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Beyond the boom of younger workers flooding in, Washington is grappling with longer-term economic challenges

The Washington, D.C. economy is preparing for the day when younger workers break up with it.

The fading of a Millennial-infused population boom in the nation’s capital that carried through the Obama years, combined with Trump’s efforts to slash the federal workforce, are but two factors that have the local economy locked in a painful transition from skyrocketing growth reliant largely on its federal patron to a more diversified and self-sustaining market.

The 68-square-mile city could be in for some more growing pains as the Trump administration has directed agencies, effective Thursday, to hire only in line with levels proposed in the president’s “skinny budget” submitted last month.

Meanwhile, businesses, economists and policy makers are grappling with bigger challenges for D.C.:

1. Population and the Millennial boom

From 1990 to 2000, D.C. was alone against the 50 states and Puerto Rico to see a decline in population, of 5.7 percent. In the decade following, Michigan earned that dubious title while Washington made up ground with a 5.2 percent increase. And in the more than half-decade since, the city enjoyed a 12.6 percent boom while the country saw population growth of around 4.5 percent.

The outlook depends on Millennials, who flocked to the city as a haven for jobs after the last financial crash. While the city remains attractive for its job and income prospects relative to other urban hot spots, expensive childcare could prompt outflows of those younger residents, according to a March report on millennials in D.C. by American University and commissioned by Kaiser Permanente.

For Neil Albert, president and executive director of the DowntownDC Business Improvement District, the city’s still doing just fine in this respect.

“We have strong assumptions of population growth, and the population continues to grow at a pretty healthy clip,” at around 800-900 residents a month, he said.

2. Homelessness and housing prices

Beneath the lush opportunities for young people and other middle- and higher-income job holders in the city is a still-plentiful army of homelessness, helping to show why the city remains challenged by rampant inequality. Washington ranked worst in homelessness among 32 cities whose mayors are members of the U.S. Conference of Mayors Task Force on Hunger and Homelessness, according to the group’s December report.

For homeless people to climb into an earnings bracket that will allow them to afford their own housing, the stock of low-income homes will have to increase.

“The elephant in the room is there’s no place for people to live — there’s not low-cost opportunities for people to live when they are trying to come out of homelessness,” said David Whitehead, housing program organizer at Greater Greater Washington, an advocacy group and community blog.

Rob Wohl, tenant organizer at the Latino Economic Development Center, said the city is putting forth “unprecedented” spending on affordable housing development, but is “still losing more low-cost housing than we’re building.”

An index of housing prices in Washington has increased nearly 30 percent to 217.12 since the post-recession trough in April 2009, exceeding the 26 percent rise nationally, according to S&P CoreLogic Case-Shiller data. Renting is also incredibly pricey, with the median monthly bill for a two-bedroom apartment listed at $3,050, the fourth-most expensive of the 100 largest cities in the country, Apartment List data show.

The soaring housing bills have pushed many longtime Washington residents out to the suburbs, though they also threaten the viability of city living for the middle class.

“I’d be worried that not investing enough in affordable housing could damage the ability to have a diverse economy and draw in the kinds of young people who could stay for the long term,” said Ed Lazere, executive director of the D.C. Fiscal Policy Institute.

3. Federal share of jobs

For decades, the economic engine of the city has relied on what Yesim Taylor calls “Fortune One,” or the government, rather than any Fortune 500 firm. Taylor, the founder and director of the D.C. Policy Center and former director of fiscal and legislative analysis for the city’s government, laments that the region isn’t diversified enough and has failed to attract high-value companies to house themselves alongside the federal government.

While the government’s share of jobs in the region has ebbed, it’s still quite high, according to Jeannette Chapman, deputy director of the Fuller Institute at George Mason University. In the immediate two years following sequestration, ending in March 2016, government jobs increased just 1.8 percent while all jobs in the Washington metropolitan area grew 3.5 percent, according to tallies by the Institute, which studies the city’s economy.

Chapman said she’s also concerned that most of the newly created jobs have been low-skilled, “resident-serving” jobs such as retail that simply respond to population growth and don’t build the economy for the longer term. Advanced industry jobs grew just 1.9 percent during that two-year period.

Even as the tech industry in the region has been “really, really, really, really good at delivering innovation in the services model,” the sector hasn’t yet adjusted as it should to a more product-oriented approach, said Jonathan Aberman, professor of entrepreneurship at the University of Maryland’s Smith School of Business.

“What you have is a very clear picture of an innovation community that is configured completely wrong to deal with the coming tsunami of government spending changes on technology,” said Aberman.

4. Restaurant glut?

One part of that shift in the mix of D.C. jobs has been a boost to the restaurant industry, in a city once mocked for its lack of foodie…

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One day, police or firefighters rushing to the scene of an emergency may be able to study a camera feed of the situation while they’re en route, sent from a drone hovering 200 feet above.

If so, they might have Brandon Borko to thank. Credit would also be due to the people who funded his Arlington, Virginia startup: not some tech-savvy crowd of Silicon Valley financiers, but the U.S. government. The same government that’s often derided as clumsy and clueless when it comes to innovation, and compared unfavorably with a pioneering private sector.

In fact, federal investment in research and development, from cancer treatments to the Internet to multi-touch screens, has saved or enriched enough lives — and seeded enough economic growth — to make you wonder why there isn’t more of it. Yet seven years into an anemic U.S. recovery, in an election season that’s seen both candidates promise to loosen the purse-strings, the focus is elsewhere: on infrastructure. It’s not a straight either-or, of course, and no one’s denying that America could use better roads and bridges. But there are other, perhaps more productive ways the government can spend money.

