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  • DC Boomtown–The New Versailles

    Posted by David Foster on August 13th, 2012 (All posts by )

    In early 2010, I wrote about the growing affluence of the metropolitan Washington, DC area:

    Chevy Chase, MD, is an affluent suburb of Washington DC. Median household income is over $200K, and a significant percentage of households have incomes that are much, much higher. Stores located in Chevy Chase include Tiffany & Co, Ralph Lauren, Christian Dior, Versace, Jimmy Choo, Nieman Marcus, Saks Fifth Avenue, and Saks-Jandel.

    Since then, the affluence of the DC area has been growing by leaps and bounds, and is the subject of a recent NYT article: Why DC is doing so well.

    What particularly struck me about this article was the following sentence:

    If you wanted to imagine what the economy might look like if the country were much better educated, you can look at Washington.

    Really? A lot of the people whose salaries are driving DC affluence have Masters degrees in Political Science, PhDs in International Relations, etc etc. Does the article’s author (David Leonhardt) really think the US would be more prosperous if we had more people with degrees of this sort, often working for organizations with vague and unmeasurable missions? Does he really not understand that the wealth these people consume is actually produced with people with very different skill sets and, sometimes, with no degrees at all?…People who know how to raise crops, drive tractor-trailors and trains, fabricate metal, design circuit boards, manage supply chains, and generate electricity?

    Another and even more bizarre passage from the article:

    The narrower of (the two economic lessons that he says can be drawn from DC’s success) is a reminder that, for all its unpopularity, a Keynesian response to an economic crisis really can make a difference. The Washington area’s households and businesses have cut back in recent years, too, but their frugality has been offset by steady government spending. If anything, government has helped fill the void, with the District of Columbia’s having received more stimulus dollars per capita than any state…

    In reality, of course, the affluence of the DC area doesn’t prove anything more about the validity of Keynesian economic-stimulus theory than did the affluence of the Versailles court during the last decades of the French monarchy. Transferring wealth to a favored elite will obviously make that elite, and their immediate dependents, richer, and this is true whether the money is extracted directly from non-favored classes via taxes, or obtained via debt financing for which the non-favored classes will later be on the hook. This doesn’t either prove or disprove anything about the efficacy of deficit spending on an economy-wide basis.

    Leonhardt does admit that “some” of DC’s new wealth is the result of economic rent-seeking, which he defines as “tapping into the economic value created by someone else, rather than creating new value,” but goes on to say, “Still, Washington’s good times are not all — or even mostly — about rent-seeking.” In this, I think he is entirely wrong. Most of DC’s increased affluence is indeed the result of rent-seeking, which most definitely a zero-sum game.

    True, not EVERYONE of the DC area is in the rent-seeking business. As I noted in the 2010 post linked above, certain Federal activities are directly economically productive: “An air traffic controller is as much a productive part of the air transportation system as is a private-sector airline pilot. A real research scientist at NIH or CDC is as much a part of the productive healthcare research system as is a researcher at Pfizer or Medtronic. (I use the “real research scientist” qualifier because these agencies seem to be devoting an increasing portion of their resources to nanny-state scolding.) And we do indeed have a private sector in the DC area–indeed, very significant portions of the Internet and Cloud Computing industries are based here, especially in suburban Virginia out toward Dulles Airport.

    But DC affluence is for the most part not being driven by the incomes of network engineers and marketing executives out in Sterling, or by the salaries of medical researchers in Bethesda or FAA managers of the air traffic control system down on Independence Avenue. It is being driven by the incomes of people who are outside the productive economy and are, in a very real sense, parasitic on it. The DC area imports large amounts of resources from the rest of the country–food, consumer goods, gasoline, computers, even electric power–for which it does not trade countervailing value.

    In this summary of articles by David Leonhardt, the author of the NYT article linked above, I notice that he is a strong advocate of higher taxes on “affluent Americans.” What this comes down to in practice is higher taxes directly imposed on some categories of affluent Americans (and indirectly imposed on many categories of not-so-affluent Americans) acting for the benefit of other categories of affluent (and soon-to-be affluent) Americans.

    What the Obama administration and its supporting “progressives” are pursuing is indeed class warfare, but to a substantial degree it is class warfare of a horizontal rather than a vertical nature. It’s a war against people who run small businesses and even medium-sized manufacturing companies, against people who work on oil drilling rigs or down in coal mines, against parents who would like their kids to have an alternative to the dysfunctional public school system, for the benefit of people like many of those you can see in expensive DC restaurants every day and evening of the week.

     

    19 Responses to “DC Boomtown–The New Versailles”

    1. Michael Kennedy Says:

      The beginning of the affluence of the DC area was during the Second World War, a period which very few would call productive except of military hardware built somewhere else. I was a small child at the time but I have read quite a bit about the fantastic growth of bureaucracies at the time. Even the Civil War and WWI were far less of a stimulus to the DC area. The Roosevelt era had some effect but nothing like WWII.

