we’re very sexy.”

DynCorp runs telecommunication systems for the Environmental Protection Agency and information technology services for the FBI. It maintains the Army’s helicopter training fleet in Alabama and manages a vaccine production program for the Department of Health and Human Services. In short, Wheeless said, DynCorp serves 42 federal agencies, and “we want to be close to our customer.”

The need to be closer to Uncle Sam is also rippling through the local commercial real estate market. The U.S. Naval Sea Systems Command recently left its headquarters in Crystal City, Va., for the Navy Yards in southeast Washington. Several private contractors combined to lease 1.5 million square feet of new office space outside the Navy Yard gates.

And the Sept. 11 devastation at the Pentagon forced the government to look for replacement offices for displaced workers. Within a week of the attacks, the General Services Administration had gobbled up 1 million square feet of office space in northern Virginia.

Phillip Thomas, president of the Greater Washington Commercial Assn. of Realtors, notes that the war effort is boosting the amount of government leasing. The National Reconnaissance Office in Chantilly, Va., he says, will need 1 million more square feet within the next four years and the National Institutes of Health budget is likewise expected to double within the next five years. But the nature of government leasing is also changing. Instead of renting space in several offices, for instance, the State Department recently leased an entire building in Rosslyn, Va.--about 350,000 square feet--to better control security.

One of the few blights on the region’s economic picture is the tourism industry. Nationally, hotel occupancy rates fell by more than 20% in the weeks after the attacks. In Washington, occupancy rates fell more than 70% below the previous year’s tally, and the revenue charged per room fell by as much as 50%. Many in the industry--bellhops, waitresses, cleaning staff--were laid off for a month or more, leaving 4,000 jobless at one time or another.

“New York has managed to define a discrete area of city, ground zero, as affected by tragedy,” said John Boardman, executive secretary of the Hotel & Restaurant Employees Union Local 25. “In Washington, we’re perceived as having the whole place full of men in bio-suits.”

The comparison rankles local officials, who are angry that federal officials have closed access to some of the nation’s most popular and symbolic sites.

When Washington’s high tourist season arrives this spring, local officials hope that the White House and FBI tours have resumed and that Reagan airport, now running at less than 60% of capacity, is back to full strength. Already, the White House has announced it will reopen to limited tours for schoolchildren.

“When revival of the economy is dependent on people spending, you have got to lead by example,” said Rep. Eleanor Holmes Norton, the district’s nonvoting congresswoman, who has been lobbying the White House to open its doors.

To help in the effort, the cast of TV’s “West Wing” recently taped public service ads urging viewers to “be inspired” by a trip to Washington. And private appeals are going out to school districts, many of which, under pressure from parents, have banned visits to the city.

But the tourism industry represents the smallest of five sectors that fuel the local economy. Generally, the Washington region had the strongest growth rate--2.5%--and had the lowest unemployment rate--3.5%--among major U.S. metropolitan areas in November.

For 2002, projections conducted for the Wall Street Journal by Case Shiller Weiss, a Cambridge, Mass., research firm, show that the median real estate price for homes in the Washington area will rise faster than any other region in the country. And projections show that while the nation’s economy will grow by 2% in 2002, Washington’s will grow twice as fast.

“The market is fabulous,” said Christine Ricketts of Pardoe ERA in Alexandria, Va. “I wrote three [home sale] contracts the first week after Sept. 11. It’s like everybody is telling Osama bin Laden to stick it in his ear.”

Aside from boosting housing prices, war traditionally has changed the character of Washington, helping it grow from a sleepy swamp to a vibrant government center.

“By 1943, Washington was pretty much like any other boomtown during the war,” wrote historian Doris Kearns Goodwin in “No Ordinary Time,” her book about the home front during World War II. “Its population had nearly doubled since 1940, decent housing was impossible to find, uniforms were everywhere, gasoline was scarce, buses were overcrowded and living costs were high.”

Many who came to Washington were on loan to the government from the private sector for $1 a year. Now, it seems, the private sector is not lending employees but minting them, thanks in part to federal spending at a time of war.