Borko’s idea might be a case in point. It involves something called swarm technology, which programs flight-paths for drones. He did run it by a bevy of venture capitalists, and he says they were excited; but they balked at writing a check because the rules on robotic flight are so restrictive.

‘Experimental Tolerance’

The Pentagon’s Defense Advanced Research Projects Agency, spotting a potential battlefield use, took the risk. Borko has a different application in mind: he envisages a 911 switchboard operator taking down an address and plugging it into software that automatically dispatches the drones from their beehives to assess the emergency scene.

“If people can’t see where the industry is going, it won’t be developed by the private sector,” said Borko, who’s 30. “There is a lot more experimental tolerance in the government.”

Maybe so, but there’s limited tolerance for fiscal loosening in Congress. Spending caps imposed under a 2011 law make it difficult for lawmakers to steer dollars toward research without cutting elsewhere.

When it comes to infrastructure, a battalion of economic heavyweights — led by Harvard professor and former Treasury Secretary Lawrence Summers — has been taking regular shots at congressional penny-pinching. Hillary Clinton and Donald Trump are persuaded. The former secretary of state proposes spending $275 billion over five years; Trump said he would spend “at least double” that amount.

‘Bang for Buck’

There’s nothing like that mobilization to lobby for research spending. There should be, according to Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington think tank.

“If you have a dollar to spend in the U.S. government and you say, ‘What is the biggest bang for the buck, roads or research?’ — there is no question it is going to be research,” he said. Atkinson’s job title suggests a vested interest but he’s been on both sides of the debate, serving as chair of an infrastructure commission under President George W. Bush.

Research and development accounted for 3.72 percent of federal outlays in 2014, according to National Science Foundation data. That compares with 2.74 percent for transportation and water infrastructure, according to the Congressional Budget Office.

It’s easy to see why politicians might want to tilt the other way. Economic inequality plays a growing role in the national debate, and construction programs create jobs for low-income Americans who’ve seen their traditional industries eroded by trade. They’re redistributive, in other words, and the transfer begins as soon as shovels hit the ground.

Research jobs typically go to a more educated workforce that has higher earnings and lower rates of unemployment. And there are concerns that corporations can piggyback on taxpayer-funded science to reap profits that mostly accrue to their owners or shareholders.

At least one U.S. politician has spoken out on the issue. Democratic Senator Elizabeth Warren says it’s time for the government to take a bigger cut from companies whose profits depend on technology that germinated in federally funded research. “The current generation of corporate winners must step up and pay its fair share,” she wrote this month in a New York Times op-ed.

One reason that’s a hard sell is because the government is outgunned by corporations when it comes to public relations, according to Mariana Mazzucato, an economics professor and author of the 2013 book “The Entrepreneurial State.” In fields like technology or pharmaceuticals, she argues, big business works hard to label the government as a meddler not an innovator, even though those same companies reap massive benefits from state-backed research.

Unexpected Places

The overall economy benefits too, though it’s hard to measure exactly how much. New technologies, or even theories, can take decades to yield dividends, and when they do it’s often in unexpected places.

It’s a complex picture. But anytime one corner of it is put under the data microscope, the results are startling.

Every dollar of the $14.5 billion the U.S. government contributed to mapping the human genome generated an additional $65 in economic output, according to a 2013 study by the Battelle Research Institute. The Department of Defense says its license agreements with industry added about $48.8 billion to the economy between 2000 and 2014.

The Pentagon, whose role in building what became the Internet is well known, is a major player in government-backed research, with deep pockets. The National Science Foundation has a smaller budget, but Maureen Mulvihill says her medical-tools company Actuated Medical was only able to thrive with its help. The foundation provided $2 million in grants to help Actuated Medical Inc. develop a cleaning system for feeding tubes, a project which took four years.

‘Incredible’ Innovation

“This company has done incredible innovative medical devices that a venture capitalist would not have funded because either the market for it isn’t very large, or it’s high risk,” said Mulvihill. Actuated is now using a $1.5 million grant from another government agency, the National Institutes of Health, to develop a similar device for pediatric feeding tubes.

When such innovations succeed, even fiscal hawks find it harder to object to the government’s sponsorship. But they become easy targets when they fail, as many must.

Another common objection to federal dollars for research is that the choice of what to fund is often driven by political correctness or pet causes, not proper science.

Henry Miller, an M.D. and biologist at Stanford University’s Hoover Institution, points to a study by an NIH unit that examined whether cranberry juice had any beneficial effect on recurring urinary tract infections. Not really, it concluded, $2.2 million later.

‘Aha!’ Moments

“That is an insult to real research that elucidates basic biological processes,” Miller said in an interview. “It is really atrocious.”

Jonathan Aberman says the government needs to make tough, strategic decisions about what deserves funding. Aberman is the founder of TandemNSI, an Arlington, Virginia firm which contracts with federal agencies to help find entrepreneurs. He helped Borko’s firm, Sentien Robotics, make contact with the Pentagon’s research arm, which took an interest in his drone project.

Aberman says the government’s choices should be informed about a wider idea of what science can do.

“The question is should our society invest part of its national wealth in discovery?” he said. “If all R&D is done by corporations where it is directly related to what they can sell you today, we lose the meandering, the ‘aha!’ moments, the discoveries that make the next new thing.”

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