    2. David Foster Says:

      A couple of other links I meant to include:

      Peter Robinson, comparing DC today with the same city when he lived there in the 1980s

      A Washington Examiner opinion column: Parasite City

    3. Whitehall Says:

      There is a similar dynamic of horizontal income transfers here in California. this November will see a ballot initiative to restrict public employee union political funding from union dues. The public employee unions are claiming in their advertisements that this is an “attack on the middle class.”

      My rebuttal is that public employee union members are middle class but only a small fraction of the total California middle class. Those non-union people are the ones pissed at the involuntary income transfers to the unions which are arranged only because of the unions’ political lobbying and contributions.

      It is really a battle within a class rather than a battle across classes (and income levels).

      Only in paid political ads can such a logical fallacy be propograted.

    4. Dr. Weevil Says:

      I’m often amazed how hard it is to get across the obvious-to-me idea that government spending is entirely dependent on the private sector. Here’s an analogy I’ve tried (with mixed success) that’s a little kinder than “government : society :: parasite : host”, though that works, too.

      It seems to me that the relation of government to the private sector is very much like the relation of the animal kingdom to the plant kingdom. If every animal in the world disappeared tomorrow, 80% or 90% of the plants would get along just fine. Of course, some (e.g. figs) have evolved to depend on animals for pollination, and a few (e.g. Venus fly traps) directly depend on animals for nourishment, but most of them would have no problem getting along without animals. However, if every plant in the world disappeared tomorrow, all the animals would die in a matter of weeks, first the herbivores, then the carnivores. The vultures and dung beetles might last a couple of months. In short, though there are feedback loops (specific plants depending on animals), in general, animal life is entirely dependent on plant life, and the same goes for government vs the private sector. That doesn’t mean that government (or animal life) is a bad thing, just that it needs to remember, and take care of, what it depends on.

    5. Bill Brandt Says:

      @Whitehall – I am just looking on our local news last night – on the CA cities declaring bankruptcy – San Bernardino is the latest and largest – one of the chief reasons is the pensions – these public sector unions are getting retirements as much as the working salary – anyway they are claiming that these are contracts and can’t be broken even with a bankruptcy –

      War on the middle class indeed – more like war on the taxpayer…

    6. Robert Schwartz Says:

      MY Slogan:

      Send the Recession to Washington.

    7. Jason in LA Says:

      Bill:

      Calpers still estimates their long term annual rate of return at 7.75%. Last fiscal year it ended with a 1% rate of return. We of course know who supposed to come up with the difference.

      http://articles.latimes.com/2012/jul/17/business/la-fi-calpers-returns-20120717

    8. Michael Kennedy Says:

      “That doesn’t mean that government (or animal life) is a bad thing, just that it needs to remember, and take care of, what it depends on.”

      Successful parasites know this or evolve to follow the pattern. Our DC bureaucrats are not that smart.

      My son is a state firefighter in California. I worry about him a lot. Fortunately, he has a successful wife who runs a very good home based business but he has already had a 5% pay cut and I fear that his whole pension will disappear.

      Ironically, the state firefighters, who fight the brush and forest fires in 105 degree weather, make about half the city and county firefighters income who have easier jobs. He wanted to be a fireman since 6th grade. He is also a paramedic but the state jobs are combined.

      He once applied to the City of Long Beach when they advertised about 50 jobs. That was 20 years ago and 5,000 people showed up for the test. He scored in the top 5% and should have gotten a job but they caught the Black Firefighters’ Association cheating. They had a copy of the test to prep applicants. A Hispanic guy my son knew sat in on the prep session, which was supposed to use old tests. The guys running the session, which had the real test about to be given, threw him out because he wasn’t black. He turned them in and the test was thrown out.

      My son couldn’t get off work when the test was given the next time.

    9. Michael Kennedy Says:

      I did a post on my own blog about this. I didn’t post it here because it is more local and I’m still kind of working on it.

      There are now radio ads for California municipal bonds every day. I have never seen (heard) that before. I think the state is circling the drain. Right now, I am writing this from our place in Tucson. I wish we were here full time. We may be before long. My kids and grandkids are all in California but I worry about the state. The changes since I moved there in 1956 are amazing.

      Romney and Ryan could still save the country but I think it is too late for California. We used to talk about annexing Baja California but it may be the other way round.

    10. Bill Brandt Says:

      Jason – as a fellow Californian you know that our whole budget is based on assumptions – IOW a house of cards. This budget the politicos just passed is “assuming” that voters will pass the governor’s sales tax initiative this Nov – and of course that initiative – once passed, will bring in the revenue they are expecting.

