There was a time when Marylanders could feel quite good about their economy. Even during the most recent economic downturn and its immediate sloppy aftermath, Marylanders could take some comfort knowing that its economy was somewhat insulated from the worst possible economic outcomes by a still expanding federal government.

According to the Office of Management and Budget, 1987 represented the first year that federal government outlays came to exceed $1 trillion, when they equaled approximately $1.004 trillion. By 2011, total federal spending totaled a whopping $3.603 trillion. Not adjusting for inflation, this represents a more than 250% expansion in federal spending in 24 years. In inflation-adjusted terms, growth is approaching 100%.

The profound expansion of the federal government can be viewed in other ways. In 1940, on the eve of World War II, federal government outlays equaled 9.6% of gross domestic product (GDP). This proportion surged during the war, of course, rising to 42.7% by 1944.

But normalcy set in after the war, and by 1965, federal government outlays represented 16.6% of GDP. Thereafter, the federal government’s share of total economic output generally rose, expanding to nearly 23% by 1983 during a period associated with the Ronald Reagan-Tip O’Neill era deficits. By 1983 (a World Series championship year for the Baltimore Orioles), the federal deficit as a fraction of GDP stood at 5.9%.

With economic improvement, as well as concerted efforts to reform America’s tax code and close the budget deficit, the federal budget deficit, as a share of the GDP, began to shrink thereafter. By the late ’90s, America was actually running budget surpluses; by 2000, the federal budget’s surplus, as a share of GDP, was 3.2%. The following year was also a year of surplus.

But America has been running at deficits ever since. By 2009, a weak economy, coupled with fiscal efforts to contain the reach of the global financial crisis, had produced an annual federal budget deficit equaling 9.8%. By that year, federal government outlays as a share of GDP reached 24.4%, the highest federal share since 1945.

Not surprisingly, economic factors in the Baltimore-Washington Corridor were among the primary beneficiaries. While much of the balance of the nation was left to wrestle with de-industrialization and globalization, many businesses in the Corridor could focus on deal flow, emanating from a variety of rapidly growing federal agencies, including the National Institutes of Health, the Center for Medicare and Medicaid Services, the U.S. Department of Defense, the National Security Agency and many others.

Episodically, deal flow became even more active during periods of conflict associated with either nation states or non-nation factors, coupled with the implementation of the latest round of base realignment.

Since 2011, however, federal spending dynamics have shifted dramatically. This has been driven by a combination of a perceived need to curb the size of annual federal budget deficits and by electoral outcomes. Republicans gained around 60 seats in the 2010 mid-term elections, with Tea Party-endorsed candidates accounting for 28 of those gains, according to data compiled by Bloomberg. Many of these Tea Partiers came into office with an expressed desire to shrink the federal government’s reach.

The Budget Control Act of 2011 (BCA) followed shortly thereafter. The act gave us both the failed Supercommittee and sequestration. Because the Supercommittee failed to agree to a $1.2 trillion deficit reduction package by Nov. 23, 2011, sequestration was triggered, with the cuts beginning during the first quarter of 2013.

Federal outlays declined in both real and nominal terms in both 2012 and 2013. By 2013, federal government outlays as a share of GDP had slipped below 21%. Accordingly, the Corridor’s economic environment has become substantially more challenging, which has impacted the entire state economy. The Free State ranked 46th out of 50 states in terms of job growth during the past calendar year, for which data exists (October 2013 to October 2014), 47th if one includes the District of Columbia. Maryland’s unemployment rate, which remained below the national average for more than 16 years (between April 1998 and August 2014) is now above the national rate of unemployment.

The state’s unemployment rate re-established a 6%-plus level earlier this year and stands at 6% at this writing, two-tenths of a percentage point above the national rate. Not only has the quantity of jobs being added been subpar, so too has the quality of jobs.

While job losses among federal contractors have hammered away at the state’s economy, the consumer-led economic recovery has helped to produce positions in lower-wage service categories. During the past three years, Maryland’s largest growth sector has been leisure and hospitality (24,900 new jobs), a segment virtually synonymous with lower-wage, seasonal and part-time positions.

Maryland’s economy has been weakening even as the national economy has gained momentum. Civilian technology, energy and industrial production segments have become particularly active, translating into surging natural gas production, rising factor output and initial public offerings at companies like Facebook and Twitter.

For the most part, Maryland has not been a key factor in these types of growing economic activity.

B2B or Not B2B

Given their high levels of educational attainment and associated versatility, many companies within the Corridor have found ways to sustain themselves. Many of these companies innovate and diffuse new technological products and processes — the key is to find a new set of customers, whether private entities in the United States or abroad.

The retreat of federal government spending actually creates new opportunities for Corridor business leaders to focus more intently on exploiting global markets, rather than simply looking to the next set of federal procurements.

The hope is that as these companies reposition themselves to more fully participate in a global economy, rather than circling the Beltway. Maryland’s business climate will have to improve in order to persuade more rapidly growing businesses to remain here.

The Corridor’s counties generally continue to enjoy Maryland’s lowest unemployment rates, suggesting that part of the much-needed transition may have already begun to occur.

Anirban Basu is chairman and CEO of Baltimore-based Sage Policy Group. He can be contacted at 410-522-7243 and [email protected].