      But we seem to have the money to make a bullet train in the middle of nowhere. Makes Alaska’s “Bridge to Nowhere” seem downright sensible and frugal.

      As to who makes up the shortfall – will the last person to leave shut the lights? ;-)

    11. Sgt. Mom Says:

      My family is all in California too, except for my daughter who lives in Texas with me. I wish there were a way to pry them loose, but my mother is in her 80ies, and lives away out in the backwoods behind Valley Center … but she is very well-thought of by her neighbors, so if the stuff impacts the fan, she will be relatively safe. My one brother and his wife live near El Centro – and they have property over the border and my S-I-L has a large extended family close by. My sister and her husband and their two children are in Pasadena. Bro-in-law works for JPL – he was offered a position in Houston a while back. We wish he had taken it … but with school-age kids, and ownership of a home. Youngest brother could relocate and telecommute from practically anywhere. He’s a graphic artist, and very good. (He did my last two book covers!) But his wife is a public school teacher, and they have a house and two children. Added to that, his wife does not look upon the Tea Partiers with favor, to say the least. Should I ever have to share the same physical space with her for longer than fifteen minutes and the conversation between us turn to politics, the fireworks will probably be epic.

      I wish I could convince them to come to Texas, but if and when they see that as neccessary, it may be too late.

    12. Jim Miller Says:

      Leonhardt is interesting — as failures often are. I used to take him seriously when he was writing on medical costs in the NYT, until I noticed a certain pattern in his thinking. He really does believe in bureaucracies more than any serious person should.

      And he is not willing to even think about using market forces in some areas. Example: He interviewed Mitch Daniels after the Indiana governor had had success with health savings accounts. (People were happier, the state saved money, the health outcomes seemed about the same, et cetera)

      If Leonhardt asked Daniels about that success, it did not appear in the article.

    13. David Foster Says:

      Coincidentally, over at Ricochet someone linked a Washington Post article on the DC-area tech sector.

      The sector is indeed significant and growing, but is unlikely to materially change DC culture, as I explained in my comment at Ricochet.

    14. David Foster Says:

      The direct link to the WP article is here:

      http://www.washingtonpost.com/business/capitalbusiness/as-washingtons-tech-sector-diversifies-and-matures-can-it-power-a-new-local-economy/2012/08/10/74558a90-e160-11e1-ae7f-d2a13e249eb2_print.html

      The idea expressed by the HelloWallet guy that DC is chock full of experts who have special understanding of “critical problems facing consumers” is, IMO, pretty…strange.

    15. Whitehall Says:

      Pardon for what might appear to have been an attempted hijacking of the thread about DC wealth. My point about California is that the liberals in DC and elsewhere will CLAIM to be working for “the middle class” but really are serving and enriching one middle class sub-group while looting and improvishing the rest of the population.

      But you knew that.

    16. Cousin Dave Says:

      The main reason the DC tech sector is growing, to the extent that it is, is because tech companies are finding it necessary to relocate there in order to do business. You have to make your operations visible to Congresscritters before they’ll have any emphaty for you. And corporate management finds it essential to be close to their lobbying staff, so they can stay ahead of the ever-advancing regulatory curve. To name one, it’s eating the aerospace sector alive — I can see that about ten years from now, the bulk of the nation’s aerospace engineering will be taking place in the D.C. area.

      And to repeat my point: this isn’t happening because D.C. is a technology center of excellence (it isn’t), or because it’s an inexpensive place to do business (it’s not). It’s because of the necessity to stay close to government and curry favor. When you have government picking winners, this is what happens.

    17. LibertyAtStake Says:

      If you want to know what a ruling class calf looks like fattened before the slaughter, you can look at Washington.

    18. Ginny Says:

      A Kelly Girl could distinguish between state work & private – grudges, petty turf bulding, infighting; follow those dots over decades & you arrive at today’s Washington.

      Versailles didn’t end well.

      Our movements, policies, arguments, people, books, even passions are not violent. (Was Reagan’s? Was Thatcher’s?) “Washington” thinkers seem to think so but they project: note the violent vitriol from our left, though not yet matching the policies of death in statist economies.

      If the French Revolution is your model, the Tea Party is frightening. But its belief all men are endowed by a creator with rights leads to a sense of purpose and productivity (and cleaned grounds). Contemplate John Adams’ attitude toward the British in, say, 1800 or the Marshall Plan.

      Of course grudges multiply and intensfy in a grievance oriented, entitlement society. Productivity declines in a purposeless one. We may not have as much time as we’ll need to change the trajectory. But we aren’t there yet.

      This dramatically differs from other revolutions – leave me alone is not the same as give me. You can ignore American exceptionalism, but that doesn’t mean it doesn’t exist.

    19. JaL Says:

      Please do not try to convince Californians to come to Texas unless they will vote very differently when they get here :)